Companies that are looking to scale can either grow their market share in their home country or go international to open up new revenue sources. Regardless of the geographical size of your home market, international expansion is a crucial step for companies to take their firms to the next level. But what is the best way to make the big jump to foreign markets and conquer them? In this third part of our time reduction series, we discuss “going international” and tackle the following questions: what are the critical things to watch out for and how can being part of an ecosystem help you out?
Going international as a challenge
When exploring a foreign market, one often sees the following pattern unfold: a scale-up rents out a foreign office and sends some of their brightest and trusted employees over on a short-term basis. These “pioneers” are responsible for assembling a team of talented local people to conquer the new market. Unfortunately, it doesn’t always work out this way, nor is it the most efficient process. The decision to ‘build’ an own office may not always be the best idea, as a lot of cash will be burned before the new office can attract customers and operate at break-even. The Harvard Business Review reported in 2015 that companies expanding their business abroad, had on average ROA (Return of Assets) of minimum 1%, five years after their initial move.
Engaging the first clients might take months, purely because of a lack of local networks and a well-positioned brand. Moreover, as the pioneers are likely unfamiliar with the local culture, having to optimize the newly assembled local team and having to define the perfect market approach - which will need a lot of adjustments - leads to a significant competitive disadvantage versus their competitors, who are already active in the market.
While local pioneering might seem logical to some extent, does your company have the strong management capabilities and deep pockets to guarantee overseas success using trial and error to position your company in the market? It will inevitably be a time- and cash-consuming process with an unclear outcome, and anyone operating under tight budgets should be wary.
A closer look into the challenge
According to the Scaleup Institute, UK scale-ups that expand internationally have to overcome two main challenges:
25% reported that finding the right talent is an essential challenge to overcome to generate foreign revenues successfully, while 24% state that access to customers and business partners is an equally important barrier to overcome.
As these elements are fundamental/essential to grow a business abroad, companies might want to explore other alternatives versus building a new company from scratch and losing time.
One interesting alternative to expand your business abroad is to take over a firm that is already active in the target country. Ideally, it should be relatively small, so acquisition is feasible. Other criteria to look at include: an established client portfolio and a good brand reputation in relevant business circles and the market in general. This way, you can use the target’s proven foundations/fundamentals for further growth, by adding your knowledge, funding or other unique selling propositions. Another quick win might be to acquire a company with a product or service range, complementary to your own so you can not only accelerate your go-to-market in the new country, but also sell the acquired products or services in your current market.
Next to these market advantages, an acquisition avoids the difficult route of finding and integrating the right talent, which remains to be a major pitfall for most companies. The cross-fertilization between local workers (that provide key insights into the new culture and market) and expats from your own company (that provide the best understanding of your own company, products and DNA) might prove to be the ideal blend for success. While this might seem an attractive route, finding the right target(s) will be the first hurdle to undertake.
The second obstacle for most scale-ups is cash. Some companies simply just do not have access to ample debt financing to fund strategic acquisitions. One solution is to pay for the target company with your company’s shares. This will create an incentive for the owners of the acquired firm to help create value for the consolidated group. A well-balanced evaluation will have to be made considering the added value of the new owners to your company, since such a deal will dilute your own stake. Should this not be desirable, other ways of strategic cooperation like joint ventures may offer the right balance to move ahead.
In any case, a buy-strategy (as an alternative to a build-strategy) will require sound planning and execution - including target identification, negotiation and due diligence - but will enable your company to grow faster and more successful, by reducing the time of go-to-market abroad by six to twelve months. In the global game of scale-ups, home advantage may be essential, but so is time-to-market.
Tapping into the ecosystem
Thinking of your international expansion strategy? An ecosystem like Scale-Ups.eu can not only help connect you with other entrepreneurs who have successfully tackled this challenge, it can also help connect you with VCs ready to fund your growth.
Discover our services for scale-ups