In our recent articles we have examined the drivers, strategies and performance implications of the internationalisation of new technology ventures in the US.
In fact, the internationalisation significantly affects the agency risk of corporate and independent venture capitalists (VCs). The expansion to new markets not only increases the institutional, environmental and managerial complexity of the operations, but also reduces the ability of investors to monitor the activities of their portfolio companies.
Proximity to the activities of portfolio companies offers obvious advantages with respect to the relationship development, knowledge of the institutional context and culture, communication and monitoring.
A recent study conducted by Joseph LiPuma and Sarah Park of Emlyon Business School directly examines “whether VCs mitigate risks associated with opportunistic and strategic portfolio company internationalisation differently by adjusting round sizes, round intervals or syndication of their investments in new technology-based ventures since investors may perceive the risk associated with internationalisation differently for opportunistic or strategic internationalisers. The empirical analyses utilise panel data of 962 investment rounds in 334 US-based technology ventures founded between 1997 and 2003”.
Interestingly, the results of the study in the US shows that compared with investments in solely domestic ventures, US VCs utilise smaller syndicates and provide smaller, less frequent rounds of capital to low-intensity opportunistic internationalisers. Lead investors may not wish to have, or may have difficulties attracting, more investors to participate in syndicates for these ventures, reflecting investor home bias.
The authors observe that this choice for smaller rounds over a longer duration can also be a result of the increased difficulty in sharing the increased risk associated to the opportunistic internationalisation strategy. It is also interesting to note that at the higher strategic level of internationalisation, no substantial difference in round and syndication size was found. The study suggests that “at higher strategic levels of internationalisation, as new ventures’ need for capital increases, investors choose to provide funding more frequently rather than providing a single larger round, in order to mitigate their downside risk despite the cost of doing rounds, as the costs of other monitoring may increase significantly when these ventures have more extensive foreign activities”.
An important implication of the study, as suggested by the authors is that investors may not perceive internationalised ventures as more risky than solely domestic ventures. More precisely, “if, in fact, early internationalisation enhances growth and performance, venture capitalists may prompt their portfolio companies to engage in foreign activities as a means to increase value. When designing the funding structure, investors’ and new venture managers’ awareness of their differing risk profiles may prompt them to jointly utilise various risk‐mitigating levers to enhance the chances of success of the venture that internationalises”.
Non-US start ups going global
The situation for start ups from outside the US going international is completely different for various reasons. In the emerging markets, there is a good likelihood that a solid technology cannot be commercialised because the market readiness may not be there to adopt the solution – lack of infrastructure, local corporates shying away from start ups, government regulations, small or no domestic market – or because the funding for expensive testing or clinical trials may not be available, or the domestic VC players would not cater to some of these advanced technologies.
In addition, the typical funding amount across the life-cycle of an equivalent company in the US is often multiple times when compared with start ups in other geographies – often three to four times compared with Europe, unless US VCs will participate in the financing rounds. This means foreign start ups entering the US market will have to compete with well‐financed competitors that look, feel and taste like US companies, while being a foreign start up may become a liability – foreign, underfunded, not as market savvy, sustaining and financing power and so on.
As a result, technology companies planning to enter the US are well advised to position themselves early in their lifecycle to international and US venturers in order to become an investible company when the time comes to expand into the US market. This starts with hiring the right talent early and understanding which domestic or regional investor has the network and expertise to help bring in the US-based venture capital downstream when a large round becomes pivotal.
Israeli start ups are good examples of this, where research and development (R&D) is likely to stay in the home country but where the management and market team may have to move to the US because of the absence of a domestic market, and all the larger funding comes from US venture cpaital players. Depending on the industry sector, European companies may keep the entire team in Europe and will assist the build‐up of a significant US operation with local market, sales and support staff.
Most European start ups in the 1990s failed in the US, as a result of missing some of the above requirements, and in most cases the funding allocated, often raised in Europe, was far too small to compete with well‐funded US competitors.
In addition, especially pharmaceutical, biotech and med-tech companies should engage early some global advisers and independent board members from multinational corporates or from US entities in this field in order to understand the leading-edge trends in R&D and also for the approvals requirements and market opportunities, while information and communications technology (ICT) companies need to get into the distribution channels or get imbedded into the value chain in certain industries.
As a result, investment patterns and risk mitigation for non-US companies is almost the opposite from the start ups in the US that plan to go international. The funding for internationalisation of non-US start ups is typically much larger for international expansion than it would be in a domestic setting.
In addition, there needs to be at least one VC or corporate venturer from the US in such a round. In addition, the board, the advisory board and other people from C-level management will have to be added from the US.
Small country case study: Switzerland
Switzerland is a small country with a small domestic market but it has high-end technologies and solutions derived from start ups.
Given a population of about 8 million in 2013, the proportion of foreigners in the nation is 23% of the total – joint highest European proportion with Luxembourg. They are an essential component of the economic and demographic balance of Switzerland’s ageing population, as well as its workforce, both at the high end of skills and knowledge and at the low end of the skill requirement. Immigrants are attracted to Switzerland by the quality of life and some of the highest salaries in the world.
The Industrial Production & Construction index as part of GDP remained constant from 2000 to 2013, the only nation in western Europe to achieve this besides Germany – Italy was down 14%, France down 18%. The Swiss industrial production industry is highly export-oriented with a truly global reach.
The strength of this sector is attributed to specialisation in some high-tech industries, niche businesses and intelligent marketing, combined with high quality and flexibility to rapid market changes, as well as highly-skilled labour in these sectors.
Development of Swiss-based start ups in 2013
36,187 new ventures, 33% started by foreigners with the top three from:
- Germany (6.52% of all start ups, 27% of all foreigners).
- Italy (6.34% of all start ups, 26.2% of all foreigners).
- France (3.99% of all start ups, 16.5% of all foreigners).
Broken down by the top three industries:
- 43% in chemical and pharmaceutical.
- 42% by professionals across all sectors with apprenticeship (but non‐university degree).
- 40% in watch and med‐tech (high‐precision).
- Huge differences of foreign start up entrepreneurs exist by local geography due to differing language structures:
- 50% in Geneva
- 40%‐50% in Vaud, Valais, Ticino, Zug, Basel City (often bordering with Germany, France and Italy)
- <20% in Berne, Uri, Glarus (countryside or mountain regions)
The 2013 top 10 largest financed venture deals – backed by VCs, corporate venturers, high‐net‐worth individuals or family offices – in Switzerland have the following patterns, which often leave little Swissness left at first sight:
- Many founders and C‐level managers are foreigners who lived or worked in Switzerland and start their venture there, since the team, expertise and the funding is available.
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Most expansion stage investors – VCs and corporate venturers – are from outside Switzerland, since local capital is not available and local VCs cannot provide the expertise and network for US or global expansion.
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Having strong foreign investors, board members are therefore predominantly non-Swiss, apart from the Swiss founders.
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Scientific advisers are found primarily in pharma, bio–tech and med-tech companies and are almost exclusively from the US or other European countries.
References
LiPuma J (2013) Venture capitalists’ risk mitigation of portfolio company internationalisation. Entrepreneurship Theory and Practice, February 2013.
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)