Dan Glazer, London Office Managing Partner at Wilson Sonsini, shares his thoughts on US expansion for European tech and the exciting future that awaits Europe, UK and London as the startup flywheel really starts to spin.
- When and why European tech companies should raise capital in the US
- Nine steps to take to de-disk US expansion
- Some “hiring hacks” to win the war for talent in the US
Listen in full here.
Within the context of the startup, grow up and scale-up life cycle of a venture backed tech company, the topic of internationalisation soon emerges and typically the focus of the discussion is on the US. There’s a point in the journey of every enterprise tech company, when they realise they will not be able to build a category-leading company of any real scale in their domestic market, and the obvious place they then start to look at is the US.
There are so many examples, both good and bad, which we can draw on that are so important for us to answer. These can be simple questions such as “How do you think about US expansion?’, “When should you be expanding?”, “What should I do?” and most importantly, “Who can help me?”. On this last question, the person every European tech founder with US ambitions should know is Dan Glazer, Managing Partner of Wilson’s London office, the leading US tech law firm. Since 2010, Dan has been supporting UK and European-based tech companies expand to the US and he relocated full time to London in the summer of 2018. Dan has been an indefatigable supporter of the European tech ecosystem, as well as for Notion and our portfolio companies, for many years now. It is always a joy to spend time in his company.
Introducing Wilson Sonsini
Wilson’s view is that Europe in general and London specifically are fantastic places in which to launch and scale tech companies.
What we know for sure is that when you truly go global, a time will come when you have to figure out your US strategy. So we are here in London to help European companies to launch, scale, establish partnerships, raise money and eventually exit via M&A or an IPO in the US.
There is no better place in the world to start a tech company than Europe in general and London in particular and no better place to scale and exit it than in the US and that’s why we are here.
What’s changed in the European ecosystem over the last ten years?
Much has changed in the European ecosystem over the last ten years, driven by the strengthening ecosystem and the scale of the funding that is now available. “When I first came to London in 2010 there was a total of $100m of venture capital invested in the UK. In 2017 that number had increased to $3.3 BN and 2019 is set to be another record year, perhaps as high as $6BN. It is incredible to me how the ecosystem has changed over that time,” says Dan. During that time the number of Seed, Series A and Growth funds has grown enormously, as has the knowledge base of how to grow companies and how to help them succeed.
The conversations Wilson are having with founders have changed a lot too. “When we met companies in 2011 to 2013 we would be mostly having conversations around moving to the US to find early-stage capital. We would regularly meet folks raising Seed or Series A funds who were talking of moving to the US without any focus on whether the US was the right place for them to go, commercially or operationally. Over the last few years we rarely, if ever, have that conversation.”
Conversations are now predominantly about expanding to the US after raising a Seed or Series A round because it makes commercial sense. Then, after building a team and proving product-market fit in the US, raising a follow on round from US investors. Dan explains, “We are playing our part in building a strong interconnected transatlantic ecosystem, and now with European companies becoming global success stories, having a strong domestic VC scene makes a lot of sense to fund the early stages and turning to the US investors at the B or C round.”
How can companies take steps to achieve PMF in the US, while minimising risk and cost?
Companies are learning fast about how to manage the risks and costs of US expansion.
“The journey for SaaS companies in particular typically starts with companies selling organically and remotely into the US market, sometimes via their European customers that have US operations, or perhaps via inbound interest or perhaps from founders joining trade missions or attending US conferences,” says Dan. “We see a pattern of remote US sales, with a fairly light touch. Companies can do transactions with US customers under UK law for example, they don’t have to have a US company, they don’t have to have feet on the ground.”
Then as traction starts to build and the customer base starts to grow, founders realise they are leaving opportunity on the ground.
“Their next step might be to hire contractors, part-time US salespeople and customer success representatives. Again it’s lower cost as you still don’t need a US company.”
Eventually though, the scale of deals, or the number of US opportunities, proves there is a need to invest.
“When companies hit some scale then it is time to think about hiring full-time people in the US and sending people from the European HQ to lead the way. At this time you have to put in place the infrastructure: setting up a company, a US bank account, HR Payroll, advisers on tax and legal issues and so forth.”
What Dan is seeing is that the most successful companies hold off putting the company infrastructure in place until they have proven there is demand and that they have product-market fit.
Dan continues: “The most successful companies are the ones that are being pulled into the US by demand, not those moving to the US because of some kind of irrational inevitability, because well, everyone has to expand to the US!”
Dan is clear on this. Companies need to get to the point where they are pushing against an open door and have de-risked the market entry to the extent that it justifies the significant investment.
When you decide to put employees on the ground in the US, things get serious.
A decent milestone to achieve before investing in a US business is 20-30% of revenues are from US companies and customers are asking for in-market pre and post-sales support. At that point, there is a pretty exhausting checklist of things that need to be done.
Dan’s checklist for US expansion:
- The bright red line is before you hire your first US employee you need to have a US corporation – which can be done in less than 24 hours – and employment contracts. You need to bear in mind that each state has differences, we don’t really have national employment. For all this, you will need legal counsel.
- You will need US versions of customer contracts and provisions for US data privacy and intellectual property.
- From a tax standpoint, getting appropriate advice, getting your US tax ID number, setting up your tax filings.
- Opening a US bank account, tied to the US sub, to handle payroll and incoming revenues.
- If sending people over from HQ, make sure you are talking to immigration specialists – this is one of the longest and toughest challenges. Everything else is done in a matter of weeks, this will take months, perhaps six. (NB Notion recommends Elizabeth Jamae of Pearl Law Group).
- You need appropriate business insurance. UK and European insurance will typically not extend to cover the US.
- Put in place outsourced benefits and payroll. In the US it’s very typical for the employer to provide health insurance, retirement benefits to employees and most will leverage a PEO (professional employer organisation). (NB A lot of Notion companies work with TriNet.)
- Making sure you have a decent office lease.
- Lastly, taking advantage of local incentives offered by state, local or regional development agencies for tax rebates, assistance finding talent, office space, venture capital.
“All of this is a well-travelled path for European founders,” says Dan. “But you will need good advice. But don’t take it from me – talk to experienced founders who have successfully launched and scaled US businesses after starting in Europe.”
When and how do you advise companies to approach US investors?
As Dan explained earlier, most Seed and Series A investments in European companies are led by European VCs, something that was not the case just a few years ago. “Unless you can tell a story at Seed or Series A that it doesn’t make sense for an investor in the home market to lead the round, then it makes sense to raise locally,” says Dan.
This makes a lot of sense. VCs want to be able to leverage their value and bring their expertise and network to bear, so a Seed or Series A investor will want to invest in companies that are relatively close at hand and with whom they can make a difference. A Seed US investor is unlikely to be able to work closely with a pre product market fit European business, but at the later stage – B or C round – a US investor can make a real impact, for example helping them build their US team and win new clients.
“A simple mantra is that Seed rounds are local, A rounds are regional and growth rounds are global, so when companies are growing into the US and seeing their US customer base outstripping their local market, then raising in the US makes sense,” says Dan.
How can European companies compete for talent in the US?
Companies coming out of Europe, that succeed in the US, are often the ones that give real thought to the best locations for the roles they need to fill. For example, they may ask themselves “does it make sense to go toe-to-toe with companies in Silicon Valley when developers are earning hundreds of thousands of dollars straight out of school?”
“Many founders conclude that it makes more sense to hire developers in their home market, rather than compete for tech talent with US companies,” says Dan. “What we see is it is the sales, customer success and marketing people who add the most value and who, if they perform well, can deliver a return on the investment. Founders need to be smart about who they hire, it’s as simple as that.”
Even then the question remains ‘how do you compete with US companies for this go to market talent?’ But Dan feels European companies can compete and win if they play to their strengths:
“On average the US company will be better funded, but there are advantages European companies can bring to bear.” Dan shares some ideas:
- One approach is to tell potential US employees that one of the benefits is that you will have to visit the European HQ once a quarter. Typically, Americans don’t travel to other countries as frequently as Europeans. This is a real perk for many US citizens and a competitive advantage.
- Another source of advantage is to commit to European level vacation time. Americans tend to take much less holiday. Salaries may be higher, but holidays are much shorter.
- Another hack is to offer salary as a bonus for actually taking holidays! In the US many companies are moving to unlimited holidays, but what actually seems to happen is that people may take even less vacation time as they don’t want to be seen as letting the company down. What European companies could do is to offer a bonus, say $5k, which is only given when they actually take all their paid time off.
In short, Dan feels these can me a difference: “These things can offer the potential for a radically different culture from a typical US employer.”
What is the outlook for M&A and IPOs in the US and the implications for European tech companies?
During 2019 the US has seen a number of large tech exits – Lyft and Uber for example. Looking back at London and its VC funding history since 2012 through to today, there has been an incredible growth and maturity.
“This pattern,” Dan asserts, “ is the same as we saw in the US 10-12 years after the VC ecosystem started to mature and we saw a significant run of big exits, private equity purchases and IPOs.” Dan sees the same thing happening in Europe in the not too distant future. “This means that between 2021 and 2025, in Europe, there should be a big run of companies coming out of the UK and Europe, and in particular London, that will lead to a large number of public listings and acquisitions.”
With the large amounts of money now coming in to Europe, it makes sense that there will be a large amount of value creation within the next few years. “The US markets – public and private – still tend to be the best places for these exits to happen, so that is likely to continue. It remains to be seen, but there are so many great and valuable companies, then there is only one conclusion I can draw and that is that there will be a large number of large European exits.”
However this volume of exits is by no means the end, it is just the beginning, because these realisations will start the flywheel spinning. “You get significant exits, you have executives and employees who have incredible experience launching, growing and exiting companies and they have capital, and those individuals do one of two things – they either create new companies or become investors in the next generation of founders. You only have to see that a few times and the flywheel will spin faster and faster, and an economy that will constantly create new companies, new funds, and more and expertise about what it takes to build ecosystems and great companies.”
Europe and UK are set for great success and Wilson Sonsini will undoubtedly play its part.