The Right Way For U.S. Startups To Expand Into Europe

October 13, 2020 By iwano@_84 Off

For companies with global ambitions, especially those in the U.S. looking to expand internationally, Europe is a natural first choice given its maturity and large consumer market. Because of this maturity, many companies assume taking a ‘copy-and-paste’ approach to European expansion will suffice. However, as with any new market, there are nuances and keys to success that can make or break a company’s ability to survive and hopefully thrive in uncharted territory. The good news: there are tried and true methods to guide companies looking to make the leap.

On the heels of growth stage fund Frontline X’s European Expansion 2020 Report, which analyzed 175 venture-backed B2B Software companies that have expanded into Europe over the past 15 years, I spoke with Frontline Partner Stephen McIntyre about keys to success and mistakes to avoid for companies looking to enter the European market and internationalize operations. McIntyre has no shortage of insights on the topic, having previously run Google’s ad business in the EMEA (Europe, Middle East & Africa) and set up Twitter’s first international office as their VP of EMEA. 

Why Europe?

With an increasing focus on emerging markets in Latin America and Asia, what is it that sets Europe apart from these other large and affordable markets as the first regional expansion for U.S. B2B software businesses? According to McIntyre, it all boils down to the size of the market and where the customers are located. In the case of B2B software, Europe is always the 2nd largest market after the U.S., and in particular, the United Kingdom—Europe’s premier ecosystem—shares a language, culture and legal characteristics with the U.S. As a general rule, in Western Europe it’s easier to co-locate U.S. tech style engineering teams with sales teams (as opposed to Eastern European technical teams, which are often separated from their sales counterparts).

While most U.S. SaaS startups looking to expand turn to Europe as their first destination, the impact of effectively scaling European operations on the broader business is often undervalued. As stated in Frontline’s report, “well-run SaaS companies should derive at least 30% of their global revenue from Europe by the time they go public.”

Where to Expand?

For the reasons listed above, London is an obvious choice for a company’s inaugural European office. However, while Berlin and Paris conventionally follow London in terms of ecosystem maturity, Frontline data interestingly points to Dublin and Amsterdam as strong options. McIntyre, who hails from Dublin, expanded further on the unique benefits of these two emerging startup hubs. 

Dublin and Amsterdam tend to compete head to head given their similar strengths and weaknesses. Historically, the popular advantage was business-friendly corporate tax rates, but as McIntyre noted, this factor doesn’t come up as a top criterion as much these days for CEOs. What differentiates Dublin and Amsterdam is availability of experienced talent. To be clear, talent availability varies across cities depending on function and go-to-market model: if a company is exclusively hiring engineers, then it’s advisable to look at Berlin, Stockholm, Paris, or Lisbon. However if a company aims to build a go-to-market operation with customer success and experienced sales teams, this precludes many European cities. 

Dublin, which counts Google, Facebook, LinkedIn, and Dropbox among the companies with sizable local operations, attracts talent, and equally as important, provides this talent with development opportunities and experience running large technology businesses. Similarly, Amsterdam is home to the EMEA headquarters of both Uber and Netflix. Beyond talent, both cities are relatively easy to do business within, whether it be hiring, firing, data privacy regulations, visa approvals, or relocation.

How to Win?

The real challenge in European expansion is doing so strategically. This means tailoring an expansion approach to selectively address gap areas and creating an effective balance of imported and local leadership—of personnel with significant company experience and personnel with significant market experience. Frontline’s report touches on several market entry strategies, of which McIntyre highlighted three crucial points for any effective European expansion.

The first is what he referred to as “success amnesia.” Successful U.S. companies forget what made them successful domestically when developing overseas strategies. This makes sense, as it typically takes businesses 5-6 years until they attempt to expand, and this timeframe has only been extended over time—companies today are expanding notably later than those from a decade ago. When the time to expand finally arrives, many companies take a sales-first approach, despite the fact that their original success came from grassroots brand building and word of mouth referrals. 

Building references from the local tech community and developing product advocates are critical steps that are often overlooked. McIntyre believes companies should invest at least one year of brand building before focusing on sales. He illustrated this using the example of Twitter’s European expansion, which was initially driven by partnerships with local TV networks (staying true to the strategy used by the company to originally build its brand in the U.S.).

The next crucial consideration according to McIntyre is hiring—an area in which even the strongest companies falter. The reason hiring proves to be such a challenge is that for many businesses, hiring a European leader is the first General Manager role in the company, as until that point, the CEO plays this role. The lack of talent networks on the ground can make the first round of hiring even more difficult. Therefore, it’s imperative to nail the first senior hire, and to prioritize candidates with their own talent networks to help build a team around them.

Finally, McIntrye stressed that CEOs should not delay expansion too long, specifically as a result of uncertainty driven by the COVID-19 pandemic. He emphasized the importance of growth stage startups staying the course, because if a company is on the road to IPO and does not consider Europe, the opportunity cost is high. Companies that delay too long create vacuums that may be filled by local “copycat” competitors. In fact, this phenomenon occurred recently in the context of Brexit. The uncertainty and market slowdown perceived by U.S. companies not yet in the region did not reflect the reality of a resilient market and continued growth, resulting in missed opportunities. In response to COVID-19, a more strategic approach is to begin selling remotely from the U.S. without a large upfront investment to test the waters while preparing for a broader expansion in 2021.

Is Your Business Ready?

The software market is booming despite COVID-19, with public markets calling from more IPOs. International expansion has proven itself to be a top growth lever—apart from selling an existing product to different domestic segments or developing new products, going international is a natural milestone for growth stage companies. Now that you have the tools for successful expansion, the only remaining question is how soon you can kickstart your company’s global ambitions.

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