Silicon Valley Unicorn Downturn Won’t Affect Nearshore Software Services Growth

A still young economic downturn in 2016 among Silicon Valley “Unicorns” should increase demand for nearshore software engineering service providers.

nearshore software

As Silicon Valley demand outstripped local supply, nearshore specialists in Costa Rica, Peru, and Argentina have seen a steady rise in requests for their U.S. time-zone aligned, Agile-experienced software engineers. In a downturn, the lower cost of nearshore engineers may become an even more important factor.

For sure the availability of skilled nearshore engineers to meet the Valley’s insatiable demand for rapid engineering scale remains attractive to companies looking for a co-engineering partner. According to Wired, there were an estimated 500,000 unfulfilled technology jobs nationally in the first quarter of 2015, many in Silicon Valley. But, with slashed valuations at large, established Unicorns — private technology startups with minimum $1 billion valuations — and tighter investment by venture capitalists and private equity, software engineering hiring budgets are feeling some pain.

Recent downturn related headlines in Silicon Valley are fueling speculation about a 2016 trend:

  • “Silicon Valley Unicorns Are Becoming an Endangered Species”
  • “57 Silicon Valley Companies that Have to Slash Their Valuations to Raise Cash”
  • “Dropbox Marked Down 34% in Expected Secondary Sale of stock”

At the start of 2016 there were at least 146 Unicorns. But, fueled by a volatile stock market and other factors, things are beginning to slow down in Silicon Valley. Jawbone cut its valuation by $1.5 billion in a $165 million down round that it mostly raised in January. Snapchat’s valuation was cut by 2% a few months ago by one of its largest investors. Even formerly private startup’s, such as Box and Square, are feeling the pinch. Both went public in 2015 with share prices that set their valuations below their respective billion-dollar-plus private-market valuations. Growth juggernaut LinkedIn has had its valuation cut nearly in half.

Analytics firm CB Insights has compiled a list of 57 companies that have raised money or exited in a down round. That’s a large number that have raised a new round of funding or exited for less money than their prior value to investors.

Many observers are also wondering what trickle down effect, if any, the Unicorn downturn will have on venture-capital-backed startups in Silicon Valley. Possible indicators: during the first few months of 2016, VC investment nationally was estimated at $9.3 billion compared to nearly $60 billion in all of 2015. In February of this year, hedge funds participated in the fewest number of venture capital rounds in U.S. technology companies since 2013. There were 176 funding deals done in Silicon Valley in the last three months of 2015, down 35% compared to fourth quarter of the previous year. But, perhaps it’s too early in the year to predict a trend.

Whichever the most important business driver — engineer availability or lower cost — the demand in Silicon Valley for English-speaking, highly productive nearshore software engineers in Costa Rica, Peru, and other Latin America countries will continue. The realized benefits are compelling and include Silicon Valley time-zone alignment that enables real-time Agile execution; language and business culture compatibility; relatively short flight times; and rapid access to software engineers with a reputation for getting things done.

Silicon Valley startups using Agile engineering methodologies place a premium on individuals and interactions, co-location, and rapid response to changes. Nearshore developers located in Latin America are generally only two hours different from U.S. cities such as Seattle, San Francisco, Denver, Austin, Chicago, Boston, and New York. Contrast that with remote developers in India (as much as 12 and a half hours) or Eastern Europe (as high 10 hours). While the ideal may remain an entirely co-located engineering team collaborating in the Silicon Valley startup’s location, this remains elusive when chasing rapid engineering scale and low cost.

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According to the largest job site worldwide, Indeed.com, on average, Silicon Valley software engineer salaries are $134K. Expanding its local team to include a nearshore engineer in Costa Rica delivers 54% or more savings per engineer to a Silicon Valley startup. That savings, combined with same time-zone business day collaboration, enables real-time Agile co-engineering that’s easier on an engineering budget.

Need to fly your nearshore engineers into SFO for a week or two of co-location to encourage “mission alignment?” Manageable, as the flight from Costa Rica is nearly two times shorter than inbound from Bangalore. And since English is the second language in Costa Rica, Peru, Argentina, and other Latin America countries, communication aligns.

As the possibility of a continued economic technology downturn in Silicon Valley looms ever larger, the demand for nearshore developers should grow, regardless of any effect on startup investment. And, with mobile and tablet commerce (forecast by Forrester to hit $142 billion in the U.S. by the end of this year) representing 38% of all online transactions, specific demand for mobile developers in Silicon Valley will rise. The nearshore market throughout Latin America can fill that void.

(Photo: Andrea/DoctorTac)

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