Where They Stand on Outsourcing: VCs for Bush –

Opponents of offshoring maintain that venture capitalists are putting profits over patriotism and taking a myopic view of the market that takes short-term savings over long-term economic health. They maintain that offshoring threatens the future economic health and security of the United States in exchange for savings that turn out not to be as substantial as promised. Some say that U.S. venture capitalists have a moral obligation to do what they can to keep jobs at home.

U.S. venture capitalists across the board reject the notion that they are morally obligated as Americans to slow down or stop offshoring. To them, to do so would be a form of financial treason that would only undermine the U.S. economy in the long term. They see the movement of jobs overseas as an inevitable change and that failure to adapt will leave their portfolios out in the cold.

Offshoring, or the sending of U.S. jobs overseas where labor is cheaper, is one of many contentious issues in the year’s close presidential race. And where there is a host of efforts on the local level, legal experts doubt that offshoring will face a dimmer future after November. Forrester Research estimates that 3 million more U.S. jobs will be offshored by 2015. That does not count those jobs established overseas instead of the United States.

Venture capitalists have a prominent role in the issue as both investors in offshore service providers and in startups that increasingly have significant portions of their work done overseas. They generally line up with President Bush on the issue. He says he supports free trade and would try to ease the pain of outsourcing by spending more money on job re-training programs. Sen. Kerry, on the other hand, has proposed changing tax laws to create an incentive for U.S. companies to keep jobs in this country, and that worries VCs. “He seemed to suggest that he was not interested in maintaining our commitments to NAFTA or other free trade agreements,” says Todd Pietri, founding partner of Milestone Venture Partners. “There is a real chance that [Kerry] will ratchet up protectionism and demonize companies that are sending work overseas.”

While the National Venture Capital Association has not delineated an official position on the practice of outsourcing, the group is monitoring the situation with a coalition of like-minded groups, according to Jennifer Dowling, the NVCA’s Vice President for Federal Policy and Political Advocacy. “We want to see policies in place that give venture capitalists incentives to invest,” she says. Given the group has taken more free trade friendly positions, its not likely to favor any substantial curbs placed on offshoring. The group is waiting until it sees something with momentum at the federal level, and so far campaign rhetoric doesn’t qualify. “It’s certainly going to remain on our radar screen as we go through the fall, no matter who wins,” says Dowling.

U.S. VCs “have a moral obligation and a responsibility to their communities to see that we keep good, highly valued jobs in this country,” says Marcus Courtney, president and organizer of the Washington Alliance of Technology Workers. He adds that VCs have been hurting American workers by demanding that their portfolio companies maximize their offshore outsourcing and that their exuberance for the practice has more to do with prevalent economic ideology than real cost savings.

Defenders of offshoring say that venture capitalists’ obligation to their country is best fulfilled by doing what they do best: funding companies. Allowing for lower costs enables VC firms to fund more companies, which will in turn create more jobs at home with stronger and more competitive companies. “Ultimately, as is the case with manufacturing, all of the stuff serves to benefit the U.S.,” says Ramanan Raghavendran, a senior partner with TH Lee Putnam. “American companies will be more competitive and can deploy more assets and cash into the American economy. In the midst of all this turbulence, there’s job cutting going on and it’s hard to see the larger picture.” Raghavendran and other VCs admit that this doesn’t translate well to a displaced worker trying to feed his or her family, but that this displacement is an unavoidable part of economic growth and change that will eventually heal.

While far from the front burner in the face of the war in Iraq and the efforts to combat terrorism, the issue of offshoring has become a theme in this year’s presidential campaign. The two major presidential candidates have staked positions traditionally held by their respective parties.

Kerry Says

Kerry calls for changes in tax law to slow offshoring and encourage more U.S.-based operations. The Democratic National Committee’s party platform pledges to end deferrals for taxes on income of foreign subsidiary companies. The savings from those taxes would be used for tax cuts to companies that create jobs domestically. The platform does not specify how large such tax incentives would be, or even if ending tax deferrals would be enough to discourage offshoring.

For Kerry, the federal government’s policies encourage job losses and stagnant job growth. “One of the first things we are going to do is stop having any American subsidize the loss of their own jobs. We are going to reward companies that stay here and create jobs in the United States,” the senator told laid-off North Carolina workers in August.

Bush Says

The Republican National Committee’s platform does not seek to change the government’s policy toward offshoring, but instead extols the virtues of free trade and affirms the Bush administration’s commitment to free trade agreements. Bush’s campaign, in addressing the issue, has warned against “isolationism” as jeopardizing further jobs. The President has proposed spending $23 billion on government job training programs in his most recently proposed budget. His campaign cites previous tax cuts as helping prevent further job losses and spur economic development.

For Bush, efforts to stop offshoring will only result in isolationism and greater economic damage. “The best thing that a president can do is put pro-growth policies in place, is to grow this economy, and to fight off an economic isolationism that can creep into the conscience of the American Political process,” Bush told supporters at a rally in Ohio this past May.

Brahmal Vasudevan, a managing director of ChrysCapital, says that in the previous Democratic administration, offshoring was seen almost in a positive light as a force that sustained the high growth rate the United States saw in the late 90s. He says that the Democratic Party is taking a stand to satisfy its base in a close election year. “Clearly it’s no surprise that Kerry has been critical of offshoring, but he’s missed the broader points of how offshoring benefits the U.S.,” he says, “not just in cost reduction but other benefits.”

Todd Pietri, founding partner of Milestone Venture Partners, finds Kerry’s earlier campaign rhetoric worrisome. “He seemed to suggest that he was not interested in maintaining our commitments to NAFTA or other free trade agreements,” Pietri says. “There is a real chance that he will ratchet up protectionism and demonize companies that are sending work overseas.”

In addition to rhetoric coming from national political campaigns, there is a growing backlash against outsourcing on the local level under way throughout the nation. State governments are finding a cauldron of outrage over government services, often call centers, being conducted by companies that use overseas workers. The law firm of Alston & Bird, which has advised firms on the topic, estimates that there are more than 100 bills in both the U.S. Congress and 36 state legislatures that seek to curb offshoring. For example, several different bills pertaining to the issue have been proposed in the California state legislature. Bills mandating full call center location disclosure as well as mandating that state business be done within respective states are proving popular. In this respect though, state laws may contradict themselves, as many states mandate bidding processes that award contracts to the lowest bidders, and companies that use offshore labor are more likely to put in lower bids for government contracts.

OfficeTiger, one of the leading companies in the sector that raised $50 million from buyout firm Francisco Partners earlier this year, has stayed away from government contracts, due in large part to potential political risks involved. Joseph Sigelman, co-CEO of OfficeTiger, says that it would be hard for state and local governments to legislate beyond direct government contracts. “It’s a very different thing to say that work can’t be done overseas,” says Sigelman. “That becomes a very ambiguous issue. If you go down that path it’s a very slippery slope.”

The venture world largely sees the issue of offshoring as a small fire being stoked by the strong winds of a close presidential election. “I fundamentally think that this is an issue that’s been hyped because it’s an election year,” says Rishi Navani, a principal with WestBridge Capital Partners. “Venture capitalists will continue to invest in outsourcing regardless of who comes into power. There might be some changes but directionally I don’t think it’s going to change that much.”

“The only way the government could justify doing something is to pay subsidies to companies not to offshore like they pay farmers not to grow products,” says Gordon Brooks, CEO of outsourcing firm Symphony Services. That may be close to what the Kerry campaign has in mind, but the Kerry plan does not include specifics that would inform the size and scope of the tax break.

Even if many of the proposals of the more strident anti-offshoring political efforts succeed, they may be overturned by the courts, according to Christopher Ford, a partner with Alston & Bird who has tracked many anti-offshoring efforts. “We don’t believe that offshore outsourcing is in any way slowing down due to the political fallout,” says Ford, who is based in Washington, D.C. “Our law firm has done a good amount of work to say that most of the legislation or laws passed are likely to be unconstitutional. Despite the fact that Kerry and the Democrats are saying are saying their going to stay the tax structure, a lot of those acts are unconstitutional or in contravention to a number of treaties.”

VCs are confident that the issue will die down with the end of the campaign season and ultimately be resolved when a healthier economy creates more jobs. “We are in the process of going through an economic adjustment, says Venetia Kontogouris, a managing director Trident Capital. “America has always reinvented the economy and our jobs, historically speaking.”