Expanding your startup? Here’s how to choose the right markets

You’ve decided it’s time to expand your startup internationally. The next question is: where to? Too often I see European companies taking the default routes of either going straight to the US or adding an “easy” nearby market — from Germany to Austria, for example, or from the UK to Ireland. At the same time a full Mckinsey-style market analysis for a company with 50 people is a little over the top. Below is a four-step framework to help you choose the right next market(s).

Step 1: Define the options

Before you think through your international strategy you need to work out how to define your options. Does it make the most sense to define your expansion by cities, countries, languages, ecosystems, or something else?

For example, Citymapper’s international expansion is defined around cities, not countries (big clue in the name…). Each city has distinct transit partners to integrate, a distinct set of terminology and localization requirements, and a largely distinct user base. Synergies across cities are small. Companies such as Uber and Deliveroo are also largely defined around cities (or metro areas) since supply-demand network effects are almost entirely within cities. Being big in Berlin doesn’t necessarily mean Deliveroo will be big in Munich, too.

For a mobile games business, such as Wooga, the most important difference between markets is which distribution channels predominate. They can lump together all markets where the App Store, Play Store, and Facebook dominate mobile games distribution: North and South America, South East Asia, and Europe. Taste in games is similar across these markets and the only localization required is some translation. The truly distinct large markets are China, Japan, and Korea, where partners such as Tencent, Line, and Kakao are far more important for distribution and require careful (local) cultivation. So in games there are four distinct markets that matter globally: China, Japan, Korea, and “Rest of World.”

For companies in insurtech and fintech, regulations and licensing are an important consideration in growth. Europe has made good progress here on allowing financial businesses to “passport” across borders. In contrast, the 50 states of the US all have different licensing and financial regulations. Lemonade, one of the best-funded insurtech businesses, is an example of a company with a state-by-state growth plan.

For most tech businesses, however, including SaaS, fintech, and eCommerce, the country unit is the best way to think about market growth. I will use a country-based structure for the rest of this post.

Step 2: Prioritize markets

Don’t jump straight into a massive Google Sheet with every possible statistic on 100 possible countries! Instead, think through what really matters to your specific business, along the following dimensions:

• Is the new market big enough to really matter? Usually this means it is at least as big as your home market, preferably bigger. I have a strong point of view here that “infilling” small supposedly easy markets is not worth spending management time on. By all means, let your existing German team make opportunistic sales to clients in Vienna, but don’t call this international growth. “Big” here refers to the size of your directly addressable market; proxies such as population, GDP, or number of small businesses are a distraction.
• What else are you proving if you win in this market? For software companies, proving you can win in the highly competitive US market is an important step to building a great company, and towards an IPO or other liquidity event.
• Are there synergies across markets? For example if you are in eCommerce, you can establish distribution hubs that cover much of Europe, and many suppliers will work with you across the continent. This also applies in sectors such as logistics and advertising.
• Is there dramatic growth or shrinkage of the market? Single-digit % market growth or shrinkage is irrelevant for a startup. However if the market is falling off a cliff or expanding very fast, take that into account.
• How well will your product work in this market? Speak to a few locals from this country and see how they react. See how analogous businesses compare between countries. If you can keep a consistent product across countries your life will be 10x easier.
• Can you beat the competition? Who are the local competitors or likely entrants? What advantages do you have, and what advantages do they have? Focus on the local startups as well as the incumbents. Think through partnerships and channels. Local competitors are easy to underestimate, but if network effects or brand are strong, the fact that they have a crappy website doesn’t automatically mean you can beat them.
• Will the economics work? Run a simple test on Adwords or Facebook to see how marketing costs will compare. Make a best guess on pricing and see what this implies for unit economics.
• Do you have a route to market? Are there channels in this market that control market access and might make life difficult? See for example how UK financial comparison sites have struggled to sign up the strong insurers and displace offline brokers in continental Europe.
• Do you have enough funding to make meaningful progress there (or are you confident of your ability to raise this money)? The classic mistake here is taking a business to the US too early, without enough funding to do it properly.
• Are there strong “winner takes all” network effects that justify a land-grab? Be careful here. Strong network effects are rare, and expanding too quickly just to try to close off new markets to competitors can easily kill promising companies (e.g. Gilt, Livingsocial, Hailo).
• Do you have an existing partner or key customer who can help you get started? For enterprise software companies, the first clients to win in a market are often the hardest, so if you already have them it will increase your chance of success. Again this is something to be careful with, in particular with partners who might lose interest at a crucial stage — or stretch your resources too thin.
• How will the time zone differences and travel impact you? For a new market to be a success, you and your management team are going to have to get out there in person and spend a chunk more time on the phone. Jetlag kills your personal productivity.

Step 3: Workshop and decide

Once an analyst or an intern has pulled together the data above (ideally with a score and a ranking), you need to make a decision. Discuss it as a management team, and get input from your board. Some issues are nuanced, and some challenges can make countries complete non-starters. At the end of the day, thought, this is a decision for the CEO; it should not be made by consensus. You will never get the full set of facts, so you need to make the best decision on available information.

As a side note: If you don’t have prior experience of the country, it is important you spend time there in person to get a sense of local specificities. There is no substitute for this. Sujay Tyle, founder of Balderton investment Frontier Car Group, is an extreme example of this. He visits every market in which they operate every quarter, covering Nigeria, Pakistan, Turkey, Chile, Indonesia, and Mexico, plus HQ in Germany.

Step 4: Review annually

Expanding into new markets takes time. Reevaluating the decision at every monthly board meeting is too short-term. However, it is important to periodically review the investment in new markets and refocus if needed. Annually is probably the right cadence, although if your market is moving very quickly, then more frequently makes sense. Do be patient. It is easy as a founder, having built your home market to some semblance of a well-oiled machine, to believe you can copy/paste that efficiency to a new market. This is never the case. You will have false starts and bad hires, and you’ll need to tweak your product and messaging.

“Our first international market was Germany. Our expectation was that we could get going in months, and in retrospect we went too wide too early. In practice it took over a year to get the right people and suppliers in place, adapt the messaging, and optimize marketing. We had to go back to getting it working at a small scale. Since then it has really clicked and growth has surpassed our expectations.” — James Hind, CEO of Carwow

Rob Moffat is a partner at Balderton Capital.