Offshoring: Why Venture Capital-Backed Businesses Stay at Home

Abstract

Some observers consider the offshoring of research and development by venture capital (VC)-backed businesses as a harbinger of the erosion of innovative capabilities in the United States. In this paper, the author presents how his interviews with the CEOs of 105 such businesses suggest that the fears about offshoring are exaggerated. While it is true that VCs are urging the companies they invest in to explore opportunities to improve capital efficiency by using lowcost labor in countries like India to develop new products and services, this is not happening on a widespread scale. Moreover, there are numerous obstacles to offshoring the development function and, in many cases, those obstacles are derived from the distinctive nature of the innovations that VC-backed businesses undertake. In other words, offshoring the core activities of VC-backed businesses is unlikely to occur unless the essence of offshoring is substantially changed. Offshoring is, however, increasing in some peripheral or non-core activities such as testing and quality assurance.

Keywords: offshoring, research, development, venture capital, entrepreneur