Budgeting for international expansion is simple: Make a sensible plan, then triple the cost and triple the time required.
If you have a runway of 18-24 months of cash, the decision to enter a new market is hard. If you move forward, you’ll be investing precious cash into a market that may or may not work; and you have to be willing to invest aggressively enough that you don’t let competitors build a lead. So how do you make the move in a reasonably capital-efficient way?
Step 1: Work out your international proof points
In a previous post, I sketched out a framework for determining which countries to expand to first and what factors to consider. Once you have chosen your first country, use this analysis to work out what challenges you’ll face in expanding to this market.
You’ll need to work out what you are trying to prove and in what order. Depending on your business you may be trying to prove that in the new market:
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people will use your product
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you can deliver a Net Promoter Score for your product that is as high as in home market
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you can retain users and/or get them to spend
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you can sell your software
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you can win competitive pitches versus local competitors
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you can build a supplier base
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user acquisition costs are acceptable
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unit economics work
The next question to ask yourself is, what proof points will give you the confidence to invest 10x as much for growth. If there are a few points, try to test the hardest one first.
For example, if you are a SaaS business moving to the US, seek out competitive pitches against your biggest US competitor. When our portfolio company Qubit was expanding to the US, its focus was on winning lighthouse customers from strong local players such as Adobe and Monetate.
If you are an eCommerce or consumer marketplace business, the toughest question will be whether you can prove out unit economics, in particular conversion rates.
Step 2: Work out your minimum viable subsidiary (MVS)
Step 2 is to find the cheapest way to validate your international proof points in a new market. This means determining what team you will need to prove out these points. You will likely need one smart, agile country manager, plus a small number of people in service, sales, marketing, or account management.
Ideally you want to hire the country manager first, then get them to hire their team. Where possible, use resources from your centralized team (for example, allocate staff from your headquarters-based marketing team to focus on the new country) as they can get going faster and make more use of what you learned in your home market.
Your precious resource at this point is usually your development team, so work out how to launch in new market with minimum development resources. Using a proper content management system and integrating translation really helps here, as does using WordPress, or something similar, for your homepage.
Wherever possible, look to narrow the scope of this local subsidiary to maximize success. Sell only your core product. Use manual workarounds to avoid building difficult integrations. If you’re taking your SaaS company to the US, sell only to companies in New York. If you are taking your marketplace business to Germany, start only in Munich.
However, do not fall into the trap of underinvesting. “Scout programs,” where you have one individual trying to evangelize a new market, rarely work. In my time at Google EMEA from 2007 to 2009, we had single “scouts” in a dozen or so of the smaller European countries. These scouts were given the task of building Google’s revenues in the country, across all sectors and sizes of advertiser, but with no product or marketing support. With the benefit of hindsight, this was much too big an ask, even for a product as easy to sell as Adwords, and the results were very mixed.
Step 3: Decide where to base your MVS
Once you have defined your MVS you will need to choose which city to base local personnel in. This should be convenient for customers and partners — and for travel links back to headquarters. Build somewhere where you can scale up the team in the long term. Don’t fall into the trap of opening in a location where you can hire more cheaply or where you have a personal connection, as limited talent pools will cause problems down the line.
In the UK it is hard to argue for a location other than London, and the same is true for France and Paris. In Germany and the US there are more options. I’ve had portfolio companies successfully land in the US in New York, Washington, San Francisco, Los Angeles, and Boston.
Step 4: Set a sensible time frame to deliver the MVS
Start by working out how long it should take to prove out your MVS. Allow time to hire the team and allow extra time for the inevitable need to replace some of the initial team members.
Allow extra time for iteration. Every country is different, and the local team will need to experiment with how they position and communicate the product.
It can often take at least a year to prove that your product can work in a new country. Sometimes it takes much longer or doesn’t work at all.
Step 5: Set the budget for one country to prove MVS
Using the output of steps 2, 3, and 4, work out how much to budget to launch the MVS, including personnel, marketing, and overheads. You can get some idea of local salaries from a tool like Indeed.com or a local recruiter. Be aware of different tax systems that can add a lot to base salary, and of higher costs to lay off underperforming employees.
Also factor in fees for recruiters, costs of employee churn, and legal fees to set up the local entity and to cover any regulatory approvals required. Also include a travel budget for the team to fly back regularly to headquarters, and allow some leeway for currency fluctuations (currency hedging is not necessary at this stage).
The most expensive person will be the local country manager (that is, unless one of the founders is moving over themselves). My first tip on this role is not to overhire. You aren’t looking for someone who is ready to run a 100-person business; you’re looking for someone who is smart, flexible, driven, can manage people, and has some relevant experience.
My second tip is to incentivize this person generously with equity, tied to hitting local performance targets. It can be tempting to set up local subsidiaries and give the local team equity in the local subsidiary, but this creates a lot of complexity in corporate structure further down the line.
Step 6: Decide how many markets you want to test out
No matter how well you prepare, sometimes new markets just don’t work. More commonly, they can work but take a lot longer than you anticipated. If you can afford to test out multiple markets in parallel, it makes sense to do so to maximize the chance that one of them comes through quickly. In the words of my partner Bernard Liautaud, “Many companies expand internationally sequentially: France then Germany then Italy… They end up going too slow, and when they arrive to further geographies, they are no longer first to market.”
If you decide to launch in multiple markets, it is worth budgeting for a Head of International to manage these efforts, ensure they are applying best practices, and be their voice to the product and tech team. As with early country managers this does not have to be an expensive hire with prior experience as a Head of International, but it does have to be someone the country managers will respect. Ideally it is someone already in the business.
Step 7: Approximate a budget for doubling down in a market that proves viable
Once you have proven your MVS in a market, you should start investing quickly to grow. This will obviously involve more marketing spend, a bigger sales and service team, and potentially a branch office.
While the MVS was all about being scrappy, it now makes sense to build something scalable, with proper backend systems and tools, and dedicated product and design resources.
Without going into great detail, it makes sense to have some idea how much it would cost to really double down in a new market. Allow time to hire the new people and ramp up marketing.
It is OK not to have all the budget you need to fully ramp up. The most important thing is to have demonstrated MVS.
Step 8: Make the budget work, get buy-in from your management team, and iterate
One you have completed the analysis above, compare it to your existing budget. Make sure you still have enough cash runway to make strong progress before needing to fundraise again (or, even better, turn profitable). It is important to take the time required to get your cofounders and senior managers to buy into the plan. An international strategy cannot be built by consensus, but it must have the buy-in of the company if it is to succeed. The whole company needs to feel that international markets are important, despite the small initial volumes, so they don’t get forgotten in product development or marketing changes.
Step 9: Get on with it!
Assuming you are in the usual VC fundraise cycle of 12-24 months between fundraises, it makes sense to kick off new markets immediately after you receive funds so you have time to show meaningful progress by the time of the next raise. However, it is acceptable to take 2-3 years, or two fundraising cycles, to really show volumes coming through in a new market.
The above process sounds like quite a few steps but should all be do-able in 2-4 weeks. It is important to then get going quickly, as hiring the international team will take time. The good thing about international expansion is that it can be done in parallel with other growth efforts.
Source: VentureBeat
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