Look Before You Leap: A Brief Playbook for US Startups Expanding to Europe

In the two years since we launched a team based in New York, we’ve helped several of our Europe-based portfolio companies successfully expand into the US market. Many of us have written extensively on the topic, covering areas including product-market fit, tackling potential regulatory hurdles, raising VC funding in the US, and various other areas. As we enter our 3rd year in the US and reflect on what we’ve learned from our transplanted founders as well as other US-based entrepreneurs we met, I wanted to take this time to reverse course and outline the key steps a US startup should undertake when expanding to Europe. While some of the items may sound familiar to you from our blogs on expanding to the US, there are key differences inherent to the makeup of Europe that will be key to identify when making the leap. Alas, let’s dive in.

Plot your ideal launch markets

For European startups expanding to the US, there is usually one jurisdiction they are concerned about: US federal law. On the flip side, there are 50 countries that make up Europe — some bigger some smaller, some more Westernized than others, and some easier to enter than the rest. When first thinking about which countries to expand to, it will be key be to consider the product-market fit, potential regulatory hurdles you may face, access to capital, the competitive landscape, and any other country-specific nuances pertinent to your business. Quantifying and scoring these domains can help you determine the markets that can be favorable, and ultimately help you plot which countries to pursue first.

Some Miscellaneous Country-Specific Startup Facts

• Austria offers the most state subsidies for startups. In 2015, the government devoted €289M ($325M) in grants to 3,715 startups, and in 2016 passed another program where they will offer €185M ($204M) in subsidies over three years. In the latest program, (1) startups are eligible for partial refunds on auxiliary wage costs for the first 3 employees, (2) 20% of accumulated investments up to €250K per year can be reimbursed by way of the new risk capital premium, (3) the Red-White-Red card makes it easy to get a work visa, and (4) increased funding for the aws Business Angel Fund (a fund that doubles investments of certain investors in companies) and aws Seed Financing provide greater funding opportunities for entrepreneurs.
• Sweden and Ireland have emerged as major startup hubs, with the former boasting companies such as Spotify and Klarna, and the latter housing the Euro HQs for Facebook, Twitter and Google. Both countries have low corporate tax rates — Sweden at 22% (with a goal cutting to 20.6% by 2021) and Ireland at a resounding 12.5%.
• If raising European VC funding is a top near-term priority, countries like Germany and England may be key to pursue early on. Many large institutional VCs operate there, and Berlin and London have established themselves as two of the world’s largest startup hotspots. Further, you’ll have a far larger talent pool to choose from when building out your team. All said, proving your viability in these markets may be key for attracting European VC.
• Switzerland, historically a global financial center, has become a hub for crypto and blockchain startups. In the small city of Zug, there are over 30,000 registered companies, and 2,000 of 123,000 residents work in crypto or blockchain. Estonia is another country big in the space, boasting the most digitalized government and Central Bank and even launching their own national cryptocurrency (the first country to do so). If your business is in the crypto or blockchain space, it’s worth being aware of what’s happening here.

Send over a founder or key executive of the company to upstart operations

Last December, one of our Partners, Priscila Bala, wrote a blog dedicated to why European startups expanding to the US must send over a core team member to run the local operation. While many key principles remain paramount for Europe-bound US startups, there are certainly nuances that US founders must consider when expanding eastbound.

As Priscila outlined in her piece, maintaining internal culture plays a crucial role in hiring and retaining top talent, building goodwill and maintaining your brand identity. Without a key human link running the tangent operation, various inherent problems can arise, such as variant paces of work, frustration with decision-making processes and misalignment of company priorities. That said, certain variabilities that conform with local culture are OK and should even be encouraged — for example, if you expand to Spain and your employees are used to a schedule that includes afternoon siestas, do promote them! However, you want to largely emulate the overarching internal culture that made your startup a success in the US, and you’ll need a key original team member on the ground to do that effectively.

Entrance to Alphabet’s Madrid HQ, circa 4pm local time

A key team member is also essential for making decisions while navigating the new regulatory environment(s). Depending on the countries you’ve expanded to, you may be forced to pivot dramatically or even consider shutting down in some places, if your team determines the cost of pursuing that market outweighs the potential reward. Such important global strategy decisions require a key team member there to determine the viability of pursuing, abandoning or iterating certain measures. The regulatory issue can likely be magnified for US companies expanding to Europe vs. the other way around, given the various governments and codes of law you may need to work within. If you’ve already expanded to 3 countries, you may have to hold triple the meetings with lawyers and lawmakers, and incur triple the fees. While your American co-founder in his new European post may not know the country’s legal framework well, it’s key that he/she is there to strategize with team members, work with legal counsel, and ultimately help make key company decisions on markets to pursue, forget, or pivot within.

Example Case: Uber vs. London

Uber determined early on that London would be a critical market to expand to, despite the stringent laws protecting taxi cab drivers. Over the course of several years, the company was infamously rejected, approved, rejected, and ultimately approved (with concessions) just this past summer by authorities in London. How? After going through the courts, they agreed to conditions that included a 15-month taxi license vs. the typical 5-year term, and agreed to adopt rules for reporting incidents to the police, preventing tired drivers from working and sharing traffic data with the authorities. To Uber, it was worth incurring the legal costs and pressure that came with expanding to London, even with the aforementioned concessions.

More relevantly to the early-stage founders reading this, the fires may come in different sizes and differ vastly across jurisdictions. In order to make the best company-level decisions and ensure your overarching strategy isn’t compromised, a key team member needs to be leading the effort on the ground.

Understand your new competitive landscape

Your company may solve a key problem for people in Europe, but chances are there is someone else in the market your expanding to (or close by in a neighboring country) already doing something similar. There’s even a chance they got their idea from you, and tried to tailor it to their market! When opening up shop in Europe, it’s essential to understand your competitors as well as the large corporate incumbents that may become your competitors. Then, your team must answer some key questions for each player:

• What are they doing right? What are they doing wrong? (Answer should include but not be limited to specifics around onboarding, UI/UX, technological capabilities, team composition, etc.)
• Where are they doing it right? Where are they doing it wrong? (Answer should include specific cities or countries, and reasons for why things work in some places and not others)
• With who are they doing it right? With who are they doing it wrong? (Answer should include data on demographics, cohort analysis, etc.)
• How are they doing it right? How are they doing it wrong? (Answer should include specifics on different company strategies and marketing efforts, and any data to provide insights on successes and failures)

Then, you must ask yourself…

• How can we do it differently from them?
• How can we steal share from Competitor A, B, C?
• Which customers should we go after first?
• What do we want to convey in our marketing?
• Do we expect a greater LTV in one country and/or demographic over another?
• Do we expect a lower CAC in one country and/or demographic over another?

…and many more questions that you and your team determine as essential!

Your company may be solving a fundamental problem in Europe that existent players have not yet mastered. That said, understanding your competitive landscape in the country you launch in, as well as in neighboring countries, is vital for mapping out your expansion strategy and executing in a targeted and comprehensive manner.

Recognize the nuances in your new target market

As I touched on in #1, it’s key to launch in the European markets where there’s a strong product-market fit — a country where customers will find your product useful, cultural habits won’t hinder adoption, and where there is high physical and/or digital accessibility. If your company offers deals to people eating in restaurants or cafes and you’re thinking about launching within the largest European markets, you may want to consider the fact that the French spend 3x more time at such places than Germans (3.2 hours/week in France vs. only 0.8 hours/week in Germany). Similarly, if your company is in the video game market, it may be useful to know that Belgians spend 2.8 hours/week playing such games while the French spend 0.6 hours/week doing so.

Once you’ve chosen your markets, you need to figure out how to best connect with your target customers so you can offer a positive onboarding experience and the most relevant UI/UX. That said, it’s vital to understand the relevant issues and causes that matter to them. For example, customers in certain countries may want extensive upfront transparency around how their data will be used, and lacking that “education” may ignite customer distrust (and subsequent churn). Eastern European and Scandinavian countries — where radical-right parties have gained significant power — likely have customers who are particularly distrustful of the use of their data, so this is especially key to remember if you want to expand there. Keeping issues like data privacy in mind can allow you to tailor your product or service effectively and maintain trust amongst your new customers.

Choose the right VCs and advisors

Earlier, I explained why it is imperative for a key team member from the US to be on the ground in the company’s new Europe-based office. It is similarly as important for that team member to have direct support from partners native to the market, who can help navigate the company within it’s new terrain. If you’re looking for European VC funding, you may want to consider the funds that have operations in both Europe and the US (like Octopus!), and/or funds that have invested in Europe-based startups within your sector. You should also try to get connected to entrepreneurs who have succeeded in expanding to Europe, and pick their brains on all the areas discussed above. Surrounding yourself with people that understand the context of your new market will be vital to a successful expansion.

If there is anything you think I missed on in this playbook, please let me know! I would love to put out a more comprehensive guide in the future, as well write templates more tailored to specific sectors. Whether you’re a founder or VC, work at a startup or are just interested in the content, I would love to hear your thoughts!