By Avner Halperin

Life in an American startup is intense. Teamwork is a challenging and intimate process. The founders, a geeky engineer and a marketing person all work together in the same garage, constantly fighting with each other. But, for startups outside the USA, the experience is much more difficult. Understanding these difficulties is important for the management of these companies as well as a growing number of global investors who are diversifying their portfolios by investing into peripheral country startups.

A startup in a peripheral country (e.g. Israel, Brazil, or Ireland) cannot be located in one garage. The domestic market is too modest to support a technology product business plan. So, the company has to target a foreign market. To be effective in the foreign market, the startup must relocate its strategic divisions (marketing, sales, and business development) to the target country. The engineer and marketer now must fight each other without seeing each other. In many cases, the marketing organization will also try to “hide” the R&D organization. American customers, for example, will often shy away from buying products developed in a peripheral country. So the startup must look American on the outside and be Israeli or Brazilian on the inside. Thus adding to the dissonance. Managing a startup split into two locations poses extreme organizational challenges. Further more, peripheral based startups can generally access less capital than their American counterparts. They have to manage their globally distributed operation on a lower budget than their American competitors.

This research focused on Israeli startups as a case in point. Thousands of hi-tech startups in Israel are targeting the USA market. These startups open strategic offices in the USA while maintaining their R&D departments in Israel. This research integrates several information sources: overview interviews with Israeli hi-tech veterans and Venture Capital (VC) managers, in-depth interviews with ten Israeli startups in their USA and Israel locations, available documentation of the Israeli hi-tech industry, and analysis of Social Network Diagrams (click on hyperlinks for more information) using a new software tool called Inflow©.

All the different information sources pointed to two mutually reinforcing principles as the bedrock for globally dispersed startup success:

• Balance between the impacts of the two locations; neither one should become dominant nor feel neglected. The statement that at some point, “only the marketing in the USA matters,” is a fallacy.
• Trust level between people in the two locations; Engineers in one site must believe in marketing people across the Ocean to be their “eyes and ears”, and vice versa.

To achieve balance and trust, several key considerations are discussed below and a list of tips is attached at the end. A detailed analysis of these issues is found in the full research document.

• Balancing must begin with management. The attention and location of management needs to be balanced between the two locations.
  • Founders should be split between the two offices. Having them all in one site limits cross-site trust level and generates a feeling of neglect in the deserted site. Splitting the founders develops high trust relationships between the two locations by utilizing the high trust between the founders (Click for diagram of split founders compare to diagram of founders in Israel and founders in USA).
• Increase trust between locations by crossing over marketing people to the R&D office in Israel and R&D engineers to the marketing office in the USA
• CEO selection is key to integrating the two halves of the company. The latest fashion of hiring an American CEO to manage the split company from the USA headquarters has produced nothing but failures. Overwhelming anecdotal evidence shows that this does not work. An American CEO has led none of the dozens of Israeli successful ‘exit’ stories. Below are some of the reasons for that:
  • The CEO’s cultural background and location should be balanced between the USA and Israel. She should be able to interact effectively with both sides and seem fair and approachable to both. An American CEO located in the USA, does not interact effectively with the Israeli R&D team that is both distant in location and foreign in culture. Compare the location of the CEO node in the Network.
  • The CEO position of an Israeli startup is not a very attractive position for an American executive. To many, it seems foreign and sometimes even dangerous. In general, the best management talent in the USA is not available for such a position. For Israelis, such a position is quite lucrative and attracts top Israeli talent.
  • A few interviewees suggested that the Israeli culture is more in tune with quick changes, low budget operation and intuitive decision making which are required in a young foreign based startup. These startups generally have less funding than their American counterparts.
  • Israelis are not proficient in accessing and evaluating American talent. They do not have the experience and the network to do that.
  
  All in all, An Israeli CEO located in the USA (preferably with prior American work experience or education) is generally the most balanced and effective choice.
• Cultural differences can be used as a competitive advantage. Management should lift the taboo on discussions of cultural differences. Cultural stereotypes are a useful starting point for a learning process on cultural differences. Stereotypes can be used as a tool for understanding preconceptions and building cross-cultural teams. The cultural learning can become a unifying team experience.
• Top management must proactively look for conflicts between the USA and Israeli offices. The research showed that top managers are often less aware of conflicts than middle management. In handling conflicts, a balance is required between the type of communication used and the level of trust between the parties. The lower the trust level, the more interactive the communication method has to be. In general, conflicts are best resolved through those who have high trust Trans-Atlantic relationships (e.g. the founders).
• Companies should invest resources in building trust between the two locations. The most effective way to do that is to have people work with each other for a while. Any excuse is good for sending people overseas periodically to the other location. The longer and more frequent the visits, the better. Face to face meetings as well as just working next to each other have been shown to be very effective.
• Office location in the USA is critical. Live interaction has been shown to be crucial for building trust. A West Coast location severely limits live interaction between the Israeli and American office. The ten-hour time difference and eighteen-hour flight time between the West Coast and Israel create an insurmountable communication barrier. The closer East Coast is the location that enables building a higher level of trust between locations.

The ultimate goal in managing a globally dispersed startup is to have the two units operate as if they were one. In fact, by maintaining balance and building trust between units, the startup will deliver more than the sum of its globally dispersed parts. The ultimate business success of a peripheral country startup is determined by numerous environmental business factors. But, optimizing the globally dispersed operation can contribute significantly to the company’s capacity to deal with its global environment.

Tips for Managing a Globally Dispersed Startup

1. Balance the management makeup and attention between the USA and Israel, Americans and Israelis, Marketing and R&D. Split the founders between locations. Don’t hire an American CEO who will not be able to interact effectively with the Israeli team.
2. Cross over engineers, marketing managers, Americans, and Israelis to the “other” side.
3. Carefully consider the USA office location. A West Coast location limits live interaction between the offices.
4. Make cultural differences an issue. Learn them, laugh about them, and use them in building synergetic teams.
5. Hire culturally inquisitive managers for cross cultural work. Identify cultural curiosity by knowledge of foreign languages, foreign travel and previous international assignments. These days, hire American executives who are willing to travel to Israel for an interview.
6. Proactively look for conflicts between sites. Have those with high trust relationships (e.g. founders) deal with conflicts. Never use e-mail to resolve conflicts.
7. Invest in off site (preferably outdoor) team building activities to be attended together by employees from both locations.
8. Initiate small ad-hoc teams that are cross-cultural and Trans-Atlantic. They build trust.
9. Celebrate successes simultaneously in both locations.
10. Set up fixed communication time slots for teleconferences between both sites. Hold the teleconferences even without an agenda – they can take the place of “water cooler” chats.
11. Maximize face-to-face time between people of the two locations. Any excuse is good for travel (send engineers to see customers, sales people to learn about new products, etc.). When people go overseas, they should not spend all their times in big meetings. There is more team building value in just doing work (e.g. e-mail) in the same room.
12. Have your investors and Board of Directors imitate your company structure. Include Americans and Israelis. Try to get VC investors that are themselves globally dispersed with offices next to both your company’s offices.
13. Make sure people in both offices feel they are treated equally on both the professional level and on the human services (benefits) level. They must feel part of one company.
14. Use technology to help:
    1. Connect the phone exchange and computer file system so that inter office connections appear local, i.e. dial a 3 digit number from the Israeli office to reach an extension in the USA (as if dialing within the Israeli office), and share a file server with all the public company files between locations so it appears to both locations to be a local file server.
    2. Videoconferences can be effective for small teams (e.g. product reviews with two people on each side).
    3. Instant messaging software is powerful in delivering the immediacy of a phone call with the privacy of e-mail.
    4. A Web database of employees with pictures and areas of expertise can be publicized. This promotes contacts between teams for sharing tacit knowledge.

This research was done by Avner Halperin at the Sloan School of Business at MIT. For additional information, comments, or questions on this topic contact: avnerh@sloan.mit.edu