Build vs Buy / Outsourcing vs Burn Rate

Definition

The build vs buy decision determines whether you develop a capability in-house or outsource/purchase it. The core rule: build what's core to your competitive advantage, buy everything else. Building a custom CRM when your business is e-commerce wastes engineering on undifferentiated work. Slack built their messaging infra (core advantage) but bought Stripe for payments (commodity). Companies that misallocate build/buy decisions waste 20-30% of engineering capacity on projects that off-the-shelf tools handle better.

Common trap

The 'Not Invented Here' syndrome is deadly — engineering teams believe they can build a better version of existing tools. Custom-built billing systems, authentication, and analytics almost always cost 5-10x more than buying (SaaS fees for 5 years vs. building + maintaining). Hidden costs include: ongoing maintenance (20% of build cost annually), security patches, onboarding new engineers to custom systems, and opportunity cost of engineers NOT building your core product. Conversely, over-outsourcing core capabilities makes you dependent on vendors who can raise prices or shut down.

Practical use

For each build/buy decision, calculate the Total Cost of Ownership (TCO) over 3 years. For build: Development cost + (Annual maintenance × 3) + Opportunity cost of delayed core features. For buy: (Annual license × 3) + Integration cost + Switching cost risk. If the buy TCO is less than 50% of build TCO AND the capability isn't core to your competitive advantage, buy. Review all vendor contracts annually — a $500/month tool that your 5-person team used but your 50-person team outgrew becomes a scaling liability.

Formula

Definition

Burn rate is the speed at which your company spends cash reserves before generating positive cash flow. Gross burn is total monthly spending; net burn is spending minus revenue. A startup with $50K/month expenses and $20K/month revenue has a $30K net burn rate and needs $30K from savings every month to survive. VCs use burn rate to calculate runway and assess financial discipline — a startup burning $200K/month with $10K MRR will be scrutinized much harder than one burning $200K with $150K MRR.

Common trap

The trap is tracking burn rate from your P&L instead of your bank account. Accrual accounting can show $50K net burn while your bank is actually losing $80K/month because of delayed client payments (accounts receivable), prepaid annual subscriptions expiring, and vendor invoices coming due simultaneously. Many founders have been shocked to discover their 'calculated' 12-month runway was actually 6 months when measured by actual cash in the bank.

Practical use

Calculate both metrics and track them separately: Gross Burn = Total Cash Out per Month. Net Burn = Cash Out − Cash In. Then compute Runway = Cash Balance ÷ Net Burn. Set alerts: if runway drops below 6 months, initiate cost cuts or fundraising immediately. Review burn rate weekly (not monthly) — cash surprises kill more startups than bad products.

Formula