Project Delivery Models for Tech Startups: Finding the Optimal Solution
By Vasiliy Soloshchuk & Vyacheslav Z. Tibilashvili
How Business Founders and Angel Investors Can Hedge Some of Their Risks
When the long period of fostering a startup idea is over, it has proven viable by what now looks like a hefty investment, and the whole thing no longer seems to be that much of a windfall, the technical implementation of a project is not what the startup’s business founders think they should be too involved in.
This normally holds true not only for startuppers, unless one of them is a technical expert, but also for angel investors, who, even if versed in development-related technicalities, have no means or time to control the project’s implementation, and thus, hedge their technical risks.
In consequence, creating the correct technical embodiment of the business idea is fully delegated to either a hired CTO, or the technical experts of an external service provider, engaged to implement the project. And this is just when your newly launched corporate ship may be setting sail for a Bermuda triangle of its own: these technical experts are just the wrong kind of stakeholders to be in control of your project budget that is directly linked to the delivery model they choose. Moreover, the efficient expenditure of your funds is not always these guys’ top priority. Even qualified technologists are a lot more likely to choose a simple, clear-cut, and technically suitable model, or, in the case of an external provider, one that that would be less stringent in terms of the responsibility they’ll have to share.
Opting for such a model may in due course translate in an inefficient use of investment funds, or even an outright project budget disaster, thwarting the timely delivery of the product to the market. Here is why this may happen.
Implementing Startup IT Projects: A Ubiquitous Catch 22
It is universally accepted (and the authors of this article subscribe to the opinion proceeding from their own experience) that the project delivery methodology technically more suitable for startups is the Agile Methodology, associated with the Time & Material Delivery model.
The project scope that is more often modified than not, the need to show the functionality to different stakeholders, and the emerging market trends that have to be taken into consideration all result in a significant number of change requests and highly variable project requirements.
The Agile methodology allows reacting to the fickle project conditions flexibly and in a nuanced manner, which, oftentimes, makes it the only possible approach a tech startup team can take. The client can flexibly adjust the project budget as appropriate.
Regrettably, what’s good for a startup technically, is totally at odds with what’s good for it financially and from the business viewpoint.
Regardless of the amount of investment a start-up has managed to land, this is always a fixed amount, directly proportional to the amount of effort required to implement the project. This expressly calls for a delivery model that allows a fixed project budget, such as, for example, the Fixed Cost/Fixed Budget model.
Moreover, unlike the Fixed Cost/Fixed Budget model, under the Agile/Time & Material model, the contractor has, virtually, no responsibility for the delivery of the final product. 100% of the project-related risks are endured by the client. The contractors are in no way motivated to keep the development costs down, they are paid in installments throughout the project’s lifecycle, and they normally love the steady inflow of fresh funds, – the more, the better. You will likely agree that that is not exactly a cooperation scenario craved by those investing either money, or energy in an innovative business undertaking.
Thus, a sustainable delivery model for a startup project must represent a well-balanced compromise between the Time & Material and Fixed Cost-Fixed Budget models to combine the flexibility of the former, with the safety of the latter to an extent that is deemed acceptable by the startup’s business stakeholders.
Moreover, the resulting cross-breed should vary in each particular case to better take into account the nuances of each project. So, is it possible for a startup to juggle the technical expediency with the financial efficiency, while obtaining a sufficient guarantee from the contractor implementing the project, to boot? And what of the existing options should tech startups’ business stakeholders and angel investors be aware of so that they can rule out some of the unwanted scenarios from the outset?
Some of the Delivery Model Variations You Can Discuss with the CTO of a Tech Start-Up, or External Contractor
Fixed Cost-Ceiling Time & Material with a Variable Scope
From our experience, one of the more useful cross-breed models to hedge a startup’s financial risks is the Fixed Cost-Ceiling Time & Material model with a Variable Scope.
This model variation is more suitable for those cases when the client is in a better position to manage the project risks, but also want to hedge the financial risks associated with the delivery of a particular set of functionality.
The above model variation retains all the important components of the conventional Time & Material model: this includes the delivery of a predefined set of features at a predefined moment in time, payment in installments upon the delivery of each agreed part of the system’s functionality, and the ability to add new requirements, and modify the existing ones before each iteration.
However, unlike with the classic Time & Material model, the time space within which some specific set of functionality must be delivered can vary. The uppermost amount that can be spent on developing this functionality is fixed, and cannot be exceeded.
When the amount of funds, designated as the maximum amount in the corresponding contract, is used up, all project efforts stop.
Importantly, under the Fixed Cost-Ceiling Time & Material model, each of the project development iterations must be covered by a separate contract. It is also worth mentioning, that this model variation is suitable for cooperative vendor relationships with accommodating service providers, interested in a longer-term cooperation with the client.
Phased Development Model
With this model variation, rather popular with venture capitalists, hedging the client’s financial risks is achieved through the division of the development effort into equal, more often than not, quarterly increments.
The delivery conditions are stipulated similar to the way this is done under Fixed Cost-Ceiling Time & Material with Variable Scope. The client’s financial risks are limited to their development costs for the forthcoming quarter.
Instead of the maximum amount of funds that is to be spent within a quarter, one can indicate the hourly rate that must be applied. This would allow for greater flexibility and eliminate the need for any possible minor adjustments (for example, when only insignificant additions are required to achieve the set goals).
A clear-cut advantage of this model is that it provides good incentives for the contractor to deliver as expected. Besides, it promotes the forging of a steady and mutually beneficial vendor relationship. This model also makes it a lot easier for a startup to both manage their budget, and report on the results to their investors, thus giving the latter an opportunity to keep their investments under control, at least, to some extent.
Cost-Driven Fixed Profit Model (Money for Nothing, Changes for Free)
It is no secret, that in many instances the business founders of tech startups tend to overinflate their technical solutions’ functionality by adding capabilities that are, in essence, just a bunch bells and whistles. These capabilities influence neither the solution’s competitiveness, nor the expected ROI. This is a not so seldom occurring scenario that most venture capitalists are unlikely to acclaim.
In addition, the importance of time-to-market for startups, as well as the frequent need to align the solution under development with the ever evolving market trends, both necessitate a delivery model that would allow ceasing the development effort whenever the implemented functionality is considered to be sufficient by the startup founders.
The above is made possible by the Cost-Driven Fixed Model, being a combination of several other delivery models. Under this model, a cost/budget target is set. The client can modify the scope of the development, practically, at any point in time during the project. They can discontinue the project at any point in time by paying the remaining part of the initially stipulated contractor’s profit for it, say, around 20% of the total budget amount.
In this way, the model motivates the contractor to perform well, while also encouraging them to use the project budget a lot more efficiently. In some cases, the above approach saves a considerable part of the project budget.
For angel investors, taking part in the selection of the project delivery model for a startup they are investing in is one of the more efficient means to curb their implementation-related technical risks. The same holds true for those startup entrepreneurs, who are relying on hired CTOs, or external technologists in making their business ideas a reality.