THE BLOG
01/27/2016 01:12 pm ET Updated Dec 06, 2017

How to Outsource Successfully

2016-01-21-1453392052-1300946-PrathamMittal.pngPratham Mittal is the co-founder of VenturePact, a marketplace that helps companies find and engage with prescreened software development firms; he previously founded Newsance, and worked in Product at Host Committee.

When I say "outsourcing," you probably think of big banks and insurance companies contracting their call centers to India. Or software sweat shops where uncreative engineers do back-office, low-skilled jobs. What you might not realize is that some of Silicon Valley's favorite sweethearts are also powered by outsourcing.

While my company was recruiting outsourced teams for our own marketplace, we saw some of the most popular startups like Slack, Klout, Skype and Box were built on the back of an outsourced team.

Not only did these well recognized companies outsource, some of them even attribute their success to it. The first version of Skype was built by an outsourced team in Estonia. They did such a great job that the two Danish and Swedish founders ended up scaling their team in Estonia itself. Today, Skype has over 44 percent of its workforce in Estonia.

Fab.com also started off with a team in India. The founder had worked with this team before and decided to use them again for Fab.com. They clicked, and eventually Fab acquired this team in India. The heads of the India team were officially named Fab.com's co-founders. Even Slack outsourced what some would say the main reason behind its success -- their design and UX -- to a design team called MetaLab. And these three are but just drops in the bucket.

There are countless other startups that have successfully built their products by leveraging outsourced teams. It makes a lot of sense: When you are starting out, it's difficult to get people to quit their jobs and get on board. Good engineers and VCs want to see prototypes and traction before taking the plunge. But then how would a bootstrapped, non-technical founder even get to the prototype stage, let alone traction?

The answer is that he outsources. This is what got the founders of highly successful Box to find a Russian team to help them with their initial prototypes.

Beyond the Prototype

But outsourcing isn't just for prototypes. When a startup is scaling, it needs to hire fast. The product roadmap only gets longer and support takes a lot of bandwidth. As we know, the talent markets are dried out by the Google's and Facebook's of the world. So, many startups in this scenario build what are called captives -- extended teams, often offshore, that are on someone else's payroll but work solely for your company. For example, New York-based ClassPass has a team in Belarus that works alongside and augments their core team.

However, outsourcing is not as simple as hiring a team and offloading the product onto their shoulders. Finding a great team that you can trust can be hit or a miss. Sometimes, entrepreneur get caught up in a "race to the bottom" with freelancers who claim they can build an Uber clone for $200. But ultimately, you get what you pay for.

Moreover, getting the engagement process right is tough. Some first-time outsourcers have unrealistic expectations and make things worse by not specifying them clearly or not signing a contract or using escrow. Another rookie mistakes is founders who remain hands off and aren't regularly involved with the build.

Joe Fernandes, the founder of Klout, answered on Quora that he actually traveled and crashed on the couch one of his outsourced developers to ensure there were no communication challenges. Jason Goldberg from Fab would also travel every other month to India to work with the company until they had built an early version of the product and built a sense of trust.

Not Just for Startups

Unsurprisingly, most of the Fortune 500 companies also outsource major chunks of their IT. Outsourcing is so prevelant that the industry itself is worth a couple trillion dollars. Just like these large enterprises, startups stand to benefit from outsourcing, too. It's simply about taking the plunge and having enough patience while optimizing and getting the process right.

Of course, outsourcing is not for everyone. If you are creating the next Palantir or Google, there is no way you can outsource your data platform and algorithms, as they are core to your differentiating strategy. But for the tech-enabled products where software is a commodity (for example Klout or ClassPass), outsourcing can be a saving grace.

A frequent rumor is that some Silicon Valley VCs don't recommend outsourcing, as it signals higher risk and makes companies that outsource unfundable. However, if done right, I think it can signal that the founders are thrifty -- they didn't waste money at the early stages. They stayed lean and executed fast without spending too much time looking for a dream CTO, because they were able to make things happen for themselves.