Money invested into early-stage companies and startups with high growth potential has boomed over the past decade. Growing at an average annual rate of more than 20% and peaking at $322bn in 2018, according to business data platform Crunchbase, global venture capital (VC) investment has never been stronger.
Given the capacity of VC to enable the growth of early-stage companies, it has helped drive the crossborder expansion of start-ups.
“VC funding in early-stage companies aims to facilitate growth, and growth necessitates an expansion of market reach. For most start-ups, this means expansion into other countries’ markets,” says Patrick de Laive, co-founder of The Next Web, a conference and media group focused on new technology and start-ups.
Now more than ever, VC is enabling the international expansion of companies. In an interconnected world characterised by the use of digital products and services, companies compete with one another on a global scale as soon as they begin doing business.
“Start-ups used to initially be concerned with home market dominance and maybe regional dominance, and then they would think about global expansion over a longer period of time. Now, given the ease of launching a business, the availability of capital, [and] the talent in ecosystems, you are competing against start-ups globally from day one,” says Nick Stocks, general partner at White Star Capital, an early-stage VC fund.
Propelled by funding
Paris-based AI photography platform Meero is an example of a start-up whose global expansion has been propelled by venture capital funding. Since being founded in 2016, Meero has raised $293.4m of VC funding and has grown to 800 employees across seven offices globally, in
Paris, New York, Los Angeles, Tokyo, Singapore, Bangalore and Barcelona.
“VC funding has been crucial to expand globally and to develop our unmatched content enrichment tech. It allowed us to make in two years what normally takes five,” says Thomas Rebaud, co-founder and CEO of Meero.
Alongside other investors, White Star Capital has invested in three consecutive Meero funding rounds from series A to C, aiding international expansion and the setting up of new offices, according to Mr Stocks. “Increasingly we’re seeing global demand rather than regional demands, but it depends on the context of the start-up,” he says.
While VC funding can enable a software start-up to scale internationally, there are greater difficulties with hardware- and product-based businesses. “Scaling a [product-based] company internationally is far harder than it is with companies that you can literally flick a switch and suddenly launch them internationally given the AppStore and the global marketplaces that you can tap into,” says Mr Stocks.
Due to hardware requiring a lot of investment, hardware-based start-ups are also much harder to scale. “Hardware adds a lot of different layers of complication, especially in supply chain management,” says Gen Tsuchikawa, CEO and chief investment officer at Sony Innovation Fund, the corporate VC arm of Japanese technology giant Sony.
The likelihood of start-ups expanding internationally also depends on the market in which they are founded. “Internationalisation is something that all start-ups are thinking about, but it differs geographically,” says Christina Bechhold Russ, director at Samsung Next, the corporate VC arm of South Korean technology giant Samsung.
Companies based in massive markets such as the US, China or India can be incredibly successful and not need to internationalise, says Ms Bechhold Russ. Start-ups based in Europe, however, may find that growing in their home country may not be enough to reach venture scale. “Unlike some of those larger markets, from a very early stage these companies have to think about internationalising their product and moving into new markets. We see companies at the seed stage [in Europe] talking about how to reach that kind of scale to move into more countries and markets,” she adds.
Data highlights the difference between the international expansion of VC-backed companies in both the US and Europe. Some 43% of Europe-based VC-backed companies ranked in the top 100 on Crunchbase have announced greenfield investments. Greenfield investment monitor fDi Markets tracked 108 greenfield FDI projects involving these 43 VC-backed companies amounting to an estimated $771m of greenfield investment between 2012 and 2019.
The equivalent search for the top 100 US-based VC-backed private companies found just 19% had announced greenfield investments. This garnered just 39 greenfield FDI projects between 2012 and 2019, amounting to $530m.
Targeting tech expansion
Many locations worldwide vie for greenfield FDI – that is, tangible, on-the-ground investment that brings new or expanded physical facilities or headcount – which is traditionally associated with larger multinational corporations than start-ups. However, given rising VC funding, and early-stage companies wanting to expand internationally, locations are having to ensure that they have the appropriate attractiveness to draw in this new generation of companies.
“I think FDI is a core part of the VC industry. It is extremely beneficial because it brings the network and ecosystems closer, which is what you need for start-ups,” says Mr Stocks.
FDI flows can also spark VC funding. “The introduction of a major FDI project into a nascent ecosystem – such as the establishment of an office by a significant [company] – can spur the volume of capital available within that ecosystem,” adds The Next Web’s Mr de Laive.
In 2018, 14 out of the top 25 destination countries for greenfield FDI projects on fDi Markets were also among the top 25 countries in terms of VC availability, suggesting that countries with a high availability of early-stage company funding also attracted tangible crossborder investment from foreign companies.