Feb 11 2007

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.