Chapter 2: The True Cost to Build Your Own Tech Team
Updated: May 25, 2019
You don't build business - You build a team! Then your team build the business.
As a founder of a technology business, each day you make tough decision on where to invest your resources to yield better return on investments. One of the most important investment decision you to have make is to invest in building your technology team, which needs patience and time, skills to filter out people and cost to hire people.
True Cost of Building In-House Team
The first instinct of founders is to hire a tech team who can not just help to bring the product to life but also brings passion that is needed as the business goes up and down before it starts growing. If you have enough capital, and access to a network which you can reach out to hire engineers, you still have to go and convince them on your vision so that they can risk their secure job and join you on adventure of bring a new value to the planet earth. However, objectively, there are few cost factors to consider as you build your team:
1. Cost of Time - This is one of the most important cost to consider, especially if you do not have a co-founder with a technology background . The average time to hire varies and according to some research it takes as long as 95 days and in case of high level executives it goes up to 120 days. According to Glassdoor, the average time of hiring a full stack developers is around 50 days in US. Again the location and experience influence the average time of hiring.
The longer it takes to build the team, the more money it costs you. It also delays launching your business.
2. Sourcing Cost - You may choose to build the funnel of candidates to hire by either using a hiring agency or doing it by yourself:
External Hiring - Taking help from outside such as external hiring agency can be a good option but it comes with huge cost. Most of these external hiring agency work in fixed price model where they charge fixed amount - % of annual salary for each new hire. The price of these services varies anywhere in between 15% to 25% of their annual salary and in case of high level executives it goes upto ~30%.
Internal Hiring - One of the studies showed that startups founders spend around 40% of their working hour on non income generating tasks such as hiring. Beside the time, there are various other costs to consider such as - job portals fees (cost upto few hundred dollars), shortlisting and interview time cost, event costs, etc.
3. Salary Cost - Whenever you hire new employee, you have to pay salary each year. There is no straight answer to the question. There are multiple factors such as state, country, industry, working experience, and skill sets which decide the final salary for any position. Roughly, if you are US based startup, get ready to spend anywhere upwards of ~$115,960 per year for a full stack developer.
4. Retention cost - Even after hiring, as employer you have to ensure that your employees stays with you and in return you have to care about their paid leaves, salary increments, bounces, extra amenities like gym subscription, insurance policies and seminars and many others.
Risk Factor To Consider When Building In-House Team
1. With the market of skilled software engineers as tight as it has been for last few years, the assumption that new startups can hire qualified developers quickly or even hire them at all - needs to be considered. The market reputation of founders, the vision and product of startups highly influence the whole hiring process which costs higher due to delayed hiring.
2. With limited knowledge in technology, the management of in-house team get even more trickier and end up in paying higher cost due to gap in communication, delayed production.
3. Bad hiring (due to desperation or through lack of technical knowledge) can have huge costs. Some estimates suggests that the cost of making poor hiring decisions can be as much as $240,000 per person.
4. With in-house team, you have limited flexibility in term of expertise and limited freedom to rotate in new team members.
5. Due to high demand of qualified software developers, the assumption that new startups have to pay additional cost to retain their engineers or even pay higher cost than market standard to hire new developers - needs to be considered.
True Cost With Technology Partner
There is another route to building your tech team and many many startups have successfully used a technology partner and built a billion dollar company as mentioned in this article.
Working with a technology partner isn't without its own risks. Choosing bad technology partner not only affect cost time but as well it can threaten your whole business and brand value. So, always research about your prospective technology partner - their working style, team, expertise, relevant experience.
1. Cost of time: You would often find technology partners who are available to work with you in 2-3 weeks of time after the initial contracts are signed. The best way is to talk to people in your network and get a reference for one. You should also read their blogs and talk to their tech team to see if they fit your needs.
2. Financial Cost: A technology partner, potentially who is not from US, charges between $30 - $50/hr, a full stack developer on a project costs $4800 - $8000 per month (= $30 - $50/hr * 40 hours per week * 4 weeks). This is almost 50% less than hiring your own full stack developer anywhere in the US. This gives you a bigger runway especially as you try to build your business.
Risk Factor To Consider When Hiring Technology Partner
The most common risks with technology partner is - lack of passion for the product / company and strong work ethics. So before you go on shopping for a technology team, make sure you know how to evaluate one - see what questions they ask when you talk to them, research them online on LinkedIn, read their blogs (see: our blogs), see their engineering practices (see: how we work) and trust your gut more than you do.
At the end, as Steve Jobs said - 'You gotta be a great talent scout', doesn't matter which route you go. Hope you see success as as you build your venture. Enjoy this clip from Steve Jobs (it's always inspiring to hear him).