Why tech start-ups go abroad

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 one be from, say, India or France?

To answer that question, it’s interesting to look at where the promising tech companies of today come from, and a good place to look at that 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, to name just a few nations that don’t appear in the list. Indeed, 35 out of 49 of the Tech Pioneers, or more than 70%, are headquartered in the US. 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 US or the UK. Looking more closely at the companies and their founders, a different image emerges. Consider these examples:

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

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 UK or the US:

1. They follow the money

Venture capital, the alternative investment on which so many companies count, has always been more prevalent in the US 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.

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 favourable 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.

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

Some start-ups will go where their shareholders or clients are. 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 they will be legally well protected. 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 unfavourable location and lack of real venture capital. With its Start-up Chile programme it offers early stage start-ups a relatively modest sum of $50,000 seed funding, coaching and office space to relocate to Chile for six months.

The Low Countries, the UK and France, from their end, 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.

Have you read?
What does it take to be a Technology Pioneer?
Which countries have the most VC investments?
Start-up Chile: a new generation of innovation

Author: Peter Vanham, Senior Media Manager, World Economic Forum

Image: Employees work at the headquarters of Box.net, an online file sharing and Cloud content management service for enterprise companies, in Los Altos, California February 5, 2013. REUTERS/Robert Galbraith