By Andy Feinberg
Something important is happening in the world of early-stage enterprise tech that is not being talked about: Young companies are now able to enter international markets at increasingly early junctures and they -- and their shareholders -- are able to reap extraordinary benefits and competitive advantages by doing so. Perhaps this growing form of “globalization” is being lost in the noise over border walls and tariff wars, but, in fact, we are seeing tech companies at increasingly early stages in their life cycles launch initiatives in overseas markets and being significantly rewarded for doing so.
Early international expansion has not always made sense for young companies. For decades many ambitious CEOs of young companies presented plans to enter a new international market only to hear the following concerns from board members and investors: “Going global too soon is ‘distracting’, it is ‘too costly’ in terms of precious cash capital and the company’s human resources, it is ‘too hard’ to stay in touch with remote teams and to find ‘trustworthy’ personnel, it is ‘too hard to deliver product’ outside of the US.” Often an argument is made that the benefits are too slim for US companies compared to the size of the domestic opportunities in front of them. Until recently, these concerns may well have been appropriate cautionary wisdom.
Over the last decade, however, developments in technology platforms, global communications, and cloud computing infrastructure have reduced the costs and frictions seen as historical impediments to internationalization while, at the same time, the rapid economic growth of international markets, the expansion and recognition of deep talent pools and expertise, and foreign markets’ accelerating adoption of cutting-edge technology solutions, have made these markets compelling and highly rewarding for early-stage providers of enterprise solutions based on emerging technologies.
Are some of these challenges still sources of friction which may impede international expansion or take companies “off track”? Sure. There will be extra-late nights, language gaps and cultural misunderstandings. Many companies already have too many initiatives on their plate, and simply learning how to focus must itself be a top priority. Early international expansion is not always appropriate for every company. And some international markets continue to present risks that technological advances have not sufficiently mitigated (e.g., China’s approach to IP protection and Brazil’s challenging taxation and foreign currency regimes).
However, with the cost of international service delivery reduced by orders of magnitude in the last decade (e.g., the cost per GB for data transfer in Japan has dropped from over $1/GB to literally pennies per GB or less), with globally-situated, affordable data centers and international service delivery latency virtually eliminated, and with the advent of excellent, free video conferencing, the risk and costs of these factors and many others have been greatly reduced, especially for cloud-based software providers. The opportunity for companies to participate in “foreign markets” at an early stage in their life cycle is no longer limited as a practical matter by the needs for local product and service operations or local manufacturing or data storage. The smallest companies can affordably compete with the largest ones anywhere around the globe without material disadvantages in cost structure or performance, and can often do so with the advantage of being more nimble and quicker to seize opportunities as they develop in new markets. We believe that early international expansion can now be one of the top priorities for many companies and, as argued below, it should be.
A brief overview of my own prior company’s experience and success in early international expansion provides an example of what success can look like. Brightcove Inc. has been for over a decade the global leader in the professional online video platform (OVP) space. Founded in 2004 and based in Boston, we created the first professional OVP service. We enjoyed fast growth as a private company and took the company public in 2012. Today the company has thousands of premium customers around the globe. Brightcove first expanded internationally in the UK early on and entered Japan when it had less than $10MM in overall annual revenue. Since then, Brightcove has been the dominant OVP in Japan (by some measures the world’s second largest market for digital media and technology), Southeast Asia, and ANZ. In fact, Brightcove has in recent years generated more than 45% of its total global company revenue from international markets. Moreover, many significant contributing talents and successful personnel in the company came from its international businesses, and many product features and QoS standards were driven by the exacting and diverse demands and requirements in these markets. And in the years since Brightcove’s international expansion, the costs and challenges of international delivery and communications have continued to decline rapidly.
This article highlights and explores five specific benefits to “going international early” for early stage tech companies.
1. International Markets Present Greenfield Opportunities for Early Stage Tech Companies
The advantages of being a “first-mover” in a compelling market are well documented. They include massive advantages over later entrants in terms of brand name recognition, customer loyalty, market share, customer switching costs, and the ability to craft relationships with key/dominant suppliers and partners without competition. By contrast, subsequent market entrants have to deploy significant resources and strategies to dislodge the incumbent from existing customers, to establish alternative brand recognition, and they often have to settle for secondary choices of partners and distribution channels, at best.
The US is unquestionably a large and compelling market, and it is not our argument that US-created start-ups should not launch their businesses in the US. But while it is true that Silicon Valley and Boston continue to lead the world in technology innovation and as spawning grounds for the creation of high-tech start-ups, roughly 90% of the world’s consumers of technology now live outside of the US. In areas ripe for disruption by high tech innovation, many of these non-US markets often do not have local (or global) incumbents dominating the field or even competitive presence. This creates an extraordinary opportunity for value-creation which companies should plan for early in their life cycles in order to reap the benefits ahead of their competitors. As mentioned above, as one example, Brightcove jumped into new markets well ahead of its competitors and established leadership positions in multiple valuable markets, including Japan, Singapore, and ANZ, capturing these advantages. As the first OVP entrant in Japan, Brightcove had the opportunity to establish partnerships with leading key suppliers, sales channels, distribution networks, and sources of local capital. We are now seeing several exciting companies in my partner’s prior firm’s portfolio doing the same, such as Volta Networks, Wise Systems, ClimaCell, and TVision, and being rewarded for it.
2. Capabilities in International Markets are Deeply Compelling Attributes for Global Customers
It is often said that the best marketing for early stage companies is “referenceability”. And being able to reference large, global brands as global customers is as good as it gets. Ask your sales team! But only those companies that can support global brands in global markets have the opportunity to win those reference accounts. Not to mention that the largest revenue opportunities are often global opportunities with global companies. With early stage companies it may be the case that initial deals with global companies are “piloted” in individual markets, but the fact of a demonstrated commitment to an international presence is almost always a key factor in the dialogue with any global company looking for an innovative technology solution. Hence, early expansion into international markets can be a direct path to accelerated relationships with global companies, top flight references, and large scale revenue opportunities.
3. Presence in International Markets Forces a Commitment to Product, Service and Operational Excellence, and Drives Greatly Expanded Product and Feature Requirements
An additional “concern” sometimes shared is that early international expansion is “hard because customers in [certain non-US markets] have exceedingly tough quality standards” or “differentiated feature requirements” as compared with US customers. But we think this is a powerful reason to go to these markets early in a young company’s life cycle. Forcing your company to learn how to perform at these levels at an early juncture builds a foundation, culture, and reputation of excellence that customers world-wide (including reference accounts in the US) find compelling. We have heard veterans of global technology companies say countless times that “if you can satisfy the Japanese and German customers with your level of excellence, then you have achieved levels sufficient to succeed anywhere.” Additionally, learning how to operate your company across international time zones, in different business cultures and even across multiple languages, creates a practice of operational excellence that yields enormous benefits in important internal settings such as communications and administrative interactions with remote domestic employees and offices, or distant customers, partners, and suppliers.
A related benefit of bringing your products to international markets early is the exposure to a greatly expanded diversity of customer feedback and requirements for products and feature development. Although Silicon Valley and Boston may be dominant centers of innovation, they hardly have an exclusive “lock” on use cases and customer needs. Bringing your products and services to international markets dramatically expands and informs the feedback loop for what you have built -- and adds exponential new thinking and innovation for what you might build. As described above, many of the most valuable products and features which made their way onto the product roadmap at my prior company were driven and informed by feedback from international customers and partners.
4. Internationally Diversified Revenue Help Accelerate Growth and Hedge Against Local Economic Cycles
Yes, the world economy is far more connected today than ever before. Nevertheless, growth rates in international markets and the availability of capital for investment varies greatly, especially in the face of systemic economic events and domestic strategies employed in response (e.g., compare geo-specific market performances in the wake of the 2008 financial crisis among countries which restricted capital availability vs. those which loosened the availability of capital). Just as hedging currencies provides financial protection against currency exchange risk based on these factors, so, too, does a portfolio of international markets provide the safety of diversified customer and, ultimately, revenue risk. The point here is simple; your VCs invest in a portfolio of companies for a reason. Why should your company bet everything on the sustained performance of a single market’s economy?
Moreover, different markets are frequently at different stages of the buying and consumption cycle for technology products, resulting in vastly different growth and adoption rates. For example, cable television was a powerful incumbent in the US for the delivery of premium content at the time Brightcove first came to market with a professional-grade, Internet-delivered solution. Far less so, however, in many of the economies of Southeast Asia, where consumers’ ability to spend and their demand for premium content had grown dramatically in recent years. Not surprisingly, growth rates in Southeast Asian markets were among the highest ever at Brightcove. Capturing the steepest slopes of the growth curves thus provide yet another reason for considering early international expansion.
5. Talent. Talent. And More Talent...
Last, but surely not the least compelling reason to expand into international markets early, is the tremendous opportunity to expand your pool of talent. Many of the most talented folks in non-US markets place an enormous premium on working for and gaining experience by working for innovative US tech companies. Unlike simply “higher salaries” or “bigger bonuses”, this is a hiring advantage not available to your domestic competitors who stay stateside. These are folks with education and training that is second to none, often at top US or global universities or coming from top ranked businesses and firms. Especially when the competition in places like Boston and Silicon Valley for top flight talent has never been more severe, with attrition and movement by top US talent at unprecedented levels in the tech industry, and with hiring costs skyrocketing -- which is especially challenging for early stage companies with limited capital but a desperate need for top flight talent -- the opportunity to bring into your organization some of the very top people in local markets is irresistible.
In addition, an international labor force can offer companies unique advantages in terms of increased productivity (e.g., 24/7 global customer and support coverage) and advanced language skills for future business development. And just like having diverse customer and partner feedback from non-US markets can inform product road maps in valuable and unexpected ways, so, too, does the diversity of perspective from non-US labor expand the opportunities for innovation.
In conclusion, there is little debate about the value that can be created for companies and shareholders of any stage through international expansion. Numerous studies have reported that a fast-paced rate of international growth is a substantial value accelerator. And that companies with a higher rate of international growth have higher returns on capital. Moreover, international growth is generally perceived as “more valuable” to shareholders as not only is current growth stronger in many international economies, many “emerging markets” are less mature so the elevated growth rate is expected to remain lofty for a longer period of time. For all of these reasons, companies which in the last decade have demonstrated higher rates of international growth have generally been more highly valued and provided greater returns to shareholders.
Now, with many of the traditional arguments against early expansion being rapidly eliminated (by technological innovation itself), and with the rapidly accelerating level of consumption and utilization of technology in international markets, and with the growth and depth of top flight international labor pools, the opportunity to capture enterprise value and many of the additional benefits of international expansion has never been greater for early stage tech companies. We believe now is the time for board members to be asking early stage entrepreneurs about their plans for international expansion.