A Guide for Startups and their Founders — April 2023
Following the Silicon Valley Bank collapse and rescue, the markets have been jittery and investors are now rather cautious. What previously had been a lot of big spending and speculation in the startup world has led founders to consider efficiency and focus on extending their runway. Previous fast scaling inevitably led to inefficient solutions, and overspending on infrastructure. High rates of pay had been a top priority to get offers accepted and people in to do the work as quickly as possible.
It takes practice to get good at forecasting and understanding operational software delivery at scale. First-time founders especially struggle here and rarely think to hire a fractional executive to help deliver accurately on this. Forecasting is important as it directly affects the size of your capital raised for investment, get that wrong and you will find you’re not going to hit targets and are running out of runway very quickly.
So as we’re all running out of runway now how you reduce your cost base or have tighter cashflow control of your biggest cost — people — is a hot topic.
Whilst most investors and many founders will want to keep all their resources in-house and on-site, no one operational size fits all. In many cases, for the sake of both finding talent in the first place and finding affordable talent, it's simply unrealistic to have everyone on-site. Try hiring in San Francisco, or other major centres, London, Oslo, Berlin, and Paris and discover just how expensive it is to do this.
I have canvassed a number of experienced Founders, CTOs and VPEs and from this and my own experience, I have collated information to share. All names and business references are removed for confidentiality.
My notes for hiring internationally — in Europe and the UK
Hiring in some parts of the EU has fewer benefits than it used to, as costs have escalated over the last 2 years there is less benefit to remote talent in an Eastern European country than locally sourcing a developer in the UK and offering them a fully remote role. There are some cost efficiencies to outsourced services however this picture changes for specialised roles — try hiring data engineering or data science talents — it's not much cost saving.
This is also really because if you are hiring individuals as a Northern European or U.K. / US-based business you pay a higher rate than if the same person was working for a business in their local market. Hence outsourcing firms are still cost-efficient in comparison to where the salary base for individual in-house hires is high.
Add a lot of overhead if you want to hire developers or technical staff in London or the South East of the UK and expect any in-office time, salaries are simply higher.
For in-house remote EU teams, it's around a 30% cost saving and whilst standards are very high, for some economies you may have issues with churn — other competing businesses offering remote roles. In Poland, everyone wants to be a contractor for tax benefits and they culturally think like contractors which is difficult for team cohesion. If you are looking to build culture this may not be the ideal model, you may be better off with outsourced services if you can negotiate a similar price.
The pandemic made remote working more normal, the same time the inflation put prices up and near-shored a lot of talent putting up costs, as this happened across Europe this has meant that market differences have harmonised for certain roles you will struggle to make savings that you used to make between Eastern European countries and northern and central Europe. The benefit is more access to talent.
Norwegian founder on outsourcing to Poland
“When we first considered hiring, we were looking for software developers with specific IoT platform experience. This was very hard to find in Norway and costs are just unrealistic for a small business like ours. We found a software vendor in Poland who had specialised knowledge and did a deal with them to provide a white-label solution they can also sell to other startup businesses. They operate as a subcontractor. If we had to do the same business now it would certainly be more expensive and the rates are higher than they used to be, it’s still more cost-efficient than using local market engineers but the gap has narrowed. I’m not sure we would make the same decisions if we were to start a business now. Things have changed.”
CTO on hiring in India
“If you’re hiring between 10–20 people you don’t need to pay overheads like healthcare and pensions over 20 you have to and it takes a lot of time and effort to set up a business. For up to 20 people you may as well consider an outsourced solution — however, cost overheads may remove some of the financial benefits. As a guide between 150–300 GBP per day is a guide rates-wise for junior to mid-weight hires.”
“You will need to hire a local market tech lead — Engineering Director to manage the team and ensure deliverables are aligned. Expect to travel over to the office established over there 4 times per year to ensure that employees feel valued, and engaged and that the leadership and teams stay aligned. All Indian teams want to come and live and work in Europe however if they do this then you have to pay local market rates in Europe, By paying lower rates they will work in the EU for long enough to land a better-paid job elsewhere. Churn is a big problem in India — good staff are always looking for a new role and often change jobs. Businesses that have only 10–20 people, will think like contractors and not be motivated to stay in roles without some security. Pricing can vary widely and one individual may charge very different rates for the same job depending on what they think the value of their relationship is with you it's part of a bartering business culture.”
“Timezones can be problematic, for the Indian teams to meet you in your timezone may not be desirable for them and could lead to churn if it’s not family-friendly hours, same for UK teams that consistently have to meet at horrible times of day and night.”
“Investors often have unrealistic ideas about operational costs and concerns about quality. They have often never run their own businesses and simply don’t understand the implications of costs for running teams in the UK, EU, or US. Founders especially first-time software founders also struggle to understand that having everyone on-site in London, Oslo, Berlin etc might create a nice culture but will generate an unrealistic burn rate. You have to outline to founders and investors that the burn rate will simply be x3 to locally source talent and it will take time with additional overheads and in the UK there is a big problem with churn.”
“Costs are significant in terms of savings if you set up your own internal office in one of these remote locations, it’s around 1/3 to 1/5 of the cost. Using outsourced solutions adds to the overhead as does use umbrella companies and dedicated teams.”
“In developing markets, there are some different perceptions about quality very often, many developers have a make-do and mend attitude which can cause problems with quality. The best tip here is to keep your QA and testing on-site in your home country or to an outsourced provider that’s local to your market to ensure confidence for execs and a thorough feedback loop.”
Founder on outsourced teams in India
“We found the rates for technical staff in the U.K. to be prohibitive we simply would have struggled to become profitable if we had decided to hire in the local market so we had to go overseas. We initially decided to set up a local office in India which proved to be very time-consuming and the first manager we had wasn’t very good, which caused a lot of problems. We now have a very good guy running the team there but have actually decided that having everything as a remote office added a lot of cost and overhead as the team grew and we have actually sought to separate out the technology team as a separate business for which we are the main customer. That suits both us and them much better and has reduced the rates we pay by around 20%. We had teams we used in the U.K. initially but didn’t find the service to be any better and the cost was very high. We also felt vendors charged unreasonably for minor changes which we were compelled to implement which left a bad taste. Overall we have been very happy with our decision to outsource to India.”
My notes on high burn rates in Startups
Businesses that have decided to wear the high burn rates for on-site staff in major European centres have limited choices when they need to reduce costs. Software teams take time to learn the stack, evolve and collaborate well as a team, this isn’t weeks it's months and years. It's really in your interest to reduce the churn of good talented developers and engineers, the overheads might not turn up on the spreadsheet in an obvious way but they will be felt in quality and time deliverables, as well as additional hours for hiring and onboarding costs. Businesses should track all employees task based hours to identify these costs in a tangible way. (Track tasks not people). if you can’t afford to pay top rates you need to either have a very compelling proposition or offer other benefits, working remotely, parental leave flexibility, and training opportunities. More senior roles for less experienced staff, all these things can help attract and retain talent. Although you risk with inexperienced people in senior roles, not only do they get the experience and churn but they also don’t always perform very well when learning a role, or simply level off and don’t learn at all. This last issue is a very common problem and one reason why fractional executives exist. Most roles in software development cannot be taught only learnt, one reason junior developers and other graduates have a hard time getting their first role.
If you want to reduce burn rates you may need to start considering outsourcing or setting up a remote team with just a few developers in a remote office to start with, and simply not replace people in the on-site office in Oslo/London/Berlin where ever. But at some point, you have to face the obvious questions around business change and people being nervous about how this impacts their roles. You also need to make some decisions to anticipate business growth and add to your team in these locations which takes time and effort.
Taking a magnifying glass to your operational costs is also key, reducing spending on infrastructure where possible to do so and centralising control. (Also important for the sake of security and compliance protocols as much as budget management) is an important step to ensuring efficiency. Most teams evolve without Solution Architecture knowledge or competency. This lack of knowledge inevitably leads to problems with inefficient solutions and poorly implemented architectures.
Security compliance in remote teams and offices
Basic things like quality standards and enforcement make it important not just for ensuring the standards are met but also that investors and business leaders have confidence that you have your QA within your local market. It is also critical for considering remote teams when you visit that things like basic security on office premises are met — for example, one development team that needed to comply with security standards that they have an office door that locks. Seems basic! But for GDPR compliance if the hardware is stolen this could be catastrophic for regulations and litigation. (Auditing security and compliance for technical solutions is a whole other topic best covered elsewhere).
Hiring in Africa — views from a VPE and CTO
“Before the pandemic, developers would get around 800 EUR for a junior 13–1500 EUR per month salary if they had some experience up to 2500 EUR per month if they were very experienced. But since the pandemic and remote working were normalised we have also seen a harmonisation of rates developers saw they were working for big companies in the US and Europe and could see they were doing the same job as these developers on-site in these countries but for less. You can argue this in different ways, and say well it’s cheaper to live in some parts of the world and the currency is less favourable therefore it’s cheaper to hire. Or you can take a value-based approach and pay more. Regardless this has pushed up rates it’s around 1/3 more expensive to hire now than it was before the pandemic.
Most startups prefer a business model where they hire individuals directly on hourly rates or payroll and sometimes they use outsourcing firms but generally, they want to keep everything in-house. Few businesses want to set up a remote office. With all the overheads and complexity of setting up an office in a remote location where you don’t know the legislation etc, they often use sites like Remote.com and TopTal to find people. We find that there are huge application numbers for jobs, for each role we get 4000 applicants but we hire only 1% of the applicants we get. Screening processes are quite long you need to do more work than you would in Europe to make sure candidates have all the required skills it takes some additional screening. The problem is most often assessing soft skills, hard skills are easier to measure and test. Many developers don’t speak good English and struggle with team working. Some cannot work well remotely others have good experience and can work with others in a team. It can vary a lot skills-wise. There are a lot of self-taught junior developers but they really need to be in an office with someone to help them to get to a good standard. Remotely training them is hard.
Whether someone is good in an office situation or remote is really down to the individual and you have to assess that at the interview.
We find startups don’t want to use outsourcing as much but big established firms do. For them, the cost and task-driven approach is most important.
The countries we hire from are Egypt, Nigeria and Kenya and some from Morocco. Nigeria in particular has a really good startup scene so there is a lot of good talent there.
Employers underestimate how important employer branding is, the best developers will value this very highly and if you don’t have the best rates to pay then it will be hard to get people interested. We have found remote roles for many developers if you don’t offer this you simply get fewer applicants. Remote is also really valued it’s harder to get good candidates if you don’t offer that.”
My notes on; Different models for operations and payment
Using an umbrella companies and international payroll
Employers of record are often used to ensure payroll for international locations, these businesses don’t always cover all international locations however and can be subject to different fee structures which can wipe out benefits for your remote staff. Make sure you check local market fees and requirements for using these businesses — Umbrella companies in some markets add a lot of overhead. On the plus side, it is faster to hire, and remote is a benefit that will tempt many staff.
In-house and on-site
The most expensive, you may achieve positive on-site cultural team cohesion but you may also struggle that many developers wish to work remotely or hybrid working and that not offering that restricts your hiring possibilities. I have seen both fully remote and on-site teams operate extremely well and very badly. There are obviously restrictions to talent attraction in small markets it can be hard to find specific engineering competencies which can restrict your ability to exploit this model.
Build, Operate, Transfer
Big corporates and corporate innovation teams often use this mode, and that’s because procuring a team is faster than building and training it from scratch and they have the budgets to do so. Specialist skills in these outsourced org’s are costly however, consider any hot skill demand area you are paying those wages + operational management overhead. Specific project experience is also key. These firms are very good at building and delivering and you get the benefit of a lot of resources all at once you may not need for ongoing operational management. Few startups recognise this. However, the challenge is very much the transfer to internal teams which is time-consuming and may come with added complexity if you have more than one set of infrastructure running. Good delivery management and requirements definition is absolutely key to success here.
If you don’t transfer operations you could also fall foul of any contract you sign with said subcontractor, they are often not motivated to operate ongoing.
Outsourcing
Similar to Build, Operate and Transfer, using a subcontractor can have a lot of benefits again for fast delivery and quickly identifying team skills. You can also find in some remote markets that teams operate as individual contractors anyway and building your own in-house remote team means you actually hiring a bunch of freelancers, with the cultural mentality that comes with it. On that basis hiring a pre-formed outsourced team is rather appealing for the right price. As you are a customer, not a direct manager their remit is to deliver to you, rather than you solve all their personnel management problems.
Fully Remote
This has been very popular as companies adapted through the pandemic but rendered a lot of middle layers of management useless. The resulting backlash to “get back to the office” is partly reflective of poor pre-pandemic management culture where you need to see people doing work at their desks to believe they are working.. As a result employers offering this with fair pay often have the edge. It also allows you to access talent around the world. However, time-zone alignment, differing cultures and ensuring that remote work is building a good positive digital culture is key. Some teams are very successful here. Teams that weren’t successful through the pandemic suffered poor physical world to a digital leadership transition in many cases. Obvious benefits to balancing family life and living in cheaper locations for staff see below.
Hybrid
A mix of both on-site and in-house + remote teams can and often do work extremely well. Blending in-person team culture with active digital engagement. It's important that the teams are active in engaging their remote co-workers and that remote hires feel valued and involved in team activities. Flying team members out to all meet once or twice a year can be valuable team culture building, and is important for inclusion. The flexibility of hybrid working also allows those with small children and other caring responsibilities to balance family life and the cost of housing. This is still an expensive model to run but may strike a balance for founders and investors who want staff in-person engagement balanced with the cost of remote workers and talent access. Especially in the early years of building a business.
Rates of pay and what you can realistically negotiate
Rates can vary a lot, where experienced hires are asking for a lot of compensation inexperienced managers and founders often assume that there is no room for negotiation and the only thing that matters is money. This is really not true. If you’re prepared to work at sales then be prepared to work at salary and rate negotiation and structure offers that really make your proposition matter to staff. Doing this marks you out as a leader. Poor leadership is poor negotiation.
Pay versus time versus mission
The level of pay you offer is only one marker, both I myself and other colleagues have taken pay cuts for certain opportunities, be that for learning, job titles, mission or simply more flexibility.
Things you can optimise on with offers:
Performance related bonuses
For executives in particular you can demonstrate performance-related pay over time. If you can’t pay a decent base, can you offer a bonus if they hit a certain target? Engineering isn’t just a cost centre, some leaders can also support broader business goals, and sales, speak at conferences, and enable opportunities through their business network, in fact, an effective CTO should do that as part of their role anyway.
Binding time
Offering bonuses for loyalty. Well, why not say ok we’ll raise you the additional payment you asked for but if you leave before X date we will deduct that from your final salary. This however only works during the post-initial “testing period”. The employer and employee may wish to understand that the fit is correct before they commit more money. Why not offer the additional payment after the initial 6 months of engagement and make it contractually obligated?
Remote versus in-house and time off
This flexibility can be really important for some hires. Offering overtime paid back in time off, and paid trips to conferences and learning centres is also very valuable. In markets where everyone is not on endless holidays, this can be very valuable to staff.
Training budgets
This is so important for technology workers, executives really underestimate how much this is valued by staff. We all need to update our skills periodically and including this in paid time is a big bonus for many.
Good culture
What are you actively doing to create a good culture? Is your team social? Are the founders planning to exit as fast as possible because this is just a financial vehicle for them and they simply honestly don’t care? Leadership that is seen to value staffers is extremely important. Startup culture attracts a lot of cynical get-rich-quick speculators, make sure you come across as authentic and motivated and demonstrate what you will do to ensure good values and engagement in person or online. Diversity initiatives are very important if you want to attract those candidates. Especially representation in leadership for non-white male profiles and any business initiatives you have to attract those candidates clearly explained.
Employer branding
This is very important, we all want to hire the guy from the big tech firm right? People just want those names on their CVs, not just the big paychecks as it guarantees perceived value even though in reality it has absolutely no impact on performance. You can pass an exam without knowing the content just like you can an interview. Make sure especially key leadership profiles are professional looking and that website reflects your mission and values as a business. You don’t need to be youthful you do need to look relevant. Advertising agencies do this, there is no reason you can’t as well.
Sell the mission and create autonomy
The purpose is very important, who wants to work at the corporate coal face on a meaningless task? Why are we all here? Autonomy and purpose is one of the most common reasons people change jobs after pay and are tightly connected with individual feelings of professional value and fulfilment. Offer people the freedom to answer problems and they will be motivated for the role.
Technology
Developers and engineers do not want to work on old tech stacks where they can’t affect decisions. It's important that you are advertising that your business is looking to drive the future, innovate and use the most up-to-date solutions and frameworks.
Rates for 2022 International — blended
These are blended averaged rates and only for the most common developer skill sets. For hot skills or difficult-to-find talent, you can add 1/3 to 50% on top of the rates quoted. You may also find rate parity with some markets for machine learning and data engineering skills between places like Africa, Asia, India etc with some EU locations as remote workers have demanded more since the pandemic and demand is so high.
This is a guide only.
UK rates and a note about EU markets:
This is a reasonable guide and as an indication, EU rates in the Netherlands, Germany and Switzerland are higher. For startups in Scandinavia — rates are usually on the lower end as their capital raises are often low however big corps and bigger startups can certainly afford market parity for pay with their German, Swiss and Dutch neighbours which is a bonus if you are a British Tech worker looking for more money and a better lifestyle.
FYI: UK Rates quoted here I would suggest are on the low side for Engineering Managers, VPEs Heads of Engineering and anyone in machine learning, data analytics or specific engineering areas. Most people I know in these roles earn higher rates.
Freelance to salaried developer rates US;
https://arc.dev/employer-blog/software-developer-freelance-vs-full-time-costs/
I will add and update this periodically I hope it was useful to you.
I am always happy to network and share knowledge regardless of whether I am hired or not, however, if you want a CTO to help solve your challenges drop me a line. There are a few problems I can’t tackle.