Not many startups backed by venture capital relocate to a different country, but the ones that do tend to reap financial rewards, as per recent research from Cornell.
Startups making an international move secured an average funding of $60 million, while those staying put managed $20 million. Additionally, the relocating startups attracted 17% more investors. Their likelihood of a successful exit—either through an initial public offering, a merger, or acquisition—was 67% higher.
Venturing abroad
Moreover, startups that ventured abroad achieved billion-dollar valuations at a rate 3.5 times greater than their non-moving counterparts. Among all billion-dollar “unicorns” in the study, those that underwent international relocation boasted a median valuation 40% higher.
“Despite the significant challenges and low observed frequency of international relocation, startups that moved internationally reap substantial benefits,” the researchers explain.
They identified these trends by constructing and examining a sample of 75,000 venture-backed startups covering a span of 20 years. Contrary to earlier beliefs that companies move to find more employees or customers, Shi and his team found a different narrative.
Performance gains
“We find that these performance advantages are explained by startups moving closer to their existing investors located in another country and tapping into their networks and resources,” the authors say.
Companies typically relocated to the home countries of their foreign investors or to places where their domestic investors had connections. In both scenarios, startups gained advantages from the social capital of their investors, ultimately translating into financial gains.
“We also find that there is a window for moving strategically: The likelihood of moving peaks when the company is around three to five years old, and those moving within the first five years since the founding reap more benefits,” the authors continue.
The study uncovered additional trends. While many assume that companies move to the United States and settle there, it turns out the U.S. was the top destination but also witnessed the highest number of companies relocating elsewhere. The United Kingdom and Canada also experienced significant movement in and out.
Regional differences
Certain countries are more likely to either witness startups moving or staying local. For instance, in the data, 14.2% of Israeli startups migrated abroad, a rate more than 30 times higher than in China, where only 0.41% of startups made an international move, as per Shi.
Furthermore, among the companies relocating to the United States, less than 40% opted for Silicon Valley. The researchers believe this is a sign that the Valley is losing its preeminence among entrepreneurs.
“As with most things in entrepreneurial strategy, there is no one-size-fits-all solution,” the authors conclude. “Startups should carefully weigh the decision to relocate, considering whether such a move could enhance capital access and garner support from existing investors at the destination.”
