Tech startup structure: the build/it buy it debate
In the Fintech world and beyond, we’ve been watching the collapse of Wirecard in recent weeks. Wirecard revealed ongoing fraud amounting to nearly €2 billion worth of fabricated funds, and filed for insolvency at the end of June. The FCA was quick to stop all activity for a week to protect Wirecard customers, but this understandably left many tech companies that use its services in the lurch.
Given the reliance many fintechs and other startups have on each other’s tech, shocks like Wirecard can spell disaster in the community. For many entrepreneurs and founders, the build it/buy it debate is a constant struggle to navigate. Of course, every situation is nuanced and circumstances highly individual, but there are some key points to consider when trying to make that decision for yourself.
Should a business build its own software solutions using their own tech team or buy market-ready products? The debate has been long and is ever changing, as software becomes more advanced, sophisticated and accessible. Startups by nature have to manage limited resources – and that’s not just money, but crucially, time. Speed is imperative in making your idea a successful reality when the opportunity is right.
Focusing on your product is the foundation of your business, which may mean outsourcing and piggy-backing on other startups’ tech. With a globalised marketplace it’s more important than ever to get your product ready as quickly as you can to fill a void while it still exists and to block competitors.
Whether you build or buy the tech you need to scale your business or get a new product launched will depend on the targets you’ve set. It’s important also to carefully consider what your pitfalls are too. Being honest about these two things will help you prioritise your decision.
Growing and improving your business requires time and money. If there’s a particular piece of tech you need in order to grow, ask yourself what funds you have and what resources are available to you in-house. If you’ve got money, do you have a tech team with the right skillset, competences and time to develop and hone this software? Is this what their priority should be right now?
If you haven’t got the cash to pay for the development but you do have the skills and capacity, you’ll most likely wait until you’ve got enough money and build it yourself. If you’ve got cash but not the technical resources then you’ll probably end up finding a solution on the market.
You only really have a tricky build it/buy it dilemma when you have the resources of time, skillset and cash all together. With so many solutions coming to market that are more specialised and innovative, the software game is huge right now, so trying to compete with a company that has a large user base to help spread their costs and iron out kinks is an attractive option.
If what you’re looking for is fairly generic then there’s little incentive to spend time and money developing something unique. For example, you probably use Zoom for your internal and client meetings, so there’s no point creating your own video conferencing platform. The basics don’t need to be built specially.
Building your own product should be your focus if it will add business value. Things become a little more complicated when the software you need requires more customisation or integration. If you do decide that you’re going to buy a product then make sure it’s easy to install and has been well tested to mitigate risk on your part.
Generic products that have a variety of functions are useful for things like sales. If you’re exploring well-known and popular products, you’ll have a better opportunity of doing a deal and can negotiate the sales agreement in advance. As long as buying externally doesn’t compromise your business USP, it can be a really useful way to scale up quickly, which is particularly important in an era that’s relying more and more heavily on digital solutions.
This could be a factor that will sway your decision one way or another. If you need to meet a tight deadline and that’s a big priority then you’ll need to focus your efforts to achieve something in the short-term. In some scenarios, building the product or software and buying it may amount to the same time. If this is the case, then cost becomes a more significant factor.
Usually, if something is commercially available then generally it’s pretty fast to implement. However, make careful analysis of lead times and realistic installation processes. If the product needs to be properly integrated and customised then factor this in and ask for realistic timeframes. Don’t forget you’ll also need to factor in time and resources to train your team. If the tech you’re looking at is completely new to them then their lack of prior exposure could be an obstacle. It may take longer than you think for your people and processes to adapt.
This will depend largely on what you’re looking to acquire or create. The costs of development in both material and personnel time may far outweigh external products. However, there could also be a number of unforeseen costs associated with upkeep.
Where products or software are produced for a wider user base, the cost for companies is lower. And it’s likely you’ll share that cost with the customer in the hopes of growth. For software, it’s also fairly common to see subscription models to help with pricing. This avoids a bigger upfront cost and can save you money by allowing you to pick and choose which areas or components you’d like to use. If balancing this cost over a longer period would help you develop more important areas of your business, then the buy it model could be a better option.
However, if you only need a small part of the product or system you’re considering buying, it may actually be cheaper to try and build it yourself. There can be a lot of additional perks that help market programmes or software that you may have no use for whatsoever. In these cases you’re paying for a lot of pointless add-ons that in the long run may end up costing you more as your business depends on only one aspect. Think about what you really need and if there is a well-priced, condensed product that can provide it. Otherwise, explore how you can create it yourself.
Is what you’re considering buying able to easily integrate with your existing systems and business processes? The cost of incorporating it into your own infrastructure may not actually be worth the time and expense of outsourcing these areas of your functionality. Figure out if your teams are able to quickly customise and make the most out of the product immediately.
Integration isn’t always straightforward, so be realistic about how adaptable your current technology and systems are. If there are breaks between your existing procedures and the product that require more money and time to close, seriously consider whether investing externally is worth it. You may end up compromising a streamlined process with unnecessary and complicated embellishments.
If the thing you choose to buy is well priced and quick to integrate then you’re in good stead for saving a lot of time and money trying to create it yourself. However, the running costs and reliability may let you down in the future. It’s difficult to predict how involved your team will need to be on the upkeep of either a bought or built function.
First installation is unlikely to be final. There are always bugs that need to be fixed, updates to install and get used to, as well as potential security breaches. When these happen in external products, you have less control over how to fix them – and how much it’ll set you back, both in time and money. Without service-level agreements, you can really be at the whim of the developer.
If you build your own product, your internal teams will have greater control over fixing issues that crop up. Feature updates can be tailored to exactly the issues you and your customers are experiencing, too. By keeping these things in-house, you’re in greater control of how your business spends its time and uses its resources.
Examine the needs and uses of the software you’re trying to build. If it needs to be completely personalised or very basic then you’ll have an easy solution to your question – build the former and buy the latter. If you’re looking for a generic product that has multiple functions, for example your sales software, it needs to be easy to install and well tested if it’s worth the risk of buying externally.
To protect your budget and resources, make sure you’re aware of the likely maintenance requirements, including the level and cost of support you’d receive. Check the risk management procedures of the sellers you go to. It’s in your interest to find out if there are any problems in parent companies to avoid falling victim to a fall like Wirecard’s last month. Be scrupulous in your research as it’s easy for things to be hidden in an industry where businesses grow quickly and things change at such a fast pace.