We are Felix and René from the Munich-based cyber security startup Crashtest Security and want to share our 7 key learnings, which we made during our first trip to the Silicon Valley. If you are also interested in cyber security and want to learn more about our security scanner for web applications, checkout our website. Together with 4 other startups from the Technical University of Munich we had the unique opportunity to make a trip to the Valley and get to know the ecosystem from different perspectives. These were our key learnings:
1. The Magic Number 18
There was a number we encountered again and again in conversations and presentations in the Silicon Valley — the magic number of 18 months. This period of time seems to be a natural constant in the Valley and decides about the success or failure of a startup. After 18 months investors want to see a proof for the economic viability of your business, otherwise they will pull the plug. This sounds very harsh, but failure is treated differently in the Silicon Valley. If founders failed they can build up on their experiences and seek new opportunities without being perceived as a failure. The number of 18 months also plays an important role for software developers, because this is the average duration they stay at one company. The fluctuation in the Valley is incredibly high, which confronts founders with the challenge of continuously hiring and on-boarding new employees. This causes a huge effort on the company-side, but it also fosters the intense exchange in the network of the Silicon Valley and is a key aspect of the Silicon Valley spirit.
2. Get the Timing right
The expansion into the U.S. market is a step which every startup has to address sooner or later as it is the largest market in the world. Unfortunately it is not as easy as just moving to the Valley and opening a subsidiary. No matter where your startup is located you need to get the timing right! Setup solid operations in your home country before tackling a new market (which is valid for other countries as well). This should prepare you for sending a large part of your management team to the U.S., which is required to be able to act and make fast decisions. Having around the clock operations has significant benefits, but does not come without drawbacks. Gaining upfront experience about how to synchronize teams, which are 9 hours apart from each others, is definitely advisable.
3. It’s expensive
We personally made the experience of how expensive it is to live and work in the Silicon Valley for 2 weeks and the costs were stressed during several presentations. Do not underestimate the wages and living expenses in the Silicon Valley. The average rent in San Francisco for an apartment was $3,800 per month in 2016 (in the Silicon Valley it was 2.700$ per month). The average base salary of a software developer in the Valley is around $130,000 [2, 3]. These are numbers you have to be aware of and include in your financial plans for an expansion. Another point to keep in mind is that you are competing with large corporations like Apple, Facebook and Google for your employees. They provide a variety of perks and benefits — WiFi-enabled shuttles, free food and snacks, rental agents, etc.— to attract and retain employees and as mentioned before your software developers do not hesitate to go after a better offer.
4. Networking is everything
Use your first trip to the Silicon Valley to build your network and not to immediately focus on the business. Join relevant meet-ups and connect with leaders of your industry. Your network is the key to everything that follows: Establishing your company, getting your first customers and pitching your idea to investors. Treat your network as an asset, because it is always easier to get a meeting by being introduced from your network instead of writing mails without having connections. As most of you know chance is important— maximise chances — you never know who you are going to meet and sometimes something unexpected happens.
5. You don’t know the U.S. Market
Even though you think that you know the market, you don’t. It is going to be different from your home market, so take your time to learn about it and be prepared to do so quickly, e.g. by applying the lean startup principles. Your sales and marketing operations have to be adjusted to the U.S. market and you will have to consciously challenge your unique selling proposition. Therefore it is essential to hire local sales representatives, who are familiar with the market and located near your potential customers. This is not only valid for your customers, but also for your investors. They prefer to be close to their startups and require the establishment of a U.S. legal entity. The usual way to go is the establishment of a Delaware Inc., but read the next takeaway before filling the form.
6. Better call Saul — Get legal help
The incorporation in Delaware might be as easy as filling just one form, but there are a lot of possible pitfalls. You have to think about the tax setup of your U.S. subsidiary and the parent company. Where is the intellectual property located? Does your subsidiary have to pay license fees to the parent company? The aspect of tax is also relevant for you and your employees, because depending on your visa situation you have to pay U.S. taxes as well. Getting the right visa is another story, which I’m not able to cover here, but be aware that certain visa types require you having an office rented before crossing the border. In contrast to the German tax system, where there are various ways to cope with delayed tax declarations the U.S. tax system is very strict and you might face severe financial penalties, if you do not fulfil your obligations and your company is checked after 5 years. Better get in touch with legal and tax experts to correctly setup your business from the start on. Furthermore talk to more then one expert, because there are some black sheep out there.
7. Founding a company is a marathon not a sprint
Never forget that you will need to sit through a rollercoaster ride of roughly 18 months so get your mind of the business from time to time and relax a little bit. Be it hiking in the Yosemite, climbing the El Capitan or playing Dungeon and Dragons with your friends.
We hope that these takeaways were interesting and somehow help you on your journey. Go out there, be curious and stay foolish!
Felix & René
Startups from the Technical University of Munich, who accompanied us: