In 2019, SoftBank lost $9.2 billion of its $10.3 billion investment into co-working space giant, WeWork—not long after WeWork canceled its IPO. Its drastic decline sent shockwaves into investment firms and tech startups alike, serving as a cautionary tale for each. WeWork isn’t alone; last fall, promising startups such as Peloton, SmileDirectClub, and Endeavor each failed to live up to investors’ expectations, and the ripple effects of change began.
During November 2019’s WebSummit conference in Lisbon—the globe’s largest gathering of tech startups and venture capitalists—investors told reporters that, instead of growth, they’re more interested in tech startups’ profitability.
However, young tech firms have much to consider when scaling their businesses—especially if they want to attract investors’ attention. Young companies face the challenge of growing their teams in new markets where they develop new customer bases and drive revenue. If these companies plan to set up a foreign subsidiary, the startup and maintenance costs alone eat away at precious financial resources. Now, tech firms have an alternative to secure top talent and penetrate new markets—without setting up an entity.
What Happened to WeWork?
SoftBank’s investment arm, the SoftBank Vision Fund, invested $10.3 billion in WeWork, only to lose 90% of that investment months later when WeWork withdrew its plans for an IPO. SoftBank neglected WeWork’s “red flags” before attempting to go public; the documents revealed internal issues, such as ethically questionable actions and poor internal governance. These revelations went public, contributing to WeWork’s extreme devaluation, and ultimately, SoftBank’s multi-billion-dollar loss.
SoftBank funneled money into WeWork, attempting to drive profitability down the road. However, SoftBank neglected other vital considerations:
- Is WeWork’s model sustainable?
- Does the company have competent leadership?
- Does its business model apply in other markets?
Each of these factors plays a role in a company’s profitability, but ensuring the right product-market fit helps startups compete in the long run. Product-market fit means a company’s product or service makes sense to consumers. The right fit looks different for every company; SoftBank believed the WeWork model applied globally because WeWork opened many offices around the world. However, WeWork is rare. Most tech startups lack the funds to open new locations that quickly and have drastically different business models, services, and products.
After establishing product-market fit, and new markets are selected, startups must decide how they will move their businesses into other countries.
An Agile, Cost-Effective Market Entry Solution
When tech startups expand, every cent counts—and so does the flexibility needed to adapt to fluctuating market conditions. Even the most promising markets change quickly, and opportunities disappear soon after breaking into that market. Similarly, new, more promising opportunities can arise elsewhere. In either scenario, leaving unprofitable markets benefits young firms—if they can exit quickly and without any lingering costs and complications.
When firms expand overseas, many establish an entity. While this makes sense for larger firms with deeper pockets and the ability to commit to a market for at least five years, it is not always a sound financial move for young firms with limited budgets and internal resources. A long-term commitment binds startups to markets beyond a profitability expiration date.
These costs and complications are part of the arduous entity teardown process, but are not included in the average setup costs of $15,000-$20,000 per country. Tech startups save up to 60% and easily scale their global teams with an International Professional Employer Organization (PEO) solution. Tech firms can allocate the money saved to grow their business to attract investors.
Instead of setting up an entity, the International PEO becomes the tech firm’s Employer of Record (EOR) and enables them to hire employees on the firm’s behalf—without a long-term contract. This method saves young firms financial and internal resources such as dedicating internal HR teams to hiring efforts, familiarizing teams with cultural nuances, and navigating local payroll laws. International PEO is an excellent option for firms that are unsure about how many employees they will hire, where, and when, as it enables them to scale without commitment to one market.
When tech startups need to hire multiple employees in different markets, they can do so without having to reach out to another provider when they choose Velocity Global’s International PEO solution. We provide the same services in numerous markets, and bill one monthly payment in the same currency, unlike all International PEO providers. But it’s not just cost savings; International PEO helps young tech firms hire and onboard the best talent—the idea-rich talent that helps tech firms stand out among competitors.
Tech Startups Cut Time-to-Market with International PEO
No matter how great an idea or product is, tech startups must find the right market fit for their product or service, and act quickly to edge out their competition. While edging out the competition doesn’t guarantee profitability, it does give tech startups higher odds of carving out their own unique place in the market. Young firms establish their market presence early by testing new markets faster than they could with entity establishment, meaning a shorter path to potential profitability.
Entity setup saps precious time. To establish an entity, tech executives spend roughly 160 hours completing necessary tasks just to set up the entity. With International PEO, executives enjoy an average of two hours’ review time, freeing them up to focus on company growth.
Invest in Your Tech Startup’s Future with International PEO
There’s no single shortcut to profitability. But for tech startups seeking novel ways to save where they can, International PEO makes cutting expenses possible. International PEO drives down global expansion costs, creating room for increased revenue. Find a simple, compliant global expansion method with International PEO.