In this article, Dan Rogers, co-founder at HR analytics provider Peakon, explains why tech startups shouldn’t set their hearts on expanding to the US – it’s often more trouble than it’s worth.
What’s the one mistake nearly all inexperienced European startups make as soon as they get their hands on a bit of money? They try to open an office in the US, and they almost always fail. The list of European entrepreneurs who have come back from the States with a heavy heart is already long, and it continues to grow daily.
The attraction is understandable, especially if you are a first-time founder. Even today, after the emergence of dozens of EU ‘unicorns’, startup culture is incredibly Valley-centric. The false mantra remains: “You have to go to the US, that’s where the funding and customers are.”
As an ambitious young entrepreneur, it is both beguiling and romantic; you want to picture yourself becoming a big deal in the Bay area, beating the Americans on their own turf. Furthermore, you’ll be told by any American VCs you speak to that Europe is a waste of time, and that you need to move to the US immediately.
The reality
The reality is very different. If you look at the list of top EU unicorns, many of them have no US presence at all. None. Zalando – an $8bn company – none; Rightmove – $5.6bn – none; ASOS – $3.9bn – about 10% revenues from US; Just Eat – $3.6bn – none; Zoopla – $1.4bn – none; TransferWise – $1.1bn – minimal US revenue.
Many others have a global reach that includes the US, and strong revenue there, but minimal ground presence. Skype was based in London and Estonia until its Microsoft acquisition. Spotify is primarily based in London and Stockholm. King Digital is the same.
I would go as far as to say that if your startup can’t work without US offices, you probably need to reconsider your startup. Obviously there are caveats to this; markets with winner-takes-all network effects that require on-the-ground sales, marketing, and/or employees – for example, Uber and Lyft – would need to launch in the US sooner rather than later. But in all fairness, I doubt many people reading this are building the next Uber.
Even with winner-takes-all markets, it’s a better strategy to build up a big presence in Europe, and then consider a merger or acquisition with a US leader, than it is to take the US head on. That’s what we did with Qype – the European competitor to Yelp. We did not focus on the US at all, instead we dominated all the main markets in Europe, then when Yelp tried to crack the EU, we had already locked them out. Instead of trying to unseat us, it was easier for them to just acquire the business – which they did for $50m in 2012.
Reaping the rewards
Indeed, a company’s decision to remain in Europe can reap many rewards. Europe is a huge market – its GDP actually outperforms that of the US. Desirable talent is more accessible thanks to more inclusive immigration policies, and the language barrier is less of an issue as it’s commonplace for younger generations to speak English.
There can also be more subtle European benefits: Spotify only took off initially because the record labels didn’t take Sweden seriously as a market. Some businesses are easier to build from Europe.
So what is the next step? Ask yourself first: are you 100% sure you need to expand internationally? Although your ego and VCs might say otherwise, chances are the answer is no. There are only three reasons to expand internationally: talent, customers, or money. It’s unlikely that Europe is a constraint on any of these.
If you have to move, it makes sense to look closer to home first. It’s no coincidence that many successful EU unicorns have taken the X + London approach. It’s easier to manage a second office when it’s a £50 Easyjet flight across one time zone rather than on the other side the Atlantic. This gives you the chance to sort out your collaboration and working setup in easy conditions, and you can always resort to resolving issues face-to-face. Going straight to the US will push your sanity and finances to breaking point, and there’s not much of a fallback option either.
At Peakon, we got lucky. We met an amazing US partner – recruitment firm Personify – who believed in what we were trying to achieve with employee engagement. Together we’ve created a ‘full circle’ recruitment, engagement and retention solution. With their North Carolina base, and an already established presence in the US, it was a low-risk deal for us with a great upside. The team already know the market, share our values and believe in our vision. So far it’s worked. We’ve already seen the fruit of the Peakon and Personify partnership in deals with some of the largest brands in North America.
Believe me, I understand the allure of the Bay area ZIP code, but there are smarter approaches to consider before you put all your chips on the ‘red’ of the Golden Gate Bridge.