Traditionally, it’s been quite difficult for software outsourcing firms to raise money, especially from venture capitalists. Prior to starting to work with Chinese companies, I was involved with three separate outsourcing companies, two in the US and one in Australia. In every case we tried to raise money, but were repeatedly rejected. The common theme for the rejection was that outsourcing firms don’t scale, so they weren’t considered good financial investments.

With these lessons from the school of hard knocks, I have been consistently surprised at how successful Chinese outsourcing firms have been at securing investments. I’ve heard about a lot of transactions, but I’ll present three as examples here (mostly because I could find press releases about them). Many of the deals are semi-secret, or at least not widely publicized, so I’ve only heard about them through the rumor mill. Here are some good examples of the trend that I’m seeing:

• Worksoft received an investment from Doll Capital Management and Legend Capital. I couldn’t easily find documentation of the amount, but I’ve heard it was roughly US$7.5M.
• Beyondsoft was able to secure funds from the Japan-China Bridge fund. Again, I couldn’t verify the amount, but I’m told it was in the low millions of US$.
• And the big Kahuna is the funding that Freeborders received from FTVentures, Internet Capital Group and TAL investments. Freeborders has been the most open about both the amount (US$20M) and their plans for the money (expansion).

I don’t know if it’s exuberance about China, excitement over China outsourcing, or just another case of silliness, but there is a lot of capital pouring into Chinese outsourcing companies, and there is a lot of money still looking for a place to go to work. I believe that this influx of funds will have a profound influence on how the industry evolves and also how quickly Chinese outsourcers become truly competitive on the world stage.

As soon as I have time, I want to do a companion post on the wave of consolidation that we’re seeing among Chinese outsourcing companies.

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