Offshore labor drove firm to brink
By Matt Marshall
Mercury News
Go ahead, join the lemmings in the rush to India.
But if you're a Silicon Valley entrepreneur or venture capitalist still
considering it, contemplate the over-the-cliff tale of Ishoni
Networks.
Last month, the Santa Clara start-up filed for bankruptcy, a victim
of moving to India too quickly.
Backed with more than $68 million from venture capitalists from
the United States and elsewhere, Ishoni once was branded a
rising star. It was developing a cutting-edge chip to allow voice
and data services over a single Internet connection -- and was
valued as high as $200 million and employed 170 people.
Seeking to cut expenses, Ishoni created a subsidiary in Bangalore,
India, and hired software engineers there on the cheap.
Weirdly, though, the subsidiary stopped returning phone calls from
Ishoni's Santa Clara-based chief operating officer, Amin Varis, early
last year.
Varis made a surprise visit to India in May and learned a big lesson
about how much damage 12,000 miles of distance -- even when
connected by Internet and phone lines -- can do.
Indian executives, he found, had forced their engineers to join a
rival firm, Ample Wave Communications, apparently in a scam to
scoop up Ishoni's intellectual assets and then bankrupt it.
Ishoni notified police, and three Ishoni India executives were
charged with illegally copying Ishoni's software -- a fiasco first
reported in August by online optical networking publication Light
Reading and followed by Private Equity Week.
The outcome of that case is not known.
Neither Ishoni nor any of its dozen or so venture investors --
including names like Credit Suisse First Boston, Deutsche Bank,
Infinity Capital, Lucent Venture Partners and John Grillos, formerly
of MVC Capital, who is the sole VC board member listed for the
company -- returned phone calls. However, a spokesman for
electronics giant Philips, which owned 51 percent of Ishoni after a
$25 million investment in 2002, confirmed Ishoni is being
liquidated.
It won't take very long: A blue padlock already hangs on Ishoni's
Santa Clara office door. Inside are empty cubicles, deserted desks
and disconnected phones.
So, what's the lesson?
The growing hysteria and hand wringing over job loss to India
sounds similar to the worries during the rise of the Japanese
threat in the 1980s.
But soon after gobbling up U.S. companies and real estate, Japan
hit its own internal limitations -- namely bad credit, cronyism and
market interventionism. Japan foundered, and has never been
considered a danger since.
True, India's vast, cheap labor supply poses a different, more
permanent threat. Skilled Indian engineers who speak great
English won't be going away anytime soon.
But increasingly, VCs say outsourcing to India has limitations.
Ravi Chiruvolu, a partner at Charter Venture Capital, wrote a
column for Venture Capital Journal in March titled: ``Tech
Start-ups Should Be Entirely Built in Asia.'' However, Chiruvolu, 35,
has since been eating his hat. While he's still keen on doing
business with India, the challenges were greater than expected,
he says.
Foreign companies are considered easy targets by Indian
technocrats and power brokers, he explains. They'll charge for
leases and other services up to 10 times the amount they do for
local companies. Companies like Intel and i2 took baths on their
long-term leases, with i2 paying 100 rupees per square foot for its
10-year lease, compared with the going rate of 10 rupees, says
Chiruvolu.
And prices are heading up. Land prices have gone up three-fold
over the past few years, Chiruvolu notes. Labor in Bangalore --
India's Silicon Valley -- has even become scarce, and you have to
pay the average head-hunter about $500 an employee just to do
a search, he says. You pay up front, and sometimes hear nothing
back.
Many Indians will forsake start-ups and flee to a brand-name
company -- say Intel, Oracle or Sun Microsytems -- the first chance
they get.
Even getting the electricity turned on in an office is a chore,
Chiruvolu says, estimating that it takes about six months to get an
office registered with the government and ready to use -- far more
than the eight to 10 weeks promised by the Indian government.
Bandwidth can cost more than four times than in the United
States, he adds.
Chiruvolu reached a conclusion: Don't go to India for cost reasons
alone. ``You should go to India being committed for the longer
term, not buckled for a one-year cost reduction.''
Dell and a few other companies have already moved work back
from India to the United States.
Dick Kramlich, a partner at Menlo Park's New Enterprise
Associates, and one of the valley's most experienced venture
capitalists, has a few start-ups with business in India, but he
says: ``If you're doing it for labor arbitrage, you're making a
mistake, because it's only a short-term gain. You'd better do it for
quality.''
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