1. Challenging the East Coast vs. West Coast Dilemma
The reason why you need to change your mindset:
Very often, European CEOs considering expanding to the USA come to us with this question: should I set up my business on the East Coast or on the West Coast? This question is even more specific for startups: New York or San Francisco?
It may not be the best approach should you want to succeed in the USA.
The US market is indeed both complex and sophisticated. Territories cannot be reduced to the east vs. west dichotomy besides considerations such as the time zone (for effective communications with both your clients and your HQ) or an access to other markets (e.g. South America, Asia). Megacities may not be a good fit for your business, be in terms of growth opportunities and operational costs. Each state has its own culture, infrastructures, tax regulations, laws, and development plans. Not to mention that buyer and customer personae vary a lot across places.
If you already have clients in the USA, you may be tempted to set up your business close to your clients’ premises to secure good relationships and a seamless customer experience. That makes sense. But are you sure that this place is the one that offers the best growth opportunities, both in terms of market size and speed to market?
An excess of confidence after winning initial contracts in specific locations may make them overlook actual growth pockets. Amateur attempts at keeping operational costs or tax amounts to the minimum may lead to strategic mistakes. An opportunistic approach for recruiting sales representatives may result in boosting short-term results (at a significant cost given expectations in terms of salaries) at the expense of perennial growth.
So, how can you determine where to set up your business in the USA?
Think “flexibility” and “growth pockets”: 4 principles to succeed in the USA
Principle 1: TEST 3 OR 4 STATES BEFORE making the move to the USA.
You can hire sales agents (or hire an outsourced sales department) and back them up by traveling to the USA on a quarterly basis (CEO, CMO, Director of Sales, etc.). If you already have a US entity (which can be created in a different state than the one(s) in which you will be selling your products or services, e.g. Delaware), you can hire an American sales representative and / or send your own employees to the USA and have them work from home or in a coworking space [See Getting a US Visa or Creating a US Entity: What Should Come First?]. Doing so, you will not only secure initial contracts, but you will also collect the information you need to identify growth pockets and assess the speed to market in each of these pockets. If, at some point, you need consider the M&A option to grow, you will also benefit from the insights collected during that test.
Principle 2: Build up a SALES FORCE THAT IS WILLING TO MOVE.
If you recruit full-time sales representatives (or in case you plan to hire some of the reps selected by your outsourced sales department), make sure that they will be willing to move to the state you will select after you complete your market test. Once companies have identified the ideal growth pocket, they often find themselves with an excellent sales representative who owns most of their clients and pipeline but who refuses to move at the time they most need it. To that respect, make sure that you don’t put all your eggs in the same basket: 1 sales rep may not be enough, and you need to have options in hand if he or she fails you.
Principle 3: FOCUS ON ONE GROWTH POCKET after you completed your test.
This market segment is not necessarily the one that is the biggest in size (keep that in mind!), but rather the one that will help you grow fast, build credibility, and reach the profitability threshold. Though “focusing” may at first sight contradict the idea of “flexibility”, being focused is exactly what will help you be flexible in the long run. First, because succeeding in one growth pocket will help you open doors as you are ready to expand your horizons: you will have built credibility in your industry and proved that you can thrive on the American market. Second, because it will help you avoid burning your cash. Do not try to go after several pockets / territories at the same time or you will end up with astronomical operational costs (salaries, logistics, marketing, etc.) and run into a tax nightmare (each state has its own tax regulations…). If you are hesitating between various market segments, you may hire a marketing consulting firm to help you narrow down options.
Principle 4: Identify the COSTS THAT MATTER.
For instance, the amount that you will pay for a commercial lease or for the portion of the corporate income tax that is due to the various states may not be relevant for selecting the state(s) in which you will do business. We see too many companies trying to keep costs down to the minimum at the expense of growth opportunities. Focus on costs that matter: logistics if applicable, salaries (you need to hire people who are in, or close to, your growth pocket), and travel expenses (for making trips to your HQ or for covering your salesforce’s trips across the USA). And do not forget about intangible costs such as the implications of the time difference between the state in which you have employees and your HQ’s location (communication hiccups may result in missed opportunities).
2. Lessons from success and failure: 5 real-life examples
Companies that suffered setbacks:
Example 1 – ABCCo. sells connected devices to sports amateurs and professionals. When ABCCo. started its US expansion, they knew that hiring a great sales representative for their activities in the USA was crucial given existing competition and the specific niche the company was targeting. The executive team met someone who had the exact skills, industry knowledge, professional network, and personality they needed. This person lived in Michigan (MI).
They hired him (at a pretty much high cost) and saw encouraging results during the first year: the sales representative secured juicy initial orders and he was willing to travel to cover the US territory. During the second year, difficulties started to emerge though: ABCCo.’s target audience was not in the Midwest, and despite the sales representative’s efforts, he never managed to build strong relationships with leads and clients. The conversion rate was stagnating, clients switched to other providers, and sales never took off. ABCCo. then tried to recruit another sales representative, but it took time, leaving the company in limbos for an additional year. As of today, they are still facing a very trying time.
Example 2 – DEFCo. sells baby products to resellers and retail chains. When DEFCo. moved to the USA, executives insisted on having the company’s office located in New Jersey (NJ). The goal was to save money on salaries and on the commercial lease. How did it go? Well regarding salaries, DEFCo. never found any suitable candidate in NJ and therefore had to recruit expats, who all wanted to live in NY, and American employees who lived in NY. In other words, DEFCo. ended up with NY wage levels.
Moreover, DEFCo.’s prospects and clients were all in NY, meaning that employees had to commute every day from NY to NJ, and then travel during the day to NY to meet clients. Needless to say, employees started to work from home without notice, asked for higher compensation, or even resigned! After 1 year, DEFCo. decided to close the office in NJ and to rent a coworking space at WeWork in NY, which cost them only an additional $500/month, a trifle for such a wealthy company. Was it worth the trouble?
Example 3 – GHICo. is a fast-growing startup that sells SaaS software. GHICo. chose to open an office in San Francisco (CA) as it seemed to be “the place to be” for technology companies. Point is that if being in San Francisco was a great move from a PR perspective, the company soon faced the business reality: salaries are astronomical, renting an office is outstandingly expensive, the ecosystem is extremely difficult to penetrate and to navigate, and the time zone is a cumbersome drag when it comes to dealing with EU headquarters.
GHICo. realized that there is no reason to be in San Francisco, except when there is a need to find investors. As finding investors was not a priority, the company decided to relocate in New York.
Companies that got it right:
JKLCo. sells sports apparel and equipment (B2B, B2B2C and B2C models). Though they expected a fast growth in the USA, JKLCo.’s executives were worried about the initial investment to be made. Having identified market opportunities in Florida (FL), they decided to start from there. They opened a temporary office in Miami, sent expats there, and hired a local sales representative, who secured initial contracts in Florida and who also worked on finding the most promising growth pocket for JKLCo.
It took the latter only 3 months to demonstrate that California (CA), not Florida, was the state that offered the best ROI opportunity for the company. JKLCo. thus decided to relocate in California, making sure that their sales representative would follow them to keep up the good work. Lesson: ponder risks with ROI indicators in mind, test your market, and focus on local growth pockets.
MNOCo. sells electric cars to consumers, private rental companies, and cities. MNOCo. initially wanted to go to San Francisco (CA) for 2 reasons: first, having a high-tech product in hand featuring the most recent IoT innovations, they thought it was the place to be to build credibility; second, California represented a huge and fast-growing market thanks to the state’s incentives for purchasing environment-friendly vehicles. However, the initial investment was out of reach.
MNOCo. then looked for other opportunities and realized that Colorado (CO) was a good place to start, as many cities there were actively working towards becoming “smart cities”. The company thus hired 5 sales representatives in Colorado at an affordable cost, who soon secured partnerships with the city of Denver and neighboring cities. This strategic move was smart: not only did it offer immediate revenue, but it also gave MNOCo. the opportunity to develop business in California in parallel without breaking the bank since sales representatives could easily travel between the two states. Lesson: start “smart”, not necessarily “big”.
3. Insights from our clients: expansion-friendly states and cities
Popular states for US expansion:
A significant amount of companies expanding to the USA choose to set up their business operations in the Northeast. Dynamic cities such as Boston (MA) or New York (NY), now host to the “Silicon Alley”, are especially attractive for startups, and the manufacturing tradition that shaped states such as Rhode Island (RI), Connecticut (CT), New Jersey (NJ), and Pennsylvania (PA) is of interest for medium-sized companies targeting more traditional industries.
The “Rust Belt” is no longer that “rusty” and is considered as a place of choice: states such as Illinois (IL), Michigan (MI), Iowa (IA), West Virginia (WV), or Ohio (OH) provide great market opportunities and some cities can brag about outstanding economic growth rates, such as Detroit and Chicago (esp. automation).
Florida (FL) is an attractive hub for companies that target Latin America along with the USA. Multinational corporations are well-entrenched in that state, and SMBs choose to set up their business there to meet big giants’ needs. It is also an attractive state for real estate and retail stores.
California (CA) is of course regarded as a land of opportunities: many tech and software giants started in the “Silicon Valley”, the market is huge, the state has developed many incentives to support environment-friendly technologies as well initiatives to build “smart cities”, and investors are legions.
Some other states such as Texas (TX), Oregon (OR), Georgia (GA) or Colorado (CO) also offer great opportunities, be it because they host niche markets, demonstrate an increasing economic dynamism, or provide newcomers on the US market with affordable and convenient alternatives to popular, yet expensive states.
Field notes on 14 cities:
Boston (MA): the place to be for biotech companies. Note that states such as Georgia (GA) or North Carolina (NC) also provide tremendous opportunities in the biotech industry.
New York (NY): New York (City or State) can virtually meet the needs of any industry. Many multinational corporation’s HQs are located there, which is a boon for SMBs and startups alike. Though there are fewer and smaller investors there than in the greater San Francisco area, NY investors are more approachable. New York City is especially prized for the adtech, banking, and fintech industries.
Philadelphia (PA): “Philly” is a great alternative to Boston or New York for it is cheaper, yet extremely close to economic hubs.
Washington (DC): the place to be for public markets and defense. The city also developed attractive options for startups.
Princeton (NJ): the city and its surroundings host pharmaceutical giants and a cohort of SMBs servicing that industry.
Atlanta (GA): the city offers great opportunities in the biotech and healthcare (e.g. senior care) industries. Moreover, it is a logistics hub for many airline companies (e.g. Delta Airlines, Air France, etc.), which is a plus for dispatching consumer goods across the USA.
Austin (TX) and Texas at large: many multinational corporations in the energy industry have their HQs located there. Austin is developing a cluster for biotech. The state is in itself very attractive for any company looking for warehouses: it hosts the biggest warehouses in the USA (incl. Walmart’s warehouses). Interestingly, Texas is a place of choice for the movie industry: Hollywood (CA) has become so expensive that other states (Texas, Louisiana, Kentucky) made a business out of it!
Denver (CO): the city is one of the fastest-growing city in the USA. It has become increasingly popular over the past decade, and yet remains much cheaper than other popular cities such as San Francisco. The city has become a hub for the storage and distribution of goods and services across the USA, thanks to its strategic location. The range of industries is broad (mining, telecommunications, consumer goods, defense & space, etc.) and more and more promising startups in the tech industry choose to begin their US expansion there. The city also benefits from the success of is neighbor, Boulder, where the GAFA have opened huge campuses gathering tech talents from over the world.
San Diego (CA): San Diego’s commercial port and its location on the United States–Mexico border make international trade an important factor in the city’s economy. Companies that do need to be close to Mexico find there a great alternative to San Francisco or Los Angeles. San Diego also gathers leading companies in the wireless technologies, biotech, and pharma industries, and hosts military bases (incl. the US Navy) which means great opportunities in the military & defense industry.
Los Angeles (CA): the city is well-known for hosting entertainment giants and fast-growing startups (television, motion pictures, video games, music recording, and production) and for gathering talents and key opinion leaders in the fashion & apparel industry. Its huge and busy port is a door to the Asian, Latin American, and South American markets, and has thus attracted many manufacturers from the world over the past decades (incl. companies in the food industry).
Seattle (WA): Seattle hosts Microsoft’s headquarters and is thus a place of choice for software companies that deliver top-notch solutions matching the giant’s needs. The state of Washington has also developed incentives to foster the development of “smart cities” and “green cities”, which attracts many startups in the IoT and cleantech industries.
Portland (OR): technology is a major component of the city’s economy (Intel has its headquarters there) and the area – that counts a high density of trees – is often called the Silicon Forest, a reference to the Silicon Valley (San Francisco). Startups in the greentech industry can find there a dynamic, eco-conscious market. Portland is also a hub for athletic and footwear manufacturers along with companies supplying or servicing the steel industry. Of course, the port is a valuable asset.
Las Vegas (NV): the state of Nevada recently launched a huge PR campaign to attract both domestic and foreign companies. It yielded results, especially as doing business there is quite cost-effective and as laws favor employers over employees. Of course, the entertainment industry is queen there. Las Vegas remains in the middle of the desert though, so it is selected by companies for which location in the USA does not have a strategic impact.
San Francisco (CA): the city remains a Mecca for tech companies and startups from over the world. It is most likely the best place to be to find investors and valuable accelerators. However, the ecosystem is very complex and difficult to penetrate, and costs are huge (lease, salaries, etc.). Also, local laws clearly favor employees over employers, putting newcomers at risks (San Francisco has its own laws, on top of Californian laws, which are themselves tough on employers). San Francisco is a fit for companies that have been built with the American mindset from the onset and that have enough funds to build an entire team locally.
WANT TO DISCUSS YOUR BUSINESS EXPANSION TO THE USA?
Send us your project brief and schedule a call with TradeSherpa today.
Whether you are looking for specific experts in the USA, you have operational challenges to address as you grow, or you need to build an expansion plan from scratch with accurate budget estimates and a structured timeline, we are here to help.
Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances.