4. How urgent is international expansion?
Often a big driver of international expansion is to head off competitors in other markets, particularly in businesses with strong network effects.
If a local competitor becomes entrenched, dislodging them will be hard and expensive.
Consider Xing in Germany which Linkedin has still not managed to take out 15 years on.
Another driver is the risk that if a business does not build internationally early enough it can become entrenched in its home market, never building the product or capabilities to expand abroad. This was the common mistake of European tech companies in the decade 2000–2010. It is thankfully much rarer now with more abundant venture capital and more ambitious founders.
Finally, many companies need to move into large competitive markets to push themselves to be the best in the world at what they do. This is often the case for SaaS businesses, where moving to the competitive US market and showing they can win clients versus local competitors is a big driver of long-run value.
The trade-off? The return on investment (RoI) of expanding internationally is usually less than the RoI of domestic expansion. Typically €1 invested in local growth will increase user numbers and revenues more than €1 invested abroad. Eventually a company will reach saturation point in its home market and need to expand elsewhere, at which point this equation might switch around, but usually, it is cheaper to expand at home than abroad.
So the dilemma founders face is how much short-term domestic growth to sacrifice to head off international competition and maximise long-term value. It is hard to produce a magic formula. Every company is different. For a company like Nutmeg, the UK’s leading roboadvisor, with a $B opportunity locally and high regulatory and product costs for international expansion, the right answer was to go international later in its development.
In the case of Frontier Car Group, a marketplace business to sell used cars, there was a clear first-mover advantage due to high network effects, and so the company launched in four international markets from day one.
A process we find works well is for the management team to take 1-2 days thinking through their international plan, including target markets and resources needed. A team member or a strong intern can pull together the relevant data beforehand.
The management team would then revisit this with their board as a ‘pre-mortem’ on what could go wrong e.g. insufficient investment in new market; starving the home market of investment; running out of cash before reaching key milestones.