The first few years of your startup are very crucial to its survival. After this stage, an ambitious startup may consider launching operations in a foreign land. Usually, you may have one reason for doing so: you want the business to grow and attract more investments. It is always a case of the bigger the merrier. Expanding to a foreign territory would also present your startup with a big chance to sell your business to a foreign investor, or launch a franchise deal. But the crucial question is usually: when is the right time to set up a foreign office for your startup? We would consider these points in bits, from time to time, about what strategies, when and how to carry on your startup business to oversea countries.
Why Do You Really Need To Move Your Startup To A Foreign Land?
This is a crucial question every startup owner must ask himself/herself. A key reason is usually diversification. In fact, the world is becoming more accessible than ever before. At a click of a button, you would know how the business environments of most countries are. With diversification, you most probably can’t put your eggs in one basket. With a more open world, why would one choose to invest everything they have in one country? Diversification is so important that you should look for investment opportunities beyond your own geographical borders. Take, for instance, doing business in one country with high volatility may affect the value of your stocks in that country. At the same time, some other countries may have a lower rate of volatility. Most investment professionals agree that, even though diversification does not guarantee against loss, it is the most important component of reaching long-range financial goals while reducing risk.
Again, take it or leave it, your location would affect whether your startup would be bought by an investor or not. The picture below shows that some countries get billions of more funding than others. This shows that investors are preferring some countries and even continents over others. Again, investment in emerging market countries carries with it certain “emerging market risks” such as currency fluctuations, expropriation scaremongers, social unrest, crime, among others. Click here to get a view about which countries pay the least corporate tax in the world.
Take a look again at this chart below.
More businesses in South Africa, from the chart above, are expanding to other offshore countries. In fact, a survey released by the Franchise Association of South Africa in 2018 shows that with most independent businesses having a 90% failure rate in the first two years of being in business, the average number of years franchisees are in business has remained consistent at 10 years — with 36% in business for more than 10 years and 67% for more than 5 years.
From the above, it has become obvious about how a future Mark Zuckerberg will suddenly put an end to his coding when he thinks about building the next Facebook in Nigeria or Sudan. However, one thing which makes most businesses successful is that most of the times, they are more willing to take the risk even in an adverse environment, such as in these countries mentioned above. But the risk also has to be a wise and calculated one.
See Post: Foreign Investors Dump More Nigerians
Why Move Out?
Here are a few occasions on which it is extremely important to move out of your current location.
Your Market is Offshore
Most African countries require you to bring back all foreign currency earned from offshore clients within the limit of a particular period. In South Africa, the limit is for 30 days. Nigeria has a liberal “free entry, free exit” approach to the movement of foreign investment funds into and out of its economy, although there are a few hitches here and there. However, if your revenue comes from offshore, do you really need to allow it to get caught in your country’s exchange control web, especially where the exchange controls are highly unpredictable? The best wisdom may be to bill and receive income in your offshore business account, which is more often than not influenced by the exchange control structure in place.
The Startup European Partnership, an open innovation platform organized by the Mind the Bridge Foundation, found that 1 in 7 of all European startups valued at more than $1 million moves their headquarters internationally (with the vast majority of those heading to the United States).
Your Investor Wants You To Move Off-shore:
In this case, your investor may have funds and the experience, connections, and mentorship, but they may desire that you move offshore before they can invest in your startup. Where such is the case, make sure that you do some studies about how much it costs to restructure your business offshore.
You Are Positioning Your Startup for Future Buyers
Most of the time, your startup’s future buyer may just want your startup to be based offshore. Sometimes, the value of your startup may just be the software IP developed by your startup and potential buyers may not want the IP to be based in your home country. Hence, the need to move to offshore locations.
Personal Reasons
You may have started a startup in your home country but you or any member of your family desires to relocate to another country. This may be a chance to extend your startup’s reach to other countries. Where such is the case, having a foreign business in the place in those offshore countries for you or any of your family members may earn you hard currency.
According to a report by the National Venture Capital Association, 1/3 of all venture-backed publicly traded companies between 2006 and 2012 had at least one foreign-born entrepreneur. An immigrant or child of an immigrant has founded more than 40% of the Fortune 500 companies. These are often 100% U.S.-based at inception, but they are more likely both to open an office abroad and to sell abroad than a company without an immigrant founder.
How Some Startups Handled The Issue of Moving To A Foreign Land
WooCommerce and Getsmarter (which sold to WordPress for something over $30-million and to 2U for well over $100-million respectively) are a perfect example (as a result of that sale to WordPress, WooCommerce today powers over 30% of all online stores with over 1M+ downloads.)
One interesting fact about these two startups before their acquisitions is that never had any plan to expand offshore, yet much of their revenue came from offshore customers. In fact, their offshore customers were the reason why both startups remained in business. Hence, the most important question every startup owner has to ask themselves is how big is your market, and are you well positioned to tap into it?
Even without planning to expand, these two startups succeeded because they focused on developing and selling their product, rather than on an intricate international group structure.
According to Dommisse Attorneys law firm which oversaw the two startups during their early lives:
They knew that at their early stages, they had many demands on limited growth capital. And more importantly, they chose to focus their time and mental energy on value creation. If they had spent either their cash or their time on international structuring, there would have been an inevitable opportunity-cost in terms of slower value creation. Even worse, the opportunity cost could have been terminal to their businesses if they used up capital that could not be replenished, leaving them empty handed when it came to investing in product development.
Bottom Line
Moving your startups to offshore jurisdictions depends on your immediate need for growth. If your immediate need for growth is absolutely pressing and you have the capital, why don’t you go for it? After all, the more markets you go into, the better the chances of exposing your business to more potential consumers. In the next series, we would be looking at the cost of setting up an offshore company across Africa and beyond and key issues of using the right tax strategies to boost your offshore business as well as issues surrounding procuring one trademark for your startup which you can use in almost over 20 countries across Africa.
In all these, you may wish to access more legal other advisory services before proceeding with expanding your business.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.