Some of the most prominent—and valuable—European technology companies right now are consumer-tech names: Think of Skype, Spotify, Supercell, Yandex and iZettle. China’s Tencent bought a majority stake in Finnish mobile-game outfit Supercell two years ago for more than $8 billion, according to published reports, while music-streaming service Spotify is now valued at more than $33 billion. PayPal just forked over $2.2 billion for iZettle in June.
Europe’s enterprise and B2B tech scene, nurturing companies in less-sexy but still vital sectors like big data, AI, cybersecurity and business software, has produced fewer household names but is growing fast. Many of these companies are scooping up bigger and bigger chunks of venture capital from European and U.S. investors—and, increasingly, moving large parts of their operations to the U.S. This “hop the pond” strategy, in our view, can be beneficial for many of these firms and help them scale into real global brands to rival Europe’s consumer-tech stars.
To put it in context: Last year, U.S. VCs participated in 17.1% of European venture deals, up from 13% in 2016, according to KPMG. Roughly one in seven European “scaleups”, or larger startups, now moves its headquarters abroad, most commonly to the U.S., according to a separate 2017 research report from consultancy Mind the Bridge. Most of these companies often keep R&D and large parts of their product-development operations in Europe, where costs are usually lower.
Examples of enterprise-focused European companies that have hopped the Atlantic include Zendesk, the customer-service software company that moved from Denmark to San Francisco in 2009, and the well-known, open-source database company MySQL, which was founded in Sweden but eventually moved to California. But in some ways, these enterprise companies are still dwarfed by their consumer brethren: U.S.-listed Zendesk is worth more than $6 billion, while MySQL was bought by Sun Microsystems (now part of Oracle) for $1 billion in 2008.
But exactly how should the next generation of business-focused, European tech companies hop the pond and grow? What are the key considerations for CEOs making this move, and what are the most common challenges? We’ve backed a number of these companies* and isolated a number of salient lessons for others.
One big market vs. many smaller ones
Europe is obviously a huge market. But as business-focused companies on the Continent scale, they increasingly need to sell to large corporate customers, many of which are in the U.S. For most companies, it is far easier and more efficient to attack one large market of 300 million people—the U.S.—than multiple, much-smaller markets across Europe, each with their own languages and culture. Products might need to be localized for the French or German or Belgian markets, for instance, and companies might face varying laws and regulations, despite the existence of the EU.
Many entrepreneurs also find U.S. buyers more receptive generally to innovative new technologies made by startups. U.S. companies also often buy technology more quickly, accelerating sales cycles for startups that are in a hurry to book new revenue and establish their businesses. And once a company is based in the U.S., securing more funding from investors is often easier.
Another, more-defensive consideration: As business becomes more globalized generally through innovations like cloud computing, open-source software and distributed teams, larger B2B companies based in the U.S. can more easily expand overseas and compete for customers in Europe. So European companies selling in their home markets will have to fight even harder for local revenue, making overseas expansion more necessary for them to stay competitive.
Get ready to move
From our discussions with entrepreneurs who have successfully hopped the pond, several key learnings emerged. One of the most basic was that European companies should 1) establish product-market fit, and 2) raise a sizable Series A or B funding round before making a move to the U.S.
A company in this situation can better take advantage of new capital to invest heavily in areas like product development, sales and marketing, executives say. Ten or 15 years ago, many European companies were wary of taking venture capital at all (and giving up significant ownership stakes) and might have been satisfied to chug along as small but profitable companies. Now, though, globalization—coupled with the low cost of starting new technology companies–means many of these companies will have to grow to stay relevant or even exist at all.
Another key lesson is that generally, a company founder and/or the CEO will need to relocate. Just moving the sales and marketing team to the U.S. generally isn’t enough to fully establish a U.S. beachhead for an enterprise-focused company, and to import the culture of the original European company that made it so successful in the first place.
A CEO or founder move is also important because in the early days of enterprise selling, a founder or CEO may need to make sales calls together with his or her VP of sales. The CEO or founder is still driving growth to a large degree, so to have that person stuck in Europe—away from key meetings and in a different time zone—is a disadvantage, notes Felix Van de Maele, the CEO of data-governance company Collibra*. The company was founded in Belgium but moved a large chunk of its operations (and Van de Maele’s residence) to New York three years ago.
Before he moved, “I was on calls with customers in the middle of the night all the time,” Van de Maele says. It meant, ultimately, that customers had more control over deal terms, he says.
East or West Coast?
Deciding exactly where to establish a new, U.S. headquarters, or large office, is also an important question, executives say. Many European companies choose Boston or New York because the East-Coast time zone is closer to Europe’s. In addition, big tech buyers like banks and pharmaceutical companies are based on the Eastern seaboard. This was one of the drivers behind Collibra’s decision to move the majority of its management team, and its commercial headquarters, to New York in 2015.
Other companies opt for San Francisco or Silicon Valley to tap what some say is a deeper pool of technical talent. Enterprises working on new types of data products, for instance, will likely find in these tech hubs a deeper pool of AI experts skilled in techniques around DevOps, cloud infrastructure, “microservices” and “serverless” computing, which are all important trends now.
Sometimes, the West Coast is closer to customers. Algolia, a French-founded company whose technology helps companies better optimize and personalize search and discovery, had just six employees when it was accepted into the Bay Area’s Y Combinator program in 2014. After the company’s time there, the CEO decided to relocate to the West Coast to be closer to e-commerce and media customers, among others, while the rest of the team returned to France to build engineering, R&D, and sales teams. Now, the firm feels it has a more-established brand in France and can recruit top engineers from across Europe. Algolia has more than 230 total employees, with about 75—including CEO Nicolas Dessaigne—in San Francisco.
Either way, a move to the U.S. is likely to be more expensive than many companies anticipate. It can also expose cultural challenges quickly. European companies with dual offices need to make culture a top priority so that employees in one location don’t feel left out. Algolia, for example, has weekly, global video all-hands meetings and tries to hire employees who don’t mind a more-global schedule—including calls and meetings early in the morning or late at night.
Getting tactical—and going local—with sales
Once a European company has made a move to the U.S., executives there also need to put together a coherent “go to market” plan for their product in the U.S. focused on sales and marketing.
That probably starts by figuring out if U.S. customers are suffering the same sort of pain, and buying your product for the same reasons, as customers back in Europe. They might or might not—and this will affect your overall sales strategy.
For this reason, it probably makes sense to hire a local vice president of sales in the U.S. This executive should be familiar with the faster sales and adoption cycles for enterprise technology in the U.S. and, ideally, be a sort of “player/coach” on the team—someone who can manage the company’s sales function strategically but also close deals him/herself. He/she will need to grapple with larger strategic questions such as which specific geographic markets and cities to target, as well as which industry segments to go after.
The U.S. sales leader also needs to be able to collaborate with the company’s R&D group to come up with sales pitch documents, segment customers into various groups and optimize marketing and demand generation. And, of course, the local sales chief should have a huge Rolodex of new, potential salespeople the company can hire as it grows!
By the numbers
After a company establishes a beachhead in the U.S., it may also face questions about how to report financials, particularly as the company grows and, eventually, starts eyeing a public stock listing. Foreign-currency risks complicate this for companies that maintain significant operations in Europe, or any other country.
But overall, making tough decisions early on standardizing your financial reporting can save you headaches down the line. If you think more than half your business will ultimately come from the U.S., and you plan to list shares in the U.S., it probably makes sense to convert to U.S.-style GAAP accounting as soon as possible. It’s normally wise to have three years of GAAP-reported financials before a U.S. IPO, so investors can adequately assess your growth rates and other metrics.
The other big questions for companies that have hopped the pond and grown is where to list shares—in the U.S. or back in Europe. Considerations include where your competitors might be listed (you might want to be in the same geography to snag the same type of valuation); what kind of investor base you desire; and whether Europe might offer a tax credit for R&D operations that remain in your home country. U.S. listings also, of course, tend to generate a lot of PR, which can be helpful for marketing and future sales.
The bottom line: The rise of cloud computing, open-source software and other trends have made it easier to start a sophisticated technology company anywhere, and more and more promising B2B companies are popping up across Europe. Actually scaling these companies into enterprise-grade businesses, of course, is the tricky part—and these days, it often includes a carefully planned move to the U.S. It’s complicated business. But we’re confident that in the coming years, more and more B2B companies in Europe will take the overseas journey and get it right.
*Denotes a Battery portfolio company. For a full list of all investments and exits, please click here. The information provided is solely intended for the use of corporate CEOs and founders and is not intended to be used in the investment decision making process and does not constitute an offer to sell or a solicitation to buy any security of the funds managed by Battery Ventures. An offering may only be made by means of a final offering memorandum in those jurisdictions where permitted by law and only to investors meeting eligibility requirements. No assumption should be made that the investments identified above were or will be profitable. It should also not be assumed that recommendations made in the future will be profitable or equal the performance of the companies identified above. The information contained in this document is current as of the date of this report. Certain information in this article has been obtained from third party sources and although believed to be reliable, has not been independently verified as to its accuracy, and its completeness cannot be guaranteed. Battery Venture has no obligation to update, modify or amend this document or to otherwise notify a reader in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.