Thursday, 20 September, 2018

Tech startups conquering the world: If market share is the only thing that matters, how do you expand further? (Part 1)

Timing and scalability are usually recognised as two of the most important factors for tech startups to succeed. In fact, the assumption in the industry is that they might not have revenue, let alone profit, for quite a long time, but they must scale up fast. This is because in today’s globalised world, it does not matter if you are the first to have a bright idea or that you are charging for it, but it is paramount that you are the first to gain market access.

While it is important for technology-oriented startups to develop a sound strategy to protect their intellectual capital, even more important would be to scale up fast and in as many markets as possible. The business environment of today would hypothetically allow two (or more) young entrepreneurs to develop the same idea in two different corners of the world. Those entrepreneurs could potentially create a startup and get a first round of funding, hire staff and start to market their service (or product) in their market of reference. The many innovation accelerators around the world are only making this phenomenon more likely to proliferate.

Another key differentiator is then “execution”, which can be defined as the decisions and activities you undertake in order to turn your implemented strategy into commercial success. To achieve “execution excellence” is to realise the best possible results a strategy and its implementation will allow. This is why it might be wise for tech startups to always have a savvy and experienced business executive among the management team, somebody with past experience in a large multinational company who knows how “big organisation” actually work.       

Unfortunately, to scale up a business in multiple foreign countries is not an easy matter, not even for tech companies which are often online-based businesses. Before you even start, there are many procedures, tax regulations and local compliance requirements to understand. Not to mention the need to hire local staff, in which case, local labour laws will make everything more complex. Other problems will come from local practices, technical standards and specifications, and finding potential local partners or vendors. Moreover, while a large number of foreign-invested online businesses entering new markets may not actually need to hire local employees, open local bank accounts nor have local physical offices to implement their operations in that country, they would still need to follow local regulations and compliance requirements, which might include renting office space, hiring local staff and opening a local bank account. In addition to raising costs, this will also add layers of complexity for management, which may severely impact any expansion strategy.

At Vistra, a global service provider of corporate services with a centralised structure operating across 46 jurisdictions in more than 80 offices around the world, we are in a very privileged position to observe global trends and see what works and what doesn’t. While assisting clients to establish and maintain subsidiaries overseas, we also witness the growing pains that some companies go through, especially when they are not properly advised or try to do everything by themselves. Below are some of our observations in several of the markets we operate in.

How about the 1.5 billion Chinese potential customers?

The Chinese market is usually appealing for tech companies because of the huge population and the amazing speed of its economy, which is soon to complete a third decade of steady growth.

Unfortunately for online-based businesses, China has what is referred to as “The Great Firewall of China”, which limits or slows down access to websites or Apps based out of China. This is why many foreign tech companies locate their servers in China. Moreover, for a Chinese domain to be registered and for a website to be hosted on a China-based server, the domain owner would require an ICP registration/filing (ICP备案) with the regulators. Without such registration, the website will not meet the requirements to go “live”. In order to apply for such ICP registration, a foreign investor/company needs a Chinese Business Registration Certificate or a Business Licence, which are the official documents of a China Representative Office (‘RO’) or any given foreign invested Chinese legal entity such as Wholly Foreign Owned Enterprises (‘WFOE’) and/or Joint Ventures (‘JV’). Such requirements may slow down the go-to-market plan since it normally takes three to four months to register a Chinese legal entity. In addition, the application for the ICP registration generally takes about 20 working days to complete.

Although several Chinese cities may look quite futuristic with local Chinese taking advantage of modern digital platforms, such as advanced online payments, bike sharing and other services, business and regulatory administration in China can still be a long and complicated process.    

India: from basic outsourcing to high value R&D?

When looking at India, most tech companies would think of IT service outsourcing. Several Indian cities have solidly established themselves as the first and largest Business Process Outsourcing basis, where multinational companies from all over the world outsource non-primary business functions or information technology enabled services, such as call centres. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India. Keeping in mind that India's cost competitiveness in providing IT services today is approximately 3 to 4 times cheaper than the US. The country also ranks third among global startup ecosystems with more than 4,200 startups.

The internet industry in India is likely to double to reach US$ 250 billion by 2020, growing to 7.5 percent of GDP with the number of internet users expected to reach 730 million by the same year. Moreover, the Indian IT exports are projected to grow at 7 to 8 percent in 2017-18 to US$ 126 billion, adding 130,000 to150,000 new jobs during the same period.

In terms of domestic market, although India is far behind China, increased mobile phone penetration and decline in data costs are expected to contribute 500 million new domestic internet users in India over the next five years, creating opportunities for new businesses. Meanwhile, digital payment is expected to reach 62 percent in 2017-18 in terms of volume of transactions.

In 2018 however, India still ranks 100th in the World Bank annual report of doing business. This is largely due to factors such as protecting investors and enforcing contracts, paying taxes, resolving insolvency, finding the right skill sets and dealing with local labour laws, which are all key to doing business in foreign countries.

The United Kingdom

Historically a leading hub of international commerce with world class legal framework when it comes to starting a business, trading across borders, and enforcing contracts, the UK is a very attractive jurisdiction for commercial practices. Although uncertainty spreads across the European continent following BREXIT, the UK is still very often the favorite first international footprint for US companies, including tech startups, as there is no language barrier and red tape is minimal, making it a very attractive entry point in Europe.

Positioned in a prime setting between European, Asian, and US time zones, coupled with an excellent holding regime and many double tax treaties, the UK has historically attracted more European headquarters than any other locations. The UK Government continues to enhance its corporate tax regime. Corporation tax is planned to be reduced to 17% by 2020, which will ensure the UK has the lowest tax rate in the G20.

Other positive factors surrounding the corporate tax regime include generous rules such as deductibility of interest expenses, no withholding tax on dividends paid out to shareholders, exemption from tax on capital gains on the disposal of trading subsidiaries and certain minority interests in trading companies, an extensive network of double tax treaties, a comprehensive tax exemption regime and an attractive tax regime for non-UK domiciled individuals intending to be based the UK.

United States

Silicon Valley is the number one place for tech startups. Many foreign tech companies establish a presence here to take advantage of the high human capital and most importantly, to access investment. As the main global center for high technology, venture capital, innovation and social media, Silicon Valley still has a lot to offer. In fact, while some of the largest tech companies in the world are here, their presence doesn't seem to refrain others to grow and innovate. There are many tech startups that are expected to challenge the tech giants in the next two years.

Next week we will continue to examine the business environment of different markets and share case studies of successful startups.

 

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