Like little stars.
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.
Some people have argued that U.S. companies have a social obligation to create jobs in their own communities.
Part of me would quote Larry Ellison, who said that hiring 10,000 people in India, for instance, is a net good for the human race. I say that tongue-in-cheek.
People are getting hired. It just doesn’t happen to be here. Jobs are going to Utah, and they’re leaving California, right? That’s terrible. Or, God, these jobs are going to the East Bay, they’re not going here.
There will almost always be people complaining that they’re not benefiting, and somebody else is. I’m very aware of the sort of obligation that we have, and part of it is out of self-interest, to have a healthy economy around where I live. But the challenge is that there is a thing called the law of efficient markets.
You can have artificial regulations. You can have tariffs. You can block free trade. You can say this is not in the national interest. You can put taxes on imports. But at the end of the day all of those strategies, which are basically short-term strategies to keep jobs in the United States, fail.
And there are more people penalized by those strategies than the people that benefit. But the people that get penalized by jobs leaving are a much more vocal group than all of the other people that tend to benefit.
So, when the steel manufacturing jobs were being taken away from the United States there was a very heavy union and lobby saying that’s not right. And you saw the people who were out of work, and you really empathized with all of them.
The thing that you didn’t see that was happening in the background was that the tariffs put in to prevent foreign competition from coming in didn’t force the efficiencies that would have shocked the system, and created more efficient steel mills and processes and innovations that ultimately would have made us competitive.
And we didn’t see all the corresponding price increases to all of the secondary buyers of steel, which they then had to pass on to their next purchaser in the value chain, which then got passed on to the end consumer. So, all Americans were just a very little bit worse off because of the subsidy that we imposed.
What I would argue in a very direct way is that this economic reality is inevitable, and the question is, do we embrace it, take advantage of it, and learn from it? Do we try to see how we, as engineers in Silicon Valley, for instance, move up the value chain and become much more relevant, and recession-proof, and frankly low-cost labor-proof? Do we make the United States continue to be the source of high-tech innovation, and outsource the low-value stuff to the places that will likely do that?
Most major chip companies moved to Taiwan 20 years ago. And there was a big outcry back then, saying, “This is crazy. Why are all the chip companies moving out of the United States, and so many of the great people in our communities are now unemployed?” But last I checked Intel was still doing pretty well. So, they got out of the commodity businesses, they moved up the value chain, they spent a lot of money on R&D, and now we have a lot of sort of white-collar employees here doing great chip work and innovating.
OK. But what would you say to one of these lower-end programmers who lost his job? What would you tell that person to do?
I would tell that person that it’s inevitable to the extent that someone is willing to do your job much, much cheaper than the price at which you’re willing to do the job, and there just isn’t enough demand to hire that other person and you. In tough economic times like today, you’re exposed. There’s an economic reality to that.
And you could either sit on that reality and wait until the economy gets better, or hope that this problem goes away, or you can basically move up the value chain, and the way that you do that is you gain different skill sets. Because there are a lot of jobs that we’re still looking for here that will frankly never go away, at least for the foreseeable future.
For instance, design engineers. The guys designing the products for quite a while will still be here. Clearly, there is a threat of India and other countries moving up the value chain as well.
Also, there may be opportunities to manage engineers that are in India, and be the interface between those low-value development teams and the very critical work that’s done here. And you may be able to get paid more. Gosh, I would pay an engineer twice his salary if he could orchestrate and manage all that and lower my risk in doing that development.
So, I would only ask people to take a look as if it was your money, your personal money in your bank account, and how would you spend it? Would you pay an engineer $120,000 for a job that the exact same engineer with the exact same abilities can do for $20,000?
Do you think that the job losses that we’re seeing in the U.S. now are just the flip side of the dot-com and telecom technological revolution that we were all so proudly trumpeting in the late ’90s? Do you think it just took a while to catch up? And we just didn’t see that this would happen?
I think that there are boom and bust cycles, certainly, especially juxtaposed against five years ago when a recent college grad might be making $75,000 a year. This is just a very painful reality. Now, it’s almost unjust. Whereas people who might not have deserved a great job were paid $75,000 and got lots of stock options, now even the best engineering graduate here in the United States, who you’d argue in most markets deserve jobs, are having a tough time.
This is one of the most painful downturns in a long time, and when you couple that with this concept of outsourcing and cost-cutting that’s now happening, it is sort of a double-whammy, which is very painful. Then when you say, maybe the economy will turn around, and maybe this concept of outsourcing won’t, and that will continue to happen, it’s tough.
I think that people are rightly concerned, and I think it’s up to all of us to be as socially conscious as we can. Certainly, at the margin, hire as many people in the United States as we possibly can do. But at the same time we have to look at the financial strength and health of the companies that we’re funding.
The risk is: If I was not doing everything I can to make the companies I funded economically competitive, everyone might lose their jobs. What should I say to the rest of the people in the company who are uniquely qualified to do what they’re doing? And we’ve shut down dozens of companies in the last three or four years.
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.
Like little stars.
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