Why Tech Start-Ups Go Abroad

There is no shortage of innovative minds in Europe or Asia. The issue is they build their companies elsewhere.

Peter Vanham

Peter Vanham

It’s a dream in many countries, but a reality in only a few: to create the next Google, Airbnb or Wikimedia. So far though, it seems as if this dream is almost exclusively an American affair. Why is this the case? Could the next example be from, say, India or France?

To answer that question, it’s interesting to look at where the promising tech companies of today came from – a good place to look is the recently announced new class of World Economic Forum Technology Pioneers.

In previous years, some of these Technology Pioneers grew to become major companies, shortly after their selection: Google was named a Technology Pioneer in 2001 by the Forum, Wikimedia in 2007, and Airbnb in 2011.

But whichever of the new class of 49 Tech Pioneers turns out to be the next Google, it’s once again more likely to be an American company than an Indian, French, Spanish, or Japanese firm, to name just a few nations that don’t appear on the list.

Indeed, 35 out of 49 of the Tech Pioneers, or more than 70 percent, are headquartered in the U.S.

The United Kingdom comes in second place with four Technology Pioneers, followed by Israel and the Netherlands (with two each) and individual pioneers from Canada, Ireland, Sweden, Germany, Italy and Taiwan.

Yet that doesn’t mean all talented entrepreneurs actually come from the U.S. or the U.K. Looking more closely at the companies and their founders, a different image emerges. Consider these examples:

  • Novocure, a K.-based life sciences company, has an Israeli founder and its research and development facility is in Israel.
  • Carbon Clean Solutions, another K.-based energy company, has an Indian founder.
  • Avellino Labs, a S.-based Tech Pioneer, has a Korean founders team.
  • Transferwise, a K,-based fintech company, has Estonian founders.

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Venture capital has always been more prevalent in the U.S. than any other country.

As these examples show, there is no lack of innovative minds in mainland Europe, or in South or East Asia.

Rather, the issue seems to be that they don’t build up their companies in their home country. So, why not?

While we can’t speak for any individual company, there seem to be at least three possible reasons why some start-ups move from mainland Europe or Asia to the U.K. or the U.S:

[Also on Longitudes: Promoting Crowdfunding in Europe]

1. They follow the money

Venture capital, the alternative investment on which so many companies count, has always been more prevalent in the U.S. than any other country.

No day goes by without another major financing round being announced in Silicon Valley, New York or London.

Start-ups know this, and know their chances of securing financing are larger in these areas, simply because it is more abundant.

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2. They put their headquarters where they are fiscally and legally welcome

With start-ups increasingly active on a global scale straight away — thanks to the internet and other enabling technologies — the choice of where to install a headquarters can depend on other variables than just access to a certain market.

For companies in research and development or an IP-driven sector, for example, the choice could fall on markets with a favorable tax regime or legal protection.

For companies working in highly regulated markets, like finance, it could be where their business and operating models are most likely to be accepted.

[Also on Longitudes: Beyond Silicon Valley]

3. They go where their clients or investors ask them to

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It’s a dream in many countries, but a reality in only a few: to create the next Google, Airbnb or Wikimedia.

Some start-ups will go where their shareholders or clients live. Investors who put a lot of money in a company might trust it more when their money goes into a company that’s headquartered in their country — and where they know the legal protections.

The same goes for prospective clients, who might be more likely to become a client of a certain company when it is based in their own country.

Knowing these rationales, governments and the private sector can each play their part in attracting or retaining start-ups in their own country – and some countries are already taking such measures.

Chile for example, became a start-up hub despite its unfavorable location and lack of real venture capital. With its Start-up Chile program, it offers early stage start-ups a relatively modest sum of $50,000 in seed funding, coaching and office space to relocate to Chile for six months.

The Low Countries, the U.K. and France, for years have had various Patent Box systems that shield R&D-driven revenues from their otherwise higher tax rates. Yet other countries choose to introduce state-of-the-art consumer protection policies or a legal system that safeguards the interests of investors.

While such measures don’t replace the record amounts of venture capital from Silicon Valley, they could offer an interesting alternative and help ensure the next Google, Airbnb or Twitter does indeed come from a different country. goldbrown2

This article first appeared on World Economic Forum.

Peter Vanham is Senior Media Manager at World Economic Forum.

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