Part 4: Scalable & Replaceable
Scalable Staff
One of the main reasons we love cloud computing is the ability to scale resources up and down quickly. Tech products can have wild peaks in traffic and need to have the ability to meet demand in order to take advantage of those opportunities.
Human resources, i.e. employees, work a little differently. It can take months from the initial budget decision until any useful productivity will come out of the investment. Even experienced engineers need a week or two to get up to speed on the company, product, nomenclature, repos, docs etc, and it can take several months to be fully settled in and 'in the routine'.
To make matters worse, some positions are harder to fill than others, and trying to run a proper team without key positions filled first can set the project off on the wrong foot, especially in process-heavy environments.
Agencies, firms and 'mini-corps' can be a good way to scale up staff quickly without needing a long-term commitment like you would with a permanent employee. Setting aside 10-20% of total tech employee budget for a handful of C2C partners can provide the flexibility to scale engineer workforce 2-3x for a short period of time, or perhaps provide expert security or database advice, or handle an important internal project without pulling primary resources off client-facing products.
There's plenty of ways to get creative with contractors, and with a new budget to play with every quarter you can find expertise in areas you just wouldn't be able to get in-house, with the flexibility and scalability that meets your business needs.
Less painful goodbyes
W2 employees are like the family, whereas contractors are more like friends. Although it's always painful to sever relationships with friends, it can be even worse with family, and the same principal applies to business.
A startup could hire an agency to manage 20+ full-time employees, but if the relationship doesn’t work out they cut one tie with the agency rather than 20+ individual ties. If the startup needs to scale down to 10 from 20, no layoffs are necessary, just a contract re-negotiation with 1–2 principals of the agency. The agency can re-allocate those resources onto other projects within the agency (hopefully) or in less fortunate cases be the bearer of bad news that the budget has been pulled.
Agency principals are likely to be hungrier for your business than a W2 engineer that is getting plenty of interest from other companies. Engineers typically have a lot of leverage in the job market and expect great compensation, perks and culture, and are constantly tempted with better offers. They are also far from ‘permanent’ employees, with very low average tenure at companies when compared with many other professions. In other terms, they aren’t likely to be as loyal as an agency that has a much larger interest in keeping your business.
In an ideal scenario, I'd see the following progression in a company lifecycle:
Idea stage
Find C2C partner that will build MVP on cash and/or equity basis.Agencies: 100% In-House: 0%
MVP stage
With MVP built, the onus is on the business, rather than agency, to build the business and reach a level of profitability or find angel investment. Agency should be on bug patrol, that's about it.
Agencies: 10% In-House: 0%
Angel round
With say a \$500k/20% angel round, the company may invest $100-200k into tech\*. The majority of this will go to agency partners for development.
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- Depending on the product and industry this amount will vary widely. If a technical edge is essential then this budget may be much higher, or if only a simple website is needed $20k or less may do.
Agencies: 80-100% In-House: 0-20%
Series A
If the company ends up with a Series A investment, or revenue-equivalent, it's time to start building the core in-house tech team, starting with the CTO.Agencies: 60-80% In-House: 20-40%
Series B & Beyond
At this point the ratio should be inverted with only 10-20% of total tech budget allocated to C2C partners. They can be utilized in temporary or creative ways to meet deadlines or fill blind spots in the company.
Agencies: 10-20% In-House: 80-90%