TradeUp Capital Fund

TradeUp is a first-in-class crowd investing platform for export-driven U.S. small and mid-size companies, established in February 2014.

TradeUp has a simple thesis: record numbers of American comapnies are seeking growth through exports. While these export-drive companies are consistently found to outperform the broader market across metrics, such as productivity, value-added, wages, and stability, they also cite lack of financing as the leading obstacle to trade. TradeUp fills this financing gap.

Below is an article on why we started TradeUp; White Paper U.S. SME Exporters as New Asset Class lays out our thesis is greater detail – and is also an interesting survey of state and performance of SME exporters in the United States.

Why We Started TradeUp

Kati Suominen, TradeUp CEO

We started TradeUp with a very specific purpose: help companies in the United States and beyond to reach their greatest potential through a successful insertion in the international economy. We are passionate about this mission. Here are our three key business motives to pursue it.

Reason 1: Record numbers of SMEs are globalizing

The first motivation is the growth in the number of globalizing SMEs. As the global economy rebounds, record numbers of small and mid-size companies around the world are seeking growth through exports. There is enormous latent capacity just in the United States: only 300,000 of America’s 30 million SMEs export. Recent surveys indicate that three-quarters of current SME exports and a near-quarter of non-exporters look to expand their exports.

The target of executives in these globalizing companies is the 80 percent of global purchasing power that is outside U.S borders. This pie is starting to grow again on the back of the rising global middle classes across the emerging world, rapid growth in African economies, and recoveries in Japan and Europe, collectively a 630 million consumer market. America’s own recovery is fueling optimism and real investments in production expansion and internationalization. Macroeconomic fundamentals also work for internationalization: the United States is growing increasingly competitive in world trade due to lowering energy costs and competitively-priced labor.

Reason 2: Globalizing companies are an outperforming asset class

The second reason for us to start TradeUp is the consistently impressive performance of globalizing companies vis-à-vis the broader market. Leading academic research across multiple rigorous studies on practically every continent has found that exporters outperform firms that do not engage in international trade. In the United States and elsewhere, SME exporters and importers alike employ significantly more workers, pay higher wages, are more skill-intensive, and have higher sales and labor productivity than their purely domestic peers. Also, companies that have investments overseas are even more productive.

If there is one iron law of economics – and there really aren’t many – it is that globalizing companies are superior to companies serving only their domestic market.

This might lead you to think that engagement in international trade makes companies better. That is very true. Research shows that after firms internationalize, they score a number of gains – revenue diversification across markets that reduces the volatility of sales and vulnerability to any one market’s business cycles; increased capacity utilization and scale economies due to expanded sales; and “learning-by-doing”, or improved managerial practices, innovations, and discovery of new market opportunities.

These dynamics boost productivity and stability, and even work to loosen companies’ credit constraints. Anecdotal data is illustrative: U.S. manufacturing and services SMEs outperform their domestic counterparts in revenue growth (figure 1). Export in fact kept manufacturing SMEs afloat during the worst of the 2008-09 crisis as emerging markets were the center of global demand; SMEs targeting only the flailing U.S. market lost out.

Figure 1 – Globalizing Companies Outperform: Recent Revenue Growth of U.S. SMEs

Source:  U.S. International Trade Commission (2010) based on a survey of 1,176 manufacturing and,1,175 services SMEs  (<500 employees).

But there is a further, deeper reason why globalizing companies outperform domestic companies: the better-performing companies self-select to international markets to begin with. This is because high-productivity companies have superior managerial assets and organizational capabilities to seek out international growth and make it to the global marketplace, and are better able to overcome the high sunk costs associated with internationalization, such as costs incurred in locating new markets and adapting products to consumer demands and regulations in foreign markets. Take a recent GE study on U.S. middle market companies: the best performers are also ones seeking international opportunities (figure 2).

Figure 2 – Growth and Globalization Correlate: Highest-Growth U.S. SMEs Are Also Most Globalized

Source:  Ohio State and GE (2011), based on a survey of 1,447 SMEs (companies with $10mm to $1bn in revenue).

At TradeUp, we relish the “exporter premium” as a tremendous opportunity: an opportunity to invest in export-driven, globalizing companies as a distinctive asset class. Some may bet on clean tech, others may bet on China; we bet on globalizing companies as elite performers with a superior set of capabilities and growth potential that set them apart.

Reason 3: We can bridge a market inefficiency

What’s really interesting to us is a market inefficiency: even though globalizing companies outperform, they also see obtaining financing as the main hurdle to doing trade. In a 2010 U.S. International Trade Commission survey of over 2,351 companies, 32 percent of SMEs in manufacturing sectors and 46 percent of SMEs in services sectors cited obtaining financing as “very burdensome” or “burdensome” barrier to cross-border trade. What’s more, SME manufacturers rated access to financing as the number one steepest hurdle to trade, out of 19 hurdles, while SMEs in service sectors rated access to capital as the third hurdle to trade, well above such challenges as high tariffs, locating foreign sales prospects, identifying foreign partners, and establishing affiliates in foreign markets.

This finding too is echoed around the world. In an OECD survey of 230 SMEs across advanced economies, access to working capital was ranked as the greatest hurdle to trade, out of 47 hurdles. In a European Commission survey of nearly 9,500 European SMEs, 54 percent of SMEs viewed lack of capital as an “important barrier” to doing business in the EU market and 44 percent to doing business in extra-EU markets. No other barrier (paperwork, laws and regulations, lack of information on overseas markets, etc.) was considered as important.

So there you have it: globalizing companies outperform yet are also constrained for capital. One reason is that globalizing companies need more money than the domestic companies, to cover the many up-front costs, create distributor networks, and meet foreign product standards. Due to their limited collateralizable assets, so-called “born global” companies – companies that globalize out of the gates – can be especially disadvantaged, despite their exceptional potential for innovation and growth.

Costs of each export transaction also grow in the international context: there are higher shipping, logistics, and trade compliance costs. For example, cross-border shipping and delivery can take 30-90 days longer to complete than do domestic orders, with each day in transit adding to shipping costs. And exporters need sufficient cushion and resources to manage risks such as potential customer non-payment and exchange rate instability.

And of course, few SMEs feel that capital is amply available. Particularly after the financial crisis, credit has been under the rock.

Until now.

Why crowdfunding?

At TradeUp, our purpose is to bridge the financing gap facing globalizing companies by leveraging the power of crowdfunding, We simply put 2 and 2 together: since crowdfunding enables companies to gain visibility across multiple types of investors globally, why not use it to capitalize high-growth companies constrained for credit: globalizing companies?

Everyone wins: companies can access critical gap capital to export and expand in international markets; savvy lenders and investors around the world access pre-screened assets with superior growth prospects and pent-up demand for capital; and U.S. economy gains via investments in companies that drive export-led economic recovery, growth and competitiveness across America.

The timing is right. World economy is back, and world trade is bound to grow at 8 percent annually through 2030, doubling by 2022 from 2013 levels – and while growth is strong now, it will start peaking in 2016. This is the time to get in, for companies and investors. We want to accelerate this process.

We don’t stop at financing. We also offer companies expert guidance to enter and thrive in the international marketplace. Our rapidly growing network of advisors and service providers enables us to offer a customized solution to ever company’s unique situation.

This is not an opportunity confined Stateside. We look to work with companies and investors around the world to turn a profit and generate growth on the back of one of the oldest and greatest engines of profits and growth, international trade.

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