Startups Need International, Without the Pitfalls

By Ernst Gemassmer

Fortune 500 companies such as IBM, Proctor and Gamble and others derive more than half of their revenues from international activities. We have heard that there are significant tax advantages in doing business offshore. All this sounds very enticing and many budding entrepreneurs can’t wait to fly to Paris or Shanghai to tap into the international markets. However, the startup CEO must evaluate a number of potential pitfalls, before jumping on the international bandwagon.

1. International requires patience. Relationships have to be built one-by-one in each country. Business contacts enjoy playing tour guide, having a meal together and getting to know you. So, do take time to get to know your partner and their country and its customs. Under no circumstances should you put your partner under pressure to sign a contract before your departure date. The partner should feel that you have all the time in the world to build and cement the relationship.

2. International requires capital. International travel is lengthy, exhausting and expensive. Local legal as well as accounting counsel is required in most countries. Hiring local staff requires establishment of a legal entity, which can be both expensive and time consuming. The hiring/firing process is lengthy, expensive and complex. Termination of a wrongly hired person can be a very expensive process.

3. The rules of the game are different in each country. These differences include: language, safety, currency, packaging requirements and numerous other considerations. Also, be aware of details pertaining to imports, such as duties and related paperwork, you may even be required to obtain import permits. If a country has currency problems, i.e. a shortage of foreign currency, you may succeed in obtaining an import license, but not the required foreign exchange cover. So, choose your target countries carefully.

4. Entering Europe is not a single effort. The classic mistake is to place an office in London and think that you have entered the EU (European Common Market). Although communication between the US headquarters and the London office may be good, proximity to local markets on the European continent are generally not achieved from London. Local presence in key markets is highly recommended, either through business partners of subsidiary/joint venture operations.

5. Manufacturing offshore could impact intellectual property. This comment applies especially to manufacturing in China. Even a trusted manufacturer generally employs numerous subcontractors and this can easily lead to unauthorized copying as well as loss of intellectual property rights, despite patent protection. However, the financial benefit may exceed the risk of losing partial patent protection.

6. Products must be adapted to local conditions and regulations. Documentation and software have to be translated into each local language. If you purchase a consumer electronic product in Europe, instructions come in numerous languages and tiny print. Electrical and safety requirements have to be met. Remember that even electrical plugs are different in most countries.

7. Carefully choose the head of international operations. Managing international operations includes several different functions, ranging from sales to a thorough understanding of finance, technology and legal. In addition the international manager must be a good communicator and diplomat both internally and externally.

The above points might discourage a new company from venturing into the international marketplace. However, my intent is to make the entrepreneur recognize and evaluate the challenges and the opportunities, before embarking into the global world.

As an emerging company, you will probably participate in one or more US trade shows. Frequently ‘international scouts’ will seek you out and promise to develop certain market places in exchange for exclusive business relationships. Do not, under any circumstances enter into exclusive relationships, as they can be difficult and expensive to sever later on. However, it is advisable to promise a potential partner a ‘head start’ in exchange for a volume commitment.

Good luck with your entry into the exciting, challenging as well as rewarding international marketplace.

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Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He has long helped entrepreneurs in Silicon Valley, as well as providing turnaround assistance as interim CEO for several companies in Europe. You can contact him directly at [email protected].

Martin Zwilling is the Founder and CEO of Startup Professionals, a company that provides services to startup founders around the world. See more details at www.startupprofessionals.com

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