Jason's outsourced dev shop abandoned his unfinished product. Evan Carmichael offers three fixes: try outsourcing again on oDesk with small test tasks first, bring in a technical co-founder with equity and a shotgun clause, or raise capital in staged tranches to avoid getting killed on valuation.
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Hi, I'm Evan Carmichael. Welcome to another edition of Ask Evan. In today's video, I'm going to answer a question from one of my readers, Jason, who's a newsletter subscriber and has a tech company. He spent a lot of money on an outsourced development shop to help build his technology. The relationship didn't go so well. They stopped producing for him. And now he has an unfinished product, is running out of money, doesn't have enough money to hire a local company, and wanted my advice on what to do next to get his company going. So I really feel for you. That's a tough situation. When you don't have the ability to control your own technology, then you're really at the mercy of other people, and that's tough. And whenever key people in your company leave too, that could put you in a tough situation. For you, a couple ideas, 3 options for you that I see. First, you could outsource it again, and outsourcing can work, and I do a lot of outsourcing with my business, and it seems to be very successful for a lot of entrepreneurs. Just because it didn't work out once doesn't mean it can't work out ongoing. A lot of people feel the same way about hiring people with their company. They may get burned by the first employee that they bring on, so then they decide, "I'm never going to hire anybody again because it doesn't work." Well, it can work. You just have to make sure you go through a process to get the right people or the right company on board. For you, you could still work, you can look at services like oDesk to try to find somebody who has done it before. You can look at their feedback from before, how much they've made, how long they've been with oDesk.com. And I've used it to get some great people to help me, you know, outsource my business tasks. So I would look at oDesk as a quick start. The other thing I would do when outsourcing is start with smaller projects. So instead of giving somebody a huge project and run with it and that's kind of mission-critical for you if it doesn't work out, Start on a small scale, give them something, you know, little, and see if they can perform with it. And then if they do perform, then you can slowly give them more and more tasks. So that might help you, you know, you might be able to break down your project into smaller tasks and give it out to different people and see who performs the best. It's a little more time-consuming, but helps make sure that you get the right people on board. So it's still an option. Option number 2 is get somebody on your company, so have somebody join your team who has the technology experience. It's really hard to run a tech company without having any tech experience within your organization. And depending on what your eventual long-term goal is with the business, if you wanted to sell it, for example, usually the buyers want to see that you have something in-house that they're, they're buying, that not everything has just been outsourced. So, you know, it's great for you as well because as you get more ideas of what you want to build with your company, you've got somebody right next to you who can help you build it out. So finding the right person can be tough. You are giving up a piece of your company, but if you were going out to try to raise capital, you're giving up a piece anyway. You want to make sure you get the right person on board. So I don't know if there's anybody who you can think of right now who you've done some kind of work with before, or who comes referred from somebody else. Again, with any kind of partnership, you want to make sure you're starting on a small scale. Let them earn in. Somebody with a tech background may not have money to buy into the business, And if it's still early stage, there may not be enough of a valuation there for them to buy into. So it could be their time coming in. So, you know, start on a small scale, let them earn their way in, let them show themselves that they can, you know, prove to be an asset to your business and that you both like working with each other. Because it is like getting married, getting a partner with your business. So give them milestones. So if they accomplish something, they get 2% and then 5% and 10% until whatever goal eventually you want to get to. I make sure you have really good shareholders agreements so that there's a shotgun agreement in there that you can buy each other out if the relationship doesn't go very well. But hopefully you've tested at the beginning and you don't get to the point where you're buying each other out. So that's the second option. The third option is you can go out and raise capital. So you could say, you know, we need another X thousands of dollars to be able to finish up this project. Go find an angel investor, give up a percentage of your business. The challenge here is if you're pre-sales, if you haven't finished your actual product and you're still in kind of the research and development mode, it's really hard to raise money, uh, and the money that you raise, you'll get really killed on the valuation. So if you had some sales, you had some more momentum, then you get a much better price. You don't have to give as much equity up in return for the money that you're giving away. If you want to try to mitigate that risk a little bit, what you could do is put it in stages. So you can say, I need $100,000, say, for the business. I need, you know, $25,000 upfront, and it's going to be at a certain valuation. And then we're going to go out and try to hit these milestones. So we're going to, you know, make X number of sales. When we do that, we need another $25,000, but at a better valuation. And then you go out and hit more milestones, and you get the last $50,000 at a much better valuation. So you negotiate that upfront so that as you grow with your business, You're getting more money coming in from the investor but at a better valuation than if you need everything up front. So I don't know how much you need, maybe it's $100,000, maybe it's $10,000, maybe it's $500,000, whatever it is, you can phase it out with an investor so that you're not getting all the money up front but you know you're also getting a much better valuation. So hopefully that helps. I think your best bet is still to try to go the outsourcing route at the start and try to piece it off into little projects and find somebody who you can work with. Longer-term solution, try to find somebody local who might be able to take an equity position in the company, who has a vested interest, wants to make it work, and you have somebody sitting next to you who is motivated to want to keep growing this product. And as you get more ideas, you have somebody who you can turn to, and they really want to see it succeed. And last option is go out and try to find an investor. Just try not to get killed on the valuation by spacing out the payment periods. Hopefully that helps. For those watching, if you like the video, please give it a thumbs up. I love seeing those come in. And if you have any thoughts, please feel free to leave a comment underneath. Any other advice that you might have, or any of your own experiences, or if you have other questions, leave a comment under the video. And we'll see you in the next episode. ¡Gracias!
