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What Do Venture Capitalists Think About Offshore Development Offices?

Question: We are considering opening up an offshore development office (location not yet selected). I would like to know if this is a negative factor in the eyes of the VC community. What should we consider before we make the jump?

Our Take: If executed properly, VCs are usually strong supporters of offshore development centers. Not only are development costs reduced, but if customer support is an important part of your company’s success, you’ll more easily be able to provide generous support hours with an offshore office. Furthermore, our experience is that acquirers of companies are also happy to find well-run offshore entities that they can leverage.

The key here is “well run.” This is not as easy as one might think. For a while, it seemed like all startup software companies were setting up shops in India or China. In fact, there were rumors that some VC firms would not invest in software companies unless they had an offshore partner. At the same time, most major U.S. technology companies set up foreign operations in major tech centers such cities such as Bangalore, Mumbai and Shanghai (among others).

Given this, wages in these cities began to escalate greatly and turnover at companies grew as workers moved from company to company – whoever was the current high bidder on wages. What started as exponential cost savings, quickly evaporated into single and double digit benefits. Furthermore, some companies were not successful in cultural integration between their locations.

So, what does this mean today? It still means that you can save money on development and provide superior customer support, but it’s not a guarantee. The arbitrage is not large enough to survive massive turnover, cultural misunderstandings, poor integration and communication issues and still save meaningful resources. Good management and integration is a must. We would advise you to certainly analyze your options, but make sure your eyes are open before making the jump.

February 11th, 2007 by     Categories: General QandA    
  • http://www.newmanva.com/blog Ari N

    Offshore strategies should not be taken lightly. Some projects that do, in the end, become successful require far more time and money than anticipated or estimated during the scoping phase of a project. As mentioned above, finding and retaining the talent is increasingly difficult, so the ramp-up time can increase 2-5x (while you are paying). A successful offshore project requires strong commitment from the company and it’s board. I think it should be viewed as a long term strategy, as it may slow you down and cost more in the short-term but pay dividends over a number of years if well executed.

  • Jason

    Absolutely, they can. The problem is that this requires a lot of talk in the beginning of the worst case scenario. Founders don’t like to have these types of discussions early on. Plus, they’d have to hire lawyers to paper this and that is both a cost of time and money – something that early stage companies don’t have a lot of.

  • http://ben.casnocha.com Ben Casnocha

    I’ve spent many hours overseeing development teams in Shanghai and Bangladesh and have been burned — what I lacked was a knowledgeable person on the ground who could supervise the activities. If you don’t have this person, it will be 10x harder to pull it off.
    A couple months ago I visited Mumbai and Shanghai and my on-the-ground observations confirmed this: You absolutely need to have a fully English speaking advocate on the ground at the development center for it to work.

  • http://divedi.blogspot.com/ Dimitar Vesselinov

    Ben, you should pay more attention to places like Bulgaria, Europe.
    A new European on the scene of IT industry: Bulgaria…or Europe’s India
    “As for salaries, it is among the most competitive ones over the world. Here are some examples of he lowest-highest salaries: software projest leader € 700-1200, specialist databases € 540-930, senior specialist sales&marketing € 370-630, system analyst € 380-570.”
    http://performe.hors-sujet.com/?p=56
    Inside SAP Labs Bulgaria
    http://video.google.com/videoplay?docid=42683659531829972&q=Bulgaria
    Outsource Bulgaria
    http://www.outsourcebulgaria.com/