Why startups thrive with immigrant founders

The recent changes to immigration rules in the UK have prompted some entrepreneurs to fear that they may be forced to leave the country as they don’t pay themselves enough to meet the new earnings criteria. This could prove a considerable mistake for a country that actively wants to attract and encourage startups.

Immigrants make up a disproportionate share of entrepreneurs — 39% of the UK’s fastest-growing startups have at least one immigrant co-founder, despite only 14.5% of the population being foreign-born. 

“Ambition lies within an immigrant’s nature — they are driven to build something they are proud of,” says Nazim Valimahomed, co-founder of UK digital bank Kroo and born in Uganda.

Immigrant founders are ubiquitous worldwide. Their presence was also particularly evident at the SLUSH tech conference in Helsinki, Finland, in December last year. For instance, among the 180 startups currently enrolled at the city’s Maria 01 startup hub, there are over 45 different nationalities. Those involved consider this level of diversity a key factor in the success of the Finnish startup scene.

“To ensure that the startup ecosystem keeps growing and supports our economic growth, we need to make sure that we are doing what we can to attract international talent to Finland,” says Hanna Nylund, chief impact officer at Maria 01.

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Foreign-born unicorns 

Most billion-dollar startups in the US were founded by immigrants, according to a study from the National Foundation for American Policy (NFAP). Ethnic-minority founders are behind a third of the correspondingly performing companies in the UK, and Europe’s list of tech unicorns from foreign-born founders is steadily growing.

It includes the likes of neobanks bunq and Revolut, quantum cryogenics specialist Bluefors, cyber security company Darktrace, global money exchange platform Wise, machine translation global contender DeepL, and virtual events provider Hopin — one of Europe’s fastest growing startups ever — just to name a few. 

This should perhaps be no surprise, as research from Temple University previously uncovered that startups with at least one immigrant founder were more likely to be innovative, both in terms of the products they produced and the business strategies they deployed to bring them to market.

This is partly because they bring fresh thinking to their new home and can apply what was commonplace in their homeland in a new environment. However, Candace Saffery, an American entrepreneur who founded solar energy company Bia Power in Spain, highlights that this is not possible without also connecting to a great extent to the local ecosystem. 

“Being an entrepreneur in a foreign country requires a deep dependence on your local team and also on your early adopter customers — and I see this as a profound advantage,” she said. 

Cashing in on diversity and bridging the funding gap

Studies have also proved that a diverse founding team has numerous benefits in terms of the ultimate success of a venture. For instance, research from HEC Paris shows that it can be beneficial to a startup in terms of how it functions. 

The study discovered that an ethnically diverse founding team was generally more successful in terms of amount of capital raised than teams with only white founders. The authors also found that ethnic diversity had a positive impact on venture performance in certain sectors that were traditionally homogenous, such as advanced manufacturing.

And still, as little as under 2% of VC funding in Europe goes to female-founded or ethnic minority businesses. Some investors are hoping to change that, with Denmark’s female-led Unconventional Ventures setting up a €30mn fund to support diverse founders identifying as women, people of colour, immigrants, and/or LGBTQ+. 

Another example is the UK’s No Label Ventures, an early-stage and “very biassed” VC fund which supports startups with at least one founder that has immigrated from outside of Western Europe. Ramzi Rafih, general partner of the fund, was born in Lebanon during a civil war and later arrived in France with his parents.

“Themes of resilience and over performance can be seen in immigrants and diverse teams, hence our bias and commitment to these entrepreneurs who may start their journeys underfunded, but frequently go on to win big,” Rafih told Tech.eu last year. 

Exit music

The value of a diverse founding team was also reflected in recent research from the University of Toronto, which shows that immigrant founders are more likely to achieve successful exits, either via an initial public offering (IPO) or via an acquisition.

Not only was an exit more likely, however, but there were also differences in how and when founders decided to cash in. The authors explain that exits typically come either when the firm is just beginning to generate sales or when it has already achieved a degree of traction in the market.

Now, remember, immigrant founders are more likely to be innovative, both in terms of the products and services they produce and also their route to market. This means they’re more likely to have a high growth trajectory, which, in turn, means that they’re also more likely to seek an exit during this initial revenue stage than they are to wait until the business has matured and is profitable.

The researchers looked at nearly 600 Israeli tech startups, each of whom had exited in some way. Of the cohort, just over 10% had immigrants in the founding team. Those startups with immigrant founders were disproportionately likely to achieve an exit either via acquisition or IPO.

While the findings are a case of correlation rather than perhaps causation, the researchers are nonetheless confident that diverse founding teams do increase the likelihood that the startup will achieve success, at least in terms of exiting successfully.

UK risks losing out on diversity in founder teams and skills

The composition of a startup founding team is obviously incredibly important in terms of the skills mix within it. But research shows cultural diversity could be just as essential. From a policy perspective, if a nation truly wants to be the next “startup nation,” then it should give serious consideration to removing any restrictions that might stand in the way of immigrant founders.

The new immigration rules in the UK significantly raise the costs associated with recruiting via the skilled worker visa, while the minimum salary requirement will price many graduates out of jobs.

At a time when startups are already facing funding difficulties, adding additional costs is a strain that many will not be able to bear. It’s a situation that may force many immigrant founders to look elsewhere when they’re considering where to plant the roots of their startup. And their new selected home nations will be the ones who stand to gain.