Why do you think that India is playing such a large role in the outsourcing of technology jobs?

I think in the Valley in particular there are a lot of nonresident Indians. There is a greater degree of comfort working with Indians. No. 2, English is a huge factor.

In terms of talented engineers that speak English, India represents a huge fraction of the world. There are something like 250,000 engineers that are getting minted in Bangalore every year.

It really has infiltrated the public consciousness. Now, so many companies I know are sending their CTOs or vice presidents of engineering to India, so you have a whole generation of people who have this experience.

It's kind of becoming like a natural monopoly. The incremental person who wants to outsource will tend to go to India. So, what that begets is this self-fulfilling prophecy where India will become better and better and better at it.

Because it has more and more experience, although, as you pointed out earlier, soon other countries will start to look cheaper.

Exactly. Bangalore, in particular, is undergoing a labor pricing bubble, where it's getting more and more expensive to do business there. But until there is a fundamental backlash, and until another area emerges, India is going to be the place.

And then, I'd tell you that India has the same challenge we do here in the United States.

So, the advice that I'd give to the engineer here is similar advice that I'd give to the engineers in India. Because ultimately if they don't move up the value chain, people are going to get fed up and say: "Hey, I can get a better engineer in China. I understand the language is different and everything else, but it's for 20 percent of the costs that I can in India, so I'm going to do that."

What is your reaction to the backlash among U.S. workers who feel threatened by this?

I think it's unsurprising, and I'm very empathetic. It's someone's life, and someone's career. And the squeaky wheel gets the grease, so the people that are just devastated by this make the news, and brutally efficient laws of economics don't make the news. They aren't as interesting. But we could point to thousands of examples throughout history where the laws of economics will simply prevail, and unless someone explains to me a rational economic argument for not pursuing the most efficient economic frontier -- other than complaining, which is OK -- I don't think anybody is proposing an alternative.

Well, they're proposing protectionist measures to reward companies that get U.S. or local government contracts, for instance, if they keep their operations here, and punish those that don't.

I think that we've been down that road in a number of different industries, and I think that we've shown time and time again that overly protectionist policies don't make economic sense.

The question is: Are we an isolationist, protectionist economy, or is it a global economy where free trade prevails, as long as you abide by rules? You don't infringe on human rights, and you abide by certain environmental standards. So, as long as there is a playing field that people will adhere to, at the end of the day, we want to sell our products into foreign markets, and foreign companies want to sell their products here.

And all consumers benefit and all workers ultimately benefit, and the only question is what are the areas of specialization that we as skilled workers will be better at here in the United States, and what are the areas where other countries will do better?

Should we do everything we can to help them to see if they can move up the value chain? Sure. And I'll tell you that the engineers in my companies that we've had to fire, every single one of them, I've looked for other positions. I've given advice to, helped counsel. It's not as if it's done in a very coldhearted manner.

It's just like when a company runs out of money and we have to fire everybody. It's just like when a sales guy doesn't sell. So, the question is: Should I keep a sales guy if he doesn't sell, just because it's a nice thing to do? I mean, of course not.

And in the same way, should I keep an engineer if he's not producing?

What factors are causing the sharp rise in outsourcing right now?

It's a bit of a perfect storm. No. 1 is the downturn. When the cost of capital was free, or very low, people didn't care as much. It didn't matter what your expense base was, you just wanted to get revenue as quickly as possible. And you didn't want to waste time thinking about India. Now, the pendulum is on the other side where you care very much what your development costs are.

Thing 2, there's been in the public consciousness just greater comfort in the concept of globalization, and in the concept of outsourcing. Because even here in the United States many companies are outsourcing things that are not core, for instance. So, I outsource my data center to Exodus.

I think increasingly there's this notion that: Let me stick to my core competency, but everything else, I can let third parties do.

The fact that Indians speak English. The fact that they're very technically capable. And there are a lot of Indians here in the United States. Then, there are a lot of Indians from India who come here to be product managers and liaisons.

All that has kind of just been a good bridge, and made that first big leap easier. And now that we've done it for probably three to four years, there's also a level of comfort that it is something that can be done successfully.

Between that time you wrote that article in March, and the time you wrote the other article in November, how much did your views on the subject change? You strike all these cautionary notes now.

I think that my views haven't changed, but it's like anything else: Usually the opportunities come to you faster than the challenges. It's very easy to see the cost savings. There are a lot of challenges, and it's very easy, I think, to underestimate. Cost saving is the obvious part.

For instance, I really didn't have a sense, until I went to India, and we got some firsthand experience back from our companies, how much you can be snookered if you are not very experienced.

Put it this way: There are a thousand little things that you have to do right, when you outsource development like this and co-launch companies on different continents. And unless you've made each of the thousand mistakes before, you almost can't predict them. So, it's absolutely humbling.

You're not any less enthusiastic about the idea, it's just more complicated in the execution than you thought?

Yes. If there are 10 big things to get right, you could focus on those things and make sure that you do them. But because there are a thousand small things you almost can't not make mistakes. And, so, the only question is not whether you're going to make mistakes or not. The only question is: Can you minimize the cost of those mistakes? The second-order question then is: After all those costly mistakes, do they still put you out ahead of where you would have been if you just did the development in the United States?

Essentially: Was it worth the headache?

Was it worth the headache. And is it worth going up the learning curve and making the investment such that the next time you do it, either with that same company or with a different company, you have a real asset now, which is a learning set?

I would argue that for a venture capital firm you want to go down that learning curve sooner rather than later, because you'll have that learning set, and be able to gain the benefits more quickly.

The economic landscape has changed. Spending $500,000 a month building a product for 12 months, so you burn through $6 million before you launch and get real revenue vs. spending $100,000 a month, is the difference between success and failure.

Therefore it is no longer a luxury to say, "Hey, I'll start a company in India." It's a necessity. Period. Because as a venture capitalist I will give you $1.5 million, and say: "Until you show me that there is customer traction, and the product has a strong value proposition, and it stands out on the other end of a customer deployment, not on paper -- the customer has actually used your product, and gets value from it -- we're not going to put more money in the company. We're not going to fund R&D science projects anymore."

And to the extent that that's true, and to the extent that a development team here in the United States costs $6 million to get to that same place vs. $1.2 million in India, I don't know. I guess I'm not smart enough to figure out the math to how you have a team exclusively here.

This is not a trend that's just simply a reaction to the downturn, and we'll go back to business as usual. I think that there is this fundamental shift that has occurred just like when the Industrial Revolution happened, and 50 years later manufacturing plants started leaving the United States, God forbid, and we were a leader of the Industrial Revolution, and all of a sudden we seemed like a victim of it. Whenever that dislocation happens, there is a whole set of losers, and whole set of victims.

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