When entering the US market, think about the cost

Entrepreneurs around the world often grossly underestimate what it takes to enter the US market. Take for example technology or software, sectors that I know. Attracted by the size of the American market and the potential opportunity to raise millions in capital that is not available home, entrepreneurs decide to take the leap and create a beachhead.

Conventional wisdom around Europe and Asia is that a local parent company will keep its engineering and product development home and “open a Silicon Valley office to market the product/service/technology”. Perfect. Until you get down to assessing what resources are required. And assessing you must, least finding out later in the game that you are grossly undersized for the challenge.

I may cover legal costs, accounting, infrastructure, rent and other investments another time. Now I want to focus on talent, the scarcest of resources, even in this market.

For the sake of example say you wanted to create a Silicon Valley-based marketing team. Naturally, you may think about hiring a “director-level marketing guy/gal with specific industry experience.” Someone who can “hit the ground running.” Well, there is plenty of great talent in Silicon Valley. The next logical thought is “how much will I have to pay?”

A quick search on Salary.com (I know, not very scientific, but somewhat of a meaningful indicator) estimates the median yearly cash compensation (base salary + bonus) of a Marketing Director in San Francisco at USD ~200,000 (or EUR 135,000 at today’s exchange rate!).

That’s just the start. Such an employee will expect some standard benefits, such as medical insurance, 401k retirement plan, time off, etc. That very quickly adds up to another USD 60,000/year or 20 to 25% of total compensation.

We are not done. Additional direct employee costs need to be factored in, such as computer and IT support (~3,000/year), smartphone and cell plan to answer all those emails from the globe-trotting CEO (~2,500/year), business travel (~10,000 to infinity/year, depending on travel perks and frequency). More often than not some form of severance pay as well as equity compensation must be included in an employment contract.

In the all-too-common scenario that such a hire happened through a broker (head hunter or contingency recruiter), there is also an upfront hiring cost of 15 to 30% of the first year salary, a nifty fee up to USD 50,000 in our little case study.

And finally such a valuable asset cannot possibly do his/her work without a bare-bone team, right? Throw in a couple of junior marketing persons and a social media intern for starters and you need to think about a payroll which will easily burn in excess of half a million USD a year!

Oh, and we have not talked about marketing budget at all…

Bottomline: Fortunately, there are ways to lower the upfront beachhead investment and the risk of building an untested in-house team (I’ll talk about those another time.)  Entrepreneurs, think hard about your objectives, assess the true amount of required resources and weigh all your alternatives.

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5 thoughts on “When entering the US market, think about the cost

  1. Matteo,

    you probably underestimate (or I do overestimate) the power of sweat for equity. I hardly believe that a CMO will get 100% of his compensation in cash and I probably consider a $100k cash payment coupled with $150k (5% of $2M pre-money company closing a round of $1M); when getting 1M round you’ll have the cash needed to bring your company to the next stage ($5M round B) and so on.

    I’d be more focused on the need of having full time trained people being 100% of their time in Silicon Valley to help w/ mgmt & sales issue

  2. Ale, thanks for the comment!

    True, equity comp offsets upfront cash. Either way, however, owners/founders must come to terms with an investment (giving away 5% of your company is a significant investment) the size of which I am not sure they are fully conscious at the start.

    My example was just meant to give food for thought. In fact you may run your company here without hiring any local management at all. But the premise, that the focus, effort and resources required are often underestimated, applies nonetheless and I will explore this more in future posts.

  3. Hi Matteo,
    what about bringing your team with you from your country (Italy in my case)? The costs would be definitely lower, don’t you think?
    In any case after just 2 weeks in the Bay Area have been impressed by the overall costs. Everything is very very expensive, and the closer you get to Palo Alto, the more you pay.

    1. Massimo, thanks for the comment. Indeed you should consider to move/bring a team in any case, as there is no substitute for direct management attention in the environment you are operating in. However as you point out, the OVERALL proposition requires a significant investment. Big market, big opportunity, big risk.

      1. I have been working the last 4 years with international companies entering the market and agree with Matteo that one of the biggest issues is the gross overestimation of what it costs to set up in the US. In order to understand the cost, it is important to spend time in the US to understand the market opportunity and perhaps work with a local consulting team that can bring strong strategic resources to work with you on a market strategy. In my experience, a large number of companies’ approach is to hire cheapest sales resource for hire, and don’t manage the resource properly. Then go through a subsequent replacement strategy of the sales resource for hire and still see unsatisfactory results. This can cost a lot of money whereas doing some upfront investment with a good market strategy company can help mitigate the risk, help understand the cost and help you plan and budget properly for entry. The main point is to budget properly for market entry.

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