Now we come to an interesting aspect that only business men understand and that is completely foreign to the venture capital world and the modern entrepreneur. To become a global MNO, you must be global. And that doesn’t mean opening new branch offices and expanding operations once you made it in one market. If you want to go this without equity financing, this is another skill to master.
It goes without saying that labor costs for engineers in Silicon Valley are higher than labor costs in Texas. And the labor costs in Texas are higher than in Berlin. The labor costs in Berlin are higher than in Beijing. And labor costs in Beijing are higher than in various hubs in India, Ukraine and Belarus. I think everybody knows this.
So what is the answer to this challenge? You don’t know these regional areas in the beginning. There is a clear roadmap to get there.
1. Understand the global ecosystems
Yes, the first step is to understand those regional hubs. By studying league tables, reports on the regions. That is a first step. The second step is to build a network with people that know these ecosystems by heart. Not advisors, but really low-cost and low-key friend networks. The next step is to use these connections to actually go to these regions and understand how they operate. And to understand the players in these industries. Right? Right.
2. Don’t get Founder or Investor Fomo
The next step is to acknowledge that no co-founder that comes from these regions and now lives close to you or any investor that lives close to you will solve the problem of accessing these ecosystems for you. The step is followed immediately with the insight that also no local entrepreneur and investor from that target region will solve this problem for you.
3. Getting organizational design that works
So, the first thing now you have to understand is how to use this platform first and capability first model to design a global organization. Rumor has it, that products should be sold out of the US or EMEA if you target the western region. And product design and brand should be in that region. So all you will do is build capability or platform in these regions. Rumor has it that capability is easier and less risky from an IP perspective. So you have to build platform in the best protected region – let’s say Berlin – and capability in the cheapest region – SEO AI in India?.
Once you got that crossed off your list, time to think about structuring this.
4. Legal structuring
Again, getting a co-founder from Beijing to sit on your US Co cap table is bull crap. You cannot monitor this founder and incentive alignment will be hard. Instead you encapsule a capability in one company that operates let’s say in Beijing. You set up the Beijing Co to build and maintain that capability and you build a monetization strategy for that capability in this region. You essentially will hold 51% and more in this entity in the region, you sit on the advisory board and command full consolidation. As a defect deterrance mechanism, you have full control over kicking out the local CEO out of the company, you Chinese/Beijing based co-owner for the BeijingCo is traveling around the globe for business devleopment opportunities and can – if he defects – be fully diluted out of his stake. To protect him a bit, he gets a minor share in other companies you built so he can potentially capture profits for other organizations in your conglomerate. And of course, his performance affects the performance of these other companies. Finally, you still need a subordinate talent to manage your BeijingCo as successful CEO. And you use your GlobalCo standing, a good salary and jet-lifestyle to get this guy motivated to stay in your organization. So the structure is CoreCo owns SubCo, SubCo has a co-founder that controls CEO and adds value to SubCo and other PortfolioCos, and CEO-co is supervised and incentivized to deliver value.
Sounds simple? Is very very hard to pull off and is something you need to be ready to do. Also forcing people to quit in BeijingCo and supervising hiring an BeijingCo. You have to read and understand SubCo to assess the risk of IP infringement, copy-catting and so forth. And you have to set targets that make incentive schemes in SubCo more attractive than defecting.
You also might want to offer services to the Co that completely mask the complexity of a part of the business function to (a) make it easier for CEO to run the business, (b) make local ops more transparent, and (c) make it harder to re-build the whole thing locally. The more costly and complex the cost of getting this service done the better. Just think of a Maltese Gambling license that will be hard to get for BeijingCo CEO.
5. You have to be global
This doesn’t make sense if you don’t show face in BeijingCo – your capability hub – and BerlinCo – your platform hub – every once in a while. So you might be on a bi-monthly 1 week visit where you whip and slash the organizational management, show face, win stakeholders and exert presence and power to the local employees. This doesn’t work without jet-setting a lot. But the cost in labour make it worth it.
And of course, you need a delegation when you go there. One eye doesn’t see a lot and a single guy being played by local management never looks good. With a delegation playing divide and conquer on the local office and playing good cop bad cop kind of plays, things get easier. And still, who is running the organization back home when you are not around?
6. Subordinate Talent in local region
Politics and risks aside, you still need a founder of your size and character to drive a top culture and organization in that region. Simply finding a half-hearted, half-assed, half-skilled person to do this job for you won’t cut it. Now this is a challenge that no VC fund will do for you. Because taking Valley talent and stuffing it into the deserts of Belarus, Kasachstan and whatnot will not fly. Even if origins are from the local vicinity. Those people gave up and sacrificed too much to sit in a remote regional office. And having such people merely oversight the local branch also won’t fly. Because that only works if they are your co-founders. But your co-founders will feel a bit too owner-ly and will take your weaknesses as a weapon against you in managing that regional hub. A VP level as delegate and a second person to control the VP level is much more likely to work. Or at least it appears so. But now you need a multi-language capable secretary on your delegation. Something you probably don’t have unless you truly are an MNO.
So the key takeaway here is simple:
- Venture capital doesnt work for global ops scaling early on. That’s why tech startups don’t do it. But it is an inferior strategy. And it is an issue that persists. Still today facebook, Google and Twitter for example have a hard time opening dev centers down there. And Microsoft and Oracle who do have a hard time doing it right.
- Learning to leverage comparative advantages and using it for building your organization is critical for building a cost efficient organization that also executes well.
- Learning this is fairly hard and it should be done sooner rather than later.
Chances are, if you don’t learn these skills early, you won’t catch up on them later on and become a dumb CEO of your global MNO.