Offshoring: The VC Made Me Do It

Venture capitalists insist that many companies look at an offshoring strategy as a means to stretch their investment dollar.
John P. Mello Jr.May 25, 2005

“What’s your offshoring strategy?”

Many early-stage companies are hearing this not from angry constituents bemoaning the loss of jobs overseas, but from venture capitalists whose feeling may be quite the contrary. In fact, it’s one of the first questions that VCs may ask certain companies before they consider an investment, according to Scott Warren, an analyst and principal with consultancy International Network Services.

“Where I’m really seeing that is in Silicon Valley,” says Warren. “The job market is even tighter there,” he adds, because venture capitalists insist that many companies look at an offshoring strategy. His experience dovetails with a recent USA Today study, which found that 40 percent of start-up companies employ engineers, marketers, analysts, and other workers outside the United States.

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To venture capitalists, says Warren, offshoring can be a means to stretch their investment dollar. “They don’t need to be as aggressive on their time to market because they have a better cost model,” he observes. “Their burn rate will be lower.”

To an entrepreneur who receives $10 million (often less) in funding and who faces a burn rate of $500,000 to $1 million a month without offshoring, forging an early global strategy can make the numbers much more attractive. “The burn rate can be as little as $250,000 a month in India or the Philippines,” says Warren.

Although start-up companies may be coming under greater pressure to offshore, “going global” early in the game is nothing new. Cerap Marlboro, Massachusetts-based Evergreen Solar — a developer and manufacturer of photovoltaic modules that was founded in 1994 — has been “global from the beginning, by design, because the markets are global for our products,” says director of marketing communications William Kanzer. “It makes sense to build factories near markets,” he adds.

Opportunities for sales and not just savings are certainly a factor, agrees Ken Zolot, a senior lecturer for the MIT Entrepreneurship Center in Cambridge, Massachusetts. Start-ups “don’t only want to get access to a cheaper labor base,” maintains Zolot; “they also want access to a possibly more receptive market,” which they might find in emerging economies.

Zolot acknowledges, however, that reducing labor costs continues to be a major consideration. “Things that used to be done uniquely by American ingenuity can now be done more cost effectively overseas,” he says. “VCs are telling companies, you don’t have to reinvent everything yourself. If there are certain things that you can buy elsewhere — even if it’s labor — why not do it?” That message may be more controversial today, he adds, “but I don’t think it’s any different than telling a start-up that they don’t have to operate their own fleet of cars.”

Since small companies — especially small technology companies — have historically been responsible for much of the job growth in the United States, will early-stage offshoring by start-up companies cause the domestic job-creation engine to sputter? Zolot doesn’t think so. “Access to more-cost-effective tools is enabling the small company CEO to grow the company more effectively,” he maintains, “and provide jobs to the value-adding, more senior people, who are going to be U.S.-based.”