US-Based Outsourcing Companies May Be Gaining Steam, But VC Investment Remains Skittish

Whether you are building an MVP, or even a fully-fledged startup, you’ll need help.

After all, most entrepreneurs can’t maintain proficiency in software development, bookkeeping, scheduling, hiring, and all the myriad of other tasks essential to growing and sustaining a successful startup.

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To bridge skill gaps, many founders turn to outsourcing firms to help glue the pieces of their business together. Popular companies such as Skype, Slack, and Github (among many others) have turned outsourced work into fully-fledged companies.

And over the years, the business of helping businesses build a business has drawn increased interest from VCs. After all, who else is going to help investors turn their other investments into unicorns on the cheap?

We’ve dove into the data to find out which startups may be up to the task.

Funding Is Sporadic In Outsourcing Startups

An outsourcing firm, as defined by Crunchbase News, is any startup that helps companies offload tasks in a way that doesn’t require the employment of a W-2 employee. Startups who fulfill this requirement need not be tied to a specific industry or task.

The Boom Of 2015

Since 2014, nearly $462 million has poured into US-based outsourcing startups across 64 known deals. Of those deals, 43 have known dollar volumes according to Crunchbase data. Here is what that investment cadence looks like over time:

From what can clearly be seen, in terms of dollar volume and number of deals, 2015 was a big year for outsourcing startups headquartered out of the United States. In total, 2015 pulled in nearly $276 million—accounting for 59 percent of total funding in our selected timeframe. It also dwarfed 2014’s total venture haul by 1,084 percent. The year’s large jump in funding was primarily fueled by one startup: Onesource Virtual.

In June 2015, Onesource Virtual raised a $150 million Series B. The raise, which came courtesy of TCV, made up over half of 2015’s total venture haul. The startup, which works exclusively with HR software Workday in a consultant capacity, has not raised a round since.

However, the momentum didn’t stick as we look at 2016.

2016 Craters

In a year that was already predisposed to be poor to startups in terms of funding, it appears that outsourcing startups took a large hit in funding and deal count. Compared to 2015, investment fell in 2016 by over 84 percent, while the number of rounds also dipped by 39 percent.

The largest deal of the year was $25 million Series B made in Science Exchange. The Palo Alto-based company, which has total of $58.5 million invested in it to date, helps researchers place orders for experiments. The company counts the UCLA, NASA, Johns Hopkins, and other venerated institutions as its customers.

And although the year cratered in terms of funding and number of rounds, it still outperformed 2014 levels of investment in dollar terms. However, the optimism we can hold for 2016 ends there. The number of deals made reduced by 17 percent when compared to 2014. The likely culprit for diminished deal count is the lack of seed deals made in 2016. Only 27 percent of known fundings were made in the seed stage in 2016, while 2014 saw a little over 47 percent of deals being made in the same stage.

But thankfully, the picture for VC-backed outsourcing firms in the United States gets a brighter as we look towards 2017.

The Year Of The Rebound

While 2017, thus far, has seen a reduced deal count, the picture in terms of dollars appears to be positive for the year.

In June 2017, the aforementioned Science Exchange raised a $28 million Series C. Meanwhile, seed-stage investment has seen a slight uptick over the previous year at 30 percent.

However, barring any large follow-on deals or a very sharp increase in the number of deals made, 2017 is likely going to fall under 2015 funding totals.

In general, the funding environment for outsourcing startups is, at best, a mixed bag. But how does the United States compare to other regions in number of outsourcing startups founded?

Outsourcing Isn’t Just The Playground Of Overseas Companies

As the The New York Times recently reported, US-based firm are beginning to prefer US-based outsourcing companies to fuel their development. And according to Crunchbase startup data, the United States make up a large portion of outsourcing startups founded since 2010:

While outsourcing has typically been associated with countries such as India, the United States headquarters the second largest cohort of startups that specialize in outsourcing. The next four countries following the United States—India, UK, Ukraine, and Australia—make up only 31 percent of outsourcing startups.

While it may seem counter-intuitive that the United States is the preferred location for startups in this sector, the environment is increasingly shifting in favor of US-based firms due to diminishing cost differences, according to The New York Times:

Rising labor costs abroad also make domestic sourcing more attractive. A decade ago, Mr. Hamilton said, an American software developer cost five to seven times as much as an Indian developer. Now, he estimates, the gap has shrunk to two times. The standard billing rate for his engineers is $60 to $70 an hour, compared with $30 to $35 in India, Mr. Hamilton said.

However, how much investors care to be involved in this shift is hard to gauge. While investment is making its way into US-based outsourcing firms, few signs point towards an increased cadence of investments being made in the future.

But for startups looking to grow without the need for a W-2 employee who may want in on equity, plenty of US-based startups are willing to take on the work.

Illustration: Li-Anne Dias