Archive: Dec 2013

5 Myths About Migrating a Software Company to the US

Firas

creation-myth-cave-art-cartoonThe last decade has been very kind to a handful of high profile, very successful international B2B software companies.

For instance, Zendesk, an enterprise customer service software company that was founded in a small loft in Copenhagen in 2006, has received more than $80 million in funding since relocating its headquarters to the United States. Oh, and it’s projected to hit the $100 million annual revenue plateau in 2014, a big step toward a potential IPO.

Then, of course, there’s Huddle, the cloud-based collaboration and content management platform that was founded in London in 2006. Since establishing headquarters in the United States in 2012, the company has raised a $24 million venture round and begun to eye its own IPO in 2014 (with a projected valuation north of $1 billion, by the way).

I could rattle off countless other success stories (and I’m sure you could come up with a few others on your own), but the truth is that those successes have clouded the harsh reality of most U.S. migrations: For every Zendesk or Huddle, there are numerous other international startups that fail miserably when they attempt to re-locate to the land of opportunity.

Does that mean that moving an international B2B software company to the U.S. is a bad idea?

Absolutely not. The problem, however, is that entering the U.S. market isn’t as easy as it looks (even if you’ve already built a successful company in your home country). Making matters worse, many international founders and CEOs often get tripped up by the allure of five very misleading myths about the U.S. market:

Myth #1: International companies must set up shop in Silicon Valley

Ah, yes, the old “Silicon Valley is the only place to be” argument. Is it true that Silicon Valley is home to a host of brand-name investors, successful tech giants, and a seemingly endless pool of tech talent? Sure. But Silicon Valley has some inherent disadvantages for international B2B software companies, too. For instance:

Silicon Valley is may not be where your prospects are: the primary allure of the Valley is that it is a hub of tech investors, talent, and strategic acquirers. But it is not the hub of your prospect clients. The nice thing about being a B2B company is that you can have many areas of concentration when it comes to your future customers. New York, Boston, Chicago, Dallas to name a few, where you would not only find customer concentration but also find really good talent. Not to mention Salt Lake City (think Omniture, and two of my portfolio companies AtTast and Instructure) and Austin (BazaarVoice, Spredfast).

 It’s further from your home country: Let’s say that you’re the founding CEO of a software company that’s headquartered in Berlin. If you relocate your business to San Jose, California, then you’re looking at almost 14 hours of travel time each way (plus a 9-hour time change). If, on the other hand, you headquartered your business in New York, your travel time would be about nine hours and you’d also gain three hours of time change, not to mention saving about $500 on airfare. Those differences can equate to a lot of time and money

 The cost of talent and real estate: To headquarter your company in Cupertino, California, you’re going to pay a significant premium for office space and engineering or sales talent, versus if you headquartered your company in Raleigh, North Carolina (a burgeoning tech hub). Is that premium really worth paying just to boast that Apple is one of your corporate neighbors

Myth #2: The U.S. market is totally homogeneous

On the surface, I understand this misconception. After all, the U.S. has a single language, currency, set of laws, and procurement habits, and its culture is mostly unvaried. But the U.S. is also a massive piece of land that is so geographically dispersed that it’s virtually impossible to treat it as one single market.

Moving your company from Denmark to the US is like going from fishing in a lake to fishing in an ocean. You’re boat is too small, your tackle is limited, the fish stick is different, and the space you’re fishing in goes from small to massive.

Entering the U.S. from your smaller home country presents similar challenges. Yes, the U.S. has a large market of mostly homogeneous buyers. But because of that market’s sheer size and geographic dispersal, it’s virtually impossible to target the entire market all at once. If you do so, you’ll probably find that you don’t have the time or resources to survive for very long.  Careful capital-efficient entry with careful expansion and ample funding are the keys to success.

Myth #3: You need to locate your company close to your prospective buyers.

This is generally a European mentality and it goes back to my point above. The beauty of the United States is that there are probably customers for your product in whichever city you decide to call home. Will there be more of those customers in Northern California, New York, or Boston? Maybe. But, unlike Europe, U.S. businesses are not contained to just one or two major markets. So, wherever you decide to set up shop, it’s likely that you won’t capture anywhere near the majority of your prospective buyers anyway.

For that reason alone (and because U.S. companies are more open to buying software over the phone), it doesn’t really matter where you set up your company when you re-locate to the U.S. The more important thing to focus on is the geographic concentration of the talent you need to hire, because that’s the factor that will have a greater impact on your ability to successfully establish U.S. operations.

Myth #4: The first person you hire in the U.S. needs to be a senior salesperson.

All too often, I’ve seen international startups make the mistake of beginning their migration to the United States by hiring a senior sales manager who has never had experience building and managing a team. From there, the company often gives that person a VP of Sales title and then uses that person to experiment with their U.S. sales model.

That approach is like putting the cart before the horse.

In my experience, international software companies need to do three things before they ever hire the person who will lead their U.S. sales organization:

  1. Figure out the segment they’ll be targeting in the US
  2. Determine the distribution model they’ll use to sell and market the software
  3. Experiment with that model until it’s been validated

At that point, your company should have a clear understanding of the skills and experience a prospective sales leader needs to have to successfully build and manage your sales team with that model in mind. Then (and only then) should you search for and recruit the person who will lead your U.S.-based sales operation.

Myth #5: It will cost you $2-3 million in funding to get U.S. operations started.

Double that number, and you might be close to the final tab of migrating to the United States.

Truthfully, whatever you think it’s going to cost you to move your international company to the U.S., it’s generally a good idea to assume it will cost twice as much. The reasons for that are simple: The U.S. is huge, it’s geographically dispersed, there’s significantly more competition than your home country, and it will likely take significant sales and marketing effort to rise above the clutter, reach your prospects, and convert them into revenue.

Additionally, because you’ll be paying less attention to your home country to set up shop in the United States, you’ll probably end up spreading yourself thin — and that will negatively impact operations in both locations. As a result, you have to be prepared to allocate more resources to entering the U.S., give yourself more time to generate revenue, and understand that you’ll make mistakes that you may not have made in your home country.

The Bottom Line: Migrating to the U.S. May be Smart, but it’s No Walk in the Park

With all of that said, I’m in no way trying to discourage international B2B software companies from moving to the United States. In fact, as I wrote in a previous post, for most B2B software companies it’s often a requirement to eventually set up shop in the U.S.

What I am saying, however, is that it won’t be an easy transition and I’d recommend against focusing too much on successful international B2B companies like Zendesk, Huddle, Acronis, and others. Those companies, quite simply, are often outlier success stories.

Instead, I think you’d be better off studying the failures of international B2B software companies that didn’t survive. Those failures can be used as a playbook to avoid common mistakes or misconceptions (like the ones above), and ensure that your business has the proper focus and resources necessary to maximize the probability of success.

Coming to America

Firas

coming to america

Five years ago, the vast majority of successful business-to-business (B2B) technology startups came from one of the major hubs in the United States — be it Silicon Valley, Seattle, New York, Boston, or another emerging region of the country like Salt Lake City.

Today, a lot has changed.

In fact, I recently read a report by global telecommunications firm Telefonica that revealed this nugget: Today, five of the biggest hubs for startup output now fall outside of our cozy domestic borders — Tel Aviv (#2), Sydney (#5), Toronto (#6), London (#7), and Sao Paolo (#9).

Does that mean that the United States is losing its innovative edge and falling behind in the race for B2B tech supremacy?

Not exactly.

Over the last few years, several factors have contributed to the rapid emergence of international startup ecosystems:

  • The explosive growth of the Internet and its access through mobility
  • A dramatic reduction in the cost of setting up a tech startup
  • The advancement and increased simplicity of software engineering
  • Significant global spread of technology education around the world
  • And, lastly, the emergence of new software distribution methods — namely, software-as-a-service and the cloud

Collectively, those factors have democratized the startup process and made it far easier for someone to build a software business anywhere around the world.

Why the United States is Still the Ultimate Destination

So, if the global startup scene has evolved so much in such a short period of time, why are so many non-U.S. startups continuing to migrate their businesses here? Couldn’t they save some cash (and frustration) by expanding to other markets closer to their home country?

It’s simple, really: Despite the ubiquity of international startups, the United States remains the access point for growth for the vast majority of international B2B tech companies.

In fact, as the Telefonica report illustrates, just three international locations — Tel Aviv, Toronto, and London — rank in the top 10 globally for access to funding.  By contrast, three U.S. hubs — Silicon Valley, Boston, and New York — rank among the top four locations for startup funding.

Additionally (and maybe more importantly), the U.S. has the largest concentration of B2B software buyers, as well. — and it’s where the most capital efficient sales models can be set up. That’s critical in the B2B space, where transactions and sales are generally much larger in price than B2C applications.

It’s important to remember that non-U.S. enterprise buyers are also generally hesitant (or totally averse) to making a big purchase online or over the phone. In the U.S., on the other hand, buyers are already convinced they should only buy SaaS products, and they are very used to buying them online or over the phone. That is why it is much easier and capital efficient to sell B2B software in the US.

And, lastly, there’s the issue of exit strategy. Despite global startup growth, the U.S. is still home to the majority of acquiring companies. If an emerging startup wants to have the option of an exit through acquisition, it’s best to establish a presence in the same market as a potential acquirer.

Combined, those factors often leave growing B2B tech startups no choice: Establish operations in the United States, or get left in the dust of a rival that will.

Barriers to Entry

In recent years, several international B2B tech companies have successfully migrated across the pond.

Customer support software company Zendesk, for example, was founded in Copenhagen, Denmark, in 2007, and is now prepping for a stateside IPO. Swedish business intelligence software company QlikTech, meanwhile, relocated to the United States in 2006 (and, oh by the way, now has a market cap exceeding $2 billion).

Of course, for every Zendesk and QlikTech, there are many, many other international startups whose migrations to the U.S. haven’t gone so well.

In the coming weeks, I’ll talk about why those migratory failures happen, share some common misconceptions that international startup founders have of U.S. relocation, and dive deeper into why, despite the obvious risk, U.S. migration is often critical to international companies’ long-term growth potential.

The one thing to remember, however, is that international migration never happens overnight.

It requires companies to undergo a long, multi-phase journey that presents myriad challenges and opportunities. All too often, international founders fail to fully prepare for that experience, or they don’t invest the necessary time into focusing on what exactly they plan to do once they hit U.S. soil. And, unfortunately, that typically leads to international startups sinking their ships before they ever really had a chance to anchor somewhere fruitful.

What, Who and Why

Firas

What I Do

I help non-US based tech startups get established in the US. I do this by providing hands-on support with building company operations in Boston, including transitioning the headquarters and founders as well.  My approach is to work with one or two companies a year where I can take a part-time operating role as a member of the senior management team.  My role is most intense and impactful in the first 12-18 months of my engagement.  After that, I take on a more typical advisory role as an independent board member or operational advisor.

One way to describe my approach is that of establishing a beachhead for my client companies. I am the first person in the US representing my client operations. I help the founding CEO build a plan for launching US operations, and I begin laying the foundations for the eventual build-out of the company team here.

Why I Founded (N)Squared

In my eight years as an investor at OpenView, I ran into many super exciting companies based outside the US. Most of these companies were looking to enter the US, but had little experience doing so. Everyone knows that starting a tech company is quite daunting. What is more daunting is starting a company outside the US, and then having to go through another startup experience bringing it to the US.  Entering the US is a difficult thing to do. Many a companies failed in their first attempt to conquer this market.

It occurred to me that what these international companies needed was the operational support to get the US team started, more so than an investment from a US investor. And so I decided to spin out of OpenView to start my own advisory firm. And (N)squared was born.

My goal is to de-couple the investment need from the operational support, and offer the latter on its own.  Yet my offering does in fact include helping my clients prepare for, and secure, US based funding.

Why Me

I have a unique blend of VC and startup experiences coupled with operational consulting experience.  I acquired the VC experience after eight years as a founding member and investing partner at OpenView.  I acquired the startup experience after five years as a founding member of three software companies, two of which failed and one survived into the expansion phase followed by acquisition.  I acquired the operational consulting experience after five years as a senior consultant in the Operations Management Group at Booz&Company.

But Why Me… Really

Because I am passionate about working with founders to help them build their startups. I thrive on mentoring. I have been there myself and made more mistakes than all of the founders I’ve worked with combined. The range of my experiences gives me a really broad viewpoint on all the elements that go into building a startup into a large company. I have sat on many boards, both as an operator and as an investor. I went through many rounds of funding both as entrepreneur and as investor. I have lived through two startup failures as an entrepreneur and one as an investor. I have seen two of my portfolio companies grow into companies about to file their IPOs. I have helped three companies based outside the US establish their US businesses. I have lived in five countries and have strong appreciation of cultural nuances. I have lived in six states in the US and understand the nuances of the America culture. At heart, I am an operator, an entrepreneur and an internationalist.

And most importantly, this is what I really want to do.

Target Clients

If your startup is a Business-to-Business software company
If your startup is based outside the US
If your startup has a large market in the US
If your startup is generating run-rate annualized revenue of $1 million to $10 million
If you are ready to make the leap into the US
If you are willing to build your US headquarters in Boston

Services I Offer

US Expansion Strategy: work with my companies to define the overall expansion stage, and the specific approach to entering the US. This phase includes the definition of the mechanics of shifting some or all company operations to focus on the US. It defines the target US market segment, and the associated distribution model. It defines the composition of the US team, the sequence of hiring, the budget model, and the required funding.

US Sales Incubation: work hand-in-hand with the founders, to setup the first sales process in the US. This includes the development of a sales process, incorporating the process into the CRM, launching marketing and sales activities and optimizing those activities over time. It also includes hiring of the sales resources, or outsourcing to an agency. It includes the establishment of an office with all its associated infrastructure.

Funding: work hand in hand with the CEO to define the expansion model and budget going forward and identify the funding need.  Complete overhaul – or first time build – of an investment package that provides the optimal positioning of the company, definition of target market and growth potential, competitive differentiation and market segmentation, and the approach to scaling the company.  Developing the due diligence data-room.  Launching the outbound program for engaging the right set of investors.  Coaching the founders on presentation skills. Providing support during term sheet negotiations and subsequent support of the closing process.

CEO Mentorship: work hand in hand with the founding CEO to develop and execute the company strategy. Defining the senior team needed and helping in the recruitment of top notch talent. Establishing and recruiting an effective Board of Directors.  Helping the CEO manage the board dynamics. And overall, helping the CEO avoid mistakes.

Who Does My Investor Board Member Represent?

Firas

Board-of-director-level issues rarely surface when the going is good.

Board meetings are pleasant when the company is executing well, revenue is growing, the value of the business is rising, and shareholders are starting to count their money. In these times, board meetings tend to be relaxed, and mostly focused on the business and its bright future.

But when the going gets tough, board dynamics can change to the worst. And with it, the role and priority of each board member can be accentuated and/or confused.

Investor Board Members

One of the confusing roles is that of the investor board member. When the going gets tough, the company is feeling a cash crunch and conflict arises around the continued funding of the company and its associated valuation — the investor board member may invariably have to wear his or her investor hat when working with the CEO and the board. And that can sometimes create the blurring of the lines in the fiduciary duties of that board member.

Let’s me be clear at this point — the fiduciary duty of the investor board member is always to represent all shareholders and the best interests of the company. Always. Regardless of whether that duty may conflict with his or her VC firm’s interests.

Now that does not mean that the investor board member would not assume the investor role outside the board meetings. But when it comes to board discussions and decisions, the investor board member should always be wearing the company board hat. In fact, he or she is obligated to.

So lets step back and go through the basics of the fiduciary duties of board members.

Board Member Roles and Responsibilities

First and foremost, the primary responsibility of a company’s board of directors is directing, approving, and overseeing the strategic and financial operations of the business. In some cases where the chairman of the board is not the CEO, the board is also responsible for managing the operations of the company and its senior team. In all cases, the CEO reports and is accountable to the board.

Each board member has a fiduciary duty to represent the best interests of the company and all its shareholders. Failure to do so can result in a personal liability to the board member.

There are two forms of fiduciary duties:

  1. Duty of Care: This is where the board member makes best efforts to have a solid understanding of the business, be well informed and aware of the strategic and operational goals, and make the time and effort to engage in the evaluation of all the options available to the company before making decisions as a board. In that, board members should solicit the expertise and options of third parties (lawyers, consultants, bankers). Board members should also hold each other accountable to being engaged and making themselves available and informed.
  2. Duty of Loyalty: Each board member must represent the interests of all shareholders over and above his or her own personal or professional interests. The duty of loyalty is one that can be confusing for CEOs/founders, and is the one where investor board members can feel the divergence of interests between their duty of loyalty and the priorities of their investment firm. But when it comes to board matters, investor board members must make sure that they are not allowing their investment priorities to come into play as the board deliberates over company strategies, funding, or acquisition decisions.

These are the basics.

Here are examples of questions that come up in these situations:

  • When is the right time to set up a board of directors for an early stage company? I have written a lot about this, and a fantastic resource to check out is OpenView’s Building a High-Impact Board of Directors eBook. The quick answer is you should not wait long.
  • I’m the founding CEO and I have a board. But I own a large percentage of the company and it’s still my company. When the going gets tough, do I have to abide by what my board tells me? Absolutely. Once you set up a real and legitimate board of directors, you don’t own the company any more. You, as CEO, are accountable to the board. You also have the same fiduciary duty to represent the interests of all shareholders, including those of your investor(s). If you are not ready to give up control, then don’t form a board and don’t raise money from an institutional investor.
  • How do I avoid having a duty of loyalty conflict with my investor board member? First, make sure that you are setting the right expectations for the company to the investor when you decide to raise money. Conflict with your investor typically arises when the company does not perform to expectations. Second, make sure you never run the risk of running out of money. Third, make sure you are not reliant on one investment firm. Diversify your investor base. One investor is too few. More than three is too many.
  • I don’t think my investor has the company’s best interest at heart. What do I do? First, make sure that you have a complete and cohesive board. Make sure that you have independent board members who are qualified. Independent board members can provide more balance to a board, which can alleviate the gravitational force of the investor board member. Second, make sure to give the investor board member that feedback. Be clear why specifically you feel this way, and be specific in your expectations. Before you confront the investor, make sure that the rest of the board shares your concerns. It may be that you are the one guilty of not representing all the interests of all the shareholders.

The Pre-Pre-IPO Checklist

Firas

I recently read this article in Fortune about the 10 requirements for a successful IPO. Go ahead and read it if you’re interested in this topic. I’ll wait.

Most of my readers are CEOs of companies that are a few years away from even thinking about IPOs. So, I thought I’d give a count-by-count set of requirements that should get you to the point where you can start acting on the Fortune pre-IPO checklist.

Here we go:

The Pre-Pre IPO Checklist: 10 Requirements for Putting Yourself into Position

1) Hire an Operational CFO

At the early stages of a company, the CFO is the founding CEO’s co-pilot. What you don’t need in a CFO at this stage is IPO experience. Instead, what you need is a CFO who is highly operational and has the prerequesite CPA-centric financial experience.

An operational CFO can help the CEO in many ways. Here are four examples:

  1. Building and assisting the CEO in managing a financial and economic control book
  2. Helping the CEO manage the operating rhythm of the company.
  3. Providing oversight to the sales team’s forecasting accuracy and reporting to the board the CFO’s more prudent forecast.
  4. Helping the CEO manage the board and board meetings.

Once you get to the pre-IPO stage, you may need to augment the operating CFO with an independent board member who has IPO experience, or replace the operating CFO with an IPO CFO.

2) Reach Out Proactively to Strategic Partners

Getting to pre-IPO status requires getting to scale. Getting to scale requires leveraging multiple channel of distribution. Leveraging multiple channels of distributions requires building strategic distribution partnerships with larger companies. And that requires building a comprehensive market map of your competition and your potential partners. Finally, with that visibility, you should be regularly reaching out to potential targets that can turn into partners.

The added bonus here is that you will also be building relationships with potential acquirers. Why would you bother if your plan is to go after an IPO?  Because the probability of getting to an IPO is pretty slim. Cover your bases.

3) Leverage a Network of Investment Bankers

Bankers are another channel to utilize to increase the awareness of your company, and a good source for insights on competition and strategic partners. Build a list of 3 – 4 investment bankers who know your market very well. Develop a quarterly update schedule to keep them up-to-date on your company and your partnership strategy. Suck them dry for insights on your competition and the strategics.

4) Build Your Senior Management Team

Each stage of a company’s evolution requires a revamp of the senior management team. At the startup phase, you need a set of young entrepreneurial masters-of-all-trades. At the expansion stage, you need a set of functionally experienced executives (e.g. VP of Sales, CFO, etc.) At the growth stage, you need a set of managers who have experience managing large teams, and some experience in the transition from a private to a public company.

5) Update Key Market Influencers

Influencers include analysts, reporters, and bloggers who cover your market. They are another channel of increasing the awareness of your company, and a good source for insights on your target segment and your competition. Build a list of 8-10 influencers and develop a quarterly update schedule to keep them up-to-date on your company, as well.

6) Make Sure Your Company is Properly Funded at All Times

  • Rule #1: Never run out of money.
  • Rule #2: Always make sure you have the right operational economics and the right level of funding to support your company aspirations.
  • Rule #3: Don’t raise too much money.

7) Build Your Operational Control Book and Manage By It

Startup companies tend to base a lot of management decisions on “gut feel” and a practical sense of the business. At the expansion stage, CEOs need to turn their attention to the economic model with which to grow their companies, and the set of key metrics to run the company by.

The control book is the closest thing a business has to the instrument panel of an airplane. Lots of necessary dials (metrics), with a handful that are top of mind for the pilot (CEO) and co-pilot (CFO).

8) Start to Build the Predictability of Your Business

In addition to managing by and through a set of key metrics, this is also the time to start managing with predictability. At the startup phase, predictability is an illusion. But at the expansion stage, you should be able to develop more predictability in your operations.

Your development team should adopt a management methodology (e.g. agile) that holds the team accountable to performance and deliverables. The sales team should develop a forecasting process that is reliable. The professional services team should be managing to a target profitability and billability. And so on. This level of predictability is a precursor to the much more stringent pre-IPO requirements to come.

9) Ensure that You Have a Board of Directors that Shares Your Aspirations

If you aspire to an IPO, make sure that you have investors who are aligned with you goals, are in it for the long haul, and can fund you as needed. Make sure that you have board members who can guide you on your journey from the early stages to the IPO stage. Recruit board members who can challenge you, and who are what your next stage of evolution requires. At some point, you will need to swap out some board members for ones who have IPO experience.

10) Build a Great Company

Yes, that’s an obvious one. But you would be surprised how many CEOs talk the talk but don’t walk the walk.

Building a great company requires many facets of greatness. You need lofty aspirations that are inspirational yet achievable. You need a great product that addresses a strong need or desire. You need a world class operation that scales efficiently. You need outstanding employees who are passionate about the company. You need to develop your employees and treat them like your most precious asset. And you need a great culture that is the envy of your competitors.

May the force be with you.