Equity for Exporters

A historic shift is taking place in the world economy: record numbers of small and mid-size companies, microenterprises, and garage entrepreneurs are going global. Before content to sell in the giant U.S. market, now even the smallest American businesses are courting overseas shoppers. One attractive target is middle classes in emerging markets, a $30 trillion market by 2025. Aiding these globalizing companies are disruptive technologies such as digitization of products, 3D printing, Bitcoin, and ecommerce, all of which are shrinking costs for small businesses to do cross-border business.

Today’s exporters are smaller and younger than ever. Many are “born global” companies that internationalize very early in their life cycles, and sell in many markets all over the world. The shrinking of exporters is most intuitive in consumer products sold online: 97 percent of U.S. eBay sellers, most of which are micro and small businesses, also export, to an average of 28 markets – a stark contrast to the traditional pattern where 1 percent of American companies export on average to 1-2 markets. Exporters are small also in such sectors as IT, biotech, and cleantech, where U.S. technologies can be even better suited for emerging markets than they are for the U.S. market. One of countless examples is Sunsaluter that provides energy off-grid for underdeveloped markets, devised by a 21-year Princeton grad Eden Full. But also smaller “heartland” companies in manufacturing, food and beverage, and financial services, among others, have realized that overseas markets are often great fits for what they have to offer.

But problems loom. The export infrastructure writ large, from complex customs procedures to high fixed costs of international transactions and benefits of shipping large volumes in bulk, is created for the traditional engines of U.S exports, giant corporations.

Finance is a particular pain point. Exporting is a capital-intensive endeavor. Globalizing companies need substantially more money than the domestic companies, to cover the many up-front costs associated with going global, such as creating overseas distributor networks and rejiggering products to meet foreign standards. The costs of each transaction also grow in the international context: there are higher shipping, logistics, and trade compliance costs. Companies need quick access to working capital when needing to fulfill large international orders. And toughest of all is to secure growth capital to expand a company’s sales force and production capacity to serve the global buyer.

The new generation of exporters is hard-pressed to handle these costs by borrowing – because many of them are the types of companies that can’t access debt. In the past, companies globalized sequentially – scaled at home first, then started exporting to one market, and then entered one new market at a time. These companies could get loans: they had long-standing relationships with their banks, and a solid borrowing base – and faced none of the post-crisis stringent underwriting criteria. Today’s exporters are turning this sequential model on its head. They have no patience nor reason to grow into large companies at home before going global.

Today’s exporters are “born global” companies that internationalize very early in their life cycles, and sell in many markets all over the world. Being young and small, these companies have much more limited access to traditional sources of capital; being fast-growing gazelle companies, they also need larger injections of capital to fuel their international growth than banks can stomach. Today’s exporters need equity.

Getting equity is tough. A small business owner’s priority is to get clients in the door. If touring the world to meet with foreign customers, she has limited time and bandwidth to court investors, a full time job for three people. This is one reason why only a limited number of companies succeed: only about a fifth of companies that try succeed to secure angel investments, a decidedly easier pathway to capital than venture capital.

The government helps only with debt. The Export-Import Bank and Small Business Administration guarantee a sub-set of export working capital loans issued by banks. The Overseas Private Investment Corporation (OPIC) provides 75 percent of an emerging market project in debt, as long as there is at least 25 percent U.S. equity participation. Canada’s export credit agency, Export Development Canada, helps Canada’s born global companies secure equity from funds and has even made direct investments in some Canadian companies. There is no equivalent in the United States.

Notice: we are not talking about overseas investments or equity in overseas assets. This is equity investing in U.S. companies – only ones that are growing both in the United States and internationally. This is exposure to an American business, with assets in America and a diversified, massive client-base, one in and outside the U.S. This is international upside with U.S. risk. What better deal?

Yet mainstream source of financing for companies, banks have yet to match the needs of the next generation of American exporters, largely because these exporters are too small to interest banks. If we are serious about helping American companies go global in a world where even the most nascent businesses globalize, this has to change. We need equity for exporters. That’s what our company TradeUp does – helps companies gain visibility with a range of equity investors – angels, private equity funds, VCs. We cooperate with lenders, to help their clients and clients-to-be to secure adequate growth capital. And we are supporting policy reforms that will open exporters’ access to capital.

What’s in it for investors? As I laid out in a prior blog, access to globalizing companies, a high-growth, outperforming asset class with global growth prospects and mitigated downside. International upside at U.S. risk. With equity to exporters, everyone wins.

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