Date: Mon, 8 Mar 2004 22:13:32 -0800 From: Norm Matloff To: Norm Matloff Subject: more on VCs' pushing offshoring To: H-1B/L-1/offshoring e-newsletter http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/03/07/BUGGI5ENK31.DTL VC firms push for outsourcing John Shinal, Chronicle Staff Writer Sunday, March 7, 2004 San Francisco Chronicle Chronicle Sections Silicon Valley's top venture capitalists are pushing hard for tech startups to use offshore workers to lower costs. "There isn't a board meeting that goes by that we don't ask, 'Why aren't you being more aggressive (with software development) in India and China?' '' said Jim Breyer, managing general partner of the Palo Alto venture firm Accel Partners, which has backed more than 200 companies. And Accel is not alone. Other VCs are sending the same message, and entrepreneurs have heard it loud and clear. Many are rushing to embrace the offshoring trend. "VCs are driving (entrepreneurs) hard to keep the cash-burn rate down," said Prabhu Goel, chief executive of IPolicy Networks, a Fremont security software company. Offshoring "is not a mandatory thing, but if you want to lower costs, you almost have no choice," Goel said. As a result, two-thirds of the company's 130 workers are in India, Goel said. The cost savings of offshoring -- more than 40 percent in Goel's case - - simply can't be ignored. Interviews with executives from five Silicon Valley startups that received venture funding in February found that savings in the range of 40 to 50 percent is typical. Clarus Systems, a San Francisco startup whose software makes it easier to send phone calls over the Internet, expects to save 50 percent by sending development work overseas, according to chief executive R. Keith Giarman. Indeed, offshore labor cost savings are so significant that many startup CEOs now include an offshoring component in the business plans they pitch to venture capitalists. That's a big change from just three years ago, according to Peter Barris, managing general partner of New Enterprise Associates, a venture firm with offices in Menlo Park, Baltimore and Northern Virginia. Few of the startups that received funding from the firm's 2000-era fund had a built-in offshoring plan, yet many of those companies eventually sent software development overseas. Now, nearly all the business plans that Barris and his colleagues evaluate for the firm's new venture fund include an offshoring component. "It's not an unusual event anymore," said Barris. The accelerated use of overseas workers by startup companies means the trend may just be gathering steam in Silicon Valley. That's because the most successful startups will survive and one day compete with large publicly traded companies like Oracle Corp. and Cisco Systems Inc. If the new rivals can make products more cheaply and thus sell them at lower prices than established companies, the big players will be forced to lower their costs to compete on price, or watch their profit margins erode. Within three years, Breyer predicted, software firms will need to have between 40 and 50 percent of their product development done overseas to compete with rivals on cost. Already, the companies in Accel's venture investment portfolio employ 25 percent of their workers overseas. That's up from less than 5 percent five years ago, Breyer said. It's also not unusual. The majority of startups that receive investments from the Menlo Park venture firm Kleiner Perkins Caufield & Byers have operations in India, Kleiner partner John Doerr recently told a group of Indian entrepreneurs in Santa Clara. "Silicon Valley is moving your way," Doerr told the group, the Indus Entrepreneurs. India is not the only country that's getting work from valley startups. Integration Associates of Mountain View, which builds custom semiconductors, opened design centers in Budapest, Hungary, and Lisbon, Portugal, in the past year, according to chief executive Jean-Luc Nauleau. Even as it did, the company continued to generate cash flow. That would have been impossible without the cost savings of offshoring, Nauleau said. That doesn't mean offshoring is right for every company or that every job at every technology startup is headed overseas. The management of Candera Networks of Milpitas, whose products manage computer-storage networks, considered offshoring when the company was founded in August 2000, said Rob Seim, its chief financial officer. "But we couldn't find the expertise," said Seim, adding that Silicon Valley is still home to the best hardware engineers. While the company has offshored some software development projects using an outside IT services firm, all of its 50 employees are in the United States, he said. Still, with India and China churning out hundreds of thousands of computer and electrical engineers every year, it's inevitable that more work will flow to those lower-cost countries. "The new reality is that you must be global from day one," said Jasbir Singh, founder and CEO of Pronto Networks, a Pleasanton company whose product manages data traffic on wireless networks. In 2002, the Indian-born entrepreneur opened two software-development centers simultaneously -- one at the company's Pleasanton headquarters and another in Bangalore, India. Today, the company employs close to 100 workers - - just over half of them in California -- and runs development around the clock, Singh said. "Thanks to the Internet, we can develop software anywhere in the world," he said. E-mail John Shinal at jshinal@sfchronicle.com.