The following is a featured piece from SuperReturn 365, published March 28, 2018. BGV General Partner Eric Buatois lends his insight. Read the original article here.
Innovation is global and good ideas can come from anywhere – but how can you establish yourself and flourish despite the risks and threats? Eric Buatois, General Partner at Benhamou Global Ventures (BGV) discusses the cross-border investment space and explores what it takes to build a global technology company.
As a Silicon Valley based venture capital firm, what are the particular considerations or challenges associated with investing in cross-border companies looking to establish a presence in the US?
Cross-border investment is a big theme, particularly in the enterprise and B2B space – and there are a lot of opportunities out there. Innovation is global and good products, good technology and good ideas can come from practically anywhere, be that India, China or Europe. Silicon Valley acts as a huge hub for growing technology companies, and establishing a presence here – particularly for firms in the B2B/enterprise space – as part of global growth, remains essential.
These companies tend to come to Silicon Valley when they’re still small and young, with typically 10-20 employees. However, moving at this stage is not necessarily an easy task. There is huge cultural gap; you need to learn how to conduct business in Silicon Valley and it can be a stretch for management teams, who will likely need to relocate. If it is to be their business hub, they will need to build out business functions like marketing, and recruiting top talent in the valley can be difficult.
“If you want to come to Silicon Valley, your value proposition and business model needs to be top class. You can’t do it with a ‘me too’ product”
Furthermore, Silicon Valley is quite often the first step outside a firm’s home market, and therefore there can be some learning around running distributed operations. This is where VC support really comes in; in helping with integration into the community. When firms arrive, they often don’t know anybody, they don’t know how to access the right talent or even how to operate.
When you create a new investment syndicate, it’s very important to have people on board who understand the cultural dimensions involved in dealing with a global company. Not only do they need to understand Silicon Valley, but they need to be able to relate to the culture of the company itself; whether it has come from France, the UK, Germany, India, China, it’s about understanding the culture of the particular firm.
Are there any regions from where firms find it easier to fit in to Silicon Valley?
There are a number of corridors between Silicon Valley and particular countries and cities that have a critical mass of tech companies, where there’s a flow of entrepreneurial talent. The first of these corridors was with Israel in the early 90’s. The result is that there is a very supportive infrastructure for companies coming from Israel. This includes an ecosystem of successful Israeli entrepreneurs that have made the transfer and understand the challenges involved, as well as a large pool of VCs that have come from Israel. Corridors have since been established with India, China and most recently parts of Europe – in particular France.
How do you think Brexit has affected the prospects for UK’s tech start-ups on the global stage?
I don’t think the VC community in Silicon Valley has really seen any impact yet – we closed a deal with a company called Kpativo in Cambridge last year so it’s still an active market for us. So I don’t think from an entrepreneurial perspective it’s a big deal; the dynamism of the technology sector is not correlated with this economic cycle/macro picture. I do think that VCs in the UK are finding it more difficult to secure raise money from LPs, however.
What are the threats or risks facing cross-border investment?
The biggest risks are macroeconomic and geopolitical. We’re seeing mounting tensions between the USA and China with the US government taking a tough stance towards Chinese technology companies. There have been high profile instances of where mergers between US and Chinese companies have been stopped. If these tensions escalate or we end up in a fully blown trade war, that will certainly be a challenge.
Take access to talent as an example as well. The current US administration is tightening immigration rules; with more than 50% of companies created in Silicon Valley started by first generation immigrants, this too could affect the market.
Beyond these risks, there’s always a risk to the cycle of fundraising and capital raising. It’s a cyclical environment and we are 8-9 years into the current positive cycle, with good availability of capital for good entrepreneurs. Of course when this cycle comes to an end that will reduce the availability of capital but we’ve we’ve been through these cycles before.
Has what it takes to build a successful global company has changed in recent years?
I don’t think so – I think there are a number of fundamentals that are perennially true. The first of which is talent. You need a management team that’s ready and capable of making the jump.
The second is a differentiated product. If you want to come to Silicon Valley, your value proposition and business model needs to be top class. You can’t do it with a ‘me too’ product. The bar to compete is higher in this regard now, I’d say, with the growth of technology hubs globally. On the positive side, the costs of entry have come down, so it is easier to build products in the first place.
“The strong emergence of corporate VC has created a massive job opportunity – people are learning the job that way and then moving into financial VC.”
Finally, you need to find investors that are attuned to the particular demands of cross-border growth. I would say historically there are few VC firms that really have this in their DNA; what you’ve seen in the last few years, however, is the emergence of the corporate venture capitalist. These firms represent around 25% of early stage investment in Silicon Valley. With the development of IOT, traditional industrial firms like automotive and aerospace companies, have set up corporate venture teams whose role it is to understand and source innovation. Because these teams operate on a very global basis, corporate investors are becoming very sophisticated cross-border investors. Obviously, this trend is a benefit for entrepreneurs who have a greater pool of experience to tap into, but also for VC firms like BGV who have a greater choice of firms to partner with.
What changes are in store for cross-border venture capital and what are the time horizons for that?
I would say when the history of venture capital is written, it will be broken into two periods: pre-’08 and post-‘08. Before 2008, with the exception of perhaps China, it was a reasonably limited industry, focused on technology companies building technology for technology companies or biotech firms building for big pharma. Since 2008, things have changed and it has become more global. This is due to the following factors and I believe that this is the trajectory we are on for the foreseeable future.
- Entrepreneurialism has become a viable career choice. Before 2008 people would consider a big company as the default choice for a stable career path but the financial crisis has led to a re-evaluation of that. You can be a top exec in a large company and still be at risk. Some have realised the best way to own your own future is to become an entrepreneur and there is more inhibition. Engineering and business schools are among the best in the world and they’re training people to become entrepreneurs left, right and centre. The supply is enormous.
- At the same time more and more people are becoming VCs. It didn’t used to be a big thing; it was secretive and nobody knew how it worked. Now, however, people are learning to become venture capitalists. The strong emergence of corporate VC has created a massive job opportunity – people are learning the job that way and then moving into financial VC.
- Technology companies are being started not to provide a product that might be acquired by IBM or Cisco, but more and more you can create a data driven, ML, AI type product that will transform an industrial company or address a specific sector issue. This means there are more opportunities for entrepreneurs to capitalise on. The growing number of business cases is good too for venture capitalists. Because capital can be deployed in different sectors without funding too many companies per sector, that’s good for return profiles.
- With the cloud and open source and the delivery of applications on mobile devices, innovative products can be developed, and brought to market, very quickly. It also means companies can be scaled up and rolled out in new markets quickly.