Many entrepreneurs have asked us in our practice about this interesting and very important question, most recently during a panel talk last week. Consequently, we have decided to give some insight into how you can decide on where to start your business. Without doubt, location can be critical to the success of a company. While an unfortunate location does not necessarily spell disaster, and there are definitely ways that you can help overcome such a problem, there is no reason to make your own entrepreneurial journey more difficult than it needs to be. You can save yourself a lot of trouble with a little bit of planning ahead, and by choosing the right place to set up your business in the first place.
Choosing a country to start your business in is probably one of the most challenging and important decisions you’ll face in the first stages of setting up any startup. The truth is, there is no one-size-fits-all solution, and instead of trying to provide one, we will explain the most important aspects to consider in your own decision. So if you are just looking for a ‘best of’ list, you had best look somewhere else (our suggestion: Most Startup Friendly Countries in the World, 2019). For those who want to find the country that is tailored to their needs, keep reading!
We really tried to make this a short guide; however, we came to the realization along the way that we have so much to say, even about the basics, that it will have to be way more than that. So, we split it into two sections, hoping it will help more this way. Important note: putting all the aspects into different groups can be done based on a wide variety of conditions: we believe the one we have chosen will help most with understanding, but it is definitely not set in stone.
Identify the target market
There is no real hierarchy amongst the aspects we mention here, but one of the most important is that creating a successful business doesn’t necessarily have to involve a ground-breaking idea, sometimes adopting concepts that work in other countries/markets can do the trick, too. So unless you have come up with an original concept (in which case big congratulations!),
you should always keep in mind that in order to be able to decide on the host country, you have to have a very clear picture of the problem you are solving, and the solution you are providing for that problem (see problem/solution fit).
In other words, you have to do a proper validation. This leads you to identify who you are trying to sell your product to: those people who actually accept and like the solution which you offer as one resolving a genuine problem in their lives (see product/market fit). This should be one of the first steps anyway, this is how you’ll know if your product has actually identified an existing customer pain and whether there is a need for your product at all. Not to mention that this is also what you will need to base your marketing strategy on, so dealing with this early on will be incredibly beneficial.
Many years ago we attended a hackathon in Budapest where one of the ideas was pet-sitting, hiring someone to take care of your pet when you are out of town—which helps you to escape the logistics of asking friends, parents, etc. That was a booming business in the US back then, but a non-existent service in Hungary. During the validation process the team discovered that the problem was genuine, people leaving town do indeed have to get someone to feed their pets, which is challenging. However, the solution of hiring strangers to take care of their precious pets didn’t appeal to people in Budapest; no one wanted to trust a stranger with this task. So, in the end, after 2 days of non-stop validation work, they chose to drop their idea and found another problem to solve. As you can see, in this case, the problem was not the business idea itself, but the actual market reality of the country they wanted to work in. If you do the same business in the US, where customers actually like your solution, your chances of succeeding are much higher.
There is truth in the saying that no competition is a bad sign.
If you have an idea for which there are no competitors on the market then you should be very suspicious, because chances are there is no market there at all (you have to be honest with yourself: there are hardly any ideas which have not occurred to anyone else on the planet before. So, if there was a validated market, chances are that someone else would already have started something in it).
As you can see, it is highly important to know what and to whom you are selling and find the country that actually has a potential market for the product. Even if the idea is naturally global, this aspect can still help you to find the fastest traction and growth to be able to generate hype quickly and attention around your business. This will pave the way for you to raise capital more easily or to enter international markets faster.
Perception of Customers (branding consideration)
What your customers will think about your corporate location is important. Some countries may even be deal-breakers for certain people, again depending on what and to whom you sell.
If you have a cool design product and you want to give it credibility, choosing a country that is famous for great designs will make it easier for you to get international attention. As you can see, this aspect again closely relates to your branding strategy. For example, selling a home decoration product as a Scandinavian design calls for more validity in itself. However, if you want to sell pineapples, addressing them as the “world’s tastiest pineapples from Sweden” might raise some questions among your customers.
Furthermore, if you have a very disrupting idea, you might succeed faster in an open-minded market than in a highly conservative one. A great example is that of Beyond Burger which started its first European operation in Stockholm in 2018, where both the vegan lifestyle and the general market openness have helped them to break into Europe with a friendly welcome.
As is clearly visible in the above examples, what works in one country may not work in another. Some business models can even be illegal or subject to high regulatory standards, permits and supervision by certain authorities, while the same model can be set up freely in a different country. For example, a business model based on the concept of a finder’s fee can be subject to certain conditions and registration as a licensed broker at the Securities and Exchange Commission (SEC) in the US, while the same concept can be set up freely in the EU, as a self-employed agency-type business.
For each country, make sure you evaluate the cost/effort of localizing your business model and include this aspect in the decision.
Access to Money
A core part of your business plan is setting up the financial roadmap for your company as to when, why, how much and for what you will need to raise capital. Getting at least the broad picture of where the financial resources are that you want to target will be part of the initial planning phase.
For example, being in sight of those VC-s that are active in your industry and business based on their portfolios and investment policies might be advantageous. Furthermore, the countries you are considering may have grant money or low-interest capital that you might be qualified for. Or you might already know a local investor interested in your idea. A lot of investors will prefer you set up in the country that they are based in anyway, so these factors are definitely worth looking into for every country you are thinking about.
It’s all about the money, again. However, the tax regime in force in various countries can also be considered when making a decision, and it often is. The tax advantages of incorporation in a tax-friendly yet reputable jurisdiction are generally worth the additional administrative costs in the long run.
Tax rate differential has proven to be a significant competitive burden for companies operating in high-tax countries. Whether or not incorporating a startup in a low-tax country is worth the cost and effort depends upon the characteristics of the business and the founders’ objectives. This factor should be considered mainly if the goal is to operate globally in the long term.