Entrepreneurship Outside the United States
[Originally published 10/11/99]
Given the number of teams at HBS working on business plans focused on foreign markets, the Harbus decided to sit down with Professor Walter Kuemmerle and discuss the entrepreneurial climate outside the US. Professor Kuemmerle teaches the popular "International Entrepreneurial Finance" in the second-year elective curriculum. Professor Kuemmerle's research and teaching interests focus on entrepreneurial finance, cross-border entrepreneurship and global technology management.
What commonalties have you observed among successful entrepreneurs - both personal traits and in their experiences?
There is not that much of a difference between entrepreneurs in the US and abroad. I think the traits are pretty general across borders. The first common trait, in my opinion, is intelligence. That doesn't necessarily mean doing well on standardized tests, but most entrepreneurs are street-smart. There might be people who are unable to define a profitability ratio, but they intuitively know what it is and how to improve it.
The second thing that I think entrepreneurs have in common is that they understand that launching a new venture is ninety-five percent perspiration and only five percent inspiration. Often, people who are extremely intelligent and who have never had to work hard to get anything in an academic environment have trouble when they make a shift to becoming an entrepreneur because it's really hard work. And a lot of the work is mundane - very basic and often boring stuff. You need to be somebody who can deal with this daily challenge of grinding through the thick stuff before finally doing something intellectual or otherwise innovative or creative.
I think the third thing is something that I call the "ability to convert." Say you're playing golf. You hit a great drive and a great second shot. Now you have to make the putt for a birdie. There are people who are just not very good at doing that and there are others who, under pressure, can do that.
I think the final characteristic of successful entrepreneurs is the ability to live with ambiguity. It comes in several forms. You must subscribe to the basic statement that "what's good today might be wrong tomorrow and I'm willing to stand up to my team and explain to them why things changed."
How do the trade-offs between risk and reward change outside the US? For example, are the consequences of an unsuccessful entrepreneurial endeavor more severe in other countries?
I think that in some countries you can basically only fail once. In continental Europe and Asia, especially Japan, this is still true - which keeps people from being entrepreneurial. I think things are converging pretty quickly however. What is really characteristic of Silicon Valley is that the entrepreneur, even if he or she fails, is somebody who has been coached through the process by a venture capitalist. When such a venture fails, people say that a good team with a good coach tried, it didn't work out, and that the team is experienced and might as well try again with a different coach. If you recreated exactly the same constellation in Japan or continental Europe and the venture failed, I don't think the failure would carry the stigma that the "lone" entrepreneur currently faces in these countries. So, if you team up with a reasonable capital provider and you replicate a similar model in Europe or Asia, I think there would be very little reputation loss if your venture were unsuccessful.
Do investors evaluate potential investments differently outside the US? Are there different factors that they focus on?
Yes. There are at least four criteria that are applied more heavily than in the US. The first one is relationships. In many cultures, existing relationships are somewhat more important in getting a business off the ground than in the US. There is research that shows that, on the margin, US buyers have a much higher propensity to buy services when they get a cold call than in other countries. In Japan, for example, you see much more of a referral situation where you call somebody and then get introduced to a service provider. It's a much more common pattern. So, if you start a company outside of the US, quality of local relationships becomes very important.
The second criterion where the US and any other country (with the possible exception of the UK) differ is the availability of exit opportunities. In many countries, exit vehicles are not as readily available. Once again, this is changing rapidly. In continental Europe, there are new exchanges similar to NASDAQ in Germany and France and Softbank is actually talking with NASDAQ about creating a similar exchange in Japan. But exit opportunities are still different.
Companies with small domestic markets have a larger propensity to think early about cross-border expansion. This is a third area in which the US and other countries differ and one, in my opinion, that favors entrepreneurs abroad. For example, Sweden is a small country, but the small domestic market should not necessarily be considered a drawback if you invest in a Swedish company. What you would be looking for, though, is whether the entrepreneur is somebody who is culturally versatile - not just in securing capital but also in selling products abroad.
The fourth issue is differing incentives. As an investor, it is very important to understand what makes the entrepreneur tick and it's not necessarily the same thing as in the US. For example, if the entrepreneur is motivated by sales-growth and the desire to build a large organization, what you have to do as an investor is make sure that profitability does not suffer. It is important to understand the motivations of the entrepreneur and structure incentives in such a way that you reach a desirable outcome for all involved parties.
How transportable are US business models to other parts of the world? In what ways do they need to be modified to adapt to the requirements of global markets?
I think most business models from anywhere, particularly from the US, are increasingly transportable and transferable for two reasons, the Web and TV. People everywhere watch TV and a lot of TV content is produced in the US. So the aversion towards a new business model is drastically reduced simply because of news coverage about it. Therefore, any business model is increasingly transferable.
Having said that, most business models require local adaptation. I think the best advice that you can give to anyone to learn about how far you need to take adaptation is to study multinationals in marketing; specifically Procter & Gamble and Unilever. These are companies that think about these things constantly - how global can a product be, how local does it need to be.
What are the major centers of entrepreneurial activity outside the US? What criteria should you use to determine where to locate your new company?
In Europe, I think one region that is growing rapidly in biotech, media, and high-tech is Munich, Germany. Spain has seen amazing growth and will probably see even more growth. And then there's clearly London. In Asia, Japan will continue to be special. For any business with mainland China, it will be Shanghai rather than Hong Kong. Hong Kong is more of a financial center. In South America, it's Sao Paolo, Brazil and Buenos Aires.
When you're trying to decide where to headquarter your company, you need to ask "which supply or demand factor is really important for my company" and "where is this factor located." In your planning, you need to prioritize these factors. If you are a service company, for example, it is generally important to be close to your customers. Also, if you're not the first mover, you should generally go where your competitors are. They shouldn't scare you. If you're a small entrant, you can only benefit from the environment of supporting industries that already exist in that location due to an incumbent.
Aside from the strategic issues, I think you should setup your company where you want to live and where your key employees want to live. I think you should also be able to speak the language of where you live or at least get by if you're going to have to raise a family there. I think the family aspect is something that often gets neglected by entrepreneurs and they realize how important it is a little too late, when their family and their company fall apart.
Given the number of teams at HBS working on business plans focused on foreign markets, the Harbus decided to sit down with Professor Walter Kuemmerle and discuss the entrepreneurial climate outside the US. Professor Kuemmerle teaches the popular "International Entrepreneurial Finance" in the second-year elective curriculum. Professor Kuemmerle's research and teaching interests focus on entrepreneurial finance, cross-border entrepreneurship and global technology management.
What commonalties have you observed among successful entrepreneurs - both personal traits and in their experiences?
There is not that much of a difference between entrepreneurs in the US and abroad. I think the traits are pretty general across borders. The first common trait, in my opinion, is intelligence. That doesn't necessarily mean doing well on standardized tests, but most entrepreneurs are street-smart. There might be people who are unable to define a profitability ratio, but they intuitively know what it is and how to improve it.
The second thing that I think entrepreneurs have in common is that they understand that launching a new venture is ninety-five percent perspiration and only five percent inspiration. Often, people who are extremely intelligent and who have never had to work hard to get anything in an academic environment have trouble when they make a shift to becoming an entrepreneur because it's really hard work. And a lot of the work is mundane - very basic and often boring stuff. You need to be somebody who can deal with this daily challenge of grinding through the thick stuff before finally doing something intellectual or otherwise innovative or creative.
I think the third thing is something that I call the "ability to convert." Say you're playing golf. You hit a great drive and a great second shot. Now you have to make the putt for a birdie. There are people who are just not very good at doing that and there are others who, under pressure, can do that.
I think the final characteristic of successful entrepreneurs is the ability to live with ambiguity. It comes in several forms. You must subscribe to the basic statement that "what's good today might be wrong tomorrow and I'm willing to stand up to my team and explain to them why things changed."
How do the trade-offs between risk and reward change outside the US? For example, are the consequences of an unsuccessful entrepreneurial endeavor more severe in other countries?
I think that in some countries you can basically only fail once. In continental Europe and Asia, especially Japan, this is still true - which keeps people from being entrepreneurial. I think things are converging pretty quickly however. What is really characteristic of Silicon Valley is that the entrepreneur, even if he or she fails, is somebody who has been coached through the process by a venture capitalist. When such a venture fails, people say that a good team with a good coach tried, it didn't work out, and that the team is experienced and might as well try again with a different coach. If you recreated exactly the same constellation in Japan or continental Europe and the venture failed, I don't think the failure would carry the stigma that the "lone" entrepreneur currently faces in these countries. So, if you team up with a reasonable capital provider and you replicate a similar model in Europe or Asia, I think there would be very little reputation loss if your venture were unsuccessful.
Do investors evaluate potential investments differently outside the US? Are there different factors that they focus on?
Yes. There are at least four criteria that are applied more heavily than in the US. The first one is relationships. In many cultures, existing relationships are somewhat more important in getting a business off the ground than in the US. There is research that shows that, on the margin, US buyers have a much higher propensity to buy services when they get a cold call than in other countries. In Japan, for example, you see much more of a referral situation where you call somebody and then get introduced to a service provider. It's a much more common pattern. So, if you start a company outside of the US, quality of local relationships becomes very important.
The second criterion where the US and any other country (with the possible exception of the UK) differ is the availability of exit opportunities. In many countries, exit vehicles are not as readily available. Once again, this is changing rapidly. In continental Europe, there are new exchanges similar to NASDAQ in Germany and France and Softbank is actually talking with NASDAQ about creating a similar exchange in Japan. But exit opportunities are still different.
Companies with small domestic markets have a larger propensity to think early about cross-border expansion. This is a third area in which the US and other countries differ and one, in my opinion, that favors entrepreneurs abroad. For example, Sweden is a small country, but the small domestic market should not necessarily be considered a drawback if you invest in a Swedish company. What you would be looking for, though, is whether the entrepreneur is somebody who is culturally versatile - not just in securing capital but also in selling products abroad.
The fourth issue is differing incentives. As an investor, it is very important to understand what makes the entrepreneur tick and it's not necessarily the same thing as in the US. For example, if the entrepreneur is motivated by sales-growth and the desire to build a large organization, what you have to do as an investor is make sure that profitability does not suffer. It is important to understand the motivations of the entrepreneur and structure incentives in such a way that you reach a desirable outcome for all involved parties.
How transportable are US business models to other parts of the world? In what ways do they need to be modified to adapt to the requirements of global markets?
I think most business models from anywhere, particularly from the US, are increasingly transportable and transferable for two reasons, the Web and TV. People everywhere watch TV and a lot of TV content is produced in the US. So the aversion towards a new business model is drastically reduced simply because of news coverage about it. Therefore, any business model is increasingly transferable.
Having said that, most business models require local adaptation. I think the best advice that you can give to anyone to learn about how far you need to take adaptation is to study multinationals in marketing; specifically Procter & Gamble and Unilever. These are companies that think about these things constantly - how global can a product be, how local does it need to be.
What are the major centers of entrepreneurial activity outside the US? What criteria should you use to determine where to locate your new company?
In Europe, I think one region that is growing rapidly in biotech, media, and high-tech is Munich, Germany. Spain has seen amazing growth and will probably see even more growth. And then there's clearly London. In Asia, Japan will continue to be special. For any business with mainland China, it will be Shanghai rather than Hong Kong. Hong Kong is more of a financial center. In South America, it's Sao Paolo, Brazil and Buenos Aires.
When you're trying to decide where to headquarter your company, you need to ask "which supply or demand factor is really important for my company" and "where is this factor located." In your planning, you need to prioritize these factors. If you are a service company, for example, it is generally important to be close to your customers. Also, if you're not the first mover, you should generally go where your competitors are. They shouldn't scare you. If you're a small entrant, you can only benefit from the environment of supporting industries that already exist in that location due to an incumbent.
Aside from the strategic issues, I think you should setup your company where you want to live and where your key employees want to live. I think you should also be able to speak the language of where you live or at least get by if you're going to have to raise a family there. I think the family aspect is something that often gets neglected by entrepreneurs and they realize how important it is a little too late, when their family and their company fall apart.
posted by gnp at 9:01 PM
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