Build an internal team or hire a dev agency? A framework for deciding based on timeline, budget, risk tolerance, and what you're building.
October 17, 2024 7 min read
Build or buy is one of the oldest questions in business. For startup software development, the modern version is: hire developers internally or work with an external agency?
Both approaches work. Neither is universally right. The correct answer depends on your specific situation—stage, timeline, budget, technical needs, and where you want to be in two years.
This guide provides a framework for making this decision.
The Core Tradeoff
At its heart, this is a tradeoff between control and speed.
In-house teams offer:
Full control over priorities and direction
Deep context and institutional knowledge
Long-term capability building
Direct communication and cultural alignment
Agencies offer:
Faster time to first delivery
No hiring risk or commitment
Existing processes and expertise
Scalable capacity without hiring
You can't maximize both. The question is which matters more for your current stage.
When to Build In-House
Internal teams make sense in specific situations.
Software Is Your Core Product
If software development is central to your competitive advantage—you're a tech company, not a company using tech—internal capability matters.
Break-even point: roughly 6-9 months of continuous work
If your roadmap extends years, the investment in internal capability pays off financially while building institutional knowledge.
You Can Actually Hire
Internal teams require the ability to:
Identify good candidates
Evaluate technical skills
Make competitive offers
Retain talent long-term
Some founders can do this. Many struggle. If you don't have engineering leadership or hiring experience, your "internal team" might be worse than a good agency.
Culture and Integration Matter
Some products require deep understanding of your business that's hard to transfer externally:
Nuanced domain expertise
Complex organizational integrations
Confidential strategic initiatives
Internal team members become embedded in your organization in ways external partners can't.
Specialized work: External experts for security, performance, etc.
Define what's strategic (build internally) vs. operational (build externally).
Capacity Augmentation
Established teams use agencies to:
Handle overflow work
Staff specialized projects
Cover during transitions
Explore new technology areas
This isn't replacement—it's extension.
The Decision Framework
Walk through these questions:
Question 1: What's Your Timeline?
Question 2: What's Your Budget Reality?
Question 3: Is Software Your Core Business?
Question 4: Can You Evaluate Technical Work?
Question 5: How Long is the Roadmap?
Cost Comparison Deep Dive
Real costs are more complex than hourly rates vs. salaries.
In-House Full Costs
For one senior developer:
That's ~$90-135/hour equivalent for productive hours.
Agency Costs
Hidden Costs
In-house hidden costs:
Time spent managing, not building
Mistakes while team learns your domain
Productivity gaps during transitions
Cultural fit issues that emerge later
Agency hidden costs:
Your time for communication and coordination
Knowledge transfer when engagement ends
Context rebuilding if agency changes
Potential rework if quality doesn't match expectations
Transition Strategies
If you start with an agency and plan to go in-house later:
Plan for Knowledge Transfer
From day one:
Require comprehensive documentation
Participate in architecture decisions
Have agency document decisions and rationale
Record key meetings and demos
Consider Hiring From the Agency
Sometimes the best first hire is someone who already knows your codebase. Discuss this possibility upfront—some agencies welcome it, others prohibit it.
Overlap Period
The handoff should include:
Joint work period where internal and agency work together
Gradual transfer of responsibility
Agency available for questions during transition
Clear end date with support window
Don't Burn Bridges
Even after transitioning in-house, you might need agency help for:
Specialized projects
Capacity overflow
Expertise you don't have internally
Maintain the relationship professionally.
Common Mistakes
Building In-House Too Early
Hiring before you've validated the product means:
Paying salaries to build something nobody wants
Harder pivots with committed team
Burned capital that could fund iteration
Most startups should validate before building teams.
Staying With Agency Too Long
Agency work that extends indefinitely becomes expensive:
Higher ongoing cost than equivalent employees
Knowledge accumulates externally
Dependency without ownership
If you're using an agency for 2+ years continuously, evaluate whether internal makes more sense.
Choosing Based on Ideology
"We're a tech company, we should build in-house" or "Agencies are always faster" are both ideological positions, not strategic ones.
Make the decision based on your specific situation, not general principles.
Underestimating Management Load
Both options require management:
In-house teams need engineering management
Agencies need project management and coordination
"Agency handles everything" is a myth. You'll invest time either way.
Key Takeaways
The agency vs. in-house decision is situational, not universal.
Favor in-house when:
Software is your core competitive advantage
You have long development horizons
You can hire and evaluate talent
Culture and integration matter deeply
Favor agency when:
Speed is critical
You're still validating the product
You need temporary or specialized expertise
You're non-technical and need to start
Consider hybrid when:
Transitioning from validation to growth
Separating core from peripheral development
Augmenting internal capacity
The right answer changes over time. Many successful companies start with agencies, build internal teams, and continue using agencies for specialized work. The key is matching your approach to your current needs, not following a one-size-fits-all rule. For warning signs during the selection process, see red flags when hiring a dev agency.
At NextBuild, we work with startups at the agency stage and help them prepare for the eventual transition to internal teams. If you're at that decision point, let's discuss what makes sense for your situation.
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