This third and final entry (see the earlier entries here and here) in our three-part series goes through some of the critical drivers of US market entry and gives some advice as to when you should consider making the leap and when not.
The question of whether or not to invest in entering the US is a very strategic one. The soundness of the investment depends on whether the US entry truly supports your strategic business goals and especially the scaling and exit potential of your business.
There are different business archetypes in this perspective:
- Location-independent businesses where other factors are more important than location
Examples of this include gaming and consumer apps: a good grasp of their distribution channels (e.g., app stores or publishers) is more important than where they are physically located. An excellent example of this type of company that everybody knows is Supercell: it is unlikely that they would have done better even if they had been in the US before their breakthrough.
- Location-driven businesses for whom a location other than the US is crucial
Many direct-to-consumer services fall to this category. The Finnish phenom Wolt (food delivery) is a good example: they can thrive and scale up with less funding in Northern Europe and avoid the hyper-competition in the US (and among the European tier 1 cities). In location-driven businesses, the local European winners are often later acquired by the US category winners when the industry enters a consolidation phase, but at reasonably high valuations.
- Software and other technology-intensive b2b businesses in which the market winners are made in the US
In this category, a strong US presence is crucial for rapid scaling and creating a strong enough exit position – practically all significant acquisitions are made by US acquirers. Most Nexit portfolio companies and success stories have been in this category (consider, e.g., Ekahau, Octoshape, or Hantro, all of which managed to achieve fast growth in the US and were acquired later by US technology giants).
There are undoubtedly many other categories and shades of gray, but understanding your business drivers is the key to the decision of whether to enter the US market and how to make it.
The Good: The Pros of US Entry
The list of positives of the US market is long, and many of the reasons are quite compelling for fast-growing companies. We’ve touched upon these in some earlier posts, but below is a recap of some of the positives and negatives of US entry.
- Market size: the US economy is over 13x the size of the combined Nordic economies.
- Funding: Better access and higher valuations to both VC and venture debt funding.
- Talent: Great amount of experienced top-flight people.
- Agility: Ability to scale and refocus staffing fast.
- Customers: Proximity to many global key customers and distribution channels. Large industrials are also often more receptive to new technologies than their European counterparts.
- Biz Dev: Close interaction and partnerships with market thought leaders & trendsetters.
- Exit opportunities: Much better position and more visibility on the radar US power buyers – a key factor for most VC funded and exit driven startups.
How many of the positives apply and to what degree must be determined on a case-by-case basis.
The Bad: The Cons of US Entry
To balance the positives, there are quite a few potential negatives as well:
- Higher (often much higher) operating costs: rents, salaries, benefits, etc.
- Increased legal & administration costs (if the parent company is kept in the Nordics, this increase should not be huge)
- Cut-throat competition – not only in selling your products but also for key resources and especially for top-notch employees such as good AI developers or data scientists.
- Legal costs and management resources required for the move
- Relocation and immigration costs and distraction, especially if whole families move.
- More difficult logistics and communication issues between offices due to time zone differences.
- More difficult IPO for a small tech company: currently more feasible in the Nordics, London or Hong Kong.
Again, these need to be assessed carefully and weighed against the positives. One key thing not to underestimate is the level of competition.
In a hyper-competitive environment, finding your true sweet spot is critical (Source: Harvard Business Review, April 2008)
If you have not been to, e.g., Silicon Valley and done business there, you simply do not understand how hypercompetitive the companies and people there are. Take our word for it.
Profile of a successful entrant
While there is no cookie-cutter solution, in our experience, there are several traits that successful US entrants often share:
- Solid strategic foundation for the entry
- The desire and the stomach for fast growth
- A strong, validated value proposition for US market
- A proven product or service that is suitable and scalable for the US market
- Proven market potential and existing early traction in the US
- A strong funding base (the cost of US entry is high, and a company should not attempt it without strong funding)
- Enough international experience to navigate the move and get things going before you have local talent hired
- Co-founder(s) and/or other senior team leaders who are willing to personally relocate
- Willingness to work very, very hard and spend some sleepless nights
- Investors or advisors who can help you in the process
If you have all or at least most of these characteristics in place, your company is a good candidate for a successful US entry and success over there.
Nexit’s Solution Framework
Several Nexit portfolio companies have made the leap successfully. We typically recommend creating a US presence along the following lines:
- Keep the parent company and the center of operations in your home county. This allows you to take advantage of the less expensive engineering talent in the Nordics, keep your admin costs lower, and also tap into the widely available national and EU level funding.
- Make the US the center of sales, marketing, and business development by moving most of the top management into the US. Typically, at least the CEO and VP of Sales move to the US.
- Hire some additional skills from the US to make the transformation faster and more genuine and add local expertise. In our experience, initial local executive hires are truly crucial. These recruits largely define your US organization and finding the right people is super-critical. The recruitment process (careful vetting of candidates, clear job descriptions, the right expectations, the right compensation model) can be challenging and it is time-consuming to find the right talent pool. Using a good headhunter is typically a good idea but do not forget to vet your headhunter, too.
- Add one or more US-centric board members for local guidance and networks. These people can be worth their weight in gold in finding the right hires, introducing you to key customers, and closing your first deals.
In our experience, this type of approach gives a good balance of upside and spending and keeps the administrative and overhead (both time and moneywise) at a reasonable level.
If you are in a stage in your development where you are contemplating these matters, we’d be happy to talk with you and give you our two cents as to how you might want to proceed – we have been closely involved with many companies that have successfully made the leap and can provide quite a bit of practical insight (in fact, we are probably the most experienced VC firm in Finland in this respect).