[Bank of the West/BNP Paribas]
Before expanding overseas, tech companies should consider these seven tips.
In the app economy, tech companies can go global at the push of a button. Whether they’re seeking additional revenue or a skilled talent pool, it’s no surprise that 85 percent of tech companies in the U.S. plan an international move.
Despite the ease of expansion, though, significant challenges exist when tech companies seek to conduct cross-border business. And while there are steps that would make it easier, too many companies recognize them only after they’ve expanded. A better time to find them is before they leave home.
Among the most costly mistakes companies make, and one that often leads to others, is rushing to expand internationally without taking a step back to ensure that all the issues have been considered.
“One of the biggest mistakes that companies make is they are overconfident in their ability to move quickly,” said Stanton Miller, Managing Director of Cash Management Sales at Bank of the West/BNP Paribas. “A company has got this great idea, they know what they want to accomplish, and they say to themselves, ‘Hey, we’re going to go expand. We think the market is ripe and it’s ready.’’’
“Then they start getting there and need to finance it, to get the goods there, to get the money in and out,” he said. “And they get bogged down in all the minutiae of the different banking systems and different rules and regulations.”
Source: Velocity Global, The State Of Global Expansion 2019: Tech Industry
Eyes on Europe and Asia
Still, the drive for overseas expansion continues to heat up, thanks to the ease of transacting with customers anywhere and tapping markets everywhere.
Europe remains the most attractive target for expansion by U.S. tech companies, Miller said. Asia, in particular China and Japan, comes in second. Not only are companies seeking potential sales growth in both regions, but the search for workers with advanced tech skills is also a driving factor. Together, they are fueling a trend that shows no signs of slowing.
In fact, the push for international expansion by U.S. tech companies is among the fastest-growing segments that Miller oversees, with companies throughout the country, from San Francisco and Los Angeles to Chicago and New York looking to transact in other countries.
Industry surveys come to similar conclusions. One recent report found that with 54 percent of U.S. tech firms currently doing business only domestically, that number is expected to drop to just 22 percent within the next year.
An Array of Challenges
Each region globally, though, will present its own set of challenges. The issues of data privacy and taxes in Europe are formidable, while the repatriation of funds and tariff concerns are of particular concern in China.
Overall, taxes were identified as the leading challenge to global expansion, with 38 percent of businesses citing that issue, according to a 2018 survey of senior executives at online businesses. Regulatory issues were second at 36 percent, while government tariffs came in third place with 34 percent of companies citing that issue for making global expansion harder.
Although not cited as a risk in the survey, the flow of funds in and out of a country can also be a significant, and sometimes surprising, headache. Restrictions on funds leaving China, for example, can be a particular challenge, while foreign exchange fluctuations in Europe and elsewhere are typically causes for concern.
This is the primary reason that having a local relationship with a bank that understands, and has a presence in, overseas markets can mean the difference between failure and success when expanding internationally, Miller said. Without a bank or financial institution that has good processes built, a successful international expansion can be a difficult and long discovery process.
7 Tips for Global Expansion
- Taxes—Speak with your tax advisor about the most tax-efficient location for international sales and billing.
- SEPA—Thanks to SEPA (the Single Euro Payments Area), you are no longer required to have in-country accounts for each European country you operate in. With few exceptions, companies can centralize payments and receivables in one location.
- GDPR—A particular concern for companies expanding into Europe is ensuring they understand the EU’s General Data Protection Regulation (GDPR). Put into force in 2018, the regulation dictates how data is handled across every sector. Subject to potentially steep penalties, it is important to be mindful how you handle all customer data.
- Regulations—Keep in mind that Asia is very different from Europe, with each country having its own currency, laws, and regulations. You should consider identifying in-country, on-the-ground partners for banking, accounting, etc.
- Cash Flow—Understand restrictions around sending money into a country (e.g., capital injections) or out of a country (e.g., repatriating surplus cash).
- Supply Chain—If you manufacture physical goods, the supply chain setup is key. You might want to have multiple supply chains in case one is significantly impacted by events outside your control (e.g., a natural disaster, or, as we’re seeing more recently, trade wars).
- FX—Once you expand internationally, foreign exchange rate fluctuations can significantly affect your results. Factor in the risk and consult with your banking provider about ways to minimize this FX-impact on your results.
“I think the biggest thing and the most challenging thing is that these companies understand the U.S. financial system,” Miller said. “But then as you go into Europe, for example, there’s all these local rules and regulations that they’ve got to understand in order to stand up a company, including how the flow of the money’s going to work.”
Self-Inflicted Damage
Other companies bring the worst challenges upon themselves.
“Some of these companies get going so fast, they’re opening up accounts in countries that frankly they might not even end up doing business in,” Miller said. “And then, with the companies created, they have all of these accounts and they’re having a treasury group that is forced to manage all of these accounts in countries where they’re not even being used.”
And while it might seem like a good idea at the time, moving fast and aggressively positioning your company for the possibility of sales down the road is not always the smartest move.
“That whole mentality of jumping before you’re planning,” Miller concluded. “So, it’s the leap—and then it’s the ‘Oh, maybe I shouldn’t have leapt.’”