The number of high-technology ventures that undertake international business from an early stage is increasingly growing worldwide.
When considering online business, it is difficult to track and estimate the number of companies doing international transactions and also understanding their domestic-international revenue split. However, when it comes to serious engagements with a physical location outside the home country – regional or on other continents – this is the picture around the world from a total pool of venture capital-financed, still privately-held companies across all stages of development and by geographic region.
Globally, of the 20,679 companies with venture capital (VC) funding in the US, Canada, Europe, Israel, India and China, as of June 2011 a total of 2,343 (11.3%) had a physical location outside their home country. Companies have foreign offices in the following countries or regions US 10%, Canada 13%, Europe 12%, Israel 35%, India 10% and China 3%.
In addition, the US is the country that hosts the largest number of foreign VC-backed companies. Of the 1,276 non-US companies with an office outside their parent home country, about 80% have an office in the US (1,024).
Despite the inherent scarcity of financial and human resources that often characterise new entrepreneurial projects, this new breed of ventures has come of age during the current era of increased global interconnectivity.
Research on internationalisation strategies shows us such international new ventures are not a homogeneous group. On the contrary, there exist systematically different patterns of internationalisation behaviour. A study by a team of researchers at Giessen University in Germany (see reference) examined empirically the determinants of different types of international new ventures, unveiling interesting insights on the key growth enablers.
The study was based on a sample of about 200 German ventures operating in four technological sectors – nano technology, bio-technology, microsystems and renewables.
Four types of venture are identified:
1 Export start ups and 2 multinational traders – ventures with a relatively low percentage of foreign sales on total sales, yet with significant differences in respect of the number of countries involved – are both characterised by a “strong learning orientation” and the systematic capability to identify and exploit opportunities ahead of competition; 3 geographically-focused start ups operate in selected international markets on a larger scale – they focus on highly specialised customer and market needs and have therefore developed knowledge-intensive and and have therefore developed knowledge-intensive and greatly specialised products and services; 4 global start-ups are defined by an intense international activity from the very early-stage of venture development – “born global” – often reflected in a distinctive growth-oriented attitude of the founders or top management – they derive their competitive advantage primarily from the ability to co-ordinate multiple, interconnected business and operational activities in various countries.
In addition, the empirical results show that growth orientation, prior international experience, knowledge intensity, product differentiation and learning orientation significantly distinguish among the four types of international new ventures.
Growth orientation: A growth-oriented attitude towards internationalisation is consistently correlated with the likelihood of developing internationalisation patterns typical of either global or geographically-focused start ups.
Prior international experience: Perhaps somehow intuitively, prior international experience is a key enabler of global-born strategies. Prior experience “substantially decreases costs of experimentation with new solutions or trial attempts to arrive at optimal solutions … and decreases the time taken to enact internationalisation plans and can reduce the number of opportunities lost or missed. Accordingly, international experience reduces the uncertainty of operating abroad and increases the likelihood of entering additional countries.
Knowledge intensity: The degree of knowledge intensity affects the early internationalisation of ventures, especially driving entrepreneurs to develop geographically focused strategies. However, ventures providing knowledge-intensive products and services “suffer from a trade-off between the cost of control and the need for expansion”, which is a major determinant of a growth strategy that targets high international revenues from few, selected international markets,
Product differentiation: Geographically-focused startups are consistently correlated to high levels of product differentiation. The focused strategy depends on the fact that while product differentiation can certainly be seen as a vehicle for internationalisation and market entry at an early stage, adapting the products or services to specific customer or market needs is expensive.
Learning orientation: A high level of learning orientation is found to increase the likelihood of establishing an export start up. More precisely, “a high learning orientation decreases the propensity of international new ventures to act on a large international scale and broad scope”. Interestingly the researchers observe that “export start-ups especially need an intense learning orientation in order to better serve the few markets they are operating in and to identify opportunities more efficiently. Only this allows them to achieve sustainable firm development and competitive advantages. Whereas export start ups may concentrate their learning efforts on few markets that they develop incrementally, other types of international new ventures, especially global start ups, venture into foreign markets at a high pace. Learning binds resources just as international expansion does”.
The value corporate venturers can bring to a new international venture with significant impact on their internationalisation endeavours can be dealt with at different stages of the venture development for different reasons, which will be subject in a future article in this series.
In general, corporates should look at various stages with a different value proposition:
1 Joint research and development.
2 Testing prototypes in the lab or in corporate solutions.
3 Product refinement before going to market.
4 Providing market data and insights.
5 Providing market and distribution channels to consumers or business-to-business (B2B) introduction upsteam and downstream in the value chain.
6 Licensing the product or manufacturing for the new venture.
7 Investing in the new venture at any stage.
8 Acquiring the new venture at any stage.
In the case of an early engagement, the corporate venturing team can help guide the start up team by suggesting and supporting the type of international new venture it could envision, which will influence a number of variables, from the profile of people it needs to hire to the amount of funding it needs to raise in the short and the long term.
Knowledge-intensive companies especially might benefit from an early global expansion through the support of corporate venturers because these fragile and resource-constrained ventures cannot afford significant or multiple failures in their globalisation execution strategies. This is where a strategic corporate partner or investor can help fine-tune the product for specific geographies customer segments, educate on these different market structures and make potential introductions to customers and suppliers in their existing network or the value chain.
Multinational corporates and their venture teams are by default already global and have the capability to help exploit the knowledge base on a broader international scope fully, which may result in relevant company development and subsequent economic upturn, while the parent company may benefit directly and indirectly through such an engagement.
Historically, most corporates have come to play in the early-revenue or growth stage, but with many products having a reduced shelf life of between six and 12 months, especially in the application, mobile, internet and consumer space. Many corporates and venture teams in recent years have engaged in early pre-revenue product development. For corporates with direct consumer contacts through retail stores, the value to new ventures is enormous, since they could tap into existing physical distribution channels, while online business is less critical for new ventures to handle, even internationally.
In the B2B space, products from new ventures may be embedded into entire, larger solutions by the multinational corporate, hence, the globalisation is achieved indirectly. Investments by corporate venturers into revenue-generating and especially growth-stage companies helps to validate the endeavour of new ventures and, in most cases, the valuation may increase significantly when a corporate joins the investor pool. In the case of a physical expansion globally, significant resources are required and multinationals may offer an early-revenue startup infrastructure leverage in some key markets, especially if it also helps to support the corporate’s key customers – a true win-win for the corporate.
References
Baum M, Schwens C, and Kabst R (2011) A typology of international new ventures: Empirical evidence from high-technology industries.
Journal of Small Business Management, 49(3): 305-30.
Boris Battistini is a senior research fellow at ETH Zurich and a project leader of the Corporate Venturing Research Initiative with Bain & Co (e-mail: bbattistini@ethz.ch)
Martin Haemmig is an adjunct professor at Cetim at UniBW Munich and Leiden University (email: martinhaemmig@cetim.org)