Start-ups Follow Work Abroad
PALO ALTO — Solidcore Systems appears to be the quintessential Silicon Valley start-up, with laptop-lugging, cube-dwelling workers huddling in glass conference rooms and jotting sales strategies on white boards.
But within a year, most of the engineers who make the company’s security software will be on the other side of the globe. Even the chief financial officer, chief technology officer and the head of research and development will work out of the emerging Indian tech hubs of Pune and New Delhi.
After launching five start-ups, Solidcore Chief Executive Rosen Sharma said he would never build a company without outsourcing the relatively expensive and highly skilled tech jobs to low-paid contractors or local hires in developing countries.
“The British empire bought raw cotton inexpensively in India and sold the finished goods back in England,†said Sharma, 31, who earned a doctorate in computer science from Cornell University. “Our raw material is intellectual power, which is cheap in India, and the finished product, our software, can be sold around the world.â€
With the drastically lower labor costs, Sharma can stretch $5.3 million in venture funding until the company finds paying customers.
Fiscal frugality after the dot-com bust forced hundreds of cash-strapped start-ups to slash costs by any means possible in early 2000, auctioning off expensive furniture and moving from swank office parks to cramped industrial lofts. Three years later, Silicon Valley investors are pressuring entrepreneurs to shrink personnel costs by as much as 60% by sending jobs overseas.
Within the last year, start-ups have taken the outsourcing trend to extremes, migrating entire development teams to India, China and Russia and leaving only skeletal crews in Silicon Valley and tech hubs such as Boston and Seattle.
“You either embrace this or die,†said Warren Weiss, general partner at Menlo Park-based Foundation Capital. This year, one-third of the engineers at one of Weiss’ portfolio companies, Walnut Creek-based software firm ManageStar, moved to Asia.
“There’s no way you can have a Silicon Valley company without outsourcing,†Weiss said. “You simply can’t make the numbers work.â€
But the rapid escalation of outsourcing worries some economists and venture capitalists.
Although start-ups rarely employ more than a few hundred people -- often working for smaller salaries than big companies pay -- they act as crucial incubators and entrepreneurial farm teams for established companies.
Outsourcing start-up work could have disastrous long-term consequences, critics say, depriving Americans of unique business experience and minimizing the likelihood that the next Hewlett-Packard would get its start in a Palo Alto garage.
“Silicon Valley isn’t dead yet, but could outsourcing become a risk to the ecosystem?†asked Allen Morgan, managing director of Menlo Park-based venture firm Mayfield Fund. “Human beings aren’t good at recognizing risks to the ecosystem when they’re acting in their own self-interest -- that’s the case with the environment, and it might be the case now with Silicon Valley.â€
Although few researchers have tracked outsourcing at thousands of start-ups in the U.S., the phenomenon has reshaped the broader technology sector. Gartner Inc. predicts at least 1 in 10 technology jobs in the United States will move overseas by the end of 2004.
According to research firm IDC, foreign workers performed about 5% of information technology services for American companies this year, but by 2007, that share will grow to 23%.
Entrepreneurs say the trend is downright feverish at start-ups because venture capitalists relentlessly focus on “burn rates†-- the amount of money a company can afford to spend and still survive each month.
Before dot-com investors turned stingy, a typical software start-up might have received an initial funding round of as much as $15 million, which was expected to last about a year.
Many entrepreneurs today receive $3 million or less, and rarely more than $10 million, to finance a similar operation. That means founders can burn as little as $250,000 a month.
Venture firms now sponsor outsourcing clinics for companies in their portfolio, and more entrepreneurs are pitching business proposals that already include detailed offshore strategies. How “offshoreable†a project is can determine whether a venture firm will endorse a company with an initial funding round.
Entrepreneurs say outsourcing has advantages beyond cost, such as a “24-7†schedule. Making the most of time zone differences, a company can theoretically compress its production schedule and beat competitors to market.
Adam Bartkowski, president and CEO of Long Beach-based Apriso Corp., hopes to take his 180-person supply chain software company public next year. His 18 developers work with customers to design software in California, then hand off projects to three testers in Brisbane, Australia, who hand off to 19 workers in Krakow, Poland.
“How would I do this all in the United States?†Bartkowski asked. “How many highly qualified software engineers do you know who want to work at night?â€
Not all start-ups are embracing outsourcing, and serial entrepreneurs say the practice can be risky.
Wireless start-up Sonim Technologies Inc. outsourced engineering work to India but within three months brought it back to the United States and expanded its San Mateo headquarters.
Founders decided that the Indian hires were not as skilled -- particularly with building telecommunications switches -- as they expected, said Neeraj Bharadwaj of Apax Partners, which funded Sonim.
“You can’t rush into this because outsourcing is a buzz word,†Bharadwaj said.
