It used to be the case that in order to scale globally, European companies needed to spend big on launching in the US to achieve the kind of growth they wanted. That usually meant re-locating large swathes of the team to the San Francisco / Bay Area, or New York. New research suggests that is no longer the case, as the US has become more expensive, and as the opportunity in Europe has improved. This means European startups are committing much less of their team and resources to a US launch, but still getting decent results. That said, European startups will still look to the US for exits, as European corporates remain laggards in innovation.
New research by Index Ventures today reveals that less than 1 in 5 (50 out of 275) European tech firms are choosing to relocate their engineering base as they expand to the US, in stark contrast with the general strategy 10 years ago. Instead, says Index, Europe’s top tech start-ups are managing to get the growth gains they need about of the US with much smaller ‘on the ground’ footprint.
The survey of 275 European startups over the last decade (including an in-depth survey of over 100 firms) indicates that creating US-based engineering, tech and R&D teams has fallen out of favor, and they are staying in Europe for longer, taking advantage of Europe’s much-improved availability of talent and funding.
Between 2008-2014 almost two thirds (59%) of European start-ups expanded, or moved entirely, to the US ahead of Series A funding rounds. However, between 2015-2019 this number decreased to a third (33%).
This chimes with research from StackOverflow which has found that the European tech scene has lifted, with more than 6 million professional developers residing in Europe, compared to just 4.3 million in the US. Tightened US immigration rules, and demand outstripping supply have inflated US tech salaries, which are 42% higher in San Francisco compared to London, making it more expensive and less cost efficient for European startups to double down in the US. Especially when they can achieve similar growth from home.
European founders are also now raising more, with rounds growing from $15.3bn to $34.3bn over the past four years.
Danny Rimer, Partner at Index Ventures said in a statement: “While for some founders, and certainly once a business reaches certain milestones, establishing a US base is a good decision, it is becoming increasingly costly and challenging.”
At the same time, however, Index found that European corporates invest three quarters (76%) less than their US counterparts on software, and this is normally on compliance rather than innovation. This means European startups are likely to continue to look to the US for exits to corporates.
The research findings are revealed in ‘Expanding to the US’, Index Ventures’ third handbook for tech founders seeking domestic and international growth. It also includes a ‘personality test’ for startups to figure out at what stage they need to prepare for a US launch.
As well as analysis of 353 European (275) and Israeli (78) VC-backed startups that have expanded into the US over the last 10 years it includes US expansion strategies and interviews with founders who’ve done it.
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