Are you noticing any differences between European and US VC appetite at the moment?
We’re still seeing lots of investment activity at the pre-seed and seed stages, and valuations haven't changed much. At Series A we’ve noticed the time it takes to reach a term sheet is substantially longer in 2023 than in 2021 or 2022. But it’s Series B stages of investment onwards that are suffering more, with many investors in “watch and wait” mode. To compound that, many late-stage investors are based in the US, where the majority of investors pulled back from the market earlier in 2022 than those in Europe.
European startups have traditionally established a solid base in Europe before tackling the US. The tech market here is a gloomy prospect while the US remains very strong – at least from a funding perspective. Should European startups think about moving into the US earlier than they might have previously considered?
There’s still plenty of capital for great businesses on both sides of the pond, and we wouldn’t recommend setting up shop in the US for the sole reason of chasing investment.
"We encourage our portfolio companies to think realistically about where their customers and biggest market will be. If the answer to that is “in the US,” then stateside expansions should be looked at as an early priority."
Seed team, Frontline Ventures
Enterprise software and healthcare are two big sectors where it often makes sense for founders to make the move earlier and to solve for product-market fit in the US.
What are some of the typical reasons founders are afraid to expand into the US?
As with any major company decision, founders are likely to have a long list of concerns. We try not to fuel their fears but the risks involved in international expansion are very real. Mistakes on this level are expensive and potentially life-threatening for a young startup – most will only have one shot at getting US expansion right. This makes preparation and planning all the more important.
The most common concerns we hear are that the US is a crowded market, that entering as an outsider will be too difficult without a solid network, and that the company might just be ignored. The truth is that it’s very tricky to navigate expansion, but not impossible.
For a start, there’s a huge market of mature customers in the US with a general willingness to spend more on software than those based in Europe. In addition to a wealth of experienced mentors, advisors and partners, there’s also an incredibly strong talent pool cultivated by successful tech players who are more accepting of the risks inherent in startups. Finally, the US is home to many of the decision makers at large corporations, resulting in more M&A opportunities for smaller organisations.
What advice would you give to a company before it breaks into the US market?
The number one piece of advice we give our founders is to prepare, plan and test with plenty of visits before making any decisions. We’d expect a founder to have done at least three or four trips to check out local areas, and meet potential hires and customers before signing any contracts. It’s not unusual for founders to spend up to three months at a time on these trips.
Secondly, things can get expensive quickly, so make a budget and then add a significant buffer to it.
And crucially, if your primary market is in the US, then that’s where your CEO should be based. Few companies have had successful expansions without making this move, but if it’s not possible, the CEO should at the very least be committing a substantial amount of time to the new location.
"The CEO’s presence will make it much easier to establish your company culture, ethos and values after moving to a new location. Not doing this early on can have a significant impact further down the line; if your first international hires don’t understand your mission and culture, they’ll build out a team that doesn’t represent the company."
Seed team, Frontline Ventures
Does a startup need a physical presence when establishing a business in the US? Or can they operate successfully without doing so?
No, a business does not need a physical office in the US in order to win US clients; buyers are willing to buy from anywhere, Professional Employer Organizations (PEOs) can employ US personnel for you, and investors can back foreign companies that show potential. However, companies will need a physical presence if they plan to scale in the US – that’s the distinction.
In fact, companies often try to win a few clients in the US before moving over there. It’s a good way to test product-market fit, prove their credibility in a new market and grow their network. New companies often get more traction with SMEs than enterprise clients, for several reasons; SMEs tend to have shorter sales cycles and fewer decision makers than large enterprises, in which there are more stakeholders to win over. That said, targeting the European branch of a global corporation is a good way to get a foothold in the US market.
What are the greatest and most common challenges you witness when a startup launches in the US?Choosing the right location:
It’s easy for tech companies to assume that Silicon Valley is the perfect place to land because it’s the epicentre of the tech ecosystem, but it’s not the right choice for everybody. First and foremost, companies should go where their customers are – that might be Boston for a healthtech firm, New York for a fintech business or Washington, D.C. for a government-focused organisation.
It’s also worth bearing in mind that the West Coast is eight hours behind the UK, whereas the East Coast is only five hours behind. Time differences can have a major impact on how the company operates, so make sure there’s a good reason for working across time zones.
Hiring the right people:
Hiring will always be a challenge throughout a company’s lifecycle, even for the most seasoned founders, but it’s especially tricky in a new location with cultural differences. We mentioned earlier that company culture and values need to be well translated from the beginning to ensure that early international hires are set up for success.
Another common mistake lies in the fact that employees tend to be far more expensive to hire in the US than in Europe. As a result, founders will often hire someone who is too junior to lead a new team. Compensation benchmark tools can be really useful for sense-checking your offer and ensuring you attract people with the right level of experience. As a rule of thumb, you should expect to pay two to three times what you would in Europe for the equivalent skillset in the US.
To end on a positive note, can you highlight some startups that have taken the plunge and launched successfully in the US?
Workvivo, an employee communications SaaS company founded in the Republic of Ireland, started targeting clients in the US market immediately after launching in 2019. Initial sales were made without any permanent feet on the ground in the US, but the company now has 140 employees – with 25 commercial roles based in the States. This US-first approach put Workvivo on the radar of companies like Zoom, which acquired the startup earlier this year after deciding to venture into employee communications. Had Workvivo focused solely on the European market for the first few years, Zoom might not have taken an interest.
In 2019 we also invested in a healthtech company called Qualio. In this case the founder decided to relocate to the US to grow the company, while maintaining and building out the technical team in Europe. Moving the commercial centre of gravity to the US early on allowed the CEO to raise $65m from top-tier funds. This helped Qualio engage anchor customers in the early years, setting the startup on a high-growth journey from the outset.
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