Tech startups embrace outsourcing to survive

The dot-coms cut costs by using low-cost labor from developing countries.
PALO ALTO, Calif. (AP) -- Solidcore Systems appears the quintessential Silicon Valley startup, 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 startups, Solidcore chief executive Rosen Sharma says 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 Ph.D. 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."
With the drastically lower labor costs, Sharma can stretch $5.3 million in venture funding until the company finds paying customers.
Do or die
Within the past year, startups have taken the outsourcing trend to extreme lengths, 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. Earlier 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."
Outsourcing startup work could have disastrous long-term consequences, critics say, depriving Americans of unique business experience and minimizing the likelihood that the next Hewlett-Packard will get its start in a Palo Alto garage.
Although few researchers have tracked outsourcing at thousands of startups around the country, the phenomenon has reshaped the broader technology sector. Gartner Inc. predicts at least one out of 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 percent of information technology services for American companies this year, but by 2007, that share will grow to 23 percent.
'Burn rates'
Entrepreneurs say the trend is downright feverish at startups 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 startup might have received an initial funding round of up to $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 per month.
Not all startups are embracing outsourcing, and serial entrepreneurs say the practice can be risky.
Wireless startup Sonim Technologies outsourced almost 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.