Outsourcing for Startups?

The latest fad in the high tech Venture Capital world is backing startups who out source R&D to India or China in order to lower cost. I have read no less than five articles in Forbes, Fortune,The Wall Street Journal, and the Dallas Morning News, praising the practice of offshore R&D. Some Venture Capital firms have gone so far as to require their new portfolio companies to practice outsourcing.

I have a better solution, instead of asking a Silicon Valley start up to locate a large number of their staff in India or China, why not move the entire operation to Texas. I bet the total cost of business for one team in one Texas location would actually be lower than the popular California- India/China setup. Think how much more productive any team can be in one location than in two or more. Especially if the locations are on different continents.

Outsourcing makes sense for a number of business, but not for startups. I once ran a Silicon Valley networking switch company (CSI ZeitNet Inc.)with 60 engineers doing hardware development in Santa Clara, and 25 software engineers in Bombay. It was a great way to hire good engineers from India, however it was a very unproductive way to develop new products. I had enough problems getting hardware engineers, software developers, and marketing people to work together when they were down the hall, much less 12 time zones away!

Outsourcing intellectual property development is even more problematic. At CSI ZeitNet we had an employee who was actually a spy for the Chinese government (he emailed all of our ASCI designs and software to China!). Think how difficult apprehending him and going to court would be if the development team were in China!

The number one problem for any startup company is getting the right product to market at the right time. A few dollars saved in development will not help if the product features are wrong, or if they are late to market.

Ralph Muse
Muse Consulting