The majority of start-ups aim for a global presence – often justifying valuations on the US market alone is not possible. Companies with strong network effects are lucky, as their internationalization can almost happen by ‘chance’. Most, however, have to expend considerable effort to internationalize effectively and efficiently. The two biggest choices a company will face is whether to expand aggressively or conservatively; and whether to hire a team or acquire.
When companies don’t have to do (that) much to internationalize
Facebook, Pinterest, or anything built on iOS / Android, internationalizes almost ‘by fire’ as the product is a software with strong network effects and no significant need for local infrastructure. In Brazil, Facebook let Orkut grow until it launched ‘Facebook Connect’ which allowed users to copy their Orkut accounts into Facebook. About 12 months later Facebook surpassed Orkut in popularity, and Google decided to close Orkut in 2014. Facebook only put attention into internationalization when it became confident that their product was polished. Even then, given the adoption of the product around the world, they could focus on the other side of the platform: the advertisers.
Conservative vs Aggressive growth
Aggressive international expansion reduces the high risk of clones being set up in a local country, but risks having a number of mediocre businesses without refined business models sensitive to local needs. In contrast, conservative growth increases risks of local competition, but strengthens the core business. Which international strategy should be pursued depends on barriers to entry (the higher barriers to entry, the more aggressive the growth), network effects (stronger network effects permit conservative growth) and level of product/market fit achieved.
A conservative growth strategy is done with significant testing and planning. I spent my summer at GoCardless, a UK-based B2B fintech company, where a team of us worked on assessing international opportunities. Four of us spent weeks prioritizing opportunities by need, market size and likely resource expended. Planning involved reading multiple market reports, pulling likely customer data from company registers and conducting over 100 interviews. And this was just the start: after my internship ended, the team devoted significant time to creating an implementation roadmap. Currently the team is hiring French and German language speakers to lead expansions.
Rapid growth bears more risk, can be chaotic, but also may help you to gain scale more quickly. A few years ago Groupon had a rapid, costly and poorly executed internationalization plan. To that point, in 2010 Groupon’s US operations lost $10.4M while international operations lost $170.6M.
Of particular note is Groupon China where a variety of mistakes were made such as sparring with local partners, putting foreigners who have little understanding of the local market in charge, focusing on hiring bankers and MBAs who had little experience of working with small businesses and overspending VC money. Perhaps as a result of these mistakes, despite almost a billion dollars in funding, Groupon was the #2 player in the market, after Lashou. Groupon’s sins did not end with China – lack of quality control led to fake listings in Brazil and loss-making business models in Europe.
Building a local team vs Acquiring
Another consideration to make is hiring a local team versus growing by acquisition. The latter could be quicker and makes more sense for network businesses such as Yelp, where small businesses and end consumers tend to gravitate towards one or two listing sites. Yelp has expanded systematically, city-by-city, over the last 2+ years, gaining presence in 120 local markets as of May 2014. To do so, Yelp has pursued a diligent acquisition strategy, starting with Qype bought for $50M in 2012 (biggest local reviews site in Europe) and then filled the gaps with smaller acquisitions such as French CityVox, one of the biggest review sites in the region or Germany’s Restaurant-Kritik. Both of the sites have their reviews fully integrated into Yelp, giving the company a jump-start with useful, relevant content and plenty of traffic.
As a result of acquisitions and build up of local teams, Yelp’s international traffic saw a 95 percent year-over-year growth rate, with international reviews growing 210 percent during first quarter of 2014. Yelp has grown conservatively, but sustainably, increasing share of revenue coming from non-US markets.
An interesting case of internationalization is TaskRabbit, which decided to build a local team and have it test a new business model when it entered the UK, its first non-USA market. TaskRabbit suspected that the auction model left both the bidder and the customer unsatisfied: people who posted tasks complained they did not know what starting price to set while contractors complained it was taking too long to find jobs. When launching in London, the company decided to opt for a system where after submitting details about the job, one is presented with hourly rates of three different ‘taskers’ to choose from. The goal of the new system was to ensure customers can make a purchase in one visit.
Results? Due to careful execution, the number of users in London grew three times faster than it did in New York and San Francisco when those cities launched. Crucially, the percentage of posted tasks that were completed doubled as well — reversing the decline that had led TaskRabbit to investigate alternatives in the first place.
Deciding on how to internationalize
Despite increasing globalization, most companies are surprisingly local – thus internationalization without careful planning can be a costly mistake. However, just as for TaskRabbit, opening in a new market with some similar characteristics can also allow a company to test new features, avoiding a potentially costly mistake in its local market.
John O’Farrell from A16Z writes compellingly on how to prioritize entry into international markets, advising to consider key drivers of the business when making a decision. For example, an e-commerce company might look at credit card adoption, import/export restrictions if appropriate and competitive landscape. The company might then make a decision to hire a local in their home market to drive initial adoption via management of marketing channels, before acquiring an appropriate partner or launching an international office.
Having considered internationalization in-depth one message is clear: each market has its nuances, and missing those can be very, very costly.