Avoiding Risk When Taking a Startup International

[00:00:01] Welcome to the Startup Builders and Backers Show, a podcast which is part of the Tech Talks Network. I'm Neil C. Hughes and you may know me from the Tech Talks Daily Podcast, which covers a completely different topic every day around how technology is ultimately impacting our life, our work and even world.

[00:00:22] But the Tech Talks Network is a series of unique podcasts that drill down on unique subjects and showcase the voices right at the heart of tech startups. And in this series, I want to shine a spotlight on the energetic world of startups where bold entrepreneurs and visionary investors come together and create the world-beating solutions of tomorrow.

[00:00:47] So, the conversations you can expect to hear on this show will dive right into the journeys of those building innovative companies and also the strategic insights of those who support them. Balancing the excitement of breakthrough ideas with the more pragmatic challenges of scaling a business. So, if you're a startup founder, you get to learn from other founders some of the mistakes they learned and also some of the opportunities that they unlocked along the way.

[00:01:14] So, I invite you to join us as we unpack the risks, the rewards and the realities of turning those groundbreaking concepts into successful enterprises. But enough from me. It's time to get our guests onto the show now. So, how can tech startups better prepare for the risks and the rewards of scaling internationally? And what trends will shape the future of global business strategies? Let's find out by getting today's guests on.

[00:01:42] So, a massive warm welcome to the show. Can you tell everyone listening a little about who you are and what you do? I'm Sean Nair and I do one thing and one thing alone. I help US companies set up foreign operations and then help them run them, taking into account all the local country regulations. That's basically what I do. It's as simple as that.

[00:02:07] And before you came on the podcast, I was doing a little research on you and your work and I quickly learned that you've got an extensive background in nuclear physics and a transition into international business consulting. So, I've got to ask, can you tell me a bit more about that origin story and ultimately how that scientific training influenced your approach to helping tech startups and businesses go global? Because I feel like there's a bit of a story there. Yes, there is actually.

[00:02:37] There are two careers and I have to blame Mrs. Thatcher for it. I worked in the civil nuclear industry, which the government at that time wanted to privatize.

[00:02:50] And I led the team that dealt with the decommissioning costs that had to go into the accounting to establish whether or not it was possible to float the larger of the two power generating companies that the government had carved out at the time, whether or not it could include nuclear power.

[00:03:09] And it was a lot of it was my work that showed and my team's work that showed that it was impossible to float that company, which was then called National Power, if nuclear assets were contained within that company. So, the result was the government hived off the nuclear assets into a state-owned company and then floated national power.

[00:03:33] But really, the killer were the decommissioning costs because a lot of the nuclear power stations in the UK are the old Magnox stations that were reaching the end of their life. And so, there wasn't that much revenue going to be generated from these stations and there was going to be like 200 years of decommissioning costs. So, it was a huge burden on that power generating business and they had to remove it to be able to float it.

[00:04:00] So, really, in order to calculate these provisions, you have to understand nuclear technology and the decommissioning process. But you also have to understand accounting because you are basically doing discounted cash flows over 200 years. So, really, accounting is not that difficult for a nuclear physicist. It's add, multiply, subtract and divide.

[00:04:24] There aren't any couple of differential equations or anything difficult like that. So, and once you understand the concept, you know, what is an accrual, what is, you know, you get to grips with accounting very quickly. So, that's when I worked with, in those days, a big five firm of accountants that was advising the government on how to float this company. And I realized that, really, I didn't have much of a future in nuclear because it failed to float.

[00:04:52] So, the government is forced to keep it. The government isn't going to put money into nuclear at that time to grow it. You know, these new smaller nuclear plants these days that are being, you know, being touted around quite a lot and might well be the future was not there at that time. So, I decided I would completely change my career and become an accountant. And when I became an accountant, I thought, well, what's special about my accounting?

[00:05:20] And what was special was the ability to bring foreign companies in, which nobody was doing at the time. And that's how we built the business up between my wife and myself from two people to 900 people that we ultimately sold in 2013. Wow. And it's that that brought me to America, too, because a lot of my clients were American headquartered companies.

[00:05:44] And, you know, servicing them, having telephone calls up to three in the morning sitting in the Cotswolds was not good. So, I had to move to the U.S. to be, you know, literally to be able to talk to clients and build a business. That's what brought me here to Florida. Wow. What an incredible story. Absolutely. It's funny how things go in cycles. We talk about the years of Margaret Thatcher, of course, and what was happening with the nuclear scene there.

[00:06:12] And, of course, now big tech are all with AI consuming so much energy and the responsibilities around that. Big tech are pushing for nuclear energy again. I'm curious, what are your thoughts on that twist? I think it's a resurgence of nuclear energy, but it's a shame that a lot of the people, the scientists and engineers of my generation are a lost generation because they stayed at nuclear power and then they just were put out to grass with early retirement.

[00:06:42] And now they're in their 60s, 70s, 80s, no use. So, there's a whole new generation of nuclear scientists that will have to grow to fund this. But I've always believed that nuclear technology was one of the safest. And it's environmentally very sensitive in terms of the nuclear waste, but it's also environmentally very positive because it doesn't generate CO2.

[00:07:10] So, you know, particularly now there really isn't much of a choice because there's going to be a large demand for power, as you say, from AI and other, there are other inputs as well that are going to require a lot of power. And nuclear is very good for baseload generation. You know, after a football match, everybody turns their kettles on, power demand goes up. Nuclear is not good for that.

[00:07:35] You know, the wind and wave power, et cetera, are good for that, particularly using batteries to store energy. But baseload generation, nuclear is very good. So, for example, Dickert Power Station in the UK, that station is decommissioned, but it's been replaced with a huge battery pack that's going to store electricity from baseload that can then be released into the grid when people put their kettles on after a football match.

[00:08:06] Wow. So I think that, of may the world, is going now. 100% with you and with your work at Nucleus now. It's been pivotal in assisting iconic companies from Tesla Motors and FaceTime and help them all with their international expansion. And to bring to life with what you're doing here, can you just walk me through some of the typical steps that you would recommend a tech startup take when they're preparing to expand their operations internationally?

[00:08:34] So, it's great to hear more about how you do that. All right. And basically, the typical scenario is where it's one of two. It might be a company that's wanting to hire their first international employee, maybe a VP of sales or business development in Europe or Asia-Pacific and needs help to get that done.

[00:08:57] So, and the second scenario is one where the companies are already international, but they're in like three or four countries and they're having a hard time managing accountants, lawyers, HR specialists, benefits brokers in two or three different time zones sitting in California or wherever they are in the U.S. For the first scenario, basically, we provide them, we work out with them what type of entity they need to set up. It might be a subsidiary.

[00:09:26] It might be a place of business. It might be a representation office or a branch. Could be any one of these. And what it ends up having to be is driven by the functions of the people. I won't go too much into the technical, but basically, we help them figure out what they need to set up. Then our legal team sets it up for them. Then we get in place country-compliant employment agreements. Our employment law team gets that in place for them.

[00:09:53] And then we basically provide them with outsourced support, running the payrolls, paying the bills, and then carrying out all the local compliance. Usually, in Europe, the first compliance is VAT. I have a joke that VAT stands for Vampires Attack Traders. But, you know, that is the first compliance that happens in Europe. And then, of course, you have corporation tax payments on account. You've got all the monthly payroll filings.

[00:10:22] And then you have the year-end stuff, the local GAAP accounts that if you're in the U.K., for example, you have to prepare and file at company's house. You've got the payroll returns that people need to be able to file their own personal tax returns. And you have the payroll returns to HMRC in the case of U.K. So, you have all of these requirements. And these requirements vary by country. And we are currently in 52 countries.

[00:10:49] So, essentially, one person, one experienced client services director takes care of all of this soup to nuts, getting you set up, helping you operate, and then making sure you're legal. So, that's what we would offer. And what is the value add?

[00:11:05] They don't have to find a law firm to set up a company, an accountant to keep the management accounts to local GAAP, a payroll company to run payroll, a benefits broker to manage all the medical insurance and other stuff they might have to offer the employee. You know, so they haven't got these multiple service providers.

[00:11:23] With the second scenario, where the company is already international and in several, maybe two or three countries with a reasonable headcount, basically, we just pick this up and provide them with a one-stop shop. But the basic message is it's a one-stop shop for international expansion.

[00:11:42] And the concept of an international expansion services, or IES, was always quite fragmented before you developed into this niche market. It's something I learned when I was researching you, too. So, what are the key challenges in this market that you've aimed to address when you very first entered this space? Because it seemed like quite a brave and bold move to try and solve this problem.

[00:12:11] Yeah, well, I don't know whether it's brave or bold, but it was an obvious move because there was nobody in the niche. The first problem was actually to establish the niche and then to develop it. But developing it was easy. It took two or three years to establish the niche. Then to develop it was easy because there was no competition for four or five years. I think the main problem today or issue today is it's very important when a company decides to go abroad that it has a budget that's realistic.

[00:12:42] You know, you can today, for example, hire an engineer in Poland or India or somewhere or using a PEO. But there are implications because you can acquire a taxable presence in that country. And that taxable presence may not come and bite you until you actually sell your business. When you've made quite a lot of money, you've sold the business and now suddenly get a tax bill for IP produced in that country.

[00:13:10] The profit made on that IP or the gain made on that element of IP would end up being taxed in that country. So, you know, you can do things the cheap way and quick way. And it may work in the first two, three years or first few years. But then you can be bitten. You know, somebody can come and bite you in the backside at a point when you're not expecting it.

[00:13:35] So what we want to do is to set the client up properly right from the word go. And that requires a certain budget. So I think it's very important when companies go abroad that they decide whether they're going to do it on a shoestring and take the risk or whether they're going to balance risk and reward.

[00:13:52] Not go the professor of accounting, extremely expensive way of being 100% bulletproof, but being reasonably safe in terms of how you're set up with an infrastructure that costs a reasonable amount to maintain. So you have to be in between. And one of the things that makes Nucleus stand out for me is this unique one-stop multidisciplinary approach to international expansion.

[00:14:21] But to help anybody listening, maybe compare and contrast with the old way of doing things. How does having a single point of contact for all international operations, how does that benefit your clients compared to, let's say, the traditional model of dealing with multiple consultants across different disciplines and indeed geographies? Yeah. I'll give you an example of where things can actually go wrong if you have multiple consultants and nobody has the big picture.

[00:14:49] And you haven't got the expertise internationally to understand the risks from the big picture. So we had a client that used a big four firm to produce a U.S.-France intercompany agreement. And the U.S.-France intercompany agreement said that France was a cost center. So France was purely a cost center, wasn't generating revenue because all the contracts from the French sales activities were being booked in the U.S.

[00:15:18] A customer needed some equipment shipped in a tearing hurry. This was telecoms equipment. The equipment was shipped from San Jose, California to Paris, and it got stuck in customs. We received an urgent email followed by telephone calls saying, we've got $2 million worth of goods stuck in the douan. We don't know why it's stuck in the douan. They don't speak English when we call them.

[00:15:45] And our customer is screaming for the equipment. Can you help release this? So when we had a look, we realized that the intercompany agreement had France as a cost center. So France cannot import equipment and sell equipment. It can only... So, you know, we had to redo the intercompany agreement to allow the French company to import equipment and recognize revenue. And then when we presented...

[00:16:11] So that was done in a tearing hurry over four days, including a weekend. And then when we produced it to the douan, got the U.S. to sign it and everything, produced it to the douan. They said, okay, fine, released. But here's a charge for storage. Yeah. You know, so that's the kind of thing, you know, you have one company doing an intercompany agreement and the shipping department shipping the goods, not understanding the implication.

[00:16:37] And that's precisely the kind of problem that our one-stop model stops because there's that one client service director who's got the full perspective and knows when you're going to do something, what the implications of it are. And either yell, stop, you know, we have to do something here or say, go ahead. And you've also received numerous accolades for your contributions to businesses across the U.S., the U.K. and India and beyond.

[00:17:06] So from your perspective, how do the challenges of international expansion differ across these regions? Are there any different challenges? Is it largely the same? What do you see here? No, I think it's not the same. I think in Europe and parts of Latin America, the main risk is getting your employment contracts wrong. You know, the risks are of employment.

[00:17:32] Because let's face it, if you're operating in Europe with, say, 40 people for five years, somebody somewhere is going to, some employee somewhere is going to sue you. So you better make sure that your employment agreements are reserved for you all the rights that you could have as an employer that you would lose if you didn't reserve them. You know, like, for example, using the British example, the right to put somebody on garden leave. If you don't reserve it, you lose it.

[00:18:00] So you want to make sure that you have robust employment agreements in place. That's a major risk, I would say, in the European region and also in Latin America, particularly in Brazil, Argentina, and Chile. Less so in Mexico. The main risks in Asia Pacific are much more diffuse.

[00:18:27] There isn't, you know, employment laws, employment risks are pretty low, particularly in places like Singapore and Hong Kong, where the traditional culture is that you just don't sue your employer. You just resign, but you don't sue your employer. I think the risks there are more regulatory risks, particularly, for example, in the People's Republic of China. They change regulations virtually every year.

[00:18:54] And if you're not on top of it, you can get penalties on non-compliance. So they're more diffuse. In the case of India, India is actually for, it's odd because the employment laws for white-collar workers compared to blue-collar workers are very different. For blue-collar workers, it's almost your employment for life. But white-collar workers, it's as close to employment at will, which we have here in the U.S., as you can get to.

[00:19:24] Because you can basically have a contract that says we can get rid of you in a week's notice and you can get rid of us in a week's notice. And that's okay with white-collar workers. So I think the employment risks are the highest in Europe. Regulatory risks are the highest in Asia Pacific and South Asia, particularly India, which has got a lot of regulation and red tape, despite things being online.

[00:19:52] And as we said at the very beginning of the conversation today, you're someone that's worked with startups that have gone on to become huge household names. So on behalf of any startup founder that might be listening anywhere in the world, what common traits do you see in companies that successfully manage international growth versus those that maybe don't make it? Any particular traits that you notice here? I think, yes.

[00:20:46] Appreciating that and having that international experience at CFO and usually at controller level is actually one of the key steps for companies to avoid foreign exposures. But having said that, there are very successful companies who made a complete mess of their international operations, incurred lots of costs. But because their business model is very successful, they've overcome these problems.

[00:21:13] So really, you know, I would say that the finance side is important. But what's much more important to business success is having a viable business model. Because ultimately, you know, if you get into a financial and tax mess, it's a question of paying your way out of it. Paying the penalties, paying whatever you have to do and getting out of it. But if you don't have a successful business model, but you have a perfectly experienced international support team, it's not going to help you.

[00:21:42] You're going to sing. And if we look ahead into 2025, it's literally weeks away now. Are there any emerging trends or technologies that excite you or you just believe will significantly impact how companies approach international expansion in the next five years? I appreciate that saying the next five years is almost impossible to predict with what's happened in the last two years alone. But what excites you here?

[00:22:11] I think two areas excite me, actually. Nuclear power does. And you wouldn't be surprised by my saying that. You know, I'm talking about small-scale nuclear power plants that can be built over a fairly short time span, don't require that much startup capital to build, and can operate for 15, 20 years as opposed to 40, 45, 50 years, which is what the Hinkley B and Cs in UK are doing.

[00:22:39] So small-scale nuclear power plants is one. Another one is actually, I think, with Trump coming in and the change in direction of the U.S. government, I think cryptocurrencies and companies involved in payments and finance, international payments and crypto are going to do very well. I think those are two sectors.

[00:23:05] There may be others, but from what I can see and judge and sitting here and a bit sensitive to the changes in the U.S., you know, that the U.S. is going to have next month, there are going to be big changes. I think basically those are two areas, certainly, that I think will be very much in the forefront of the news and possibly expansion and probably going to get easier to get capital.

[00:23:31] I think also with Trump coming into power, the ability of private equity firms and venture capital firms to raise capital is going to become easier, because I think interest rates are going to go down. And that means that people are going to be prepared to take more risk, investors, to get a better return. Oh, I completely agree with you on many points there. Interesting times ahead.

[00:23:53] And again, for any startup founder listening, looking for that valuable takeaway, if they're looking to expand internationally, any critical advice that you would offer to them to not just ensure a successful expansion, but also sustainable operations in new markets, for example? Any critical advice you'd share around that? Make sure your business has got international appeal.

[00:24:21] Take into account the fact that there's going to be more protectionism in the world, especially with Trump in power putting tariffs on imports, but other countries are going to retaliate. So you may, if you're in a product company, have to consider manufacturing in-country to sell in-country. And thirdly, you know, make sure your business model is robust and subject to that. Make sure you have an adequate budget to set up and grow internationally. Don't do it if you don't have the budget.

[00:24:51] Fantastic advice. I love to hear more from people listening to what they thought about our conversation today. And anyone that would love to carry on the conversation we started today, or just find out more information about Nucleus and how you might be able to help them. Where would you like to point everyone listening? They can email me. My email address is sean, S-H-A-N, at nucleus-co.com. I'd be happy to help them.

[00:25:20] That's very kind of you. So I'll be interested in how everybody listening, what their big takeaways from today's episode is. I'll throw my email in there as well, techblogwriteroutlook.com. Let me know your thoughts. It would be great to carry on this conversation and bounce even more ideas around. But, Sean, just a big, big thank you for taking the time to sit down with you today. Really appreciate your time. Thank you. And thank you so much for your time. It's a pleasure meeting you. Take care.

[00:25:50] I think, as we learned today, international expansion is both a challenge and an opportunity for tech startups. And my guest's insights have shed light on how Nucleus helps companies navigate this journey and ensuring a seamless process by addressing everything from regulatory compliance to payroll management, all with a single point of contact. I think that was the big message there. But what are your thoughts on the strategies we discussed today?

[00:26:19] Have you faced hurdles in scaling internationally or considered the advantages of taking your business model global? Love to hear from you as always. You know, you can get me on LinkedIn and all social channels at Neil C. Hughes. And my email is techblogwriteroutlook.com. So please join the conversation. Let me know your experiences and insights. Hopefully I will have the privilege and honor of speaking with you all again then. Bye for now.