Offshoring An Issue Even For Startups

Venture-backed companies are mixed on offshore outsourcing, with some saying its low costs, inexpensive skilled workers, and around-the-clock operations make it attractive for startups. Others worry that these benefits are mitigated or even eclipsed in some cases by quality-control problems.

Contrasting views of offshoring were offered by VC-backed entrepreneurs at a gathering in San Francisco hosted by PricewaterhouseCoopers and attended by Silicon Valley venture capitalists, in town this week for a meeting of the National Venture Capital Association.

Custom chipmaker Open-Silicon, which received funding from Sequoia Capital and Norwest Venture Partners, explored offshoring in 1998, long before the term was coined. Offshoring was essential to delivering affordable chips: India has the engineering talent to design semiconductors at a fraction of the cost it would take in the United States, said Open-Silicon CEO Naveed Sherwani. But it took two years to get the process right; the biggest challenge was coordinating operations on two continents.

Cavium Networks, a maker of microprocessors for networking equipment that's looking to go public, held off on offshoring in 2001, despite intense pressure from its VC backers.

The dot-com bubble had already burst, said CEO Syed Ali, and the need to control costs and quality dictated that operations remain based in Silicon Valley, where they could be closely monitored. Later, as the company moved into its second- and third-generation of products, it started offshoring.

Offshoring too quickly can imperil early-stage companies. "Offshoring only works when processes are set and documentation is in place. Those are not present in a startup," Ali said.

AlphaSmart, a maker of educational software that went public in February, operates offshore operations in India, China, and Russia. The time zone differences are good and bad for the company, said CEO Ketan Kothari. "When it works, you have a 24-hour advantage," he noted. "When it doesn't, you have a 48-hour delay."

The perception by many that VCs push the companies they own into offshoring is well-founded, says David Spreng, managing partner of Crescendo Ventures. Crescendo's $1 billion portfolio includes 35 companies involved in building telecom infrastructure. One of them achieved eight-to-one cost savings by offshoring, Spreng said. "It would have been dead if it hadn't moved operations offshore."

Taking a longer view of business, Spreng said that offshoring will become less of a contentious topic as the economy rebounds and the pressure for cost cutting subsides.