I think for startups, outsourcing is the best term to use.
I'll agree that outsourcing is a more appropriate term, I used the word offshoring in my initial post without thinking because I thought (incorrectly) it was less politically charged than outsourcing. I'm going to agree with SwellJoe and say that there's something inherently xenophobic about the word offshoring.
Your mistake is equating development to production. Making software is difficult because designing upfront and then expecting the result to reflect "what users want" is an oxymoron. Instead think "just-in-time" design and creation of a software product in very close communication with users.
'... total outsourcing leads to delayed and inferior products due to human factors and mis-communication ...'
Outsourcing in this context is just another business fad. Feel free to insert your own business "Buzz words" in place of place of the ones inserted.
"Offshoring is defined as the movement of a business process done at a company in one country to the same or another company in another, different country. Almost always work is moved due to a lower cost of operations in the new location. Offshoring is sometimes contrasted with outsourcing or offshore outsourcing. Outsourcing is the movement of internal business processes to an external company. Companies subcontracting in the same country would be outsourcing, but not offshoring. A company moving an internal business unit from one country to another would be offshoring, but not outsourcing. A company subcontracting a business unit to a different company in another country would be both outsourcing and offshoring."
So there is a small semantical difference between the two, offshoring is broader.
Edit: Offshoring is not necessarily broader than outsourcing, except offshoring applies to internal and external business processes.