How to deliver premium returns at exit
Eric Buatois, General Partner at global venture capital firm, BGV, discusses investment strategy and the building of cross-border companies in the B2B enterprise sector.
Silicon Valley is widely credited with birthing and growing the global venture capital industry. The very large B2C companies and the first wave of SaaS companies emerged on this soil. Today, however, we are entering a new generation of Enterprise 4.0 companies where teams with very strong domain knowledge in their industries can apply Artificial Intelligence and Machine Learning to create new solutions on a practical and granular level, with Line of Business managers. This wave is global. Fertile ground for entrepreneurs has opened up around the world, especially those in technology hotbeds such as Israel, India and Europe. Despite the shift, these companies still need to build a presence in Silicon Valley, sooner rather than later.
Dr Martin Haemmig has been a recognized authority on analyzing cross-border companies and investments for over a decade. His research, based on the analysis of more than 17,000 companies, reveals fascinating insights on cross-border businesses. First, on average, they demonstrate a revenue growth of 2.1 times that of their single-region peers. Second, they deliver an average multiple of invested capital of 5.6x, compared to the 3.7x return from their single-region competitors. And, third, the average IPO multiple of invested capital is 6.4x, while that of single region businesses is 5.5x.
This astounding difference in performance can be partially explained by the low cost of engineering outside Silicon Valley, coupled with generous government grants. These companies generate more global revenues quickly as they are present in different parts of the world.
But the high performance of cross-border companies can be attributed to more than a pure cost arbitrage. A different playbook is required to build these companies; one that BGV has practiced, and nurtured, for over 10 years. BGV’s successful strategy includes the following elements:
- Create a global culture from day one. Build a mindset to compete on a global level. The culture of a startup is shaped by the first 15 to 20 employees. Being global has to be thought and internalized from day one. Too often, very promising companies stay too long with their local market, potentially losing the opportunity to expand. The company culture becomes risk averse to a fast globalization which erodes its competitive mindset. As a result, the company does not learn how to compete in the top league.
- Build the company with the mindset to either be the leader, or number two, in the market segment selected. It is not enough to win local customers or be the leader of a small market. This cannot support venture returns. Venture capitalists in Asia and Europe no longer accept these strategies as they need to deliver returns in line with, or above, the USA venture capital industry. Acquiring a clear view of the global market is a daunting task for a young company. This is where VC firms that specialize in specific markets with a global perspective can add a lot of value. CVC, one of the world’s largest private equity firms, represents a solid 25% of VC financing and has a very deep industry knowledge at the global level. Their participation, even in a very early financing round, will contribute to building a good market understanding.
- Identify the source of competitive advantage and invest early on. Young entrepreneurs can be distracted by the first customer wins. But it takes more to build a company and a leading business. Essential considerations include: what will make the company win? what is the business model? can you change the dynamics given your cost and talent arbitrage? can product-led growth play a role? what is the specific “go to market” strategy as replicating your competition is not enough? is there a well thought out partnership ecosystem? is the culture of the company aligned to support the competitive advantage? how complete is the management team? what gaps need to be filled on the management team?
- Build a strong management operations system before scaling up. Operating a distributed company with less than 20 or 30 people is more complex than it looks. A strong communication process with an open, direct culture is fundamental. Every employee needs to know their role and efficiently contribute to the objective of the company. Very often, remote employees will work from home. Cross-border companies with a strong management operating system have a solid competitive advantage in the emerging new post Covid-19 world. They use tools like Slack, Notions, Zoom and Microsoft Teams intensively from inception. The GitHub management manifesto is a good reference document. Companies that have grown in a single culture, within the same building, have far more difficulty in staying efficient with “Work From Home,” despite having raised more capital. (Please see our discussion with Platform.sh here).
- Pay market price for top talent when expanding in the US. The cross-border entrepreneur is often concerned by the cost of top talent in the US, especially in comparison to the salaries in their home country. They are afraid of disrupting their company salary pyramid and as a result, hire B or C level performers, leading to a churn-rate of two or three individuals for each key position. Sometimes they are hesitant to relocate or have one of their founders relocate abroad. But this gap has to be put in perspective of the opportunity. In fact, it is imperative for the CEO or the founder to relocate as they have credibility within the organization to drive the product in the right direction, plus the vision and energy to win the first customers and partners abroad. The founder, once immersed in the Silicon Valley culture, will be able to assess the cultural gap within the existing management operating system and evolve it. The founder’s passion will be essential to recruit A+ leaders in the US organization.
Cross-border company building, especially in the B2B space, will increase due to the digital transformations of a broad set of industries on a global basis and the wide use of AI and ML to generate better business outcomes. Young companies will need to carefully select their early-stage venture capital firms to ensure they can provide the required value add to support them on their cross border company building journey.
Each company is different and your investors need to treat you as such and should be able to provide you specific guidance for the stage of the journey and the market the companies are in.
As they embark on their search, they would do well to identify a home with cultural agility, a global perspective in their target market, a well-proven skill set and a trusted playbook to land in the US market. The partners at BGV were all born outside of the US and have stood at the forefront of global B2B enterprises throughout their careers, building businesses from the ground up. As this new wave of enterprise innovation sweeps the globe we look forward to partnering with dynamic entrepreneurs who share this vision and mindset and to rolling up our sleeves to build the next generation of enterprise technology.
For a relevant discussion focused on the evolution of the Israeli Cross Border Model, see our talk with Jerusalem Venture Partners here.
