In this post we draw on over 10 years of our combined experience of advising U.S. startups on European expansion and discuss key factors to consider while evaluating locations for a regional HQ. In particular, we distill strategic considerations that matter from those that don’t.
Europe has a lot to offer to start-ups: access to a market that population-wise is twice the size of the U.S.; free movement of goods, capital, services, and labour; diverse customer base and a single currency in key markets. It also provides a contrast that helps better understand the existing target audience in the home market and improve the product.
A European expansion strategy almost certainly represents an extraordinary investment of time, money, and energy. However, “European strategy” should not be treated as a “Europe-wide strategy”. Despite being a single market Europe is not one market. Instead, it is made up of individual countries rich with centuries-old cultures, traditions, languages and mentalities. As a result the European market comes with a whole lot of questions, including, “Where to set up regional headquarters?”
Apart from obvious need for a local HQ – due to disadvantages of managing European operations at a global level – there is no single answer to this question. The strategic decision for choosing a location for regional HQ is typically a function of operational and strategic requirements, local resources, talent availability, customer proximity, and tax and legal considerations. However, not all of this factors have equal weight in decision-making.
What matters and what does not?
To help clients navigate the strategic conundrum for European HQ choice and focus the resources wisely, at Expansion Partner we advise our clients to think about factors that really matter vs. those that don’t.
That is not to say that some of the aforementioned factors – operational and strategic requirements, local resources, talent availability, customer proximity, and tax and legal considerations – are unimportant for the business. Yet, when setting up an HQ in Europe startup leaders must differentiate between an immediate problem and a future problem. We see many companies start by worrying about future problems (E.g.: Does country X offer favourable enough tax conditions? What about legal entity registration? And how limiting is the employment law?) and shape their strategy around risk mitigation. While underpinned by good intentions, this approach tends to impede the ultimate expansion priorities.
What is typically perceived as operational risk in reality is secondary – if not tritieraty – for the overall HQ strategy. Most operational, tax and regulatory questions can be handled fairly easily (with some exceptions e.g. fintech and biotech) compared to true objectives of European expansion, i.e. winning foreign markets. Instead the two most important considerations when choosing an HQ location are simple:
- What is the most relevant market(s) for me to win?
- Where can I find the best talent to succeed?
Testing international waters in “easy markets” is rarely an optimal strategy. For example, Dublin or London might seem like attractive HQ candidates to many American startups: English-speaking, culturally similar, and some tax advantages.
However, such reasoning is likely to be a curse in disguise. Dublin or London – and even the entire United Kingdom – are geographically separated from the rest of Europe and can be small markets compared to the rest of Europe. As a result, most learnings from these markets are not relevant or replicable in other European countries. Market segmentation, size, growth, customer behavior and cultures are country-specific.
Therefore, unless there is a direct intention to limit international operations to, say, the UK, launching international expansion in London or Dublin alone incurs high costs, while yielding little additional strategic value and learnings.
|The UK is different from the rest of the EU: a different currency (Pound sterling, not Euro); a centralized country with a heavy focus on London, a culturally tricky market (In some areas it has a strong U.S. influence, in many others it does not). So it can be difficult to estimate how a new product might be adopted. Brexit adds a new level of uncertainty. Key areas that could adversely affect U.S. startups expansion plans are:
1. Immigration regulation, reduced talent attraction and mobility.
2. EU and UK ending up as two separate regulatory jurisdictions.
3. Data protection regulation.
4. Intellectual property regulation
A better approach is to set up European HQ in the location that gives access to the largest market (i.e. where medium-term returns are greatest) and that in a long run would offer a competitive edge to the overall business.
The talent pool: Sales and Marketing
Today’s customers increasingly prefer localized products and services, requiring the entire communications and sales strategy and content to be locally adapted. Europe is no exception. Bringing original marketing and sales strategies – and sometimes even functionality – to the region is likely to backfire. The ability to respond to local customer preferences and reconfigure the service or product proposition requires qualified and reliable sales and marketing teams on the ground.
A U.S. startup’s competitiveness in Europe is dependent upon its ability to develop a dynamic capability or difficult to imitate combination of human resources locally in coordination with the company headquarters. The local team needs to possess a thorough knowledge of the local customer and excellent market access. Furthermore, there needs to be a constant alignment between the startup leadership at the U.S. HQ and team members in local markets to ensure the product strategy meets local market expectations and visa versa.
In her book Leading Global Innovation: Facilitating Multicultural Collaboration and international Market Success Karina Jensen writes:
The go-to-market and execution phase ensures launch preparation from market awareness to sales readiness to customer engagement. There is the constant concern for sufficient communication and information. If a company succeed in capturing positive, local customer references prior to the product launch, there is an opportunity to develop more persuasive marketing and sales tools. […] Attention should be placed on access to local customer references and information that can assist regional sales teams.”
So a successful location choice for a European HQ would be anchored in a city where the company has best access to high quality and reliable sales and marketing talent pool. Such access is typically developed via personal networks of the leadership team, investors’ European assets, European partners or expansion strategy consultants.