“And I think to myself, what a wonderful world.”
Ask 15 people where the best place on a planet to start a company is, and 14 are likely to respond: Silicon Valley. Despite this, entrepreneurism is gaining steam elsewhere, both across the United States and throughout the rest of the world. Historically, this has been limited to tech outposts in Israel or India, but today venture-back start-ups with overseas headquarters are popping up all over Europe and Asia. Entrepreneurism is inviting infrastructure–venture capitalists, attorneys, recruiters–that will help make the global start-up a permanent fixture instead of a temporary phenomenon. Ironically, it is the start-ups in good ol’ Silicon Valley that noticed this first, and they are the ones that will first experience the challenge of being a true global start-up.
According to IDC, this is the year that the number of Internet users outside of the United States will surpass the number inside the country. As you might expect, the gap is expected to widen. Online usage is dramatically rising in Europe, with 66 million people expected to go online this year, a 40 percent increase from 1999. In most of the Nordic countries, Internet penetration nears 30 percent of the population, which is comparable with that in the United States. In addition, many experts believe that the United States actually lags behind both Europe and Asia when it comes to wireless Internet access and usage.
Besides signs of increased Internet usage, there also have been several softer signs that reaffirm the evolution of a fertile start-up environment in Europe. Capital availability has increased at all stages along the company life cycle. Liquidity opportunities have increased with the success of tech-focused stock exchanges such as Germany’s Neuer Market, and within 12 months many expect the arrival of a Pan-European Nasdaq-like exchange. As capital increases, service firms such as recruiters and attorneys are dedicating more resources to early-stage companies overseas. Lastly and most importantly, Europeans have a new respect for entrepreneurship–an important step in a culture that once favored job security well ahead of risk-taking.
Far away on the other side of the planet, California-based start-ups have slowly become aware of the rising overseas activity. The first signs were subtle. Shortly after launching a Web site and issuing a press release about their recent round of venture financing, unsuspecting young entrepreneurs may notice that the foreign versions of their URLs (.uk, .jp, etc.) have been registered by cybersquatters. Someone on the other side of the globe is paying attention to start-up financing news in Silicon Valley. Of course, we shouldn’t be surprised. In addition to offering all of this opportunity, the Internet also offers instant information to anyone on the planet. The RedHerring has become an arbitrageur’s tool for new-age global opportunists.
While URL squatting is bothersome, it is a paltry problem compared with a more aggressive form of imitation, which I will call "global cloning." Several Silicon Valley start-ups have been shocked to find that overseas companies have launched mirror-image versions of their Web sites targeted at the local community. One notable site is likely Germany’s Alando, a version of eBay’s popular auction site (eBay acquired Alando in June 1999). This is only the tip of the iceberg, however. One company I work with encountered not one, not two, but three venture-backed German start-ups "borrowing" the look and feel of the original. Unfortunately, look and feel was not all that was borrowed. As HTML files can be copied directly off a start-up’s servers, these new sites frequently include exact copies of source from the originator.
Though cloning innocent start-ups may or may not be ethical, it is happening, and I wouldn’t count on any international organization stopping the practice anytime soon. In fact, I have heard rumors that European venture capitalists encouraging cloning as the modus operandi. This presents an interesting problem for the global start-up. Strong marketing and PR are standard elements of a successful launch and can attract employees, financiers and business partners. But these same announcements attract unwanted imitation activity overseas. U.S.-based start-ups traditionally wait until they reach a certain level of stability before expanding overseas. With a fertile international start-up market, however, companies are in a quandary.
The new global start-up is faced with difficult decisions. One option is to move quickly and enter as many markets as possible, potentially (and likely) well before it is ready. Rapid expansion before a company has stabilized its domestic business is extremely risky, though, and it may suffer a fate similar to that of Boo.com, which tried to launch in several markets simultaneously. Regrettably, the opposite scenario doesn’t work well either. If a company acts conservatively, others may leverage its hard work and experience and quickly and easily take market share that you may feel is rightfully yours.
As is true in most cases, a compromise is probably the optimal solution. As a first principle, a start-up should never look overseas until it has achieved at lease some minimal level of progress at home, likely measured in terms of revenues, customers or profitability. Once that is achieved, there are three ways to enter a new market: through a joint venture, through an acquisition, or by building a business from the ground up. If a company does not have a good understanding of the local market and culture, it should heavily consider the joint venture route, as it could use the perspective of a local partner. If it has some understanding of the market, an acquisition may be in order, but the company is still in charge at the end of the day.
The three Internet leaders–Amazon.com, eBay and Yahoo–offer some interesting lessons for charting the global frontier. Amazon, clearly a successful international organization, with 24 percent of first-quarter sales coming from overseas, used acquisitions to get ahead in both the United Kingdom and Germany (becoming the No. 1 e-commerce site in both countries). Surprisingly, these are Amazon’s only two subsidiaries; the company has no presence in France, Asia or South America. eBay acquired Alando in Germany and launched its own site in the United Kingdom and Canada. It is noteworthy that eBay originally launched a Japanese site on its own but shortly thereafter brought in NEC as a joint venture partner to better compete with Yahoo Japan Auctions.
Even Yahoo, the king of all Internet companies, used joint ventures to get traction early in foreign markets. Yahoo owns 34 percent of Yahoo Japan; 70 percent in the United Kingdom, France and Germany; and 60 percent in Korea. Only recently–once it had established itself as a global profitable company–did Yahoo begin launching 100 percent-owned subsidiaries. I suspect that the build-it-yourself scenario, which was the typical model for companies five to 10 years ago, will be limited to such international powerhouses as Yahoo. With a global start-up infrastructure, it is simply too difficult to organically grow in multiple countries simultaneously.
Though it may not seem obvious, the presence of start-up infrastructure overseas actually poses new challenges for local start-ups that have visions of global greatness. Ironically, the same courage that leads a start-up to look overseas could cause failure if the company moves too quickly and aggressively or assumes it can get by without local partners. When considering such alternatives, it is important to keep one fact in mind: 50 percent of something is worth a lot more than 100 percent of nothing.