Building A Cross Border Technology Business
Building a technology business located in Silicon Valley is more of an art than a science. Adding a cross border dimension could create the perception of an impossible task. Eric Buatois, general partner at BGV has built venture-backed cross-border companies for more than a decade between Silicon Valley, Western Europe, Eastern Europe and India. In the early days of venture capital, both the technology innovation and market opportunity were located in Silicon Valley. Since the late 80’s and early 90’s technology innovation has blossomed in Israel and Western Europe. In the late 90’s and early 2000’s, China, Taiwan and India became strong technology development centers. With the Internet bubble crash and the subsequent limitations on immigration visas, many talented engineers and entrepreneurs returned to their home country with the know how to build start ups and raise venture capital funding. Over the past 5 years, many strong technology companies have been created in outside Silicon Valley. Several strong companies such as Yandex (Russia), Alibaba (China) have developed successful Consumer Internet companies by replicating proven Silicon Valley business models in this space. This fundamental and profound exchange of ideas, experience and people has created “corridors” between Silicon Valley, Israel, China, India and Europe,. Entrepreneurs from these corridors have few inhibitions to relocate the headquarters of their company to Silicon Valley while maintaining strong R&D teams in non-US countries. Finally salary and cost of living increases in Silicon Valley combined with the difficulty of recruiting local talent along with the limitation of work visa for skilled professionals are forcing entrepreneurs to distribute their R&D internationally. Technology companies seeded outside the US especially in the Enterprise IT space need to have a presence in Silicon Valley to either address the large US market, set up strategic partnerships with US based technology giants like EMC, VMware, Citrix, Oracle, Google etc, or prepare for their exit (IPO or M&A). If these trends are well known with several success stories, why are many Silicon Valley Venture Capital firms wary of leading cross border investments ? It comes down to the perceived complexity/risks associated with cross-border deals combined with the lack of core competencies required to address them. This includes: 1. Cross cultural understanding Given the wide diversity of cultures (China, India, Israel, Russia etc), one cannot be an expert in every local culture. But the board members of cross-border companies need to have an awareness of cultural differences. English may not be the first language learned and spoken by the entrepreneur. Despite using the same words, he or she may imply a different meaning. A widely used phrase such as “commitment” or “schedule” have different meanings in different cultures. In the Scandinavian, Chinese, or Japanese cultures, an executive will never commit to a schedule if he or she is not 99.5% sure and convinced that it can be met. In the Silicon Valley culture, an executive will commit if he or she is 80% confident that the milestone can be met. Compensation conversations often magnify these cultural issues. Silicon valley is well known for its meritocracy driven compensation practices. Sometimes such an approach could have an adverse impact on teamwork, especially in different cultures. Some cultures value teamwork above individual performance. Stock options are perceived differently in different countries either due to local taxations scheme or for local culture reasons. Consequently a tried and true compensation approach in Silicon Valley may not have an equal impact on employee motivation within cross-border technology companies . Firms in Silicon Valley have developed a soft and diplomatic way of communicating criticism or suggestions for improvement. In the French, Israeli, Chinese or Russian culture, this soft feedback will not be internalized or understood. These cultures tend to demand a strong and straightforward communication. 2. Investor Syndicate Alignment The investment syndicate in cross-border technology companies will usually consist of board members in Silicon Valley and from the local country as well. The cross cultural differences described above will also apply between different board members. During the first few months and the first year of the investment, face-to-face meetings should be the norm. The board should also pay more attention to define its values and operating principles. Board meetings should rotate between the various key sites. It is a good opportunity for directors to become familiar with the various parts of the organization and to understand the context in which they operate. Networking with investors or independent board members in the home country is a good way to get familiar with different practices and exit expectations. Bottom Line, it demands more international travel and time commitment from the directors. 3. Recruiting and developing a management team with a global skillset Any young and developing organization tends to use the norms and the values of its founders as the underlying values of the company. The cultural values of the founding teams are usually very strong – for example a company created by an Indian or an Persian founder might tend to recruit Indian or Persian managers. While such an approach may reduce the integration risks it may create a missed opportunity to bring the best in class skillset into the company. A VP of sales or business development coming from a more traditional Silicon Valley culture may be more efficient in establishing partnerships with the large tech companies even if there is a longer integration cycle. Many Israeli start-ups establish US headquarters at a certain stage in their development, with a US based CEO and VP of Sales. Board members have to be extremely involved and active in assessing the maturity of the organization to integrate best in class executives with different cultural backgrounds. Experienced cross border investors can tap a pool of proven executives with a solid experience of mediating between the Silicon Valley and their home countries cultures. These executives tend to be more open to address the right business opportunity in the right place instead of only pushing the North American market. If Consumer Internet businesses tend to be local by nature, technology intensive B-to-B businesses have to be global since inception. The enterprise IT market is definitively global and early stage product adoption can take place outside North America. The necessary investment needed to build a cross-border technology company will pay off with building a more flexible firm. A firm with an ability to exploit multi-regional market opportunities while leveraging lower cost local talent and credible local investors. Consequently building successful Enterprise IT companies in the future will increasingly require cross-border investment competencies for success.