Funding an Outsourcing Engagement With Entrepreneurs’ Equity | Article

outsourcing in an unstable economyAs the U.S. economy teeters somewhere between recession and recovery, the pressure is still on IT managers to tighten their purse strings and look at turning over their non-core functions to an outside service provider. Outsourcing certain functions in a managed services arrangement is one way companies can save money and allow their IT staffs to focus on more strategic projects.

But in these days of belt tightening and falling stock prices, how do you fund an outsourcing initiative?

Vensure, a Burlington, Massachusetts-based provider of software development infrastructure, has an unusual answer. The service provider gives entrepreneurs the ability to trade their outsourced development projects for equity in their company or idea.

Vensure calls this the ‘Engineering for Equity’ model. “This is a very progressive funding model that has received a warm welcome from most entrepreneurs we’ve talked to. We see this as the only way a software company can reach profitability. Under the Vensure model, companies can focus on core competencies, not to mention customer relationships, and have their next-generation products built without serious distractions and exorbitant costs,” explains Christopher Prinos, director of marketing and business development.

“So far, everyone we’ve presented the idea to has embraced it. It’s really a win-win situation, as our success is directly related to the success of our clients. This puts the entrepreneur at ease and makes it easy to sell the quality of the finished product,” he continues.

Outsourcing Compresses Time to Market

One client who has utilized this option is Mactive Inc., a Melbourne, Florida-based service provider of advertising systems to the media and publishing industry. The company needed to get its new ‘AdBase’ product line to market quickly. IT expenditures became an issue.

According to Scott Roessler, Mactive’s president of U.S. operations, the firm had older versions of key production modules that urgently needed updating. “We needed to have these products quickly, but with manpower driven towards core products, a resource crunch raised its ugly head,” he explains. “We had the ideas and the old products on which to base the new production modules, but not the manhours to produce the code,” he adds.

Fortunately, an established relationship with Vensure meant that Mactive had to look no further for third-party assistance. Vensure began working with Mactive in the spring of 2001, providing it with a team of 20 developers ready to create accurate specifications for Mactive’s product updates within days.

Prinos believes Mactive was testing Vensure to see if the firm could produce something of value. “I don’t think they really expected us to deliver something they could use,” he says. When Vensure delivered its alpha product, Mactive “really began to understand and believe in outsourcing as a viable product development alternative,” says Prinos.

Vensure’s supplier network offered a virtual inventory of development professionals, which allowed Mactive to take advantage of a ‘pay as you use’ outsourcing model.

Prinos describes Vensure’s relationship with Mactive as an extension of the Mactive development team. The company’s relationship manager spends about 25 percent of his time at Mactive’s headquarters in Florida, where management provided office space for the Vensure team, he says.

Roessler believes that as the costs of maintaining an IT engineering staff increase, it will become increasingly necessary for companies to work with outsourcing service providers to help facilitate new products they can bring to the market quicker and cheaper. “But outsourcing is not free. In the short term, it may allow for some cost-savings; but the real value is in long-term expenditures and reduction of overhead.”

With Mactive, Prinos says that Vensure provides a number of ancillary services, such as marketing, working directly with Mactive’s marketing team. The company even plans onsite product launches to train Mactive staff.

Launching a New Company Together

Roessler says Mactive does not work with service level agreements (SLAs): “Mactive has line managers for each major group. We provide information on how the product is to function and work with Vensure to develop the product. Mactive drives the product line and Vensure delivers the products,” he explains.

The buyer has been more than satisfied developing Mactive through the “Engineering for Equity” model. Both Vensure and Mactive are now outlining plans to launch a new company using this paradigm.

For other small companies looking for alternative solutions for funding, both Prinos and Roessler say that their approach stimulates innovation by reducing costs and risk associated with launching ideas. “It encourages building the ‘microcompany’ – an approach that focuses on building small, modest-sized companies that can be quickly sold or acquired,” says Prinos.

Roessler adds: “With Vensure essentially acting as a venture capitalist and funding our product development, we’re confident that the market will embrace what we built together and help Mactive maintain its position.”

Lessons from the Outsourcing Journal:

  • Outsourcing non-core functions in a managed services environment cuts costs while allowing IT staff to focus on strategic endeavors.
  • Access to outsourced talent with domain expertise dramatically reduces the learning curves and software development cycle.
  • Funding an outsourcing relationship with a customer’s equity gives entrepreneurs a unique opportunity to speed time to market and build development teams and products without losing an equity stake (typical with traditional venture capital engagements).
  • ‘Engineering for Equity’ helps private investors mitigate their risk when evaluating investment opportunities.


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