“How do I expand abroad?” is a frequent question we get asked by early and growth stage B2B startups. This question is particularly important for European startups and companies operating from emerging markets, such as LatAm, India, Russia, and South East Asia. If your home base is not a huge domestic market (like the USA or China) and you have high growth ambitions, international expansion becomes very important very soon.
The list of mistakes below is based on successes and failures we’ve seen across more than hundred B2B companies of all stages and sizes, and is complemented by the best management practices and patterns noticed by the top VCs. Avoiding these 7 mistakes in your international expansion journey will save you time, money, and may even prevent from fatal failures.
1. Expanding internationally too early
I like the 9 steps to Repeatable, Scalable, Profitable Growth, a B2B startup lifecycle, suggested by David Skok from Matrix Partners. At System2Labs we see these steps to be true, and in our experience expanding before step 5 “Prove non-founders can sell” is a recipe for disaster.
If you haven’t found product-market fit, haven’t generated significant revenue, or haven’t proven that non-founders can sell, you should focus on fixing that before expanding internationally.
This is not to say that you should always start in your home market or in a single market. This simply suggests that expansion in and of itself is unlikely to solve these early stage challenges. Just like moving to a new country will not necessarily make you happier, expanding abroad will not necessarily solve your core business challenges.
I hear many startups who are saying that their product is “too early” or “too expensive” for their domestic market, and this is a reason to go to Europe and the US. While it may be true, you should be careful with this logic and gather some facts. Your domestic demand may indeed be limited, but you should make sure that there are no fundamental product or demand issues preventing you from selling regardless of the geography you are in.
Let’s have a look at two examples. UiPath, a Robotic Process Automation startup, that originated from Romania and it now valued at over $1B. When did they expand internationally? They opened the office in the USA after they had some major global customer wins and partnerships and after receiving funding from top tier VCs so that they could afford the expansion. Dan Lupu, partner at Earlybird Venture Capital commented, “The company did not have any real feet on the ground in the US and yet they were getting a lot of attention from US customers, riding a very timely trend.” Contentful is another successful startup that expanded to the USA from Europe. They setup an office in the USA after seeing significant demand for their products coming from the USA and experimenting with people working in the US time zone from Berlin.
2. Expanding internationally too late
The opposite mistake — expanding too late — is also quite common with European startups. Many European VCs such as Earlybird and analysts cite “winning locally mindset” among European founders as one of the main reasons Europe is considerably behind US in terms of venture capital invested. I like how Robert Vis, Messagebird founder, put it in Websummit panel, “Founders are not thinking big enough. In Holland you see a lot of people saying, “I’ll go win the Benelux”, I don’t know if many people here even know what Benelux is. […] These are basically three smallest countries in Europe”. The point is that
While you are winning the [insert a single market or region here], your American competitors may be winning the world.
Early international expansion has been an important step in the success journey of European unicorns. Balderton, a top tier European VC, has gathered data to compare European and American companies with $1B+ valuation on the timing of international expansion and found that “European companies expand internationally 19 months faster than their American counterparts.”
Thanks to a large domestic market, “Expanding too late” can be less serious (rarely fatal) mistake for American startups, yet it is still important. The classic examples of going abroad too late are Google and Facebook (Alex Schultz talks about it here) in, for example, Russia. Partly due to American companies’ slow internalisation, Russia has Yandex for Google and VKontakte for Facebook.
3. Going to too many countries at once
After achieving some initial success in the domestic market, many companies start making plans about going abroad. If this is a startup is not coming from one the these countries, the list usually looks something like this: the USA, the UK, Germany. Sometimes neighbouring countries or large Asian markets come in the mix. This is logical, of course, since these are probably the most attractive markets, but going to all of them at once is very hard and expensive. Do you know many successful B2B startups who managed to open a few large markets at once?
It is very important to evaluate different markets according to their attractiveness for your business and your ability to win. Then decide on which market to focus first and make on the expansion plan. Balderton sees the following international expansion patterns across their portfolio companies:
· Straight to the US
· Small European market > UK > USA
· Market-by-market European expansion
The right path will depend on your business model, stage, and available resources. For example, if your business is location specific (e.g., healthcare, fintech, some types of marketplaces) or requires significant regulatory compliance, it is even more important to go one by one. If your product is inexpensive, requires little localisation, and has self-service elements, you may consider launching a few new markets at once.
4. Entering a new market with a new product
Founders often think that they need a new or different product to win in the new market. This is dangerous. Lean startup has popularised the idea that startups should focus on re-risking their businesses, i.e. testing their assumption starting with the riskiest ones. Going to a new market with a new product is a combination of two major risks and with the resulting risk profile probably higher than the sum of the two. From the learning prospective, if you go to a new market with new product and fail, you won’t know if this is due to product or the market.
Of course, we are not saying that you should just go abroad with an existing product. You should absolutely do basic market research, conduct customer interviews, tests, and pilots in the new market. What we are saying is that
it is best to enter the new market with your core product that has been tested and “validated” by the customers.
It should be a product which you know how to sell, how to service, and the product that is highly valued by existing customers (e.g., has high NPS, low churn). As mentioned before with UiPath and Contentful examples,
the most successful B2B expansions are the ones where the companies tested the international demand for their products before officially expanding abroad.
5. Expanding without testing the markets
We mentioned tests and getting some demand as important success factors. Indeed, expanding into a new market without taking the time to test it first is a common mistake startup founders do. But how do you actually do it? While the proper answer is always company-specific and requires a lot more details that we can provide in this blog, here are a few best practices:
· Define your riskiest assumptions of international expansion, make hypotheses and decide how to test them in the simplest, fastest, and cheapest way. One of the best exercises at this stage is to have a management workshop and discuss the reasons you may fail (imagine a post-mortem). Then brainstorm ideas to design simple experiments to test for these reasons.
· Understand the market: who are the potential customers, how are they different from your domestic customers, how is the market structured (who are the players, how are my types of products sold), what are the common sales processes. Interviews with potential and competitor customers is the one of the best ways to do this research. Make sure the interviews are business conversations (not market research surveys, and not sales pitches) and they test your hypotheses in a non-biased way.
· Get founders or knowledgeable executives to visit the market and talk to potential users. We sometimes hear that the founders are too busy to do this. This may be a red flag. At the early and growth stage, you as a founder should only expand to a new large new market if it is strategically important, i.e. one of the 3–5 most important initiatives. If the founder does not have time this task, then it is either not the best time to expand or the founders should review their priorities.
· Try to acquire some customers remotely. In many cases, there are things you can do from your market before setting up the office in the new country, e.g., you can ask someone in sales and service to work in the customer time zone, you may invest in a few business trips, or run a dedicated customer acquisition experiments. You can hire a person from your target market to work for you locally, e.g., hire an American sales rep in your Berlin-based startup (this is an approach Wooga took).
· Set up a pilot before going “all in”. You may set-up a small team in a in just one city in your new target market. This could be done by founders or hired executives, or in some cases an experienced 3rd party (e.g., a consultant or an interim country manager). The pilot should be carefully designed to test for the hypotheses you defined in step one.
6. Testing new markets by hiring sales reps
When planning the pilots, many founders think about hiring a few sales reps in the new market, attempting to oversee them remotely, and hoping that it will somehow work out. In our experience, this approach rarely works. It is very hard to find the sales people with the relevant skillset without understanding the market first. It also sets unrealistic expectations on these sales people — they should be facto act like country managers or CEOs of their territories. You may get extremely lucky and find a person who can do magic, but it is hard to count on it as a reliable tactic.
Like in most commercial hiring decisions, hiring sales people should never be the first step in your decision making. Hiring sales reps is a part of the execution (the How), not a strategy (the What). It is a means and not an end. You just have to do your research and market intelligence, conducts tests and pilots and define the What. Based on this work, the you can design the Go-to-Market model for the international market, define the minimal viable organisational structure, and the basic skillset that the sales people should have. Only afterwards are you ready for the next step, which mostly probably involves setting up a small office and hiring the first sales people.
The key to creating a reliable revenue engine is to minimize the need for a miracle, i.e. set up the environment where even average people can win.
7. Relying on channel partners to open new markets
In the B2B technology startup world, channel partners are usually software distributors, system integrators, or IT consultant and outsourcing companies. There typically specialise on a type of software (e.g., security or document management) or an industry vertical (e.g., healthcare or government).
Some founders think that getting a channel partner in the new country is the best way to expand. In our experience, this may work in some cases but not that often. Expanding abroad with channel partners may work well when:
· The company is well-established in their home market, e.g, it has managed to get significant revenue (say over £10M ARR), and financing (e.g., stage B) based on some clear adoption metrics
· The company is based in a well-developed market (e.g., USA, a large European market or a other market with world-class expertise) and is expanding to smaller markets via channel partners, e.g., an American company working with partners in smaller European countries
· The company has a unique solution which gets a lot of organic demand, but the team is simply uncapable to satisfy that demand on its own
· The company is already somewhat established in the local market and needs channel partners to scale (this is where channel partners can be extremely useful, but this is not very relevant to international expansion)
However, if you are a smaller startup based in, say a small European, Asia or Latin American market, are you hope to get into the US or the UK via partners, the chances for success are quite low. First of all, it is hard to acquire channel partners.
If you are small and unknown, acquiring good channel partners is not much easier than acquiring own customers.
Even if you manage to acquire them, it does not automatically mean that they will be brining sales. Channel partners may have hundreds of suppliers in their portfolios, their sales people may not necessarily know your product well enough to sell. You should also know that many channel partners rely on the manufacturers to create the demand (“pull”) and introduce them to the leads.
Some founders ask about agents — individuals who work for commission from sales. Founders may expect these people to sell their products or make useful introductions. While you may be able to get some opportunistic sales if lucky, this is usually a very unreliable route to market in Europe and the USA. Agents are not very common in the Western markets and in technology sales and are not always well perceived (or even considered legal) by professional buyers.
With both channel partners and agents you also lose ownership of your customers. You may find yourself in a situation when it becomes difficult for you to access customers, understand them, cross- and up-sell.
Having said this, channel partners can be a very valuable to early and growth stage technology startups if you use them for the right reasons. They can be a great source of market intelligence, since they know a lot about their customer needs. Just like in the case of UiPath, spending time with a partner allowed them to unlock the potential of their product, “We had a good product […], but we didn’t yet know what we could do with it. Until somebody came and told us ‘you can use it to build an airplane.’”
I hope that this list is helpful to startup founders and executives who wish to expand abroad, as well as to VCs and other investors. Subsribe to System2Labs newsletter to stay tuned for the next editions where we will talk about the exact steps that you should take to go expand abroad and many other ways to create scalable sales engines. System2Labs has a lot of experience working with B2B companies in the US and in most major European markets. We have developed tools and methodologies to help startups from any origin to expand abroad. Contact us if you have questions about the expansion approach that works best for your business.