Go big or stay home: When should startups expand internationally?

startups from countries with a population of less than 50 million go international twice as fast as startups from countries with a population of more than 50 million: 1.4 years as opposed to 2.8 years.
by Yehia El Amine English YehiaAmine

16 May 2018 | 13:41

Source: by Annahar

This photo shows the UK Lebanon's Tech Hub's co-working space in Beirut. (Photo Courtesy of UKLTH)

BEIRUT: Startups are usually classified into two categories: those who seek international expansion from day one, and others who walk the path of localization to remain in their market and the ones resembling it.

According to a report by McKinsey, startups from countries with a population of less than 50 million go international twice as fast as startups from countries with a population of more than 50 million: 1.4 years as opposed to 2.8 years.

Thus, smaller countries need to think internationally from an early stage.

“A founder in the U.S. or China can focus 100 percent on their home market and comfortably build a billion-dollar business; whereas a founder in Sweden or Ireland knows from day one that their business needs to be international, if it is ever going to get really big, and build accordingly,” the report highlighted.

That’s the upside for bigger countries; the downside is that they may only think about the international market at a late stage and may struggle to adapt their business accordingly, the report said.

Malek Ghemrawi, a serial entrepreneur who has grown and exited numerous startups, has a long track record of how to develop businesses from inception. Some were international from day one, while others at a later stage.

Currently, he trains and mentors startup founders on how to develop their product or service for either localization or international purposes.

Here are some of the questions Ghemrawi asks founders to help them assess when they should enter their first international market.

ARE YOU INTERNATIONAL MATERIAL?

Some businesses are in the lucky position of being able to be global from day one, where adding global customers requires almost no incremental effort. Common characteristics of these companies are:

- No need for local operations or logistics

- A product that does not require localization

- Can acquire customers via online channels or global platforms

- Minimal local network effects

“A good example of this type of business is game companies and consumer apps that use the app stores and Facebook and social media for distribution,” he told Annahar.

According to the serial entrepreneur, these types of companies can easily export their services or products to the outside realm, especially with the help of modern day advertising tools and platforms that really shove them into the spotlight, such as Google’s Play Store and iPhone’s App Store.

COUNTRY ADD-ONS

For businesses that aren’t global from day one, the next question is whether they are ready to think about a new country.

“You should get to clear product-market fit before expanding internationally, as pivoting your product once you have expanded across multiple countries is exponentially harder,” Ghemrawi noted.

He considers that the common mistake here is deciding if they have product-market fit too early. “You need to be very honest with yourself about whether you have nailed the crucial issues for your product yet,” he added.

For a consumer business, the key issues are likely strong retention and organic growth. For a marketplace or e-commerce business, the founders need to be confident of positive unit economics and route to market. For an enterprise software company, startups need to have a sales model that works.

Startups also need an organization that is ready for international expansion.

 “Successful international growth is going to take a lot of attention from at least one founder, so you need to have enough management bandwidth in the business to cope,” Ghemrawi told Annahar, adding that they need enough tech/marketing/customer service resources in place to handle another country.

HOW DEEP ARE YOUR POCKETS?

The next step is to think through the main challenges and costs of international expansion.

Some considerations would be regulatory approvals, which are particular issues in fintech and healthcare, and product localization is required, such as simple translation, new content, new data sources, and new functionality.

“Also the need for sales/service/operations teams on the ground, local competition, and what competitive advantage they have,” he added.

But startups should, of course, also take into account the advantages they have for international expansion: multinational clients or partners, their technology platform, capital, and market insights.

Founders then need to put a budget in place for their international growth.

“A rule of thumb is to budget enough cash and time so that the international market can reach 10 percent of the scale of your home market. Then double both numbers,” Ghemrawi said.

IS IT URGENT?

Often a big driver of international expansion is to head off competitors in other markets, particularly in businesses with strong network effects. If a local competitor becomes entrenched, it will be difficult and expensive to take them out.

“Another driver is that if you do not build internationally early enough, your business can become entrenched in its home market and never build the product or capabilities to expand abroad,” he highlighted.

Finally, many companies need to move into large competitive markets to push themselves to be the best in the world at what they do. This is often the case for SaaS businesses, where moving to the competitive markets and showing they can win clients versus local competitors is a big driver of long-run value.

“The trade-off is that the return on investment (ROI) of expanding internationally is usually less than the ROI of expanding domestically,” the serial entrepreneur said.

Typically, with a business that is going well in its home market, $1 invested in local growth will increase users and revenues more than $1 invested abroad.

“Eventually, though, a company will reach saturation point in its home market and needs to expand elsewhere, at which point this equation might switch around,” he said.

But usually, it is cheaper to expand at home than abroad.


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