Startup: I went bankrupt because they said I had to go global
By: Simon Janiak
Tags: VC, Venture Capital, Startup, Business, Funding

A start-up must be global — this statement is repeated like a mantra by numerous representatives of the start-up ecosystem. In many cases, companies make a lot of business mistakes blindly following this strategy, and end in bankruptcy. Practice shows that sometimes it is worth to simply become the leader of one market and enjoy organic growth, leaving the battle to conquer the world to visionaries.

Today, there is more and more talk of deglobalization than globalization as the interconecting system has proven to fail. Operations are therefore limited to autonomous operation in specific geographic areas and sectors, but this is only the initial phase of the trend. The challenge for companies is to make a strategic decision whether to go global and enter the international markets. If expansion is chosen, a number of new doubts arise right after: which market to choose first, whether to do it simultaneously or successively, where is it worth starting? These questions are absolutely justified, but it is worth stopping for a moment on the primary reason for this state of affairs and thinking: why exactly expand your business to other countries?

Every country has its own customs

The general concept is that if we start operating in many areas at the same time, we will quickly increase the scale of the business. Comparing each market to the cake, after knowing its size, we forecast what piece of it we are able to take over in a given time. So if we approach five cakes at the same time, we will grow much faster. Moreover, it is dictated by the fear that we must necessarily lead the way, otherwise we will not be able to build a strong position. At first glance it makes sense, but it is a kind of generalization and the trouble starts when you get into the details.

The foundation of the issue is the expansion model and the resources that are related to it. Take, for example, SaaS, a typical contender for global domination. Let’s also assume that it is an innovative B2B service that requires at least a video call, and preferably a meeting until the sale is closed, due to the enterprise approach and customized implementation. Therefore, we have a relatively high acquisition cost. If we want to keep the momentum organic, we should have a country manager in every country. It is true that it sells best in your native language, knowing the local market and culture. In each of these destinations you need to start building a brand using the full spectrum of marketing and public relations tools. It’s not half bad if the product is easy to understand and newsworthy, because then a group of natural ambassadors forms, and the increases are exponential.

However, if this factor is missing, it is a colossal task, repetitive processes, hundreds of meetings and a comparatively quick need to expand teams. An important aspect is also the fact that relatively many companies do not reach a break even point in such a short time and a cashburn occurs that must be maintained somehow. Effect? Quickly, if only because of the costs of HR and payrolls alone, a heavy financial structure is being created that requires large investments outlays.

The operational challenge is not just product development, but the effective management of all teams. Some people will be mismatched and the market will not develop, others will be bought by competition or change life plans — it is a constant struggle. Not having a large financial cushion, most often in the form of financial rounds and experienced managers, can quickly lead to bankruptcy.

The above-mentioned cultural diversity is also a significant problem. Often, fresh GMs have very general vision guidelines, general process documentation, a product / service and a small budget. That’s all. They must therefore build everything from scratch with an entrepreneurial spirit. Create a team, build relationships with groups of stakeholders, report to the headquarters, arrange processes, and at the same time ensure stable growth.

However, depending on the country, customer attitudes and habits may differ. And so, in some countries the price will be more important, which is e.g. a critical point in Poland, in others it will be safety or comfort. In terms of communication, performance will reign in one place, in other — affiliation and WOMM elsewhere. Apart from the channels, the content itself will also vary. In terms of payment, a credit card may be standard, but only cash will be accepted in a certain market, so the process needs to be modified.

A local regulatory system for law and taxation, not to mention linking both centrally, presents another challenge. All these things, and these are just the tip of the iceberg, need to be successfully adapted, and failure to identify the elementary error in time could lead to downfall. This is a challenge in one market, so it’s worth realizing what it looks like with ten.

Expansion or development?

If you want to ensure systematic development, you need to analyze the situation well. First of all, it is necessary to realize whether the product is both universal and innovative enough that will make it suited to several or several dozen markets. Sometimes it turns out that the real problem that is solved by the product has a geographical barrier — it does not exist elsewhere or it is not considered important in the scale of needs.

Another issue is the verification of target markets, which must be done initially on at least two levels, i.e. to estimate the capacity of a given market and verify direct and indirect competition, and to forecast the onboarding process and costs of a given destination. What is the assumed growth? When will there be the BEP? What steps need to be taken? — these are just the basics.

The next issue is finance and determining how many markets, and at what time we can manage, which will build a certain scale with a good cost approximation and pessimistic assumptions of revenues.

In the vast majority of cases, it is best to use the previously mentioned local GMs. Of course, there are also other models, such as providing services from the founding country, hiring more native speakers for the team and conducting international marketing campaigns, but here the product must allow it. There are goods where the lack of a subsidiary in a given country results in a lack of customer trust and ultimately the resignation from the purchase, not to mention e.g. shipping time, if they are physical products, or complete lack of brand awareness on the market. Yet another model is the acquisitions of smaller, local entities, but here the modus operandi of the company should often be restructured.

Considering all these challenges, it is worth considering whether this is the type of business the company is ready for. It requires a lot of skill and experience, which young teams often lack. The alternative would be to spend money on product development instead, and to operate in a single market with more advanced technology. There are a number of businesses that achieve up to tens of millions of net profit and operate exclusively on the local market without rounds and foreign conquests. Certainly, therefore, globalization is not a obligation. So is it worth it? It should always be a matter of individual judgment.