3 lessons from Mr. Worldwide: international expansion at start-ups.
In August 2016, Uber sold the Uber China business to Didi Chuxing for a reported $35 billion. And in less than two years, March 2018, Uber, the darling of the Valley, a company that pioneered the sharing economy pulled out of South East Asia admitting defeat to rival Grab.
The story of Uber isn’t unique, there’s countless stories of start-ups that have expanded internationally, with hopes of unlocking future growth — only to admit defeat years later with millions (or billions) wasted. And it was this question, while working on a FinTech’s international expansion myself, that I began to ask a question:
Why do some start-ups successfully scale internationally? And why do some fail miserably?
The reality is, for many start-ups — staying in one market isn’t good enough; to find new growth, you have to go internationally. Especially for markets that aren’t as colossally large as the US or Chinese market. It’s nearly every month that you hear about another start-up in London entering a new country; and nearly every month you hear about another start-up entering the UK market.
Over the last two years, I’ve been collecting notes from my own experience as a PM working on international expansion to countless coffees I’ve had with people on this topic from Dropbox, Uber, Facebook, Stripe, Skyscanner, Amazon and Google. And this is the first of three topics that I wanted to write about to give other people insights onto what I’ve learnt. This is definitely not the definitive guide, I’m sure someone way smarter than me can write a book on it — but rather a framework on what you should think about if you want to scale your start-up into new international markets.
The first post is to help you think about your business model, and how that influences how easy or difficult it is to scale internationally. The second post is to think about how the dynamics of finding product market and channel market fit in new international markets. And finally, the last post is about scaling culture globally.
What got you here, won’t get you there.
Is your start-up really global? Really?
The internet is wonderful. 30 years ago, taking a company to a new country meant setting up warehouses, shop fronts, hiring staff, setting up local bank accounts — really painful and expensive stuff.
Nowadays, it’s incredibly easy. Set-up payments through Stripe, get a website up using Squarespare or Wix, and magic — you’ve got global business.
The problem is, for many two-sided businesses (think AirBnb which has hosts and travellers) or FinTechs where financial regulations matter a lot, it’s not that easy. Getting drivers is hard; getting a financial license is hard; setting up supply chains is hard; acquiring customers is hard (and expensive).
The question is — how do you think about your business to figure out if it’s truly global. What is it that makes it so easy for companies like Dropbox, Netflix or Google to launch their product to the world — literally at the click of a button; and what makes it so much harder for companies like Uber, AirBnb, Monzo, Skyscanner, Amazon (retail) or TransferWise to launch into a new market?
Think on the margin.
I remember one of my professors at business school continued to remind me in our Microeconomics class, think on the margin.
Tech companies are often characterised by almost zero marginal cost, allowing you to scale infinitely spreading your fixed costs of software development over a large user base. This is mostly true for companies like Google, Dropbox or Facebook where you can switch on your product to everyone in the world at the click of a button.
But just because you’re a tech company — that doesn’t mean you have zero marginal costs when you scale into a new market. Just because you call yourself a tech-company, think WeWork, doesn’t mean your business is made-up 100% of tech (WeWork is really a well marketed real estate company). A lot of it comes down to your business model, and how your business creates and captures value.
Cost of kick-starting the flywheel: If you’re a two-sided marketplace, think Uber with drivers and riders, you have to solve the chicken and egg problem. If you don’t have enough drivers, you can’t get riders; if you don’t have riders, you can’t get drivers.
What’s the solution? Simple. Just subsidise one or both sides of the marketplace. This might mean discounts and offers for riders; this might mean a minimum income and attractive deals for drivers. This isn’t free.
If you’re a company like Skyscanner, you need to set-up commercial deals with enough airlines to make it attractive enough for users to reliably use you to search for the best flight deals. That means paying for business development teams, that means office space now, that means now you need a general manager now to look after the region — these are real costs.
Cost of customer acquisition: Unless you have a way of generating viral growth, which isn’t necessarily easy to do across geographic boundaries, you also have to think about your CAC. What does acquiring customers in a new market look like? How do you find channel market fit? What will it cost you to acquire enough customers in that market to get the flywheel going? The days of ‘built it, and they will come’ are pretty much over. Just because you have a great product, doesn’t mean people will know about it — and that means money spent on sales and marketing to acquire users.
Cost of regulatory permissions: If you’re in the FinTech sector, getting regulatory permissions can be a nightmare. AML (anti-money laundering) regulation, credit licensing, setting up merchant accounts — all these can be a huge hassle. The cost of paying lawyers, and the paperwork — especially in frontier markets, can be a lot more than you might think.
Cost of setting up supply chains: I remember a friend setting up a bubble tea shop in Cambodia, and yes I know it’s not a tech company, but one of his biggest challenges was getting the pearls in bubble tea into Cambodia. If you’re a direct-to-consumer retail tech company like Away luggage; nailing the supply chain from finding the right delivery partners to making the whole returns process work can be a huge undertaking when you expand internationally.
Cost of distraction: And finally, the cost of distraction. Strategy is about resource allocation, knowing what to focus on, and what not to — and we often forget that management focus is also a scarce resource. Being in multiple markets mean you’re distracted, you have to focus on both your core business in your home region and also markets abroad. Don’t ignore the cost of distraction.
Global vs local network effects.
Network effects are incredibly valuable — network effects help explain the incredible growth and competitive moat that companies like Google, Facebook and AirBnb have.
The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. Source: Investopedia
For example, Spotify is incredibly valuable for artists because of the number of Spotify users listening to music on Spotify. As more artists release music on Spotify, this becomes more valuable for users listening to music as there’s more choice of great music, this then attracts more artists and you have a virtuous cycle.
The problem with network effects are the ‘chicken and egg’ problem. If you don’t have any listeners on Spotify, it’s hard to get artists on-board. If you don’t have any artists or music, it’s hard to get listeners.
When you expand internationally, you are quite often starting from scratch. For example, if you’re Uber launching in Hong Kong, having drivers who drive for you in London does not help your network. Getting more Uber drivers in London doesn’t benefit riders who are using Uber in Hong Kong — and so therefore the network effects can sometimes be isolated to a given region. It’s why I think peer-to-peer FinTech players such as Venmo in the US find it incredibly difficult to scale into Europe.
It’s why I think tech companies in the travel sector, think Skyscanner, Booking.com, Expedia, AirBnb have done incredibly well in building valuable ‘multi-sided’ marketplaces. Travel in itself crosses geographic boundaries, and therefore a user in Hong Kong would value more hotel selection in London.
A good question to ask is, what competitive advantage do I have over a local start-up doing the exact same thing as me? Just because you’ve succeeded in one market, doesn’t guarantee success in another market.
So is it all that terrible?
So you might be thinking, well this sounds like a bunch of doom and gloom. The reality is, finding new growth internationally is hard, really really hard — but the rewards are huge if you can nail it.
I’m always skeptical when I hear about start-up XYZ expanding to a new market, or claiming they’re in 6 markets. The question isn’t, are they in a market — it’s whether they are successful in a market (i.e. positive unit economics).
Whilst many start-ups have failed to scale internationally, many have succeeded and done phenomenally well doing it. There’s no magic recipe to international expansion, like how there’s no magic recipe for finding product market fit — frameworks like lean start-up and customer discovery have helped entrepreneurs and product managers ‘short-cut’ the process, and I hope I can do the same for other people looking to take their start-up to new markets.
