There is a point in the evolution of most tech companies that international expansion seems appropriate and beneficial to support continued growth. I find that most startups either pursue that expansion way too early or accidentally find themselves operating internationally without intention. This article explains the various complexities of international expansion and the associated risks to the business.
Over my professional career, I have done business in 21 foreign countries, either establishing them as new markets for my company or expanding a prior-established business presence throughout the country. That career included serving time as President for an Israel-headquartered company that generated practically all of its revenue in other countries around the world. I accumulated more than three million miles on airlines along the way, mostly from international business travel.
I’m also writing in context to solutions that are not delivered to the market via online, self-service purchase, usage, and support. Mobile apps and very simple SaaS solutions are somewhat global on day one, by nature.
When is the Right Time?
Expanding into international markets should be a very calculated decision followed by significant amounts of planning. With few exceptions, there is no such thing as “dipping your toe in the water” or experimenting with a simple test drive. You either expand into an international market or you don’t. Hopefully the remainder of this article will substantiate these claims.
Before starting such an expansion, you should start by asking yourself some fundamental questions. Are you running out of sales opportunities in your home country? Is the serviceable market in your home country too small to get investors interested in your current round of funding? Are the opportunities in international markets significantly better than at home? Are your key competitors already expanding internationally and you’re afraid of not having enough opportunity there if you wait? Answering one or more of these questions in the affirmative might be a legitimate reason to start planning for your international expansion. But during the first few years for startups in large markets like the US (my home market), it is very rare that these issues will arise.
Note: The rest of this article will be written from the perspective of a US-based startup, because that’s the home market I know best. However, most of the principles described here apply to a startup based in a developed country. For startups in small or under-developed countries, there is no choice but to expand internationally. Those startups can still use this article as a roadmap of sorts.
In the early days, focus is a startup’s best friend and there’s almost no greater distraction than expanding internationally. Most startups should not consider such an expansion until they’ve mostly optimized their customer acquisition and support models in the US, established an effective management system and healthy company culture, and either secured sufficient funding to have at least eighteen months of runway or reached a point of generating consistent profit. For most startups, accomplishing those things takes years.
What is the Big Deal?
If a prospect in Mexico or France or Australia wants to buy your product, why not just let them do it? After all, you’re doing everything possible to maintain high revenue growth. Let’s step through the biggest issues I’ve personally encountered and hopefully you’ll see what the big deal is.
Employment Laws & Practices
There is a good chance you’re going to need some number of in-country personnel to advance your business interests there. Sure, some employees from the home country can travel to complete the first customer sales or first distribution partner relationships, but what happens after that? If you’re going to sell directly to your customers, you will need an in-country sales team. If, instead, you’re going to implement an indirect method of acquiring customers (ie – distributors, resellers, retailers), you still need someone in-country to recruit, on-board, train and support those partners.
Every country has a different set of laws that govern employment. Even if you hire a consultant to help you figure that out, there are also generally-accepted employment practices that you will need to understand. Maybe they relate to terminating an employee, discrimination, work hour flexibility, getting a company car, or something related to holidays and vacations.
You might be thinking that you can just hire a contractor to do the in-country work rather than put a foreigner on your payroll as a regular employee. That’s fine. What are the local laws and practices related to that? How are you going to pay them?
This overall issue is one reason why US companies evaluate the synergies and opportunities in a foreign region rather than just a single country. Expanding into the UK might be followed by expansion into France and Germany. Your local team covers all three countries, over time. The same happens in South America and parts of Asia. Imagine the synergies with this approach versus expanding into France, then Brazil, then Singapore. Yikes!
Business Laws & Practices
If you will have full-fledged employees in the foreign country, it probably means you will need to setup a local business entity that hires them. What options are there for business entity types in that country and which is best for you? What is the process for getting a new business established? How much will it cost? What sort of accounting, tax, and legal filings are required, and at what frequency? How might local data privacy or marketing solicitation laws affect you?
Like with employment laws and practices, so are there different business laws and practices in every country. Certain economic regions like the European Union provide a benefit in this regard because of a set of laws that are in common across the participating countries, but they don’t cover everything.
Even if you get everything figured out, there is always a risk of violating some law and maybe not intentionally. Or maybe a competitor, business partner, or otherwise decides to launch a lawsuit against you. As we all know, anyone can launch a lawsuit for just about anything they want and leave it to the judicial system to sort it out – if it ever goes that far. How would you deal with a court case in (insert target country)?
You might be thinking your foreign customers can just pay you in US dollars. But most of them don’t have US dollars in their bank account and aren’t willing to pay you via PayPal or similar. If you establish a local business entity, you will probably also establish a local bank account for receiving such payments in the local currency. With success, you’ll generate a lot of sales in the country. That’s great, except how are you going to get your hands on the excess cash that accumulates and is needed for US-based expenses? You can’t just do a wire transfer to your US bank account without understanding the laws and required tax accounting treatment in both countries from making such a transfer.
If the country you want to expand to doesn’t speak English as a native language, you’ll have extra complexities to deal with. It’s not just a matter of more difficult business conversations. I haven’t actually found that to be a huge issue. Instead, it’s your product itself. If you’re a software company, your user interface and online help will need to be translated. If you’re a hardware company, any text labels on the product will need to be translated and that means another SKU and bill of material components that you will need to forecast. It also means translated packaging, user manuals, warranty registration cards, and the like.
It’s also your website, marketing materials, proposal templates, invoices, and any other online or physical content that is consumed by, or exchanged with, your customers, business partners and service providers.
You can pay a translation agency to convert anything needed into the local language, but do you trust that they got the messaging just right where it matters? You could have your in-country sales rep provide the translations, but don’t you need them spending all of their time selling? And don’t forget that when you make updates to your English versions of the product, content, and other deliverables, you’ll need to update the translated versions as well.
Exporting Physical Products
If you sell a physical product, you will need to ship it to the foreign country for purchase by local customers. You might be thinking you can just put it into a FedEx box and enter a foreign address on the shipping label. Easy, right? Well, not quite. You’re not shipping a gift to your cousin in Argentina. You’re fulfilling a business transaction that is subject to the commerce laws in both the US and the foreign country.
Special documentation, possible export and import duties, and export licensing requirements must be understood and implemented. It is possible that your in-country distribution partner understands this well and that can be of great value. Your customs broker will become one of your most valuable service providers.
You will also need to concern yourself with warranty returns. The process of shipping something from a foreign country back to the US doesn’t just involve working the shipping process in reverse. For example, you don’t want to pay duties and tariffs again on a failed product that’s being returned. But the customs authorities want to make sure you aren’t cheating the system.
If you’re selling a physical product (ie – hardware, CPG, etc), you’ve already learned about the complexities of regulatory requirements in the US. It’s an alphabet soup of acronyms and required certifications you have to achieve before you can sell your product on the market. Guess what? Most of those certifications don’t convey to foreign countries. Some do but many don’t. The other countries have their own versions. That means extra time, effort, cost and risk.
I’ll mention intellectual property protection in this category. If you have any patents, they probably only apply to the US market. Do you know what it takes to gain patents in foreign countries? I do. It means extra time, effort, cost and risk. By the way, are you infringing on someone else’s patent when you start selling in (insert target country)?
Some countries have a business culture that involves corruption. As a US business, you absolutely do not want to be in violation of the Foreign Corrupt Practices Act. Having in-country employees that are on your payroll introduces additional risk in this regard. They might be following the business culture they grew up with, not knowing they’re putting your company in legal jeopardy.
Even if your employees or business partners are clean as a whistle in this regard, just the existence of corruption in the local business culture will introduce uncertainties into your business projections. My company was selected as the winner of a request for proposal (RFP) by a government agency in a Latin American country with a history of corruption. The formal decision to award the $250,000 purchase was to be made at a public event and the winning vendor or designated representative was required to be present to receive the decision. My distributor’s assigned employee was bribed by the competition not to appear at the event. The RFP process had to be administered again. The second time around, my competitor bribed the officials to modify the specifications in ways that were favorable to my competitor. After more than a year of work, we lost the deal.
Time Zones & Travel
Expanding into Canada or Mexico comes with the benefit of time zone synergy and reasonable travel costs. But expanding into Europe or Asia introduces both time zone and travel cost complexities. Trying to have business conversations during overlapping business hours is more difficult. The cost of international travel to establish, develop and support your business in the foreign country is going to seriously add up. It also means you won’t be as responsive to matters that require your physical presence. If you suddenly need to be in Dallas tomorrow afternoon, you’ll need to rearrange some things on your calendar, but you can do it for sure. If, instead, you suddenly need to be in Munich or Singapore tomorrow afternoon, good luck.
Tech Support Model
If you offer any form of phone support, differences of time zone and language introduce complexities. You’ll either need to staff the hotline at times that aren’t normal US business hours or implement a tech support operation in the country or region where your customers are. You’ll also need to staff the hotline with support reps that speak the required languages.
You’ve figured out how to price your product for the US market, but what about for your selected foreign country? You might be thinking that you can simply pull up an online currency converter to derive the equivalent price in the foreign country. But foreign exchange rates change constantly and sometimes dramatically.
As a US-based company, if you price in the local currency it means you are taking the risk on currency conversion rates over time. For this reason, US companies often uplift their converted prices by 10-25% (I’ve seen even higher) to offset this risk, and they update their prices every year. But uplifting prices means your solution is less competitive in the foreign market.
Walking Before You Run
You might have noticed multiple references to “partners” in this article. The issues, unknowns and risks involved with international expansion are the reason many companies initially rely on partners to enter a new country. The most common forms of partnership for this purpose are resellers and distribution channels. They obviously know how to do things like sales, marketing and support in their local country and using local currency. But some of them have already partnered with American companies (or wherever your company is headquartered). And a subset of those also know how to legally import a foreign physical product.
Finding the right partners is hard, as is finding the right combination of legal expertise to help negotiate a good partnership agreement.
The complexities covered in this article are just the most commonly encountered. The full list of issues you might encounter is considerably longer. And since every additional country you enter comes with a unique list of complexities, embarking on a multi-country expansion effort as an early stage company introduces significant risk to viability. Is the thought of remaining in your home market looking a little better about now?
If you must go down the path of international expansion, spend lots of time educating yourself and planning your approach. There are ways to crawl-walk-run into a new country and I almost always advise that. Advisors with international expansion experience and service providers that specialize in the issues mentioned here will serve you very, very well.