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?
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.