Hiring Full-Time vs Contractors / Outsourcing Impact on Valuation?

Our SaaS startup is (hopefully) getting our first customer soon, at which point we decided to bring in additional resources to accelerate development.

The basic options is whether to bring in a short-term contractor with the exact skillset we need, hire a full-time person, or outsource. My guess is that we may do some combination of the above.

We are boostrapped right now, but if things go well, we may need to raise money. What impact does how you do development have on your valuation? I read somewhere that for seed rounds each developer that's part of the team is counted as 500,000 in valuation, but I would imagine it's less if you outsource or contract. On the other hand, outsourcing can be cheaper, so you can do more with less funding.

Any experiences / opinions to share?

Number of developers is not a critical factor in valuing your company. Yes, the number of developers will impact your cost structure, and therefore affect the valuation, but 500K per developer doesn't mean anything. (I wonder where you got that number from)

Having said that, here are my thoughts on whether to hire / contract / outsource. The answer really depends on the kind of product you are building -

Is your software product your core competency? Do you expect to constantly update the product functionality and have rapid releases? Do you NOT clearly know the specifics of the product you are building? (a product like 37signals, for example). Then you should have an in house development team. You are essentially a product company and outsourcing your core strength may not make sense.

Instead, if you are a services company with software as a tool, and your core competence is something else (let us say you are providing unique content via your website and charging customers for that. or something like this forum for example), then may be you don't need an in house development team. Contracting / outsourcing may make more sense.

We are a bootstrapped SaaS company with a differentiated product in the works. We decided early on that contracting / outsourcing is not the right path for us. (At least not in the beginning)

Finally, like most things in business, the answer will really depend on your specific context. Hope that helps.

I would disagree as well. The body count of developers has little to do with evaluations. Your investors will look at three things:

• Management Team: Can these guys execute if we give them money?
• Technology (or Product): Does the technology work and is it defendable?
• Market: Will people actually buy it?

Since you have boot strapped to date and are close on a customer, you are pretty far ahead of the game. One thing that you do need to be careful of is outsourcing your core technology. That will make investors nervous. Another is scaling the business. Getting one customer is great but how do you scale to 10 or 100. That is what investors want to know. Those discussions may bring up the outsource vs insource question. As long as you have a rational plan, the resources debate should be moot.

I would not agree with this. You have 10 developers churning out a product no body wants, would that make valuation for your company 10x ?

I guess if you are able to demonstrate that you have been able to develop and launch the product by bootstrapping , that might be much better.

Whether to outsource/hire contractors/full time employees would really depend on how much you have on your plate right now. Make a realistic evaluation on how much work you need and what's you're expected revenue. I think a combination of the 3 will give you the best value but in can be tricky if don't know exactly where you are and where you're going.

I agree with the others that # of developers (or # of people) isn't a primary factor.

In fact, contractors may give you a higher valuation in a sense, because contractors are often less expensive than (fully-loaded) employees, and imply that your development isn't based on a few, rare, and therefore invaluable people.

The truth is that valuations are based on other things like revenue, profitability, growth, business model, what the buyer expects to be able to do with you, whether the founders will stay, and how much the founders need to be paid off to give up their babies.