WORLD: The Rise of the Micro-Multinationals

OfficeTiger is the sort of young technology company that once created thousands of high-paying jobs in the USA, fueling sizzling economic growth.

The 5-year-old business employs 200 in the USA. 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 USA to begin with.

Nearly 40% of start-ups 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. start-ups, speeding the pace of globalization, now bypass the USA 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 start-ups 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% from a record 5% 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 USA.

Now start-ups are joining the exodus. Micro-multinationals create jobs that aren't reflected in the Labor Department (news - web sites)'s influential monthly jobs survey. The number of these jobs is unknown because most start-ups 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 micro-multinationals. "You have to be global."

Private investors like Sevin, dangling scarce start-up financing, now insist that ventures expand outside the USA 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, start-ups are hiring well beyond India, the nation most closely identified with offshoring. They're also hiring in Germany, Italy, France and even closer, in Canada.

That's a switch from tech's historic evolution: Start-ups grew and hired in the USA 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.

Now look at online search giant Google. It hired outside the USA just three years after its 1998 start. It won't say how many of its 3,000 workers are outside the USA.

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 USA, lawmakers are taking up anti-offshoring legislation again amid continued weak job growth. Employers added just 146,000 jobs last month, the government said last week: Economists had expected 190,000.

'Overseas strategy'

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 USA, then replace them with lower-paid workers abroad. Not addressed are jobs seeping invisibly beyond the USA as micro-multinationals respond to a raft of market forces.

Venture-capital firms now routinely ask entrepreneurs about their "overseas strategy" to be considered for crucial start-up money.

"We really are pushing a lot of these companies into this model," says Eric Gonzales, a general partner at Doll Capital Management in Silicon Valley's Menlo Park.

As much as half of Doll's investments are in these ventures, vs. 10% five years ago. "And that's definitely increasing," Gonzales says.

Doll's investments include Coradiant, which develops business software and hardware to improve online transactions for companies such as payroll service provider ADP.

Coradiant has nine workers near Boston and 32 in Canada, where labor is cheaper. It got $5.3 million from VCs early last year.

In many cases, USA TODAY found, start-ups such as Coradiant got more VC money: a median $6.1 million, more than twice the amount given to firms with U.S.-only operations. That's a sign VCs may have more confidence in the micro-multinationals' prospects, says Mark Heesen, president of the National Venture Capital Association, a trade group.

VC firms, which invest for institutions and rich individuals, play an outsize role in the globalization trend because they dominate finance of the most elite start-ups. VCs invest money that banks won't lend for labor and other expenses.

Yet since the tech bubble burst in 2000, VCs are investing less and growing pickier, bolstering their leverage. They pumped $5.1 billion into software start-ups last year, down from the record $23.2 billion in 2000.

Private-equity firms, which invest in more mature companies, also are circling micro-multinationals. Francisco Partners said it poured $50 million into OfficeTiger in June. OfficeTiger would not have won the money if it weren't a global player, says co-founder Randy Altschuler.

He and partner Joseph Sigelman started the company in late 1999 with 25 employees at Chennai in southern India. Altschuler, 34, works at New York headquarters. Sigelman, 34, is at a sprawling Chennai complex.

OfficeTiger sells a host of services to banks, print shops, insurance companies and other clients demanding high-quality work at rock-bottom prices. An investment bank, for example, might want research on a client's competitors for a sales presentation. A print shop in Iowa might need type set for a restaurant menu.

OfficeTiger workers in Chennai do the work, then ship it back to the USA over the Internet for a fraction of the cost if done in the USA. Altschuler wouldn't disclose wage rates in India. But he didn't dispute VC estimates that labor costs there are often one-fifth those in the USA.

Business is booming. OfficeTiger won't disclose revenue. But it expects to add 1,500 workers by the end of this year. About 500 will be in the USA; the rest will be in India, Sri Lanka and elsewhere, Altschuler says.

Tech start-ups feel pressure to aim at worldwide markets, rather than focus solely on the USA. That means hiring foreign software developers and other workers to better serve customers abroad.

"You could build a nice $25 million business with a domestic niche," says Mike Morini, North America president at OutlookSoft in Stamford, Conn. But to serve Fortune 1,000 customers, he says, "It's going to be very difficult to survive."

OutlookSoft, started in 1999, develops business-management software. It has 140 U.S. workers and an additional 60 in sales, design and customer support in France, Italy, the United Kingdom and Germany.

Customers there are more comfortable dealing with neighbors. "People in France want to buy from people in France," Morini says.

Pinching pennies

Entrepreneurs, who spent like drunken sailors in the dot-com years, now pinch pennies by hiring abroad on the cheap.

"The dot-com meltdown is long over," says Mike Chuli, CEO of Coradiant. "The board will tell you I watch cash as closely as if it's our last dollar."

Coradiant employs 30 workers in Montreal doing research and development. Labor in Canada costs 70% of the U.S. rate, Chuli says. It's even cheaper in Russia, Romania and India. Highly skilled software developers in India earn as much as $3,000 a month vs. as much as $15,000 in the USA, says Sturiale, the venture-capital executive. Lower overhead keeps prices low so start-ups can better compete for business from tightfisted buyers. Annual corporate tech spending is expected to rise as little as 3% this year, about the same as last year, Goldman Sachs says.

Pricing is key in every industry, including anti-spam software, one of tech's rare hot spots, says Pavni Diwanji, founder of e-mail security firm MailFrontier. "Keeping costs low for any business is always a competitive advantage," she said.

MailFrontier, begun in 2002, has 20 contract workers in India doing quality control in New Delhi and Gujarat. Three more do research and development in Australia. The company has about 70 U.S. workers in Silicon Valley.

Creating 'the best kind of jobs'

To be sure, many young U.S. tech companies, including micro-multinationals, also create jobs in the USA. Among the software start-ups studied by USA TODAY, more than 80% of their combined 5,300 jobs are in the USA.

And many of those jobs are for highly paid CEOs, senior software developers and other professionals at corporate headquarters. "The best kind of jobs," says Mark Zandi, chief economist at consultant Economy.com. "The ones you want in the United States that create the most income and wealth."

By tapping global markets, tech start-ups may beat foreign competitors and grow stronger and more prosperous, Zandi says. Eventually, that could mean they'll create more good jobs back in the USA, he says. That's a view shared by those downplaying the threat of offshoring by mature companies.

But in the short run, that's little comfort for Silicon Valley, hardest hit in the tech meltdown. The San Jose area, home to Hewlett-Packard, Intel and other tech giants, lost one in five jobs - 189,000 - since 2000.

Valley productivity is up, says a January report by influential local group Joint Venture: Silicon Valley Network. But that hasn't spurred job gains. "That's a big story," says Hancock, the group's CEO. And micro-multinationals are "a part of it."

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