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.