Why Do Startups Make International Moves?

In connection with funding, typically; those chasing money abroad tend to raise a lot more of it

Silicon Valley is home to some of the most successful startups in the world, including a handful of foreign-born unicorns like Waze and Grammarly that arrived in their early years. Ostensibly, the region’s large talent pools and access to a giant customer base (the U.S.) attract droves of young, serious firms from around the world. 

But one study shakes up assumptions about why startups emigrate, where they go and how they fare. Using a database created to capture moves of nearly all venture-backed firms worldwide, the study in Strategic Management Journal calls into question several widely held beliefs about startups.

Making Moves

“We do not see a hub-and-spoke structure, with the U.S. at its center. We do not see migrants strongly attracted to clusters of similar firms,” according to the paper by Cornell’s Yuan Shi, UCLA Anderson’s Olav Sorenson and University of Maryland’s David M. Waguespack. Instead, they write, emigrating young firms appear to choose destinations in whatever country they are most likely to raise more capital.

Among the study’s findings: 

• No single place in the world dominates as a destination or feeder of migrating startups. Places like Silicon Valley that receive a lot of foreign entrepreneurial firms also export a lot of entrepreneurial firms. 

• Funding sources are the biggest predictor of where a company will move internationally. Firms are most likely to move to the home nation of their initial investors or to another place those investors have strong business connections.

• No matter where they move, emigrating firms raise far more venture capital than those that stay put. The average mover in the study sample raised $60 million — more than three times the average of those in the group that stayed — mainly from investors in their destination countries.

• International moves, though, are exceedingly rare among venture-backed startups. Only 1.4% of the sample moved internationally after receiving at least one-round of funding.

The study draws from a much larger sample than is typical in startup location research, where case studies and examinations involving pairs of countries are common. The co-authors created a core database that includes nearly 76,000 firms, originating from 147 countries, that received at least one round of venture capital funding between 2002 and June 2022.

Firms that received capital from high-status investors, or from investors that previously supported migrating firms, migrate more frequently than others by huge margins, according to the findings. U.S.-born startups are most likely to move when a majority of their investors are foreign based, and they are increasingly less likely to move as they add domestic investors. On the other hand, the probability that a startup elsewhere with foreign investors will move generally increases as it adds more domestic investors, perhaps because they exhaust available local capital, the researchers write. 

Following the Money

Places that have a lot of venture capital companies both attract and export more funded startups. The 1,078 emigrant startups in the sample landed in 77 countries. The top destinations were the U.S., Canada, the U.K., Israel, China, Singapore and Germany. 

Israel to the U.S. was the most common route, with 150 firms in the sample moving here. The U.S. exported 22 startups to Israel during the same period. The authors note that Israel’s venture capital industry was started largely as offshoots of U.S. firms and likely maintains strong ties.

Of all 530 firms that moved to the U.S., about 40% landed in Silicon Valley, which includes San Francisco, San Jose and Oakland. Los Angeles, Boston and New York City also received large shares. Worldwide, Beijing, Hong Kong, London, Seoul, Shanghai, Singapore, Tel Aviv, Tokyo and Toronto were among popular destinations. 

Although the U.S. exported far more funded startups than other countries, the rate of out-migration in this group was the lowest. Funded startups in the U.S. were far more likely to stay in country than those originating in other countries. 

Other studies have found that U.S. immigrants play an outsized role in U.S. entrepreneurship. More than half of American startups valued at $1 billion or more were started by immigrants, and almost 80% of these companies have immigrants in key roles, such as CEO or chief engineer, according to a study by the National Foundation for American Policy. Most immigrant entrepreneurs start their firms in the U.S., oftentimes after studying in U.S. universities.