2021: Medici Global Newsletter #1: Geo-sourcing Your Core Product

Traditionally outsourcing core product development has been looked down upon, but cross-border companies are making it a part of their model in curious ways.

Feb 05, 2021

Introduction

If you talk to any entrepreneur or investor, the debate on whether its ok to outsource your product development brings up all sorts of negative connotations. Consultants are expensive, they don’t really get your company, their output is driven by the number of hours, and frankly they don’t care about developing original IP. And if you outsource, are you even a technology company anymore?

One example of the horror story of outsourcing that was going around Twitter this past week was where the US Government outsourced a project for $40M that could have taken less than $50k to build is where the incentives break down. A bad RFP process, with the wrong incentives, is someone else’s champagne lunch. If this happened to a startup (and it has), you would be embarrassed too.

Gojek Proved You Can Successfully Geo-insource your Core

Indonesia’s Go-jek, and their SuperApp bundle of services, was built initially by the Bangalore outsourcing firm C42 Engineering. Its founder and CEO, Sidu Ponnappa, then joined Gojek’s board and ran all engineering out of India, growing the userbase 900x within 18 months. Rather than sitting on hourly or project fees, Sidu built a killer team of engineers, who liked working with each other, with the flexibility to work with different startups, until Gojek’s management made them a compelling offer. Sell for cash and equity, and become our core engineering team. The result was great for both sides - GoJek got talent that would be impossible to hire in Indonesia, which accelerated their ability to capture the market ultimately leading to a well deserved Unicorn Valuation. C42 Engineering got to trial GoJek, to see if there was chemistry, for all of its team, and in seeing the momentum up close, as they saw rapid growth, they traded short term cash for long term equity upside, and a cash acquisition. The result - the ability for both sides to rapidly accelerate their ascendence in a market. By changing the incentive structure from “milk us from cash, to join us on the upside, and get a cash exit”, Gojek rearchitected the incentives for outsourcing, to one of geosourcing innovation.

The combination of Indonesian consumers served by rapid Indian Engineering became a DNA match in heaven. Indeed, Sequoia India, which counts ex-Gojek CTO Ajey Gore as a partner, is facilitating even more geo-sourced engineering to give some of its portfolio companies an edge in rapidly building product surface area in the face of competiton and massive growth potential. Startups like Zilingo, a sprawling shopping and commerce conglomerate across 5 countries, still operate today with a geo-sourced core.

Rippling and UiPath Proved You Can Successfully Geo-source your innovation engine

Parker Conrad’s Rippling is one of Silicon Valley’s fastest growing companies, last valued at $1.35B1. There’s one caveat, 50% of the headcount is actually in India. Rippling’s competitive advantage is that its product is a vertically integrated stack of 5 huge SaaS products in one; device and app management, Global Payroll, benefits and HR & Talent Administration. Customers get to buy once, and cut data fragmentation five times. Most entrepreneurs would attempt just one of these products but as we’ve seen with hyper competitive markets, focus means your value over time becomes easily commoditized. The solution, just like building SuperApps, is to build SuperSaaS, which I define as a network of SaaS products sold to the same customers, which encounter network effects of data. As Rippling owns identity, payment, and app usage data, there a number of products which could be built on top of its burgeoning suite.

With a hyper productive squad of hundreds of Bangalore deployed software engineers to rapidly iterate on product sold out of Silicon Valley, Rippling gets an innovation engine that can’t be copied. There is timezone arbitrage too, feature requests come in overnight, and deployed the following day. The fundraising prowess of Parker, coupled with the Engineering Prowess of CTO, Prassanna Sankar, and a lucrative US market, creates a novel flywheel. Invest in incredible talent at 1/2th the cost, and build 5 times more product surface area than anyone would dare to co-ordinate, rapidly replacing focused rivals in the US like Gusto with a 1-click integration. SuperSaaS can only be built with geo-sourcing.

Another example of geosourcing your core innovation to win a market is UiPath’s ascendency to to a $35B valuation, with both brilliant sales, and brilliant product engineering. The ironic thing is that UiPath, wasn’t first to market. Daniel Dines, the founder of UiPath, observed how an Indian outsourcing company he knew was using software to automate work. He immediately set his sights on doing better, snatching the contract from Rival Blue Prism, who proved the market, but was beaten to the punch by his Romanian rival, an upstart at the time.

Those lessons were put to the test after he [Dines] lost his largest outsourcing customer in2 2011. Rather than fold up his little shop, he quit chain-smoking and elevated Tîrca to cofounder and, later, chief technology officer—and they focused on the company’s side business selling software development kits, or SDKs, that helped engineers code apps faster. That proved to be a stopgap. The fundamental shift came when an Indian customer showed Dines how it was building off those tools to train software to mimic basic tasks like data entry, no engineer needed.
UiPath dispatched staff to visit the Indian company and then, it says, snatched the contract from Blue Prism, which had just coined the term “RPA” after automating back-office functions for banks. “They made it clear this was the best use of our technology,” Dines says. “Our software was completely useful in the RPA world.”

For an RPA provider to be really dominant it needs to integrate with hundreds if not thousands of software products across desktop and browser based surfaces, and integration engineering isn’t sexy at all, but if you get it right, it gives you a hell of a network effect. UiPath’s key, is the engineering office that the company was born in Bucharest, which served as the original hub to allow the company to develop automation integrations across cloud and desktop software, as customer requests came in, with 150 engineers. The company wants to add 1000 engineers in Bangalore3, and Seattle, and a smaller office in Cluij as its main development centers. The India office again gives UiPath tremendous headcount to do integration engineering at high velocity, and skill, distributed across timezones.

Concluding thoughts on Geosourcing

It used to be thought that “low-cost” or offshore development centers were a cost saving exercise, but the smartest, and most valuable cross-border companies are using geography, massive global capital sources and global customers to Geosource their core innovation engine. By distorting the ratio of high quality engineering resources per dollar, when managed well, can allow a new generation of SuperApp, and SuperSaaS companies to be built globally, that leave rivals in the dust in terms of how much vertical integration they can eat for their customers.

If you are running a single geography company these days, you have be aware of being left in the dust by these cross border management strategies, which have to come from leadership, tied to the national origin and global open-mindedness of the founders. Geosourced innovation will be one of the hallmarks of Globally dominant technology companies going forward.

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