What's the best way for a young company to grow its business overseas? Very conservatively, say many venture capitalists who have experience chasing international business and warn that the promise of limitless growth opportunities in India and China is not always all it's cracked up to be.

The IBF Venture Capital Investing Conference kicked off Wednesday in San Francisco with an optimistic-sounding panel on the best practices to grow globally, but it quickly devolved into a series of cautionary tales about expanding too quickly. Panelists advised against starting an operation in a new country without having a sizable staff on the ground, but they said that the time and effort involved in building a culturally sensitive local team from scratch was sometimes so substantial that it could slow the company's overall pace of growth, especially if it was a relatively young startup. They warned that the same problem often appeared when outsourcing some key company operations to cheaper labor markets overseas. Even often-overlooked challenges, such as maintaining a staff across different time zones and enduring jet lag while traveling to see them all, could get the best of a manager and a company, the panelists said.

"One of the biggest mistakes we see among young companies is a feeling that they must expand overseas," said Tom Dyal, a general partner at Redpoint Ventures. "By the time you set up the service and support operations, it can end up costing more money than the revenues would justify. We've had a lot of false starts expanding overseas."

Dyal recalled two instances where portfolio companies had disappointing results when they tried to expand into India to save some money. "We did get operations up and running, but the savings were not there and the overall pace of innovation really slowed down," he said.

And Marty Pichinson, co-managing director of Sherwood Partners Inc., said that one of his companies was in the process of shutting down an operation in India that turned out to be more of a drain on productivity than a way to save costs. "The work quality was good, but the management of the process wasn't much better [than in the U.S.]," he said. —Andrea Orr

See July 17, 2002 story from TheDeal.com on Marty Pichinson