Venturing abroad: key considerations for founders contemplating ‘going global’
May 11, 2021
International expansion strategy is increasingly on the minds of founders we speak with. Cross-border sales are becoming a key driver of growth. Raj Ganguly, a Managing Partner at B Capital Group, predicts that 75% of private, venture-backed, growth-stage companies will derive their revenues from 3 or more continents in the next decade. For many, tapping into global demand is not a question of “if” but “when.” And then there’s the “how.”
“What’s the ‘right’ way to enter a new geography?”
“Should I establish a local entity?”
“What are the key things I should be aware of in managing cash internationally?”
If you’re asking the same things, you aren’t alone! All of these and more are common questions for growth-stage entrepreneurs and their operations, finance, and legal teams. To get you started in finding the right answers for your company, we’ve put together some of the key (but non-exhaustive) advice around “going global.”
First, how should you expand into a new geography? Dr. Dirk Besse, Managing Partner and Head of M&A Europe at Morrison & Foerster LLP, explains that there are basically four methods: “revenue only,” M&A, a joint-venture, and establishing a fully-owned subsidiary.
- Revenue-only: “The simplest way to expand is through a ‘revenue only’ model because it requires the least set-up,” says Dr. Besse. This is where your company conducts its business from afar without setting up a local entity in the new country. But managing and growing a business from a distance — while ensuring your operations comply with local laws and regulations — isn’t always feasible.
- Fully-owned subsidiary: The organic option is at the opposite end of the spectrum — building a local subsidiary from the ground-up. Dr. Besse explains that the key advantage is that it “gives you full control over the culture, costs, scaling the business.” But establishing a new legal entity can be fraught with challenges and costs and, depending on location, miles of red tape and delays.
- M&A and JV: These are ways around some of the complications posed by setting up a subsidiary. Both provide immediate market access and an existing workforce. JVs can also help pave the way for later M&A, especially if your company needs to line up financing. However, M&A requires both a suitable target and a large up-front capital outlay. And JVs sometimes run into complex governance & coordination requirements.
We also receive questions about using professional employer organizations (PEOs). These companies have pre-existing entities in many countries and can quickly stand up a local contractor workforce on your behalf.
Patrick Zanoni, CFO of the conversational commerce company Yalo, says that “PEOs are the least risky but most expensive way to employ people overseas” since you are paying both the contractors’ salaries and a PEO fee. “Don’t go with PEOs for more than a handful of people per country, or unless you’re just trying to test out a ‘high risk’ market,” he advises. Leveraging payroll and HR companies that specialize in managing overseas workforces are generally more cost-effective and scalable options.
Once you’ve decided you are going to set up some sort of foreign entity, what else should you think about? The next considerations fall into two main buckets: legal-operational and financial.
Legal-operational considerations include things like setting up a legal entity and hiring local talent. We typically break these considerations down into four sub-categories:
- Operations: what are the legal and filing requirements for incorporating a new business entity? What are the local laws around capital, physical presence, and governance requirements?
- Employment: what are the legal categories of an employee in the country region, and what are the local labor laws and hiring (and firing) practices? Dr. Besse of Morrison & Foerster notes that “local law applies to local employees,” regardless of the parent company’s location.
- Technology & IP: what are the legal IP rights, duration, and legal remedies in a country? What data sovereignty and residency laws & requirements exist?
- Taxes: what are the corporate tax rates and accounting & reporting requirements? What are employee income tax & withholding requirements?
International financial management can be daunting, as there are a number of inter-related things to take into account. Tommaso Todesca, an Executive Director in International Banking at JP Morgan, lays out several key considerations that can be categorized into three main buckets:
- Local considerations: all of the things that happen and must be taken care of locally in the new country. Important questions to think through are:
- Payments: how will you pay your employees, suppliers, and vendors? Are there local equivalents of ACH and wires, and how much do they cost? How should the local office manage payments and petty cash?
- Collections: how will you receive payments from the local economy? What systems and (virtual) accounts can you leverage?
- Taxes: In addition to the legal considerations described previously, how does the tax regime impact local operations? For example, what kind of business activities will be carried out locally to take advantage of favorable (or avoid onerous) taxes.
2. HQ-to-local connections: the relationship you’ll be setting up between your company’s headquarters and the soon-to-be-established local entity, and all of the things that impact it.
- Banking model: who is the right banking partner for that location? Tommaso recommends keeping it simple — for example, try to avoid using 3rd party partners for local clearing unless you have to, as is typical in many markets in the Asia-Pacific.
- Control: what’s the relationship between your HQ and local controllers? In general, limit to local control only what’s necessary to run the local business operations, and ensure you have systems & processes in place to maintain proper visibility & oversight.
3. Systemic considerations: broader issues and considerations you’ll have to manage when setting up international operations.
- FX exposure: depending on how you make and receive payments, exposure to foreign currency fluctuations can be a major concern; figure out your level of risk and hedge accordingly.
- Liquidity management: make sure you consider how the new entity will impact your company’s need to maintain cash-on-hand. Regulations affecting liquidity can vary widely between jurisdictions.
From deciding on a market entry method, to hiring employees, to setting up a banking structure, the key is creating a plan and not losing sight of the complete picture. Patrick of Yalo says the biggest mistake he sees startups make is going global “without a clear strategy or timing,” instead assuming that their international expansion will simply work itself out.
At B Capital Group, we provide our entrepreneurs with the right information to begin their “going global” journey, and we connect them with the right resources around the world to help drive them to success.
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