Written by OMERS Ventures Managing Partner Jambu Palaniappan
I first started drafting this post a few months ago, and never could I have anticipated where the world would be now. The COVID-19 pandemic means businesses are facing incredible uncertainty, even on home ground, let alone thinking about expanding. My instinct was to shelve this until life returned to normal (whatever our new normal will be), but on reflection, it occurred to me that there may well be businesses who could still benefit from this insight today.
And maybe now, with the economy providing its own levelling mechanism, you will look at international expansion, post-pandemic, differently.
If having read this post, you feel like it would be useful to schedule a video call to discuss your own situation in more detail, I’d be happy to oblige. Drop me a line at JPalaniappan@omersventures.com. I’m blocking off several hours a day for open office hours with any startup or founder that needs it.
Having moved relatively recently to the investor side of the table, I get a lot of questions on the topic of growth. Here, I’ll share some of the biggest lessons learned from my time at Uber. I acknowledge that Uber is a very specific case in product-market fit and capital raised, but the lessons are relevant to others.
Until COVID-19 stopped many businesses in their tracks, high-growth companies were expanding internationally at a seemingly unstoppable rate (think Uber, Airbnb, Transferwise and Stripe). So, it’s no surprise that entrepreneurs with big ambitions automatically assume success requires global expansion from the start. At some stage it almost always does. But too early on, that assumption can lead to dangerous thinking and if not done right, could really damage your business. Whenever it makes sense to start thinking about growth again, and before you pull the trigger on your international expansion, ask yourself these five things:
What is motivating you?
There are a lot of reasons why international expansion might make sense, but it’s important to be honest with yourself about what’s motivating the move:
- Are you expanding because you have a problem that you believe somehow access to a bigger/new market will solve?
- Are you doing it because you think it’s expected of you?
- Or, do you feel like you’ve mastered the current market and have all the foundations in place to be able to benefit materially from your early mistakes?
If it is anything other than the last point, think very carefully about your next move.
Very rarely have I seen a business succeed in country two when it has not reached full potential in country one. Of course, these aren’t the stories you read about in the media, but there will be far more that fail than the ones who do it successfully.
Even the tech giants who appeared to be expanding at unbelievable speeds spent more time than you might think getting it right. When I was working on international expansion at Uber, we spent a full year not only just in one country, but even at times in one specific part of one city. When the company expanded internationally, we spent nearly an entire year proving ourselves in France. I realize that there’s a lot of public debate about Uber’s business model right now, but I don’t think it means we can’t learn from the steps the company took and how the process of international expansion unfolds.
Have you got it right?
As I hinted at earlier, before you even entertain the idea of expansion, you need to be confident you’ve really got it right in your current market. Do you have a product people love? Are they referring you to others? Are they staying with you? Do you feel good about the unit economics? Some of the quantitative measures you are probably already looking at are:
- Net Promoter Score
- Gross margin
- Customer acquisition cost as a ratio of the lifetime value of a customer
- Full loaded profitability
These are necessary, but I would suggest you start to dig deeper into the qualitative answers behind those hard measures. Your numbers might be impressive, but are they driven entirely by a massive cash injection to buy customers? What number of customers are coming to you organically? And is that trend on the increase, regardless of the money you throw at it? Have you figured out how far down the path you are willing (and able) to go before you start focusing on operating profit?
Your first market is the place to tweak everything in order to maximize efficiency in all that you do. The goal as you expand should be to shorten cycles, increase the comparative growth rates of new markets and get to profitability faster with each new market you enter. It might sound counterintuitive, but it’s what the most successful companies will do.
Is your model repeatable?
Few people will tell you that if you think building a business is hard, expanding to a second country is even harder. If you’ve got it right in your home market, take the time to write the playbook for exactly what you do, capturing what you’ve learned from the early mistakes you’ve made. Turn those mistakes into actionable lessons that won’t soon be forgotten. Ask yourself this:
- Are you ready to re-orient your entire company to a global model?
- Who’s going to own the new country?
- Is your infrastructure equipped to deal with international nuances? For example, can your financial systems deal with multiple currencies, VAT etc?
- Have you been realistic about the cost implications of expansion — look beyond the obvious office space and infrastructure to things like legal fees, setting up companies, getting regulatory approvals, and fully loaded headcount costs given varying social insurance and payroll taxes.
To really test your expansion readiness, can you confidently set benchmarks and milestones that will require significantly less time and money to reach in market B than they did in market A?
Do you understand what is different?
It should go without saying that a deep understanding of local culture is key to the success of any new venture. Stories abound of famous market entry failures (eBay’s lack of an adequate chat function for Chinese consumers is just one example). The lesson is simple, if you are expanding to an international market, you must have local people, with local knowledge on your team.
I strongly recommend that as part of your playbook you identify ‘culture carriers’ from your existing business who can go and work with the local team to ensure there is consistency in culture and values. Listen to feedback from your team on the ground. If they tell you something won’t resonate in their market, trust that they know what they are talking about. There is a fine line to walk between being confident based on past success and humble enough to recognize you don’t know it all. It will be helpful for you to identify the things that are so core to your business they are simply non-negotiable. Again, this is clearly a hard thing to do in a COVID-19 world, but I’m confident that it will be even more vital when we come out of the other side.
Do you have the team?
The first thing to ask yourself is whether you have the right people currently in the team to support this expansion. Can you realistically dedicate the right people to it — and do they have the time and expertise? Once you have identified this person (or people) map out what you need locally. Where will the main priorities be? Will it be a business development role? A technical role? A regulatory role? How will you ensure innovation can thrive?
Think about the business model for expansion. What role will technology play? Will you be centralized or devolve power and decision-making to the market leaders? Quite apart from the people, is expansion going to be capital intensive? If so, do you have the cash?
If you really want to go deep on this topic, I highly recommend reading Ben Horowitz’s book The Hard Thing About Hard Things.
Is it worth it?
The final question is perhaps the least tangible but most important: with all that expansion will entail, is it really worth it? Could the effort you will expend in expanding be put to better use by going deeper in your home market for now? What are you really trying to achieve? What is the upside of expansion?
Don’t allow yourself to get caught up in the romance of building a global business before you and the team that you trust have really thought all of these questions through…and been brutally honest with your answers.
If you’d like to connect with me on LinkedIn you can find me here.