Narayanan Madhavan

BANGALORE: Multinationals have trimmed the fat for years by shifting low-value work to India. Now, slim Silicon Valley start-ups are leading a new outsourcing wave, moving cutting-edge product development to Bangalore and beyond.

The start-ups have their top managers and sales teams in the United States, but design products in India, where high-tech engineers earn a third of their U.S. counterparts.

While the 1,800 firms in India's technology capital have focused on lower-value services such as call centers and software coding, companies are now tapping low-cost expertise in a corporate global village where location is not important.

"Companies don't have passports," Indian venture capitalist, Abhay Havaldar declares bluntly.

The new hybrid firms have, inevitably, spawned new consultant jargon, such as 'right-shoring', 'any-shoring' and 'smart-sourcing' -- all signs that they now care more about what they do than where they do it.

B.V. Naidu, Bangalore's director of the Software Technology Parks of India, says 50 start-ups have registered in the past year, employing at least 500 people, and with plans to grow.

The numbers are small for an Indian outsourcing industry that already exports $12.5 billion worth of software and back-office services, and employs 800,000 low-cost, English-speaking workers.

But the start-up numbers are for Bangalore alone, and other cities like Hyderabad, Madras and Pune are not far behind.

Naidu spotted the trend as early as 2000, but it was stymied by the bursting of the dot.com boom.

"Some of them are still around," Naidu said. "The first wave was in 2000. The second wave is now."

"MICRO-MULTINATIONALS"

The revival is funded by venture capitalists, who want more bang for their bucks now that making money on start-ups has become tougher amid sluggish demand for initial public share offerings.

India-born entrepreneurs and venture capital (VC) firms are backing a clutch of companies such as Infinera, which uses light waves to build computer networks, and InSilica, which custom-builds microchips.

Others include CollabNet, funded by Norwest Venture Partners, which provides a platform to help teams from around the world work together to develop software over the Internet.

NetScaler, whose investors include Goldman Sachs and Gabriel Venture Partners, develops technologies to help secure transactions and content delivery on the Internet.

These companies are small, but do business wherever they want.

"We call them micro-multinationals," said Ganapathy Subramanian, managing director at Jumpstartup Fund Advisors.

India's emergence as one of the world's fastest-growing telecoms markets is an added advantage, bringing deep-pocketed telecoms companies and low-cost engineers closer to each other.

Promod Haque, named by Fortune magazine as No. 1 on its "Midas List" of investors, said India's lower costs meant VCs did not have to risk as much money on a given start-up.

"Because exit valuations have become difficult, you have to build a company with less capital," Haque told Reuters.

Haque said more than a dozen of the companies in his Norwest Venture Partners portfolio, which manages $1.8 billion and backed companies such as PeopleSoft, have outsourced to India.

Fellow India-born venture capitalist, Vinod Khosla of Kleiner, Perkins, Caufield and Byers (KPCB), which funded companies from Google Inc. to Juniper Networks, was in Bangalore earlier this year, wooing talent for his start-ups.

GLOBAL TEAM SPIRIT

New middlemen have sprung up to help the young firms, such as Pari Natarajan, chief executive of Zinnov -- short for 'zeal with innovation' -- a consulting firm that specializes in offshore outsourcing by U.S. start-ups.

He warned that start-ups need to work out carefully the division of labour and nurture an international team spirit that will suffer if U.S.-based engineers fear for their jobs.

"In this game, you have to work together. If there is no culture match, it's not going to work," Natarajan said.

But he noted the economic pull was strong, given that it generally costs just $2 million to develop a modest software product in India, against $5 million in the United States.

"The VCs can put that kind of money in three firms and hedge their bets," he said.

Nonetheless, developed countries were likely to keep their edge in high-end areas such as artificial intelligence, he added.