Global Themes

On Globalization & Venture Capital

Multi-national Start-Ups and Going Global…

Two weeks ago, I spent a very interesting couple of hours at the London Business School with Prof. Gerry George and his summer school students, where I was on a panel discussing entrepreneurs and teams that we like to invest in. 

After the session, I had a brief discussion with a few students on Globalization and how this was fundamentally changing the way we are looking at businesses and opportunities.

Val Agostino of eBags, who was at the session later sent me the link to this amazing article on Business 2.0 “The Mighty Micro-Multinational” by Michael Copeland:

(Business 2.0) – WHEN WORKING IN THE TROPICAL SUN BECOMES too much for Ivko Maksimovic, the lanky Serbian heads to one of the Dominican Republic’s pristine white-sand beaches… Maksimovic, 29, is the CTO of Vast.com, a startup search company based in San Francisco. He lives in the Dominican Republic because it’s warm and far from Serbia’s troubles. He works for Vast because his bosses think he’s the best person for the job, and it doesn’t matter much where he is physically as long as he has a broadband connection.

Vast launched a year ago in its present form and now employs 25 people who work across five time zones, four nations, and two continents–all of which makes it a particularly striking example of a growing breed of startup that can best be described as a micro-multinational.

I can see these kind of companies becoming the norm rather than the exception in the years to come. In the past few months alone, I have come across at least three start-ups that have operations across three continents. 

Val told me that his company itself has been in close contact with several other start-ups in US & Europe to exchange thoughts on the benefits/challenges of going global. He also told me that “…due to price inflation, coordination problems, and high staff churn, many start-ups are now launching their own operations and foregoing the third party providers.  The cost savings are frequently a factor of 5-10, and oversight is better….” – which reinforces this trend.

Although it is tempting to conclude that this is solely driven by cost, the reality is that companies are opening offices where they find the right people and where it makes sense to do so (either because they can be close to customers or supplies or partners).Increasingly, it is also a matter of quality:

“It’s not cost as much as it is quality,” says Brad Oberwager, CEO of watermelon juice and fruit company Sundia. Oberwager runs the 20-month-old firm out of his San Francisco home but employs workers across the country as well as in India and the Philippines to serve customers in America and Europe.
“I can get incredible people in the United States and abroad. But if my customer service budget is a certain amount, and I can get one person in the U.S. or three people in the Philippines, it’s an easy decision. Not strictly because of cost, but because now I can serve my customers better.” 

I continue to believe that jobs will not move outside US or Europe just because they can be done cheaply elsewhere (although that may be the short term impetus), they will move – and more importantly, “stay” – outside because that is where the skills are and that is where the talent is.

Policy makers in Europe and US fail to see this point – and dropping standards (and numbers) in science and mathematics makes it worse.

“Global delivery capability” and optimum cost-base have become such compelling propositions that some VCs would not even consider investing in a company that does not have this. The Business 2.0 story quotes Promod Haque, MD of Norwest Venture Partners on this:

Haque’s firm will rarely even look at investing in a new startup unless its model includes dispersing a major portion of its operations abroad. “You need to take an overall multinational and global approach to doing business,” he says.

Then, the article puts its finger on what is probably the hardest thing of all:

Pull apart most micro-multinationals, and at the center you’ll find what Vast CEO Ravikant calls “the magic expatriate.” This is someone who bridges the United States and the other key locales for the startup.

Early last year at an INSEAD conference, Phil Anderson made a similar point and talked of high demand for (and a great shortage of ) people who were able to “bridge” different business and cultures…these people are the glue that holds a multi-national start-up together and extremely valuable because they are able to move between boundaries with ease. 

However “globalization” – especially for a start-up – is not easy and hardly as painless as it sounds. There are tools that may help the process (and the article lists a bunch of them), but I can say from personal experience that distance is still a big barrier to better understanding and unless there is a systematic and conscious effort made by a “micro-multinational” team to create a common culture, things are more likely to fail than to work out.

Having said that, I liked some of the success stories cited in the article:

The most spectacular is Skype. Co-founders Niklas Zennström and Janus Friis pioneered the micro-multinational when they started up the Internet file-sharing service Kazaa in 2000. The Swedish Zennström and Danish Friis operated from Amsterdam, employed programmers in Estonia and elsewhere, and forged partnerships with companies in the United States and Australia. Sued by the entertainment industry for copyright infringement…the pair moved on to Skype, applying the same micro-multinational business model and file-sharing technology to the Internet phone service. The payoff: $2.6 billion when they sold Skype to eBay last year.

Online printing company VistaPrint also has proven micro-multinationals can be built to last. Founded by American Robert Keane in Paris in the 1990s after he finished business school in France, VistaPrint now has its headquarters in Lexington, Mass. But two-thirds of its more than 650 employees are located outside the United States–in Canada, the Netherlands, Jamaica, and Bermuda…The company’s global footprint has helped VistaPrint net millions of customers in 120 countries and revenue of about $133 million over the past 12 months. VistaPrint went public on Nasdaq last September, and as of early June its stock had risen 116 percent, giving it a market cap north of $1.3 billion.

…the business model’s strengths (of a multinational start-up) far outweigh the deficiencies, says Marten Mickos, CEO of open-source database company MySQL. The company, based in Uppsala, Sweden, and Cupertino, Calif., has cells of employees all over the world. If there’s a new customer to chase, a potential hire to woo, or a tempting market to break into, there’s probably a MySQL person already on the ground to help. “We don’t think twice about going anyplace in the world. We just go,” Mickos says.

With that kind of spirit, you may just be able to make it work.

 

 

 

 

 

July 31st, 2006 Posted by | Entrepreneurship, Globalization | 3 comments

3 Comments »

  1. Awesome blog and article. I’m going to blog it.

    You may be interested in my posts on globalization: http://ben.casnocha.com/globalization/index.html

    I think globalization is one of the most importance forces that’s going to affect my generation. I just got back from two months in Europe and next up is Asia.

    Comment by Ben Casnocha | August 10, 2006

  2. Ben,

    Thanks. I am going to have a look at your “Globalization” category posts when I have a leisurely moment. At first glance, looks like a good and really interesting collection of articles.
    I agree with you that Globalization is going to be a defining feature of your generation. I would even go so far as to say that its going to impact everyone’s life who is currently between 0-40 yrs of age…

    More on this after I have read some of your posts.. I wish you good luck and safe journeys around the world.

    Shantanu

    Comment by Shantanu | August 10, 2006

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    Trackback by wmftcffy | August 14, 2006

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