Building Startups Across Borders
Today: Crossing borders is more easily said than done in the startup world. We need to up our game without delay.
The Agenda 👇
Because “Startup = Growth”, crossing borders is a challenge most startups have to face
My own firm, The Family, has several years of experience (good and bad) in that field
Surprisingly, very little circulates about how to proceed and tackle related challenges
There are various categories of problems that startups encounter while crossing borders
Building open knowledge together: The Family’s next steps and how you can contribute
My firm The Family is focusing more and more on what I’ll call (for now) ‘startups across borders’. By this, I mean any tech startup that operates and is structured across national boundaries, whether it’s to serve customers in a different country, hire talent in a distributed manner, or raise capital from foreign investors. Below is a synthesis of my views on the topic.
1/ Why does it matter?
The challenges of doing business across borders are familiar to startup founders. Because tech companies are lifted up by increasing returns to scale, their tendency is to always look for more room to grow and reap the rewards of operating at a larger scale.
In some cases, such as startups founded in the US or in China, this doesn’t necessarily mean you’ll need to be present in several countries. But in many other cases, including in fragmented Europe, growing a business often equates crossing national borders on at least one side of the business—whether it’s to find new customers, hire talent, or raise funds.
As I wrote in Will Fragmentation Doom Europe to Another Lost Decade? (January 2020):
The persistent fragmentation explains why European tech is lagging behind. Because of the core features of increasing returns to scale, tech businesses have a critical need to reach a very large scale if they want to be profitable and win out over competitors. If European entrepreneurs encounter barriers on all three fronts of building a business (customers, talent, and capital), they can’t grow as quickly and steadily as their competitors from the US and China.
In other words: reflecting on such issues (crossing borders) is the curse we who are based in smaller countries have to live with. It’s high time we make progress in dealing with it!
2/ Useful concepts and frameworks
There are several concepts and frameworks that are especially useful to reflect on these challenges. One that I like a lot, inspired by Anish Acharya of Andreessen Horowitz, consists in determining if a business is “default local” or “default global”. Let me quote Anish writing about the specific case of fintech (from a16z’s newsletter):
Fintech is default local, not default global. Unlike software or a social network that can be “turned on” in any geography, fintech products must receive local regulatory approval, offer local payment methods, and work with local bank partners — all of which takes time, talent, and money, oftentimes a significant, dedicated team. Additionally, over the last 10 years, local fintech players have emerged around the world, posing formidable competition for foreign entrants.
Another interesting concept is that of the “Internet Nation”. My cofounder Oussama Ammar once wrote an entire blog post about it, so let me just quote him:
There’s always been a huge tension with startups: do you launch locally or globally?
You hear both sides: you need to stay focused (local); you need to be ambitious (global); you have to move fast (local and global…).
One of the pieces of advice that comes out of that tension is to launch in a good market and see how it goes: in Europe, maybe that meant launching in the Netherlands or the UK, and then taking things from there.
But at The Family, we often joke about a nation that seems to be invisible for lots of people: the Internet Nation.
What is Internet Nation? It’s the only nation with no border. It’s the nation where everyone speaks English (whether as a first, second, third, fourth language). It’s full of people who are young and ready to buy, people who see themselves as early adopters, people who like to try new things.
3/ The Family’s journey across many borders
The Family’s interest in startups crossing borders derives directly from our own experience as a firm. We have long sought to expand beyond the borders of our initial market (France). As early as 2014 (just one year after our launch) we reincorporated as a UK-based company. The following year, I myself moved to London, where my family and I spent 5 great years. (We’re now in Munich, Germany 🇩🇪)
The path to becoming a pan-European firm has been a series of iterations and humbling experiences, as I described in The Family's Pan-European Ambitions (September 2017). More recently, however, the pandemic has helped us move much further down the path, including by closing all our physical offices, while also solving residual problems—but also placing new challenges in front of us.
About that, see A Memo About My Firm, The Family (September 2020):
Not having a physical office anymore is liberating because it enables us to reach out to founding teams well beyond Europe: we can now operate globally, without being constantly brought back to our base. On the other hand, the competition is tougher, with most existing accelerators, starting with Y Combinator itself, having switched to remote as well. It requires doubling down on online content and providing ambitious founders with a compelling value proposition.
4/ Obstacles and pitfalls encountered during the journey
As a firm, we’ve never found it easy to cross borders. Here’s an overview of the many problems we encountered along the way:
The gaps and frictions related to regulations in various fields. It isn’t easy to deal with these unless you find diligent and competent professionals. And since those are usually expensive, the whole effort comes at a hefty price.
Pushback from our original entrepreneurial ecosystem in Paris: fans demeaning us for switching our content from French to English; shareholders suspecting foul play; journalists coming up just short of deeming us unpatriotic. I guess it comes with the French mindset: unlike other countries, particularly in the emerging world, we’re not a nation that celebrates emigrants, and we don’t acknowledge the idea of a diaspora. If people leave France, it’s seen as a sign of arrogance, and the price they’re made to pay is being cut off from the local ecosystem.
Above all, I’ve discovered that even foreigners have integrated the fact that French prefer to stay at home. Therefore if you’re French (with a French-sounding name and a French accent), many people assume that you’re based in Paris and doing business on the French market, and that’s it.
About that, here’s an anecdote. When I lived in London (from 2015 to 2020), several times people I knew there would send me an email along the lines of:
Hey, I’m in Paris today for some business meeting. Can I stop by your office for a coffee? Would love to catch up with you!
To which I would respond:
Oh, but I’m in London at the moment, and by the way I live and work here, so maybe we should have that coffee when you’re back from faraway Paris?
I guess that’s a trait French people share with Americans: provincialism. As a result, it’s assumed you prefer to stay on your home turf and that you don’t do business elsewhere (except in food or luxury).
Only France is not the US, and so you can’t build something big (at least in our field, that is, investing in pre-seed startups) if you decide to stay at home. This is why we at The Family never gave up on our vision of expanding beyond borders!
5/ There are many reasons for operating across borders anyway
Why have we ignored the setbacks and stayed on course? Three reasons, mostly:
It makes sense from a portfolio valuation perspective. We know the secondary market very well now, and one thing we’ve realized is that a portfolio of equity in early-stage startups is heavily discounted if the majority of these startups are located in the same country—assuming that country to be any place other than the US, the UK, or Israel (that’s tier-1 and tier-2 in the West). The discount applied to a primarily French portfolio is especially harsh because of the country’s bad reputation (deserved or not) in global tech circles. (About that: despite the progress made recently, my assessment is that France is still tier-3, trying to make its way onto tier-2.)
It also makes sense from a risk management perspective. An interesting concept in economics is that of an “asymmetric shock”, “a change in economic conditions that affects different countries, regions and/or cities in a different way”. Shocks are frequent in the startup world, and they’re often triggered by local conditions: a change in the local rules, the rise of a local champion, an adverse economic climate because of the local political context. And so if your business is to manage a portfolio, you need to account for the possibility of asymmetric shocks. And the best way to mitigate their consequences is to diversify your portfolio across several geographies.
Finally, I’d add that expanding across borders is quite simply a goal that’s very dear to our hearts. We at The Family all like to travel, to interact with people from different backgrounds and cultures. We’re also fascinated by how the shift to the Entrepreneurial Age is happening at different paces depending on the geography, having very different impacts depending on the local conditions. Quite simply, we’re convinced there are many things to learn from other countries, and many opportunities to seize for those who do what it takes to be present and relevant. We want to be in that category, otherwise what’s the point?
6/ Why isn’t there a roadmap for operating across borders?
You would think that there are good practices that everyone knows when it comes to operating across borders, to which any entity that wants to take the leap can refer. But here’s the truth: such a roadmap is nowhere to be found—at least not out in the open. Sure, you’ll find a lot about the challenges met by US companies expanding globally—as well as some recent interesting guides such as Index Ventures’s handbook for European startups seeking to expand in the US.
But that’s about it. And the fact that much information isn’t available has three explanations:
Few organizations are actually multi-geography, therefore not that many people have been actually confronted with the challenges of growing a business across borders. As a result, that knowledge is a scarce resource because so few people have been there, and so it’s difficult to seek expertise when you decide to go down that road.
There’s a bias on the market: most of the knowledge is retained by lawyers, which creates several problems. First, you have to pay to access it. Second, even if you pay, lawyers are in the business of assuming the worst, so most of their advice will be pointed to dissuading you from taking the leap. Finally, for many lawyers your expanding across borders means they’re about to lose you as a client, so why help you make that move?
Finally, we have this idea that the economy is globalized and that it’s easy for capital and business in general to move across borders. The reality is that we’re blind. As I explained in The Great Fragmentation (quoting Pankaj Ghemawat), the world economy is far from being as global as we think. As for the examples of organizations that have managed to expand across borders despite the adverse winds, well, they have a secret: they’re paying a LOT of money to a few firms (either one of the Big Four or a global law firm) that have the unique ability to support their clients in their efforts to do so. As you can guess, this is well beyond The Family’s price range, as it is for most tech startups that are considering moving across borders.
7/ Categories of problems encountered in operating across borders
There are many categories of problems encountered by businesses that expand across borders, but here I’d simply make the distinction between ‘soft’ problems and ‘hard’ problems.
‘Soft’ problems are all those related to cultural and linguistic differences: managing a multicultural team, adapting a product for a local audience, complying with local customs when it comes to selling. (By ‘soft’, by the way, I don’t mean to suggest that these are easier problems to address. Quite the opposite in fact: the ‘softness’ makes those problems more difficult to spot and to define, therefore it’s even more difficult to come up with a solution.)
‘Hard’ problems are more prominent and visible, therefore they’re also easier to address and, in some cases, to solve. Indeed, businesses will encounter many ‘hard’ problems in fields such as corporate structuring, employee equity, complying with local tax rules, doing their accounting in a proper manner, writing employment contracts so as to minimize the risk of litigation, etc.
Many editions of European Straits have been dedicated to discussing ‘soft’ problems, which I think are at the heart of Europe’s failure to build tech giants like in the US or China. However what my colleagues and I have diagnosed recently is a lack of open source knowledge when it comes to addressing ‘hard’ problems—all while more and more startups are switching to a crossborder approach (the pandemic has only accelerated the trend). To give you an overview, let me focus on narrower categories that I think are particularly important. Feel free to suggest others!
8/ Example #1 of a ‘hard’ problem: corporate structuring
Few founders pay attention to corporate structuring because, let’s be frank, it sounds like the most boring topic in the world; also, we’ve all been told that what matters is getting out of the building, talking to your early users, and designing the best product possible. So why care about corporate law?
The problem is that this attitude leads you to leave everything to the lawyers, which means you’re dependent on the state of your local entrepreneurial ecosystem. If this ecosystem is advanced and healthy, the average lawyer will be aware of good practices and you won’t have to worry about where and how your company is incorporated. If, on the other hand, you’re part of an entrepreneurial ecosystem that’s lagging behind, the probability is high that the law firm you picked will miss out on some good practices, eventually costing you money and opportunities down the road.
Here are three examples of things made possible by the right legal structure:
Granting equity to employees. One thing is certain: startups need to make sure their early employees have a vested interest in the company, as I explained in Why Employee Equity Matters (February 2019). What’s less certain, however, is how exactly you should do so, because in many cases the answer is “It depends”—in part on where the employee resides, but also on where your company is incorporated and what its by-laws make possible in terms of diluting existing shareholders by granting equity to employees.
Securing founder control. The typical journey of a tech startup from the seed round to the IPO is that the founding team will end up owning 10-25% of the company once it becomes public. However, most successful companies make sure to keep founders in control even once their actual stake goes below a certain threshold. This can only be done if the local corporate law allows for things such as a dual-class of shares—and if, unlike those who shunned Deliveroo’s recent IPO, local investors understand why it’s so critical for founders to remain in control.
Raising funds more smoothly. Getting funded across several rounds, from pre-seed to Series B and beyond, is a key feature of any company lifted up by increasing returns to scale. But have you ever thought about the practicality of it? In France, for instance, raising a new round not only requires finding investors and agreeing on the terms; you also need to ask your bank to open a “compte de capital”, a dedicated bank account to which investors need to send the exact amount down to the penny, otherwise none of the funds raised will be made available. So you’d better not incorporate in France if you want to raise in a more flexible manner.
(Caveat: Since 2013 France has had an equivalent of the US’s SAFE, known as “BSA AIR”, which The Family designed with lawyer Sacha Benichou: Sacha’s game-changing idea was to 'hack' the mechanism traditionally used for full ratchets, but with the conversion price adjusted upward rather than downward. It instantly became best market practice in France, all without any regulatory change being required.
However not all investors are willing to use it, especially if they count on some tax incentive that doesn’t fit into the AIR mechanism. Have a look at what my then-colleague Jean de La Rochebrochard had to say about AIR at the time: Introducing AIR, the best seed funding tool to invest in France.)
If you’re not convinced of the importance of choosing the right legal structure and location to let your company move across borders, have a look at the following:
My own Where's Europe's Delaware? (subscribers only)
Elizabeth Yin’s enlightening 2020 thread about how most challenges when it comes to investing across borders relate to a company’s legal structure:
9/ Example #2 of a ‘hard’ problem: complying with an industry’s regulations
This will be more familiar for readers of this newsletter. The more software eats the world, the more startups are launched on markets that are heavily regulated. Sadly, in most cases, regulations (and the approach to their enforcement) differ a lot from one market to the other, which forces startups to tweak their model to the point of operating different products on different markets—or they simply take their losses and give up on expanding to certain geographies altogether.
Even in geographies known to be less fragmented, appearances can be deceptive. For instance, in the European Union we have this thing called the European Single Market, but it exists only in certain industries such as manufactured goods and financial services. This means startups that aren’t in those industries have to comply with demanding legal frameworks that differ from one country to another. (Also, the Single Market is effectively less and less of a reality, with the UK having left the EU and many member states pushing back against regulations made in Brussels.)
Can founders do anything about it? It’s not clear if you can optimize as much as in the case of corporate structuring, but there are more and more players, especially on the investing side, that have realized how the fragmented regulatory landscape can be detrimental to the success of startups (again, see: Deliveroo’s recent IPO). And I’m personally convinced that with a little bit of work, startups in regulated industries will be able to find a firmer footing by doing various things:
Better knowing which geographies are welcoming and which aren’t.
Getting a better grasp of a standard playbook to approach cross-border expansion in a regulated industry.
Finding allies on the ground to help them overcome obstacles more easily once they decide to take the leap.
In a previous edition, I wrote that US startups are confronted with as many regulatory obstacles as their European counterparts. The difference lies elsewhere:
There’s a playbook for conquering the US market, even with regulations differing from one state to another.
Because that playbook exists, investors are reassured and are ready to deploy capital in spite of the uncertainty on the regulatory front.
And because all that capital has been deployed, startups can pay competent lawyers and lobbyists and literally throw them at the problem while founders focus on core business.
So, you see, what we need is the playbook, not only for the US, but for every market that’s a target for ambitious founders building startups across borders! Then the rest will follow.
10/ What’s next?
Well, first of all, subscribe to European Straits because tomorrow I’ll share a detailed reading list gathering all that I’ve written about this topic in the past, and more—for paying subscribers only.
Also, my colleagues and I are thinking about launching a new stream of content targeted at founders who are confronted with these ‘hard’ problems as soon as they cross borders. The goal, obviously, is to help them avoid, mitigate, or even solve these problems as early as possible.
I’m already thinking about all the topics, angles, and interesting people we should interview. But if you have ideas, by all means send me an email or find me on Twitter: we need to grow a community of like-minded people willing to tackle that challenge together, and at a global scale! Thanks for reading 🤗
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From Munich, Germany 🇩🇪