Is your startup thinking of going global? Attracted by the possibility of conducting cross continent business or negotiating contracts with a foreign language translator?
Well, I was just speaking to a friend of mine today and his startup is looking to expand beyond the borders of USA. Because of my experience of working on two different geographical regions in the world at startups, he wanted to know my thoughts on when is the right time for a startup to go global.
Question 1 – Why go global?
Without a doubt, foreign markets are very exciting because of the huge potential revenue potential available. Markets such as China, Japan and the E.U. either boast of huge consumer markets or sizable enterprise customers. This is particularly important for the next few years with the concern of the US economy (for this blog, my assumption is that the startup is based in the US). In addition, with the fall in the US dollar, US goods will be cheaper for foreign markets to purchase and will drive revenues for a US based company. An excellent example is IBM – their last quarterly earnings increased by 24% because of successes in foreign markets.
Question 2 -Why not go global?
The first critical question here is will the cost of doing business overseas outweigh the return revenue? And often, it’s the cost that most companies underestimate. Here is a list of costs that I’ve learned to take note of when going international -
- Product cost – internationalization of product (e.g. unicode, architecting the product with language resource files, etc.)
- Product cost – localization (e.g. end user/admin UI translation, documentation translation)
- Product cost – certifications (e.g. hardware certifications for power or radio transmitters in different countries)
- Product cost – localized features (specific features that are needed to win in the region but are not used anywhere else)
- Selling cost – human resources (e.g. hiring a local team vs. shipping someone over from head office)
- Selling cost – localized marketing (e.g. what country specific marketing campaigns should be invested in)
- Services cost – support (e.g. compared to your primary market, some countries have a lower tolerance for problems and have a higher requirement for when they be addressed by)
The other aspect of the equation is the revenue piece – sales cycles of the same product are often different the moment you leave your primary market. For example, in countries that are centered on relationship selling, the sales cycles can be longer. Therefore, it is important to be patient when selling in these countries. During the early days, it is important to view them as the investment stage and have lower revenue expectations.
The second critical question here is do you have the ability to undertake another geographic market.
To answer this question, the following issues need to be addressed:
- How much more of your product do you still have to build for your primary market?
- How much of your primary market have you won and still need to invest into?
- How applicable is your solution to overseas markets? (i.e. is there as strong a need for your product as in your primary market)
When you’re opening a foreign market, you’re going to be diverting resources (money and people) to a different area. No army likes to fight a multi-front war. Likewise, with a startup, fighting a multi-front market war can be very draining to everyone if there’s still more work to be done in the primary market. For example, critical features needed to win in the foreign market will be prioritized lower in the backlog list if there is still a huge set of features needed in the primary market.
Question 3 – How to go global?
Once you’ve decided that the plan is to go international, the next question of implementation comes up. With it, are some common questions that are debated -
- Do we hire local representation or depend on a distributor/reseller?
Personally, I am a fan of having someone in country representing the company. However, I also recognize that in certain countries (e.g. Japan, China, etc.), it is required that you have a local company representing you. That said, at the end of the day, the distributor/reseller’s resources are dedicated to them and not you. Therefore, to achieve your revenue success in the country, it is important to have a local resource to push your agenda and help direct sales activities back to you. In addition, in difficult customer situations, you want to make sure that your company is well represented at the table and jointly present a balanced story of what occurred.
- Distributor vs. Reseller… who should represent us?
In my opinion, if you are a cutting edge technology and opening a new product market, you need direct touch with the customer. As my old boss Dion told me once – resellers fulfill the market, they don’t build the market. Therefore, a distributor that has a direct sales force and carries a dedicated revenue number will have a advantage over one that does not. Creating extra layers of resellers will remove visibility into the opportunity and prevent you from having any impact over the deal. Net-net: Even if you are working with a distributor/reseller, your company needs to be close to the action.
- Master distributor vs. many resellers
In my opinion, when you’re first entering a foreign market, it’s important to have focus. Signing up an army of resellers will result in enablement havoc. Your attention will be constantly shifting from one party to another. What’s worse is that they’ll all be fighting to get a piece of the small beginning revenues – dealing with channel conflict during the early beginnings is very unnecessary. So, with “focus” in mind, my vote goes to master distributor.
Question 4 – Can I change my mind after I go in?
My experience is that once you’re in and have signed customers, it’s very, very, very, very difficult to say “we’re pulling out”. The second round of restart will be extremely difficult because you have left with a negative impression on the market. Certain markets (such as Asia) are extremely sensitive about this. I had a reseller tell me that one of my competitors will never be able to re-enter the market because they had abandoned customers and partners. In summary – if you’re going in, make sure that you’re 100% dedicated to it.
So, my ideal situation to enter into a foreign country is as follows:
- Single master distributor
- 18 – 24 months exclusivity with pre-paid royalties tied to that (can be renewed after contract expires)
- Distributor has an active sales force that can sell directly to customers
- Active sales force carries a dedicated revenue number for your product
- In-country resource
- Market Development Fund – derived from a percentage of sell through or bookings. Marketing budget targets are fixed and co-shared between the partner.
In the early days, a company needs a partner to build the market and the relationship must be structured as such from the beginning.