Further to our international expansion survey analysis and expansion case studies, we are breaking down the expansion stages.
In this article, we cover some of the key themes to consider when deciding when to internationalise. We have also produced an informal diagnostic tool to help you understand what you should consider before expanding and give you an indication of your preparedness. You can find the tool at the bottom of this article!
The suitable moment to expand will vary by company and vertical. Companies’ decisions on when to expand will depend on why they are expanding.
Is it to capitalise on a significant new opportunity? Is it because they’ve discovered what they hope is an excellent entry approach? Is it because they’ve fulfilled objectives and are approaching ‘potential’ in their home market? Is it because it’s part of the roadmap with investors? Is it because they are building on existing traction secured in the new market?
In this article, we consider ‘expanding’ to mean setting up a dedicated team to serve a market(s) in addition to your first/home market.
This is a particularly important decision for Edtech companies based in Europe. Some markets have the populations of large cities and some companies operate in relatively niche customer markets. Thus, there is a low ceiling on companies’ potential growth in their home markets.
What’s clear, though, is that companies should have confirmed, or at least be close to, product market fit in their home market prior to expanding. This can be evidenced by solid month over month revenue growth, preferably gained organically.
In addition to companies’ own performance, the suitable time to expand and enter new markets is likely to vary by the differentiation and level of competition between a company and its domestic and international competitors. Competition is likely to be less significant in smaller markets- as companies enter, often large or larger markets, they will often be competing for the same customers, given that the larger, more attractive prize is likely to have also attracted other entries. The suitable time to expand is also likely to vary by whether the company is seeking VC backing.
We lay out these points below:
Differentiation in first markets:
If a company has solid differentiation in its first market, then it’s likely that it can divert some of the leadership’s focus to a new market entry while simultaneously building its profile and relationships in the domestic market.
If the company has limited differentiation in its first market, then early expansion is more risky as it would split the company's focus, but could be considered the fastest route to growing the business.
Differentiation in new markets:
If a company has solid differentiation with competitors in the new market, it would be logical for it to accelerate its expansion growth and entry plans to capitalise on the differentiation and build traction in the market, using the time and space ahead of competitors to make the offer more and more appealing (widening the differentiation and localising the offer). This is particularly true in markets with strong network effects.
If a company has limited differentiation with competitors in the new market, the company should consider seriously the risks of entry and whether it has the resources, offer and talent to grow market share in the new market, into the headwind of similar competitors.
Whether raising VC backing:
If a company is either backed by VCs or hoping to raise VC backing, it will need to demonstrate solid growth plans, maintaining or accelerating its current trajectory, which in most cases, particularly in Europe, involves expanding to new markets as soon as possible to capitalise and build on its momentum. Companies with VC backing often have more ‘runway’- the investment provides some space into which the company can grow and accelerate beyond.
If a company is not seeking VC backing, then it might be more inclined to delay expansion until it has built a strong and stable position in its domestic market, providing the foundations for expansion (given shorter ‘runway’).
So, we have established that the appropriate time to expand is likely a function of 1) product market fit in your first market, 2) existing differentiation and thus competition levels domestically and internationally, and 3) whether and how a company is looking to raise VC backing.
For obvious reasons, expansion is considered a risky process (runways end…).
The inherent risks of diversifying the focus of a rapidly growing business represent why the timing of expansion decisions are critical, particularly the first expansion. Some of this process is quite ‘chicken and egg’ - it makes sense to know where you want to expand prior to deciding when to expand. You need to know why the new opportunities are worth the risk and also understand the nuances of the risks- for example, if you decide to expand now, but regulatory processes take 9 months to undertake, you could lose 9 months to better-prepared competitors.
It’s an inter-dependent decision- there will be an opportune time when the business is ready to expand and an opportune moment to enter the market. It is startup teams’ jobs to understand both and choose to expand as close as possible to where the two trajectories intersect. However, it must be stated, there is no point trying to ‘time’ either opportunity perfectly. There will always be reasons to hold back and reasons to press on with expansion.
There is no one size fits all approach.
Regardless of the reason you want to expand, as stated, you must have a thorough understanding of your performance in your first market and an understanding of the levels of financial and personnel resources that are necessary for a successful expansion. Companies will define ‘expansion’ differently- for some, expansion will mean ‘testing’ product market fit extensively prior to full entry, while for others it might mean hiring someone on the ground or focusing someone internally on market understanding and how to make an entry. We would encourage companies to consider a range of approaches to find the suitable entry option, which, as with the ‘when to expand’ decisions, will be a function of a) market fit b) differentiation, and c) funding.
There are three key things you should consider prior to deciding to expand:
Sustainability
Your local performance:
Questions you must answer:
· What’s your growth outlook in your first market?
· How sustainable and predictable is your performance in your first market?
· Why are you performing well in your first market?
· How does your ROI of marginal spending compare when focused on domestic growth vs international growth?
Indicators to help you answer these questions:
· Revenue growth by stream
· Headcount growth by stream
· New customers and retention by stream
· ‘Surplus’ or unallocated capital
· Parallel figures from competitors, where available
Opportunity
New market potential:
Questions you must answer:
· What market conditions best suit your business, based on both domestic market fit as well as aspects from your home market that could be more favourable elsewhere?
· What is the size of your destinations’ addressable markets?
· What and how are competitors doing and how can you differentiate? Can you price your offer competitively?
Indicators to help you answer these questions:
· Market sizing exercises on new markets
· Points of similarity and difference between home and new customer markets
· Revenue or funding insights on competitors
· Headcount of competitor businesses, both total and obviously focused on the new market
Operability
Your expansion process (inc. budget)
Questions you must answer:
· How can you maximise your available resources and what can they realistically achieve?
· How significant are the adjustments you would need to make to achieve market fit and localise your product and marketing?
· Will you operate a centralised or decentralised management structure?
· What roles do you need to hire to maximise your chances of success in the market?
· What hurdles do you anticipate facing and how will you overcome them (regarding hiring, regulations, relationship building, etc.)?
Indicators to help you answer these questions:
· Available budgets
· Available time in teams to be allocated to new markets
· Regulation maps to highlight key hurdles.
If you can satisfy yourself with your answers to these questions, then you’re probably ready to take the plunge…
The diagnostic tool
To help you consider some of the factors you should think about prior to expanding and give you an informal sense of your preparedness for expansion, we have formed a diagnostic tool. You can use it here!
Comentários