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Sequoia leads $30M investment in Chinese IT outsourcing firm, Worksoft

Updated

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Sequoia Capital, the big-name Silicon Valley venture capital firm, has led a $30 million in a second round of funding into China-based IT outsourcing firm Worksoft Creative Software Technology -- continuing Sequoia's streak of investments overseas.

Moreover, Worksoft is gunning to someday go public on Nasdaq, according to the company's vice president of biz development, David Scott Lewis.

He said Worksoft is positioning itself as the "Infosys of China," in reference to Infosys, the best-known Indian outsourcing firm.

The company is the fifth largest China-based IT outsourcing firm, Lewis adds. But Sequoia and Menlo Park-based Silicon Valley firm DCM's investments (DCM led the company's first round) make it stand out -- for being the only Chinese IT outsourcing company to attain high-profile investors. The company is focused on the U.S market, Lewis added, whereas the other four Chinese outsourcing companies focus on Japan.

Java programmers get $75 per hour in the States, whereas Worksoft pays them a mere $20 in China, Lewis said (Update: Lewis corrects us in comment below, saying they pay even less than $20). "Our rates are much lower than Tier 1 Indian cities and a bit lower than Tier 2 Indian cities," he added.

In an email, Lewis also says we should expect a "HUGE acquisition or two from Worksoft," (his caps, not ours) with a Bay Area company a likely target -- as a way to help the company access the U.S. market.


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From: VC Ratings
Sequoia Capital offshores investment strategy
Excerpt: Two of Sequoia Capital's latest investments leave little doubt that the Silicon Valley venture capital firm is playing the offshoring trend in a big way. On Tuesday, Worksoft Creative Technology said it has closed a $30 million second round of funding...
Tracked: May 31, 2006 10:01 AM

Comments

Matt, actually we can bill Java programmers at $20 per hour and still make good money. Of course, they are paid less. In Tier 2 cities, a Java programmer with a few years experience can cost us less than $10 per hour.

If you need to integrate i2 with Siebel, it's too early for China (sans IGS in China). But if you need Java, C++, C#, ... programming to a spec, China is tough to beat.

As far as IPR is concerned, U.S. firms just need to use a little bit of common sense. For all practical purposes, it's not an issue. Keep the core IP development in the States, but outsource the other 80+% (with China as an excellent option). Best to do it to a spec, too, the one exception being development using agile methodologies. China is fast and cheap, perfect for agile, less so with something like RUP (IBM's Rational Unified Process).

Again, just a little bit of common sense can help a lot with sourcing decisions. To quote from one of my AlwaysOn Network "Letter from China" columns (see http://doiop.com/risk ): "China is great at localization and globalization. China is very good at software testing. China is getting better at software development and is excellent in the embedded space. And some firms, primarily through acquisitions, offer world-class capabilities in areas such as Siebel deployment, and web services for point-to-point integration and legacy conversion." Of course, I'm referring to Worksoft in particular, China in general.

David Scott Lewis on May 30, 2006 11:08 PM
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Why is this Mr. Daniel Lewis promoting his company's costs in a public forum? It seems like a strategically stupid thing to do, and a nice way to draw more competitors into a space that has no fundamental barriers to entry. Good for the ego, bad for business, no?

jacques on May 31, 2006 4:58 PM
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As a Java/J2EE programmer in Tier 1 city of India I used to get Rupees 3,00,000 a year at Infosys.
That is 6700$ a year.

Your quote of $20 is way to o overrated.

6700$/year = 4$/hr.

You should seriously change your $20 line to $5 or $5. Otherwise its damn misleading.

Harshal Vaidya on May 31, 2006 10:54 PM
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Maybe, jacques, but if I ever need CHEaP OEM S0FTWARE!!! made I'll look up Worksoft. Blog posts are free targeted advertising.

Will on June 1, 2006 4:10 PM
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What this posting hints at in terms of a strategy for IP protection offshore, is that it often comes down to the personal relations between outsourcers and clients. This helps determine the level of commitment at an offshore firm to emphasize IP protection throughout the chain of command and to set up systems to protect and monitor IP.

The presence of top Western mangers at an outsourcing facility offshore makes such facilities much easier to work with. Such facilities may not be cheaper than some of the scrappier offshore domestics, but the added value of Western managers pays off in term of lower project admin costs and better project outputs.

The fact that this Chinese firm has picked up U.S. venture capital also makes them inherently less risky than their counterparts that are just domestically funded.

Anthony Mitchell on June 2, 2006 1:54 AM
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What I quoted was a fully-burdened rate. Infosys is NEVER billing a Java programming with a few years experience at $4 per hour. No way. We see the competitive rates. China is very different from the States. It's not uncommon here to see the actual rates being charged by your competitors! I know this sounds crazy, but it's true. So we know the real rates that are being charged.

I also suspect that some of the comments are comparing apples to oranges. India's Tier 1 cities run a much higher cost structure than BJ, SH or SZ, but India's Tier 2 cities run a slightly higher cost structure than BJ, SH or SZ. Hence, in order to maintain a significant labor arbitrage advantage, many (most?) BJ, SH and SZ based firms are building (or have already built) substantial operations in Tier 2 cities. Some are already planning for a move to Tier 3 cities. And everyone here knows that Tier 4 cities are also an option.

A Java programmer who gets paid $5 per hour in a Tier 1 city gets $3 per hour in a Tier 2 city, $2.5 per hour in a Tier 3 city, $1.5-2 per hour in a Tier 4 city. Remember, some of these cities have over 20 universities and a huge number of software engineering graduates.

India simply can't beat China on labor costs. However, for experienced personnel, China is sometimes higher than India. In China, ITO is a young, youthful industry; hence, experienced personnel come at a premium. But recent grads with a few years experience are still very cheap.

And am I giving away secrets in an industry with essentially no barriers to entry? Of course not!! Don't be silly. According to McKinsey, there are 8,000 solution providers in China. I've met with over 100. I'd guess that there are at least 2,000 -- and the McKinsey number might be right. My point: EVERYONE knows the billing rates. There's nearly total transparency, much more so than in the States. There are few secrets when it comes to billing rates.

BTW, my post was to simply correct an error in the original post by Matt. I wasn't misusing this blog for promotional purposes.

David Scott Lewis on June 4, 2006 8:07 AM
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