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The Honolulu Advertiser

Posted on: Sunday, February 13, 2005

Tech startups increasingly bypass U.S. to fill jobs

By Jim Hopkins
USA Today

SAN FRANCISCO — OfficeTiger is the sort of young technology company that once created thousands of high-paying jobs in the United States, fueling sizzling economic growth.

The five-year-old business employs 200 in the United States. Yet it employs 2,000 more in southern India, with plans for hundreds more performing tech-heavy financial services and other tasks. None of those jobs got there through traditional "offshoring." They were never in the United States to begin with.

Nearly 40 percent of startups in a new USA Today study employ engineers, marketers, analysts and others in jobs created in India and other nations. Russell Hancock, CEO of an influential group charting Silicon Valley's future, called the findings "amazing."

The study found that many U.S. startups, speeding the pace of globalization, now bypass the United States for nations where customers and cheap labor are plentiful.

The newspaper studied 106 software firms, started since 1999, that got money last year from influential investors called venture capitalists. VCs pump more money into software than into any other industry.

The rise of these "micro-multinationals" is worrisome because startups generate most tech jobs. Their role is now more vital as mature tech firms consolidate and export work, cutting U.S. employment. Indeed, tech's share of all U.S. jobs fell last year to 4.4 percent from a record 5 percent in 2001. Tech's job share is now near a level last seen in 1992.

And it may not have hit bottom. Hewlett-Packard's ouster Tuesday of CEO Carly Fiorina raises doubts about its plans. Software giant Oracle just laid off 5,000 workers after swallowing rival PeopleSoft. Top chipmaker Intel has said it plans to do most of its future hiring outside the United States.

Now startups are joining the exodus. Micro-multinationals create jobs that aren't reflected in the Labor Department's influential monthly jobs survey. The number of these jobs is unknown because most startups are private. But USA Today's study, examining a slice of software start-ups, found nearly 900 jobs created in foreign nations — the tip of the iceberg.

"It's an irreversible trend," says Nick Sturiale, general partner at Sevin Rosen Funds, a VC firm that has made up to half of its investments since early 2003 in microultinationals. "You have to be global."

Private investors like Sevin, dangling scarce startup financing, now insist that ventures expand outside the United States from the get-go. Start-ups say survival hinges on global markets where cell-phone software and other new tech gear spring to life. Young ventures want cheap labor to keep prices low to better compete.

Speedy Internet access lets entrepreneurs ship software design and other work anywhere from Day 1. What's more, startups are hiring well beyond India. They're also hiring in Germany, Italy, France and even closer, in Canada.

That's a switch from tech's historic evolution: Startups grew and hired in the United States for years before spreading to foreign nations. H-P, for one, didn't expand abroad until 20 years after its 1939 start. Tech consultant EDS hired abroad 13 years after starting in 1962.

Online search giant Google hired outside the United States just three years after its 1998 start. It won't say how many of its 3,000 workers are outside the United States.

But here's a clue: It has offices in Toronto, London, Tokyo, Hamburg, Paris, Milan, Sydney, Amsterdam, Dublin and Madrid.

Mendocino Software, which makes software that recovers data and computer programs, moved even faster. Begun near San Francisco in 2003, it employs 17 workers in India among its 67 staffers.

Across the United States, lawmakers are taking up anti-offshoring legislation again amid continued weak job growth.

At least 40 states debated bills regarding offshoring last year. But they focused mostly on traditional offshoring, in which companies lay off white-collar workers in the United States, then replace them with lower-paid workers abroad. Not addressed are jobs seeping invisibly beyond the United States as micro-multinationals respond to a raft of market forces.