July 11, 2024
If you ask us me what has been the most difficult challenges I experienced so far in building the startup, I would immediately think of:
I have made quite a few errors in choosing the wrong accountants a few times (slow, or too expensive, or too big for a startup to be a relevant client) or the wrong lawyers (not responsive and often just expensive for no added value).
So what is a good recipe to get it right early in the journey?
By the way, what should we outsource to external services and what should we keep in-house?
Memory from university and master classes is that a startup should keep in-house everything that is mission critical (for example code development or markets trading) and outsource what's not (for example accounting).
But this seemingly simple decision hinges on a delicate balance between cost, speed, and quality.
On the surface, building an internal team offers long-term value. The recruited talent becomes an integral part of the startup, developing (and keeping) a deeper understanding of the company's goals and culture. This internal expertise allows for a precise, intentional and more nuanced approach to future problems, leading to unique, ad-hoc and innovative solutions that wouldn't be readily available from outside suppliers. Moreover, the internal team would progressively earn specific, valuable experience as the startup grows, and would build and share a unique culture.
However, building a team comes at a cost. Recruitment, on-boarding and ongoing salaries add a significant financial burden, especially for early-stage startups with limited (or zero) resources. Also, a startup does not have the brand of Google, Coca Cola or Nvidia today, making it very hard to attract a lot of talent with the specific knowledge, skills and network required to conduct specific activities well.
Outsourcing, on the other hand, offers a faster and potentially more cost-effective solution. Specialized firms can bring years of experience, tackling problems quickly and efficiently (in theory at least). This can be particularly beneficial when dealing with one-off tasks or highly specialized needs (= such as lawyers negotiating contract to open an investment fund once). In parallel, relying solely on external suppliers can create a knowledge gap within the startup. Additionally, the quality of the outsourced work can be variable, and finding a reliable partner with the right expertise can be time-consuming (to my first point above - and see further below).
Where's the sweet spot in this "make vs. buy" dilemma? Let's consider three factors:
In our relatively short experience here, we have implemented a hybrid model. We are building a small, light but very experienced team for core activities (coding, markets, operations, people & culture, sales) while outsourcing the rest - from legal to accounting processes, investing licenses, building the infrastructure around distribution.
Bastien, our COO, is coordinating current and future providers while building internal knowledge, hunting for the best external providers available. There is just some stuff that we cannot deal with internally: as an example, imagine the legal complexities of dealing with software royalties, international taxation, nuances in the Luxembourg fund industry, complying with MIFID II in Europe, squaring off distribution agreements to sell funds) and thus we need to look outside.
The external professionals we hire need to be solid, competitive, happy to focus on small clients. It has not been easy so far to get it right.
Where to look to find them?
Securing the right professional services has become a complex challenge.
We are building the future of investing across different countries with different regulations. What set of professionals understand cross-border tax and legal implications in specific industries (investing and software)?
Assuming we luckily spot a list of service providers who happen to be experts in some innovative and unexplored spaces where we are trying to create innovation. Who do we contact first? Who can we trust? Long lists of service providers are overwhelming. The struggle to differentiate between global giants (say Deloitte) offering a one-size-fits-all approach and a boutique firm specializing in the intricacies of their target market is real.
Cost remains a constant. Balancing the need for high-quality services with limited budgets is also an issue. In the various errors that we have done here, we have been tempted by apparently standard services (say accounting) offered on the cheaper side by less established firms. The quality of the output has been a disaster. But hey, when we decided to spend our own money for better services, costs went significantly higher (2x) with just an uptick of 10% in the final quality of the output.
Gosh.
Here's where resourcefulness (and hope) should come into play: a wide network of helpful friends who happen to know someone who knows someone.
First, the possibility to speak/consult with friends or former colleagues who have been through exactly the same challenge is invaluable, but also rare. Second, approaching trusted contacts who happen to be subject-matter experts in a specific field - say legal partners in the finance space - can also be incredibly valuable, at least for navigating the space, filter a long list of possible outsourced solutions and eventually finding the right one.
If not, the remaining solution is trial and error: experimenting with suppliers on a single (non critical) project and see what comes out. The downside is wasting time.
We changed five accounting partners in three countries after disappointing deliveries and we are still searching for some better partners. In parallel, we changed two legal resources for the same reason in one country.
On the bright side, we had some recent good updates:
=> a (very kind) friend who happens to cover a major position at a leading legal firm is connecting us with different subject-matter experts within his firm. Such firm is not used to deal with a small fish like us and it is not cheap. But thanks to his help we will be supported by the right experts, we will delay the payment of fees after billing just the necessary hours, and - perhaps most important - we will get some attention as if we were an established major client
=> another very good friend who happens to work in a leading fund management company is advising us on the nuances of building a serious, performing, efficient vehicle in Luxembourg and is doing everything he can to make it easy, fast and possible for us to do what major banks normally do
In conclusion, finding the right international professional services is a daunting task for startup founders and their team. Thorough research and clear communication might help. Luck helps too. But we have found out that they key to solve daunting problems is often not what you know, but who you know.
