Opening New Markets The Right Way
Strategic Considerations for International Expansion in Tech Companies.
There is a point in the evolution of most tech companies that international expansion seems appropriate and beneficial to support continued growth. Most startups either pursue that expansion too early or accidentally find themselves operating internationally without intention.
The concepts covered here are most relevant to companies that do not deliver solutions to the market via online, self-service purchase, usage, and support. For example, mobile apps and very simple software-as-a-service (SaaS) solutions are somewhat global from the onset. Additionally, these concepts are most applicable for startups based in a developed country. For startups in small or underdeveloped countries, there is no choice but to expand internationally, and these concepts can still be used as a roadmap of sorts.
When is the Right Time?
The decision to expand into international markets should be a calculated and well planned move. With few exceptions, there is no such thing as dipping your toe in the water or taking it for a test drive—you either expand into an international market or you don’t.
Before starting such an expansion, consider these fundamental questions:
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Are you running out of sales opportunities in your home country?
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Is the serviceable market in your home country too small to get investors interested in your current round of funding?
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Are the opportunities in international markets significantly better than at home? If so, along which dimensions?
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Are your key competitors already expanding internationally, and are you afraid of losing competitiveness if you wait?
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Do you have multinational customers pushing you for international expansion?
Answering one or more of these questions in the affirmative might be a legitimate reason to start planning for international expansion. But during the first few years of operating in large markets such as the United States, it is rare that these issues will arise.
In the early days, focus is a startup’s best friend. Expanding internationally is a significant endeavor. Most startups should not consider such an expansion until they have optimized the customer acquisition and support models in their home country, established an effective management system and healthy company culture, and either secured sufficient funding to have at least 18 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, 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 you might encounter.
Employment Laws & Practices
There is a good chance you’re going to need 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 (i.e., distributors, resellers, retailers), you still need someone in-country to recruit, onboard, 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 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 you can just hire a contractor to do the in-country work, rather than put a foreigner on your payroll as a regular employee. Think about the local laws and practices related to that and how you are going to pay them.
This overall issue is one reason why US companies evaluate synergies and opportunities in a foreign region rather than a singular country. Expanding into Germany might be followed by expansion into France and Italy. Your local team can cover all three countries, over time. The same happens in South America and parts of Asia. Imagine the synergies with this approach versus expanding first into France, then Brazil, then Singapore, which would be a more cumbersome process.
Business Laws & Practices
If you will have full-fledged employees in the foreign country, it might mean you will need to set up a local business entity that hires them.
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What options are there for business entity types in that country, and which is best
for you?
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What is the process for getting a new business established?
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How much will it cost? What sort of accounting, tax, and legal filings are required, and at what frequency?
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How might local data privacy or marketing solicitation laws affect you?
As with employment laws and practices, there are also different business laws and practices in every country. Certain economic regions such as the European Union provide a benefit in this regard because of a set of laws that are in common across the participating countries.
Even if you get everything figured out, there is always a risk of violating some law—not intentionally, of course. Or maybe a competitor or business partner decides to launch a lawsuit against you. Anyone can launch a lawsuit for just about anything and leave it to the judicial system to sort it out. How would you deal with a court case in (insert target country)?
Payments
Payment methods for foreign customers are likely to be a different currency than the one you use (dollars in the United States). Customers will have different currency in their bank accounts and might not be willing to pay for goods or services via PayPal or other digital wallets.
If you establish a local business entity, you will likely establish a local bank account as well for receiving payments in the local currency. With success, you’ll generate sales in the country. The next issue is using those funds for US-based expenses. You must understand the laws and required tax accounting treatment in both countries that something like a wire transfer might involve.
Language
If consumers in the country in which you want to expand don’t speak English as a native language, you’ll have more complexities with which to deal. It’s not simply a matter of more difficult business conversations. Additionally, your product may have language barriers.
If you’re running a software company, you will need to translate your user interface and online help. If you’re a hardware company, any text labels on the product must be translated. That, in turn, means another stock-keeping unit (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 also means addressing any website needs, marketing materials, proposal templates, invoices, and any other online or physical content that is consumed by, or exchanged with, customers, business partners, and service providers.
Companies can engage a translation agency to convert anything needed into the local language. But can they be trusted to get the messaging just right where it matters? In-country sales reps could provide the translations, but they need to spend their time selling. Further, each update to English versions of a product, content, and other deliverables will require 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 assume you can put it into a FedEx box and enter a foreign address on the shipping label, but it’s not that simple. 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 home country and the foreign country.
You must understand and implement special documentation, possible export and import duties, and export licensing requirements. 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.
Warranty returns are also important. The process of shipping something from a foreign country back to the home country doesn’t just involve working the shipping process in reverse. For example, you don’t want to pay duties and tariffs again on the return of a failed product, but the customs authorities want to make sure you aren’t cheating the system.
Regulatory Requirements
If you’re selling a physical product (i.e., hardware, consumer packaged goods, etc.), you’ve likely learned about the complexities of regulatory requirements in the United States. It’s an alphabet soup of acronyms and required certifications you must achieve before you can sell your product on the market. Most of those certifications don’t convey to foreign countries; some do, but many don’t. Other countries have their own versions. Extra time, effort, cost, and risk are the result.
Intellectual property protection also falls into this category. If you have any patents, they probably only apply to the US market. Gaining patents in foreign countries also requires extra time, effort, cost, and risk. Ask yourself: Am I infringing on someone else’s patent when I start selling in (insert target country)?
Corruption
Some countries have a business culture that includes corruption. As a US business, you do not want to be in violation of the Foreign Corrupt Practices Act. Having in-country employees who 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 US company in legal jeopardy.
Even if your employees or business partners are clean as a whistle in this regard, the mere existence of corruption in the local business culture in a foreign country will introduce uncertainties into your business projections.
ime Zones & Travel
Expanding into Canada or Mexico comes with the benefit of time zone synergy and reasonable travel costs, but expanding to 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 will add up. This 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. If, instead, you suddenly need to be in Munich or Singapore tomorrow afternoon, it might be a stretch.
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 who speak the required languages.
Product Pricing
Your products may be priced competitively for the US market, but prices in the selected foreign country may differ. You might assume 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, sometimes dramatically.
As a US-based company, if you price in the local foreign currency, it means you are taking on the risk of currency conversion rates over time. For this reason, US companies often uplift their converted prices to offset some of this risk. In the past, I have uplifted US prices by 10 to 25 percent, depending on the currency exchange volatility for a given country or region in which I was doing business. This practice likely requires international price list reviews and updates at least once a year. A challenge with this is that uplifting prices means the solutions become less competitive in the foreign market.
Walk Before You Run
The issues, unknowns, and risks involved with international expansion are the reason some 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 already know how to conduct sales, marketing, and support in their local country. They know how to transact in the local currency, and some of them have already partnered with American companies and companies located in other countries from their own. A subset also knows how to legally import a foreign physical product.
Finding the right partners is challenging, as is finding the right combination of legal expertise to help negotiate a good partnership agreement, but the right partners can be quite valuable when it comes to international expansion.
These are but a few of the complexities and challenges a business can encounter in expanding to another country. The full list of issues is considerably longer. Since every additional country entered comes with a unique list of complexities, embarking on a multicountry expansion effort as an early-stage company introduces significant risk to viability.
Education and planning are crucial when embarking on a path to expand internationally. There are ways to crawl-walk-run into a new country. Advisers with international expansion experience and service providers who specialize in critical issues will serve a company well.
