Technology strategy: Build, buy or partner?
The global engineering services outsourcing market was valued at USD$1.5tn in 2021 and is expected to be worth USD$6.6tn by 2030, with a CAGR of 33.2% from 2022 to 2030.
Source: Precedence Research, https://www.precedenceresearch.com/engineering-services-outsourcing-market.
© Choi Sungwoo
Will outsourced development impact your exit valuation?
Building proprietary technology is capital-intensive and requires time. Buying proven technology is often safer, quicker and an Opex consideration but seldom generates asset value at exit. The middle ground is partnering with third parties to develop your IP. But what generates the maximum value across the entire investment thesis?
The driver of technology strategy should be the investment thesis. If the revenue milestones depend upon rapidly acquiring market share, and value at exit will be driven by ARR or ARPU, then buying (or subscribing to) third-party technology is likely to deliver greater ROI. Conversely if a large part of the exit valuation depends upon having an asset that the next acquirer can exploit, then building technology is likely to be a better strategy.
Partnering with an outsourced developer to create your own IP often reduces time to market, which accelerates revenues, but is unlikely to reduce the net cost (it still requires investment in internal functions to ensure product-market-fit and asset quality).
In many investments, the optimal use of partnering is in conjunction with building in-house, with the split dependent upon product maturity and product share of revenues, and to maximise ROI, the level of outsourced development can be changed over time as exit nears.