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Tuesday, Nov 24, 2009
American workers won't like what venture capitalist Ravi Chiruvolu says about why his tech start-ups are built using Indian workers. But they'd better listen.
Dec 17, 2003 | Xalted Networks, a router technology start-up in Plano, Texas, launched in 1999 and soon grew to 200 employees. Four years later, that same company has just two employees in the U.S.: a founder who does sales and marketing, and a single design engineer. The remaining 220 employees work in India.
Xalted is just one of several start-ups that Ravi Chiruvolu, 35, a partner at Charter Venture Capital in Palo Alto, Calif., has helped fund. All of them are pushing aggressively at the limits of global outsourcing. Chiruvolu's companies do more than just relocate customer-service call centers or back-end programming operations to developing nations. They move everything that isn't tied down.
Chiruvolu's other ventures include Web services company Talaris, the procurement software start-up ManageStar, the enterprise software company Niku, and the semiconductor start-up Cradle Technologies.
Chiruvolu, then, is a flashpoint for the kind of outsourcing behavior that has been igniting hot debate. Among the questions that are being asked are: What obligation, if any, do U.S. entrepreneurs and investors have to create domestic jobs? Will the U.S. market falter if too many top technology jobs go overseas? And should the U.S. government do anything to forcibly stem the overseas tide?
Chiruvolu has jumped headfirst into the fray. In March 2003, he wrote a column for Venture Capital Journal with the provocative title "Tech Startups Should Be Entirely Built in Asia." But then, in November 2003, after his firm and its start-ups gained more experience in India, he wrote another column that toned down his previous proclamation, headlined "About that India Recommendation ... Ahem ... It's a Lot Tougher Than Expected."
Chiruvolu is still enthusiastic about hiring overseas engineers at one-third or one-fifth of their U.S. cost: "I was in the U.S. Army. I was born in India, and I was raised in the United States," he said via cellphone from his car. "I have a lot of nationalistic pride, but it's bogus to say I will only hire Americans. It's hypocrisy." He told Salon why outsourcing is harder than it looks on paper, but becoming essential for new companies that aim to compete in a global marketplace.
Last March you wrote a very bullish article about outsourcing for Venture Capital Journal in which you declared that building a new company entirely in the U.S. is no longer pragmatic. Do you still believe that is true, and why do you think so?
I think that it's still true fundamentally.
More and more of our competitors will be doing [outsourcing], and all it takes is one or two to pull that model off, and they will have a cost base that's maybe one-third of ours. They just have a lot more leeway, and a lot more ability to develop products faster, and to bring them to market faster.
But in your more recent column, you wrote that despite the low wages and real estate costs, there are hidden associated costs that come from doing business in another country.
Absolutely. I think that that venture capitalists and investors have a tendency to believe that everything is an execution detail: "Hey, you know an engineer is $1,500 a month. Great. We'll hire 30 engineers, and here's the burn rate, and go execute. And obviously it may be a little more challenging, but go get it done. That's why we pay you the big bucks."
The reality is that there is a lot more involved, when you do a cross-world joint development exercise. [Sometimes] you're not even sure exactly what the specs [of the product] should be, and you're not even really sure exactly what the customer wants, because typically you're inventing the future. It's very difficult to manage cross-border in this manner.
What are some of the difficulties that you've faced?
One of the natural ones is just the hiring. How do you hire the best possible people given that you're often coming in as an outsider, and given that people know you don't know the market and want to charge you more, not just on a salary basis, but for all the corollary, ancillary services -- the rent, the connectivity, all those things. There are certainly people more than willing to take advantage of anyone.
And let's say you've got the best prices, or best cost structure: How do you know that you're getting the best people? Oftentimes, these people aren't committed to your vision and what you're doing. They're a long way away, and maybe they just have a different philosophy or mind-set.
Maybe it's just a transaction for them. Maybe they're saying: "This is a great way for me to learn some stuff over the next six months, and then I'll jump to the next highest job. Why should I be committed and loyal?"
Plus, a lot of development in the early days of a company is very iterative. The best performing companies adapt over time, as you figure out the true customer needs. What features people will really pay for, as opposed to the wish list that they'd love to have, or a set of things that they say: "Yeah, that sounds great," but at the end of the day they're not willing to pay for it.
So, there's a lot of back and forth that has to go on in the very early stages. And if you don't have that when you're doing remote development, guess what? You might have saved money by hiring the engineers at 30 percent of what you could have hired them for here, but the product that you actually developed doesn't make sense. So guess what? All of a sudden you end up having to start over from scratch because you don't really have a value proposition that people are willing to pay for.
But one of the things that's ironic about all this is that people are beginning to say: "Why go to India for software? Why don't we go to China, because China is half as expensive as India?"
It's just a complete crackup. Because now you have to justify India, and then the same arguments for the reasons why you should stay in Silicon Valley are the arguments that people are now making for India. So, it's always this never-ending search.
