AI SF recap: When to outsource vs hire in-house

With Gloria Felicia leading the discussion as the moderator, our founding partner Jozef Maruscak shared valuable insights during a comprehensive conversation on AI outsourcing at AI SF week. The discussion revolved around crucial aspects like determining the right moment to outsource, effectively managing budget allocation, and how to make sure your idea won't get stolen by an agency.

Let’s jump right into it!

Gloria Felicia:

"All right, so maybe can you tell us a little bit more about what Sudolabs does?"

Jozef Maruscak:

"We have been around as a product-building agency for approximately 3,5 years. Our focus is primarily on assisting startups, mainly based in the US, in bringing their products to life. In practice, we help early-stage founders with the MVPs, as well as assist Series A or Series B founders with specific product features. We've been working with some of the best companies including those emerging from the YC program or funded by VCs like a16z. We also collaborate closely with multiple other VC funds. Within just three years, we have bootstrapped the company to 90 full-time team members. Currently, we are stepping into the AI domain, expanding our services to include AI offerings. This exciting development is expected to attract more clients, given the ongoing advancements in AI, and we are thrilled to be a part of it."

Gloria Felicia:

"You said AI offering, right? There are just so many companies these days trying to incorporate AI when they don't really need to. What is the best-case example of when a startup or company actually needs AI?"

Jozef Maruscak:

"In terms of the ideal scenario for AI solutions, I think it comes to the very same question that every startup is asking, regardless of whether it focuses on AI or not: Does the technology truly benefit the user? If the application of AI enhances effectiveness, speed, or cost-efficiency, then it's the right use case for AI. We should learn from past experiences with Web 3.0, where the trend was to integrate blockchain into products simply for the sake of being cool. Those days are over, and for AI to thrive in today's market, it is crucial that we remain honest with ourselves about the actual need for this technology. However, based on what I see in the current market, most of what is being built is actually useful for many companies, and that's why there's so much hype around it."

Gloria Felicia:

"So for the founders in the room people just assuming that something is a pain point. How can someone prepare before coming to you to outsource and make sure that the product discovery is done correctly?"

Jozef Maruscak:

"I think that one of the key pain points in general in software delivery that we have seen over the past 3 years and that's why we’ve set up the product department at the end of the day was that there was so much money wasted on building stuff that shouldn't ever exist on the market. There's still that builder's mentality where you just build, build, build without proper validation. It's crucial to validate concepts before committing extensive resources to product development and engineering, as they are the most costly aspects. There are many ways how to do it. The easiest way would be to talk to the end users in very structured user interviews. You should also, from the very beginning, set up your data pipelines and data analytics. It means that every interaction between the user and your product should be captured in your database. You have tools like FullStory that provide detailed insights into how users interact with the product or you can use HotJar which offers similar functionality helping you understand how users engage with your product and why they may drop off. However, perhaps the most valuable action you can take is hiring someone with industry experience, someone who has witnessed both successful and failed products. Their expertise can significantly accelerate the process."

Gloria Felicia:

"Very cool. Great. I guess for very early-stage founders who just fundraised, for example, $200K-$250K. How would you suggest the budgets go towards... Should it go towards hiring a full-time engineer? If it's outsourcing, when is the right time to do that?"

Jozef Maruscak:

"This depends on the product. For certain types of products, most of your budget will go to marketing and sales. For other types of products, you need to be tech-heavy and your go-to-market approach will be different. But in terms of the choice of whether you should hire internally or you should outsource, the question is mostly based on what you want to use the outsourcing agency for. A great outsourcing agency should allow you to build more for less money quickly and ideally of higher quality, but it's not the best solution for all the use cases.

Early-stage founders aim to get the MVP out, yet they don't know how many people will they need later. They don't know what the product will be because they haven't validated it yet. So if you find an agency that can give you the team in a week from now and they can quickly iterate on the MVP and quickly try to get closer to the product market fit, that's the best-added value for most of the early-stage founders. For later-stage companies (series A or series B), they want to intensify their efforts without spending weeks on hiring, onboarding, and team integration. In such cases, they hire agencies like ours, which offer flexible engineering capacities that can be scaled up or down based on the specific problems they need to solve."

Gloria Felicia:

"A lot of times founders are very concerned about their ideas being stolen by other agencies. How would you mitigate that?"

Jozef Maruscak:

"I think that the agency environment, as well as the entire industry, is very unhealthy. We have been fighting heavily with a lot of assumptions. Since we've been in the market, we've come across countless providers that shouldn't exist at all. It's incredibly challenging for founders to assess the true quality of the services offered by these agencies. Our approach begins with building strong relationships with companies, which is why a majority of our deals come from existing clients or through partnerships with funds. Evaluating agencies can involve identifying both good and bad practices right from the start. One crucial aspect is ensuring that whenever you pay for code, it should be legally transferred to you, as stipulated in your agreements and NDAs. Additionally, You should also talk a lot to the other clients of the agency, to get valuable insights into the agency’s operations. Unfortunately, there have been instances in the past where agencies somehow stole the idea. However, engaging in such unethical practices will cost you your survival on the market."

Gloria Felicia:

"For founders without any technical background and they're struggling to find a CTO, do you have any tips and tricks? How can they build their MVP?"

Jozef Maruscak:

"I would say that around 30% of the founders we work with are non-technical founders. The typical flow involves us developing the MVP, followed by their successful fundraising round. Then we help them in hiring internal teams. This is a typical use case. In terms of hiring, finding a technical co-founder or CTO is a very tough challenge. You lack prior experience working with the individual, making it crucial to establish a strong personal connection and set up some trial period. For instance, you might agree to work together for four months before discussing the terms further. In my opinion, the primary reason for company failures often stems from problems between co-founders. Rushing to secure a technical co-founder as a business founder, despite having resources and a clear vision, carries a high risk of failure. It's important to take your time, engage in thorough discussions, establish trial periods, and ideally leverage providers like us to build your product before transitioning to your in-house team."

Question from the audience:

"Since you work with the founders and the early stage of product discovery and problem discovery, what pricing mechanism do you have? Do you have upfront pricing or would you be willing to operate on a, let's just say, stake in the company?"

Jozef Maruscak:

"We have done that on several occasions before. It really depends. Most of our clients opt to pay for our services, similar to having their own team, which offers a level of cost-effectiveness and flexibility. However, there are a few companies each year with whom we take a different approach. In these instances, we secure a stake in the company, taking on a certain level of risk. Prior to proceeding with such an arrangement, we extensively evaluate whether we can afford to do it. So, while it may not be the standard practice, it does occur."

Check out the recap by Founders Inc. on this link! For updates on our events make sure to follow our LinkedIn, we will soon release our community website.