For startup founders it’s getting easier and easier and easier to expand globally. The world is getting smaller every day.
However, international copycats are cloning businesses earlier and earlier making it increasingly important for companies with global aspirations to plant flags around the globe sooner rather than later. But, and this is a big but, going international too early risks costly mistakes that can and do sink entire businesses.
Judging the right moment to go international takes careful consideration.
Go international as early as you can
Avoid duplicating cost in an unproven model
If possible, start by selling internationally from your home base
When I started investing in startups in 2000 the generally accepted wisdom for founders with big home markets was to crack your domestic market first and only worry about going international after that. That’s changed dramatically and the most aggressive founders are now thinking about growing sales globally from day one.
Looking at our portfolio two examples spring to mind. Live Better With and The Drop both started advertising and building their customer base in the US within a few months of launch. The founders of those companies knew that they could sell internationally with minimal incremental cost and that if they were successful, they would increase their growth rate and demonstrate conclusively that their addressable market extends beyond the UK, both big drivers of valuation.
Beyond growth and proving to investors that they should factor other countries into their market size calculations the other driver for going international early is to preempt copycats. There are investors on both sides of the Atlantic who are scanning Crunchbase and other sources of data on startups to look for ideas that they can clone in their home country. If you are an American company, European and Asian clones can be an annoying interference with your global aspirations, but if you are a European founder you have the larger concern that a US clone can deprive you of your largest market.
These are powerful reasons to make international expansion an early priority, but caution is warranted. As noted above at Live Better With and The Drop international expansion was easy from an operational perspective. They were both able to leverage their existing logistics with US addresses substituting for UK addresses. At Live Better With there was a slight increase in delivery costs which they passed onto the customer and The Drop didn’t even have that. The suits they sell are made in China so shipping to the US rather than the UK comes at no extra cost.
For businesses like these, it’s a no-brainer to run an Adwords or Facebook campaign in the US very early on and see what takes. For that first test it isn’t even necessary to localise the site. If the proposition is going to fly internationally then some customers will convert even when the pricing isn’t local currency. Only once it’s clear that international demand exists does it make sense to invest in multi-currency checkout and other conversion optimisations. Then the next stage is to open an international office when it can be justified on a cost basis or when it becomes necessary to keep driving growth.
However, for other businesses international expansion is more difficult. If sales and marketing or delivery or implementation of the product requires activity proximate to the customer then local capability has to be built prior to sales, necessitating investment ahead of any validation of demand. In most cases the initial investment amounts to a couple of heads, a small office and a commitment from a member of the founding team to move to the new country, or at least be there for a week or two a month. That’s a big deal for a small company, and more so when you factor in the amount of time the rest of the team will spend thinking about and supporting the international office.
For companies that fall into this category judging the timing of the investment is critical. The best advice is to wait until you have got your model working in your home country before setting up abroad. Otherwise you are, in effect, running the same experiment at once in two different geographies, which doubles the cost of learning. That might sound manageable, but bear in mind that there’s an organisational cost as well as a financial cost. You will be making the same mistakes in two different places, which can often mean changing people’s roles or even letting them go.
The advice to expand internationally once the model is working is attractive in its simplicity, but can be challenging to follow, because there’s often no clear moment when the model is ‘working’. One great way to think about the life of a startup is that it is a never ending search for perfection. At the beginning perfection is miles away, and over time it gets closer and closer, but there is always room for improvement. The question then becomes whether the model is ‘working well enough’ to expand internationally. Two thoughts here, firstly, many startups experience a moment when it feels like the focus of the management team moves from continually fighting fires to optimisation. If you haven’t reached that moment yet then think hard about whether it’s too early to set up your first international office. And secondly, pay attention to how important the international office is to the goals of the company. The more important it is the more tolerance you should have for going international sooner rather than later.
It’s also important to think about who will go. It’s tough to execute well on an international expansion strategy and more companies fail than succeed. It’s key that the new office is headed up by a trusted senior executive, and ideally one of the founding team. That will make sure the international expansion effort gets the attention it needs back home and maximise the chances of cultural alignment across your two offices. If you can’t spare someone of the required calibre then best to wait until you can.
Finally, there’s one special case of international expansion that I want to mention here. Some founders consider expanding to the US because they want to increase their chances of raising venture capital from US investors. I think the important thing to understand is that US VCs rarely invest in seed or Series A companies that are outside the US. There are a few who do so occasionally, and a number of them advise founders that having somebody on the ground in the US is either a gating factor or will make it much easier to get a deal over the line. However, they will never guarantee that if you do open a US office they will invest, making it dangerous to do anything you wouldn’t otherwise do in the hope of getting them to commit to your business. The bottom line is that if you really want US investors in an early stage startup you should move the company HQ to San Francisco or New York. Anything else is playing at the margin.
In conclusion, getting the first international sale and opening the first international office are exciting and value creating moments in the life of a startup and ambitious founders want to get these milestones under their belt as soon as possible. However, expanding globally is riskier for some startups than others. Best practice in deciding when to pull the trigger is to build a solid understanding of that risk in your company and to balance that with the reward you will get if you are successful in executing on your international strategy.