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Here’s the way it works: You’re building a web service in the U.S. or Western Europe, but you realize Silicon Valley, New York and London are terribly expensive places to hire programming talent. So you hire staff in a developing economy, perhaps Eastern Europe. And why not? Skilled programmers outside the West are cheaper and whip-smart, helping you save money and improve your product.
It’s an approach that has worked well for big names like Skype (s MSFT), Wikia, Opera and many others.
But guess what? That’s not necessarily the way it works anymore. Partly because of Europe’s financial crisis, some of the “old” countries are now becoming the jumping-off point for services in developing economies, and not the other way around.
Take Portugal. Once it paved the way for the modern age as a nation of explorers who built the first global empire in history. These days, however, it’s fast becoming a center for inexpensive startup workers, especially with those companies looking to expand into Brazil and elsewhere.
A fundamental shift
Here are a few examples. HouseTrip, a holiday rental service similar to Airbnb that is regarded by many as one of Europe’s hottest startups, is headquartered in London but has a large number of service staff in Lisbon. Or what about Webnographer, a UX startup that has had offices in the city for a couple of years?
But the prime candidate is probably Rocket Internet, the notorious German clone factory that has a significant development center in the northern Portuguese city of Porto. It houses at least 150 programmers and support staff, who are all building crucial elements of major international properties like Groupon (s GPRN) and Zalando.
For Rocket and its masterminds, the Samwer Brothers, Portugal provides a great base for dramatically expanding its business in developing economies across South America, Southeast Asia and the Middle East. Miguel Pinto, the managing director of the Porto center, confirmed recently that the team was focused on technical development and would carry on expanding at pace.
But Carlos Silva, a Lisbon resident and co-founder of crowdfunding startup Seedrs, says it’s a confluence of bigger circumstances that makes it sensible to hire staff in Portugal for companies focused on markets like Brazil.
“The Brazilian market is definitely a very big and interesting market for European companies, but — at least for a startup — setting up a base there is not an easy task,” says Silva. “Getting work permits is complex, and the country is still quite bureaucratic. Portugal, on the other hand, is part of the EU, making it very easy to attract talent from all over, has a very simple process to create companies and deal with legal and tax obligations, and is geographically much closer to European centers of entrepreneurship.”
The free movement of workers inside Europe certainly helps, but that’s not all that’s going on. There’s also the fact that the economy is under severe pressure. Portugal has the lowest GDP per capita in Western Europe, and the sovereign debt crisis has been kicking the nation in its soft parts for a long time now.
Joao Martins, the CEO of Porto-based news aggregator app Niiiws, thinks the lack of opportunities at home is a big part of this recent change.
“There are at least six great engineering universities in Portugal, graduating a lot of very well-prepared young people to work,” he says. “The problem is the general economic environment, the work culture and the lack of management skills. You can hire one of these guys for $1500, but you can’t find more than a dozen really big Portuguese IT companies.”
Meanwhile Brazil is getting more and more expensive as the startup economy explodes: According to Payscale.com, the median salary for an IT manager in Brazil is 136,000 BRL ($66,000) but the same job in Portugal is just €30,000 ($36,000).
The connection between the two countries makes a lot of sense — not least because of the linguistic connection and the imbalance in populations (Portugal has around 10 million people; Brazil has 196 million). But in the past it would have been Portugal and its entrepreneurs taking command of those emerging markets rather than simply supplying them with low-cost talent.
The signaling has become even stronger recently. Even the prime minister, Pedro Passos Coelho, got in on the act, telling local people struggling to find jobs that they should emigrate to South America.
That may be excessive — and Coelho came in for plenty of criticism — but it’s clear there’s been a shift.
“Portugal has always been an excellent platform to enter not only the Brazilian market but also other developing markets like Angola and Mozambique or even India, through its connections with Goa, and China, through Macau,” says Carlos Silva. “Bigger companies are already taking advantage of it by having participations in some of Portuguese biggest companies like Portugal Telecom and EDP and, as you said, some startups are starting to do the same. I would not be surprised to see more startups follow that same route.”
The shoe is definitely now on the other foot. The question is whether this change will happen elsewhere in Europe too.