Capital Flight

Corporate Research E-Letter No. 46, April 2004


By Philip Mattera

Wall Street is giddy over the impending initial public offering of stock in Google Inc. The New York Times is speculating that the search engine company may end up with a stock market valuation of $20 billion or more. As part of the celebration, lavish praise is being heaped on the venture capitalists – especially Mike Moritz of Sequoia Capital – who provided the earlier funding that helped Google become one of the major entrepreneurial success stories of recent years.

What has gotten less attention is that many of the more recent investments of Sequoia Capital and other U.S. venture capital firms are being made in companies whose operations are located far from California’s Silicon Valley, home to Google and many other technology companies. In fact, U.S. venture capital (or private equity) has played a major role in the controversial practice of offshore outsourcing of white-collar work from the United States to low-cost countries such as India. Many of the Indian companies, in particular, that are capturing that work owe their existence and growth to American venture capital firms. The smart money apparently thinks that the outflow of jobs from the U.S. economy is not going to end anytime soon.


For the past century, venture capital has been inextricably linked to innovation in the U.S. economy. Backing ideas deemed too risky by commercial lenders, wealthy individuals helped pioneers in fields such as automobiles, electric power and commercial aviation get their start. Beginning in the 1930s, some of these patrons began to approach such investments more systematically and began to create firms to management the process. Laurance Rockefeller and John Hay Whitney were the leading figures in this regard, and their efforts led to the creation of, respectively, Venrock Associates and J.H. Whitney & Co., two of the earliest formal venture capital operations.

However, the real golden era of venture capital began in the late 1970s in tandem with the outpouring of innovation in electronics and computing. Venture capital put Silicon Valley on the map, allowing start-ups firms such as Apple Computer and Microsoft to transform the world. For those who followed the financial side of high-tech in the 1980s, venture capitalists such as Arthur Rock and Thomas Perkins were as celebrated as Apple’s Steve Jobs and his fellow entrepreneurs.

Over the past two decades, venture capital has had its ups and downs. It helped spark the dot com revolution of the 1990s and suffered the effects of the tech meltdown along with everyone else. Yet it is undeniable that U.S. venture capitalists helped to build companies such as Compaq (now part of Hewlett Packard), FedEx, Genentech and Intel that created substantial numbers of American jobs.

In the past few years, a number of venture capitalists have been succumbing to the same siren song of cheap labor that has seduced U.S. corporations into moving operations overseas. (See E-Letter No. 40 for more on this.) For them, the new place to invest—the new Silicon Valley—is to be found in places such as Bangalore, India, where scores of new companies have sprung up to take over the work that U.S. corporations no longer wish to perform at home. Along with the call centers that have received much attention, India is awash with operations devoted to what is called business process outsourcing (BPO)—handling functions such as data entry, bookkeeping, computer programming, image processing, debt collection and the like for foreign companies. 

Some of these new firms in India are offshoots of established domestic business conglomerates such as Tata Ltd. and the Hero Group. Yet most are entrepreneurial start-ups dependent on outside funding. Increasingly, that funding is coming from the United States.


One of the earliest U.S. venture capital investors in India was Citibank Private Equity, which in 2001 began to focus on the emerging BPO sector. That year Citibank put $6 million into Daksh eServices Ltd., a provider of “customer relationship management” services (i.e., call centers), and the following year it sank several million more into the firm along with other two other private equity investors: Connecticut-based General Atlantic Partners and Britain’s CDC Capital Partners. Daksh is quite a success story. It has more than 6,000 employees involved in call-center and customer-service work for clients such as IBM recently agreed to acquire the firm for an amount reportedly in excess of $100 million. 

General Atlantic Partners has also invested in Patni Computer Systems Ltd., an Indian provider of BPO and information technology services that now has revenues of about $250 million. In 2002 General Atlantic invested $50 million in Brigade Corp., a BPO company that is nominally based in the U.S. but which does most of its actual work in India. Other U.S. venture capital firms that have invested in Indian outsourcing companies include the following: 

  • Warburg Pincus, one of the giants of U.S. venture capital, has invested in firms such as WNS Global, which focuses on BPO services for airlines and insurance companies, and Venture Infotek, which allows companies to outsource transaction processing.
  • Oak Hill Capital Partners (founded by Texas billionaire Robert M. Bass) and Financial Technology Ventures together bankrolled EXL Service, a firm that allows financial services firms to outsource their back-office operations.
  • Trident Capital invested $16 million in Outsource Partners International, which specializes in the outsourcing of finance and accounting services at its operations in Bangalore.
  • Sequoia Capital has invested $22 million in 24/7 Customer, a firm that describes itself as “the  #1 provider of world-class voice and email based customer support services and solutions from India.” Sequoia’s Mike Moritz sits on 24/7 Customer’s board of directors.

There are even examples of the venture capital firm itself being offshored. WestBridge Capital Partners was set up in India to help launch cross-border information technology companies using funds that come mostly from big U.S. financial institutions such as Goldman Sachs and Merrill Lynch. Among the outsourcing firms it has backed are ICICI OneSource (financial services), Indecomm Global Services (health insurance claim processing) and marketRx (pharmaceutical marketing).


Many of the outsourcing firms being backed by venture capitalists these days fit the mold of what is called the “micro-multinational.” Companies adhering to this model have a small headquarters in the United States comprised mainly of executives and salespeople; all or most of the actual work for clients is performed in offshore “delivery centers.”

Increasingly, that work is not limited to staffing call center lines and performing low-level data processing tasks. Indian companies are moving into more sophisticated forms of software development and engineering services. Some observers are calling the process a shift from business process outsourcing to “knowledge process outsourcing.”

There is every indication that U.S. venture capital firms are prepared to bankroll this transition, despite the impact it may have on the availability of skilled jobs in the United States. In recent months at least two large delegations of American venture capitalists have visited India to scout for new investment opportunities. One partner in a private equity firm recently told the Wall Street Journal: “In a couple of years, 90% of all start-ups will have some connection to India or China. There’s no going back.”

It is perhaps naïve to expect venture capitalists, who have never been known for having a great deal of social conscience, to think about the consequences of their portfolio decisions on the well-being of the U.S. workforce. Yet it is not unreasonable to make such a demand on some of these institutions that invest in private equity funds—namely, pension funds.

Some large pension funds (especially public employee funds) have been investing in private equity for the past decade or more. The biggest of the pension funds, the California Public Employee Retirement System (CALPERS), has earned about $5 billion in profits from private equity investments since 1990. It is difficult to determine how much pension funds have invested in private equity pools that focus on offshore outsourcing. CALPERS, for instance, has invested in more than 200 different private equity funds. Pension funds trustees should investigate this matter and consider whether it makes sense for an institution that serves a fiduciary role for workers to be using its assets in a way that might promote the loss of jobs in the United States.

Unfortunately, CALPERS may be moving in the opposite direction. Just this month, the fund announced that it had added India to the list of countries in which its portfolio managers can make direct equity investments.

In an article last year, a partner in Charter Venture Capital wrote that “building a company entirely in the United States is no longer pragmatic,” presumably meaning that it is no longer sufficiently profitable for investors who expect high rates of return. Some consideration also needs to be given to whether it is pragmatic to use American capital to take jobs away from Americans.

Note: This E-Letter is an offshoot of work on offshore outsourcing that the Corporate Research Project is doing for the Washington Alliance of Technology Workers (WashTech). WashTech has separately developed an online database called Offshore Tracker that contains information on U.S. companies that are transferring jobs overseas. See <>.