At Tau Ventures we have invested in startups that are fully in the US, where the CEO is in the US and the rest of the team offshore, and everything in between. For us there is no right or wrong inherently in any approach but it’s a matter of why and how a particular company builds itself. Below are the five key principles we believe are critical in deciding to offshore.
1) Quality — The pandemic has in many ways equalized the playing field as most software startups have become mostly remote. But managing at distance is always a challenge, even more so if it crosses multiple countries. If teams have worked together before or if offshore hires are coming through very trusted sources it is obviously a plus. That is only half of the equation though. To be truly effective we encourage our entrepreneurs to have strong communication across the company, even at the earliest of stages. Whether it’s phone or email, Slack or Telegram, daily stand-ups or weekly reviews, facilitating both informal and formal communication as much as possible is key. The consequences of getting it wrong are dire, just ask any distributed team that has had to refactor their code because of miscommunication with their offshore personnel.
The converse is true too i.e., we do see some companies deliberately offshoring to take advantage of better talent elsewhere. Canada especially Toronto and Montreal are very strong in AI. Israel is famous for cybersecurity. Northern Europe especially Sweden and Finland have proven to punch above their weight class in gaming. But once again, just having good talent is not enough, any good investor will ascertain about the systems in place.
2) Cost — The most cited reason to offshore is to take advantage of cost differences. The map below shows a composite view from 2020, with the baseline being closer to $100 / hr in the US. As many startups have found the world is not flat and a 2-5x price difference still persist.
3) Timezones — When it comes to offshoring what matters is longitude not latitude. We have seen teams located on opposite ends of the globe that work around the clock; one side finishes work and goes to sleep, the other side wakes up and picks it up. We have also seen teams located in very similar timezones through similar working hours. And we have seen the polar opposite of these efficiencies in both cases. What savvy investors look for are management teams with a keen understanding of the nature of their work. When it can be divided fairly autonomously then offshore teams can run by themselves, when it can’t then best to have an offshore team in a nearer timezone for constant communication.
4) Culture — Culture is hard to define and even harder to quantify. How comfortable is each side with a common language? Do you observe some or all holidays within your extended team? Is the popularly shared infographic below something your team will laugh at or take offense?
Caveat emptor for those considering multiple offshore teams at very early stages. At Tau we have rarely seen them succeed, not because of logistical challenges but because it makes it much harder to develop a unified company culture. If you are an entrepreneur building a globally distributed team off the bat then you will have to work even harder to align everyone around mission and execution.
5) Outsourcing — Whereas offshoring is about hiring talent in other parts of the world, outsourcing takes it a step further by subcontracting completely someone else. Traditionally outsourcing has been for corporates but has its place among entrepreneurs too. Tesla essentially outsourced the chassis of the Roadster, its initial product to Lotus. Medical device startups routinely outsource the development of their app. AWS is in many ways an outsourcing of your cloud. All that said, at Tau we look primarily at seed in software startups and thus view outsourcing mostly negatively because we believe engineering should be done in-house at the companies within our focus.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.