January 2004

VC Outsourcing Intelligence: What VCs are saying
By Sherry Prescott–Willis

Trends in Outsourcing
Remember when outsourcing was mostly practiced by large companies who were looking to farm out their IT and payroll processing needs? Well, times have certainly changed and we know that outsourcing is not just for IT and payroll anymore! In fact in a recent report from the Outsourcing World Summit, Michael F. Corbett & Associates, Ltd. cited information technology as the top outsourcing project, followed by accounting and finance. The report also stated that "outsourcing is increasingly being applied to one of the most sensitive parts of a company's operations–marketing and sales." This is no surprise to consultants, as we know that outsourcing continues to be a fast–growing trend for organizations in Silicon Valley.

Yet, what types of outsourcing services are considered most critical to fast growing companies? To find out, I surveyed a total of ten local VC firms to find out what they thought about current outsourcing practices in their portfolio companies.

VC Survey Results
To target the VC community, I chose VC General Partners or Partners as the target for the survey. Since VC Partners are generally knowledgeable about their portfolio clients and trends in their respective industries, I thought they would be an excellent resource to better understand what was happening with outsourcing among their clients. In general, I also thought that VCs in the Bay Area would be in–tune with the latest outsourcing trends with start–ups and early stage companies that had recently been funded or were being funded by a VC.

When my research was completed, I saw that the VC firms that were surveyed varied in expertise and specialized in a wide array of technologies and products from biotech to healthcare to networking, enterprise, software, wireless and more. Although each VC may have invested in a variety of different types of early stage portfolio companies, most VCs agreed that the top 3 outsourced services for their portfolio companies were wrapped around core business activity including Finance, HR and Engineering/product development.

After the survey results were tallied, the top 3 core outsourced services were clearly:

• Engineering
• Finance/Accounting
• HR/Payroll/Benefits

In addition to the top 3 core outsourced services outlined above, 70% of the VCs interviewed also mentioned Program Management, Public Relations, IT Development (in India or overseas), Product Development and Manufacturing as outsourced services that their clients were using. Public Relations is a service that VCs thought could be outsourced quite effectively, especially during the first stages of growth in an organization.

Why do portfolio companies outsource?
Although saving time and money is important to companies, finding the "expertise to get the job done" was most important. When asked the reasons as to why their portfolio companies were outsourcing, VCs overwhelmingly replied that expertise was the #1 reason for outsourcing.

Top reasons portfolio companies outsource:

• #1: Expertise
• #2: Save time for company
• #3: Save money for company

How does VC find outsourcing help?
Of the VCs surveyed, 90% answered that they did not have someone internally to help with outsourcing. VCs also mentioned that they primarily used their rolodex to find outsourcing contacts. This certainly indicates that the VC community is a referral–based one, and relies heavily on their own internal connections to forward on names of outsourcing vendors.

Budget Ranges for Outsourcing Projects
When I asked about a typical budget range for outsourced projects, I got an array of answers. Since a project may range in length and scope, VCs said that a typical outsourcing project could range in budget from $15,000–$1,000,000. Budget was dependent on the type of project, as well as the service needed. A typical length of a project varied from 6–18 months.

What stage does Outsourcing occur?
According to the VCs surveyed, outsourcing is typically recommended in the earlier stages of funding (seed round, Series A/1st round of funding). VCs mentioned that companies generally need outsourcing help during the growth phases of their organization.

What do VCs think that their portfolio companies should outsource?
When VCs were asked what they thought should be outsourced, they mentioned a range of services including: Engineering, Finance/Accounting, Human Resources/Payroll/Benefits, Marketing Communications, Marketing Plan Development, PR, Recruiting, Strategy/Planning, Web. 60% of the VCs interviewed also said that they agreed that an increase in outsourcing could help their portfolio companies to meet their financial objectives.

The benefits of Outsourcing
Most VCs agreed that Outsourcing addresses a large, looming problem that fast–growing companies face in early stages of funding. Typically, once a VC hands off a first round of funding, there are visible milestones that need to be met by the management team. Portfolio companies typically face the following challenges:

• Managing a burn–rate
• Financial planning/CFO role & responsibilities
• Bringing products to market quickly
• Juggling planning and execution with little time
• Demands of managing company's growth during early stages

How can consultants help portfolio companies?
As a consultant, you can help a portfolio company or early stage company by offloading responsibility from a management team. Your expertise as an outsourced consultant can help a company to meet milestones faster, possibly bring a product to market faster which means quicker time to bring in revenues and turn a profit for the VC. As one VC stated, "we outsource to get something done faster, cheaper and better." While consultants can help a company finish something in a timely manner, they also offer the added benefit of offering expertise in an area that may not exist in–house.

Examples of how consultants can help a portfolio company:

• Help management team with execution plan
• Provide expertise in an area not available in–house
• Step in as interim resource during growth stages on key projects
• Provide roadmap for product development, deliverables
• Provide services that allow management to focus on core competency

Outsourcing allows management team to Focus
Since the goal of a growing business is to grow its business, a consultant can definitely provide services to help a new company to focus on just that. Essentially, outsourcing to a consultant provides a benefit both to the VC and the company being funded. Using an "expert consultant" can help a growing business to plan effectively with the confidence that the execution of major projects is underway. While key projects are being completed, a management team can concentrate on growth and profit, which gives them a greater chance to meet their milestones for a next round of funding. And, this, of course can be critical to the success of any new business.

Sherry Prescott–Willis has over fourteen years of strategic, product management and channel marketing experience. She specializes in both consumer and high–technology products, working with early and mid–stage companies to develop effective marketing initiatives at the product development and corporate level. Sherry has a proven track record for developing successful marketing programs that impact the customer and drive results. For more information on the VC Outsourcing results mentioned in the article above, contact: sherry_prescott@yahoo.com.