The European Union (EU) likes to sell the continent as a single market for doing business — but for startups looking to secure funding, hire talent and execute go-to-market strategies as quickly as possible, it often doesn’t feel that way.
Unlike US startups that can roll their products and services out across a huge (and largely homogenous) market from day one, European startups must instead wade through the rules and regulations of each individual country before they can even start doing business. And once they’ve done so, the headaches continue: different currencies, tax systems and cultural differences all take time and money to navigate.
Many argue this fragmentation puts Europe’s tech industry at a disadvantage — it’s often cited as a reason why the ecosystem is smaller than the US’s. It’s a topic on European leaders’ minds, as they debate how to create a more unified business environment for startups. “The broader challenge is that Europe, despite its economic size, still operates as a collection of individual countries rather than as a unified market in the way the U.S. does,” says Daniel Ahremark, CFO at Dutch-headquartered hospitality software Mews, which operates in 86 countries. “This makes it harder to build companies at scale, leading to a landscape filled with strong local players rather than true pan-European leaders and the foundation of what could be ‘European exceptionalism’.”
Until the EU solves this challenge, its startups will need to be as adaptable and resourceful as possible to build their pan-European businesses. “There are a lot of leading tech companies that have emerged from Europe, proving great businesses can be built and grown in the ecosystem,” says Tiphaine Bergault, an executive director in J.P. Morgan’s Innovation Economy team.
The trick is understanding how fragmentation impacts international expansion — and how startups can overcome these challenges to grow successfully. Here are four key considerations for cross-continental expansion.
1/ Get to know your market
Market research will determine where your product or service might best fit next. But if you really want to crack a new market, you can’t do it at arm’s length. An on-the-ground team is invaluable for getting up to speed quickly with the local rules, regulations and cultural nuances.
You need to invest in having local representation.
“[Fragmentation] forced us to [be] very intentional,” says Ahremark. The “localisation” team at Mews is distributed across the company’s markets and tasked with getting to know the legal technicalities, compliance procedures and other specifics of local business operations. “Our US competitors don’t need to do [this] in their home market. It adds significant overhead, but it’s necessary.”
Customers like to be served in their own language, and local representatives can also help build trust as an outsider. “In France, for example, our clients across e-commerce, fintech and software say if you don’t have a French presence it’s very difficult,” says Bergault. “You need to invest in having local representation.”
2/ Know how much it’s going to cost you
“Each country has its own legal framework,” says Bergault. “This complexity increases costs — not just directly [through higher VAT rates, for example], but also indirectly in terms of the time required from the team to understand these frameworks.”
Getting to grips with the paperwork at the start, from the process of incorporating subsidiaries to accounting documentation, saves headaches later. Advisors can help make sure no hidden costs are overlooked.
At Mews, for example, Ahremark describes a complex matrix of VAT rates for hospitality businesses — 10% on accommodation in Spain, 7% in Germany and varying rates for other services sold on the same premises — meaning invoices must be carefully written out.
Employment contracts will also be different, along with the employer’s expected contributions. In France, “employer social contributions can exceed 40% of the gross salary”, says Ahremark, compared to Ireland, where it’s more like 11%. “As you would assume, these deltas affect hiring decisions, compensation structures and overall expansion plans for companies scaling across Europe,” he says.
3/ Know the local spending habits
Did you know consumers in Germany love direct debits? Or that 30% of people in Romania don’t have a bank account? Have you heard of IDEAL, the payment system they use in the Netherlands? If not — do you really know how you will collect money from your customers?
There’s a lot of fragmented customer expectations.
“There’s a lot of fragmented customer expectations,” says James Allington, global advisory head, ecommerce & fintech at J.P. Morgan. “There are cultural differences that, from a payment point of view, seep through. In [each] market you’ll need different ways of collecting money from your customers, something we support clients through – but it creates additional problems to solve for businesses.”
Regulations like Payments Service Directive (PSD2) have been designed to boost payments innovation and alignment across Europe, but Allington warns that not all countries implement EU directives in a uniform way. “A good example is open banking — in the UK it’s done very well, in Germany momentum has been building, but as you expand into more markets the implementation is varied. All those nuances create fragmentation.”
4/ Understand the flow of money
Expanding across Europe also means juggling currencies and cash in different countries. You don’t want cash stuck in pounds when you need Euros, or sat in a subsidiary earning less yield than it could centrally.
Generally speaking, you don’t necessarily need to hold all currencies.
All businesses need to map out how the money flows in and out, but when operating subsidiaries in different countries, it’s important to also establish which currencies to hold in currency and which should be held in your “functional” currency (for most businesses in Europe, that will be Euros). But beware of hidden costs. Many providers that offer automation have embedded FX fees, meaning they charge a percentage each time they automatically convert money for you.
“Generally speaking, you don’t necessarily need to hold all currencies if your financial reporting and/or cost base is Euro denominated,” says Allington. “It’s a careful balance of value and complexity.”
Read the orginal article: https://sifted.eu/articles/fragmentation-europe-startups-brnd/
