3 Rules to Effectively Enter a New Market

When the pandemic hit, many small and medium enterprises (SMEs) a.k.a. "startups," adapted fairly quickly to the new "normal." I recall vividly a chilly March morning in 2020 arriving to the office of an aspiring Copenhagen series-B startup, and being told we are to work "remotely for the next couple of months-" the world was shutting down. The next day, I was on an airplane to San Francisco trying to beat border closure deadline and be with my family.

Aside from setting new norms in how, where and when we work, the pandemic had a prolific effect on businesses, large and small, on both sides of the Atlantic. Business leaders started to think harder about expanding beyond national borders.

European-based entrepreneurs coming from small countries like Denmark, the Netherlands, Bulgaria and others are thinking about expanding globally, almost from the start. According to VC company Index Ventures, there were over 275 European based startups that launched in the US in 2020.

Their American cohorts have typically stayed in their home market until an enterprise stage ($3B-$5B), till they hit maturity — that's the upside of having a large domestic market, I guess—but that's no longer the case.

24% of US companies in Europe have between 25-50 employees

According to Netherlands based EuroDev Group, 24% of American companies expanding in Europe have less than 50 employees, 26% have between 100-250 employees. When it comes to revenue, 40% fall between $5-$50 million in annual revenue. The study also finds that American growth companies, primarily in the B2B space, like to use European partners when doing business in the "old" continent. Local partners allow American firms to access on the ground knowledge and contacts. Buddying up with some local could help reduce various operational risks for an organization.

Key Advantages to Expanding Abroad:

- diversify earnings

- validate product-market fit, globally

- additional, diverse and sometimes more affordable talent

- to grow - certain countries maybe lacking the product you are offering leading to immense growth opportunity (Netflix in 2010's)

Innovative companies should push themselves and expand into new markets to become the best at what they do. An expense management software (EMS) company moving to the US and showing that it can win clients and compete head-to-head with incumbents, could prove a long-term value of sustainable earnings.

What's the motivation (ROI) to expand abroad if for $1 invested in the home market a typical return could be $1 in revenue? Recalling Charles Handy's s-curve frame that eventually a company will reach a saturation point (maturity) and will need to expand abroad, launch new products and more.

The Three Rules

Rule #1 - Have a Playbook

Irrespective of the company, it is imperative to have a single point of truth for your business. Call it catalog of the vision, "best practices," processes, team, budget and so on. In short, a game plan. Some clients will go at it without a clearly defined strategy expecting to fall back to a model and/or product that's worked in the home or another market. This is not a one size fits all, it hardly ever is. Every market has its uniqueness - culture, regulations to name a few.

The Vision - Any playbook will start with a Vision.

Think Christopher Columbus here. Why did he set out on an arduous two-month journey across the Atlantic? The man looked upon the journey as a way to spread the message of Christianity, understand navigation, maps, botany, indigenous people, and more. It was his own destiny.

Your vision for the future expansion must be clear, bold, unique and enduring

Sample questions for a powerful vision:

- What are our hopes for expanding abroad?

- What is the business case?

- Do the economic benefits of expanding in an international market outweigh the risks ?

- What problems are we solving for the greater good?

The Strategy

The strategy will depend on several aspects, not limited to the type of business (B2B vs B2C), target market selection, business partner selection, in-depth analysis of the regulatory environment, determining a roadmap plan, culture, competition, etc.

Target market selection or total addressable market (TAM) is important part of the strategy and involves thorough sizing and growth of particular segment, e.g. clean energy, e-commerce and so on.

Regulations - You must iron out the regulatory and compliance aspects before you start deploying a lot of resources. Especially if you are in healthcare or financial services -two highly regulated industries. Study in depth the local laws and eventually hire a legal counsel to do an in-depth analysis of the applicable law for your product/service.

One European startup took nearly 2 years to get the "right" financial product before the actual launch, largely due to regulatory limitations (licensing) in the US. Think time-value-money (TMV).

Remember: 99% of business is execution and only 1% is strategy (idea)

Rule#2 - Establish a Product - Market Fit (PMF)

Before moving abroad companies should have tested and validated their product in their home markets. This means you have aligned your products/services with the needs of your target market.

A Product-Market Fit is the inflection point in which you are starting to generate revenue and you can think about sustainability and growth of revenue beyond one product or market. Founders need to be very honest here and make sure they've nailed the customer pain point and have tested your business model.

For an aspiring growth organization this could mean several things: you have moved beyond the Build-Measure-Learn (BLM) product lifecycle by building a viable product (MVP), have taken the time to measure customer metrics and learned from them to ultimately improve the product and insure sustainable growth. BLM is important in B2B SaaS models where you need to have a proven sales model but BLM is even more importantly in B2C segment where a company looks to retain clients and grow organically and consistently iterates to get it right.

Note: don't wait too long after you validate your PMF as you might risk getting entrenched in your domestic market and never build a product or capabilities to launch abroad.

Before you prepare to move abroad, demonstrate repeatable growth with small number of segments. Demonstrate repeatable growth.

Rule#3 Execute, execute, execute

There's a saying in the business world: 99% of business is execution and only 1% is strategy (idea). Some founders/executives think that once they come up with the strategy they will delegate it to their VP or another officer to execute. Let's start with a quick definition of the two.

Strategy, as I wrote above, should answer questions like "where do we play," and "how to win that play." Traditionally, strategic decisions originate at the executive level but this is no longer the case in striving organization. Everyone puts multiple hats and pulls their weight. Strategy choices are made throughout the organization: in R&D, product management, marketing, customer service and so on.

As a product manager at an international investment bank I was often approached by c-suite with questions like " How do you think we can distinguish ourselves in APAC?" or "What products do you think the bank should launch to be more competitive?"

But once these strategies cascade up or cascade down, the execution often times lies within the c-suite team.

A strategy seldomly exists in vacuum. And it almost never can be fully implemented as everything that you assumed when you formulated the strategy would most likely change by the time your strategy is executed - your customers, technology stack (think about negotiating with all the vendors), competitors and more often regulation (Trump Administration followed by Biden's).

Final Words

Taking a company abroad is not an easy task for many founders as they need to tackle several internal and external impediments.

Solutions to Internal/External Barriers:

- Information (pre-expansion)

Accessing information during the discovery phase could prove a difficult undertaking despite the digital world we live in. There are local privacy laws, for example, Europe's GDPR, geo restrictions, quality of data and other barriers to access, locate and analyze market data (competition, customers, and so on). Google translate can only go so far, as well.

Solution to the above is to engage with local consultancy to gather the required information/contacts, first-hand.

- Human Resources

Another big barrier is human resources. Executives may find it difficult to allocate time and resources for someone to properly research and design an appropriate entry strategy.

An additional amount of work is also required from the startup's personnel, sometimes with no prior experience, to handle logistics, and hot topics such as legal requirements. Reviewing proposals and other legal documents is an olympic undertaking requiring appropriate training and interpretation of foreign laws. A solution here is also to outsource some of the preliminary work to a consultancy or legal office—we've seen European-based startups take as long as 1 year of ping-pong review before signing a light commercial agreement. That's time, value and money.

- Financials (Funding)

This is a big one. Don't cut corners here. Small enterprises are scrambling for funding these days. This is due to high interest rates and market sentiment,. However, we have seen a number of foreign-based growth companies, including N26 Bank, despite its mega billion valuation and more recently Rails Bank, pulling out of the US as they didn't commit sufficient capital for the expansion, among others (effective G2M plan).

While internal/external impediments such as lack of organizational capabilities and resources are very important to start and develop the international market, it all boils down to diligently planning (playbook) your expansionary efforts and executing at the right time.

For more information, including free 1 hr consultation, please contact us at info@nestorglobal.net or 1-415-666-5572 (US) +45 3164 0765 (EU)