3 ways you can build and fund your tech startup

- August 1, 2013 4 MIN READ

If you’ve got an awesome idea for a tech startup but lack the technical skills to build it yourself you’re going to need to get some technical assistance.   There really are only three ways to do this, which I’ll cover here.

Engage a digital agency

Firstly, if you have enough capital behind you, you can outsource the development to either a digital agency or an offshore development place.  The advantage of a digital agency is that they’ll have all the skillets required to build your product.  They’ll have the creatives, the front end developers, the back end engineers, database gurus, graphic designers etc etc.  A typical digital agency in Sydney will charge anywhere from $50,000 to $150,000+ for the initial build.  And the rest.  (Prior to coming to us one of our startups paid $22,000 just for the function scope!)

The problem becomes with a disconnect between the goals of the two parties.  You see, the digital agency, like you, is a business.  They have one objective – to make money.  From you. And they bill by the hour.  So when you present some extra functionality (and if you’re an excited founder working on your startup, you will have 100′s of extra ideas) the digital agency are going to go “sure thing!!” as it means more time and more money.  Fast forward 12-18 months, you haven’t launched and you’re out of pocket by over $100k.

Alternatively you can spend the money offshore, using one of the popular freelancing sites like odesk or freelancer.  Typically it will cost you around $20k to get a complete software build.  But once again, like the digital agency, your objectives are not aligned.  The offshore developers want to build this as quickly as possible so they can move on to the next, which ultimately means the quality of the product isn’t going to be very high.  This might be fine for a prototype, but any serious move in to the market is going to need some robust engineering or you’ll end up with a “cick-frenzy-failure” on your hands.  So you’ll probably do this 2-3 times, so, $40-60k.

Even when it works (and don’t get me wrong, there are some seriously awesome digital agencies out there that do stunning work) there’s the issue of IQ. You’ve just outsourced the development, the heart and foundation of your company to someone else.  Eventually you’re going to need to pull it in house or you’ll forever be tied to a third party – a risk.

So how do you get alignment? Simple, method two: you find a tech co-founder.

Start with a tech-cofounder

Startups with co-founders are 5.25x more likely to become a $25m company and 9x more likely to be a $500m company so there’s definitely a huge benefit here.  Tech co-founders are also 100% committed to your idea as they’re living and breathing the idea with you, but they come at a price, of equity.

Say you managed to convince a guru to leave Google and become your tech co-founder.  They’re going to want to have about 50% of your company, only fair, there are two of you both working for sweat equity.  Eventually, they’re also going to want to get paid a salary (like you) so let’s call that a startup-friendly $60k a year.  Now we have beautiful alignment, the two of you are motivated by the same objectives and have the same vision.

The problem with a tech-cofounder is that you’re “limited” by my skill set.  They might be the best back-end engineer, but they’re rubbish at design, rubbish at front end coding, rubbish at PR, marketing, SEO etc etc.  So you’re going to have to bring those skills in.  $5-10k on design, $5-10k on front end, a small PR and SEO budget and right away you’ve given up 50% of your company and spent upwards of $80k, but at least you’re aligned.

So, digital agencies gives you the skills, but at a cost of cash and alignment.  A tech co-founder gives you the alignment but a huge cost of equity and cash.  What else is there?

This is where the Venture Technology model developed at BlueChilli comes in.

Partner with a company designed to build startups

Obviously this is the type of thing we do. [PLUG!!] But let me explain how it actually works as far as the numbers go etc.

We combine all the skills of a digital agency with the alignment of a technical cofounder, at equity and capital contributions that are compatible to the best in both.  We take 10-30% equity depending on what you bring to the table and charge you $40-75k depending on the complexity of the build.  And we invest $150-200k worth of resources in to your startup.  You retain control, you retain the majority ownership and we’re aligned.

Unlike the tech-cofounder situation, you have a diverse range of skills in your business, you get 20+ tech cofounders – the right people at the right time.  Unlike the digital agency situation, we don’t make any money until you do – so our objectives are 100% aligned.  We then work with you to grow your development team organically, hiring the right people at the right time when the business can afford it.

There are other models of course, and I encourage you to explore all your options. Check out Pollenizer, the New AgencyAngel Cube and Startmate for alternatives in Australia and make sure you drop us a line to see how we can help.