I posted this on Medium last year, and it has become my most-read Medium post to-date.? I'm re-posting here for folks that follow the BP3 blog, and because the post has held up well over time.
10 Barriers to International Expansion (for Startups)
This is the sh*t no one tells you about international expansion? a primer on taking your startup overseas when you?re ?too small? to do it, from the school of hard knocks.
BP3 started as a small software and consulting practice in Austin, Texas in 2007, making a name for ourselves as an innovator in the BPM space. Late in 2014, we acquired a company operating out of London, which accelerated our expansion to the UK and Europe. We now operate in 7 countries???recently incorporating in Holland and Denmark and acquiring Futurum IT in Denmark last month. Our European team has more than doubled since that first day after the acquisition in 2014, thanks to the hard work of everyone there and in the US.
We bootstrapped our way for 9 years at BP3 and built a great business in Europe, and now we?re going to share all the lessons we learned the hard way???hopefully you won?t have to!
What Kind of International Expansion are we Talking?about?
When someone talks about international expansion they likely have different scenarios in mind:
- Hiring staff, opening an office, and interacting with clients or customers in another country
Selling products or services through partners???no staff
- I?m a SaaS business???if I take Euros I?m international right?
For purposes of this article, we?re just going to talk about the first type???putting a team on the ground in another country.
1. It Costs Money. Real?Money.
As a startup, the biggest barrier to entry for international expansion is the cost. The rule of thumb that I?ve heard in the past is that it will cost $2M to begin to enter a single international market, and could cost considerably more. Most small companies can?t spend that kind of money to expand, even if they could see that it would pay off.
If you?re raising Other People?s Money (OPM) you may not think twice about dropping a few million on international expansion. But if you?re bootstrapping your business when you go International, you?re really cautious about how you do it. The return on investment and cashflow have to be there.
2. Bank Account Part 1???You?re not big?enough
You need a bank account. I?m sorry, but you don?t have one overseas. The key barrier is the number 30. As in $30M. In Revenue. And if you have less than $30M in revenue, your US-based bank will not help you. They likely won?t even tell you that they could help you if you had more than $30M in revenue, because (a) the person you?re talking to likely doesn?t know, and (b) they probably know that you?d be upset to find out that such an arbitrary limit is constraining your business.
3. Bank Account Part 2???Regulations
No problem, you think, I?ll call up a bank in (insert other country here) and open an account. Not so fast. They?ll need you there in person. Several times. Over several months.
You?ll need to submit a passport, a utility bill, tax returns for several years, a letter from your mother (probably), notarized statements from the company, on company letter head. And you?ll have to prepare for an ill-defined process to run its course.
Odds are, the bank you?ve reached out to will still say no. If you ask why it is so difficult, they?ll tell you ?Sarbanes Oxley?. They won?t mention their own regulations that also make life difficult, but those are there as well. You?re on unproven ground. They want to make sure you?re not hiding or laundering money. They want to know that you?re a real business. You might even need a local company director, and that person might need to be a citizen of the country.
My advice: try several banks at the same time, they?ll all ask for the same information anyway, and most will say no. And then be prepared to make at least 3 trips in person to visit the bank, or to hassle them on the phone on a regular basis. Always ask for their names, and their supervisor?s names, so that you can follow up and keep the breadcrumb trail going. Be prepared to wait at least 3 months to get that account opened. Meanwhile, keep a good ledger of accounts so that you can track what the new international business owes your parent company as all the bills are paid out of the parent account via international wires for the first few months.
You?ll find getting a VAT registration and a company formed go much quicker and easier, believe it or not, in almost any EU country.
4. Taxes. Your Firm isn?t Ready for your International Tax?Issues.
We thought international taxes would be an issue. But what we didn?t realize is that even the big tax firms in the US really can?t do your taxes in the UK and in other locations in Europe. They expect most companies to cobble together their tax strategies from several tax firms???one in each country???none of whom has the big picture.
Obviously, that?s not going to work. We looked long and hard to find a tax firm that we could trust to advise on these issues. Even so, we also have local tax advice in Europe. It?s that hard.
5. People???you need them, you don?t have?them.
You?ve got to find and hire your team. Make sure you have an idea of where to recruit talent???both where and from where. If you hire a good leader, they?ll help you with this. Unless you?re going over to lead them, or sending someone over to lead them, you need to identify someone who can be that leader.
I think the toughest decision is whether to hire a do-er or a leader. A do-er can do the work, but also can lead others effectively as the team or organization scales. A ?lead? is someone who isn?t going to do the work, but leads others. Either path has risk-reward.
I can say that you?re better off hiring a leader who is a resident or citizen. That person will have more familiarity with local contracts, laws, customs, and business norms than anyone you can send over. There are a lot of people whose careers have focused on being the enabler for US businesses in their country. You can definitely find people who have experience working for an American company and therefore are familiar with the likely miscommunications and snafus that happen when two cultures meet.
If you?re really lucky you find someone to lead your first international office who is comfortable in both cultures. Someone who has the ability to ?translate? between US and European businesses, and can save you from many misunderstandings over time. You need this kind of talent in your international team.
6. You Don?t Speak the?Language
If you?re starting in the US, you?ll want to pick a European Headquarters where English is a common first or second language. England, Ireland, Holland. But there?s a risk: you think you speak the same language. You don?t.
Our European manager has constantly had to translate simple every day words and expressions to avoid confusion. Learning that the word ?scheme? in the UK just means ?plan? was a big relief, because when Americans say ?scheme? usually they?re up to no good!
And that?s a trivial example. The real life issues are more important than that???what might be an off-hand comment in the US raising no alarms, might be a huge concern for the European team???or vice versa.
7. More Communication
It turns out that communication is an issue above and beyond the language. Because if you didn?t have a distributed team before you went international, you definitely have a communication issue after you expand internationally.
It?s a big challenge to weave people who don?t live and work at headquarters into your daily dialogs, and into your important decisions and dissemination of information. The amount of time that goes into planning communications goes up dramatically as the distributed team grows. And while IM, email, Slack, blogs, Skype, Hangouts, FaceTime, and other technology advances have greatly improved our ability to collaborate over time and space, none of these mediums trumps face-to-face communication.
So you?ll have to work harder. Establish rhythms that allow for meetings during business hours that work across many time zones, or allow for more than one meeting, when previously one would do. Extra effort has to be made to give your team members in remote locations that opportunity to participate in the conversation and contribute their ideas and challenges back to home base.
Whatever communication strategies you?ve had up to this point, you?ll need new strategies going forward.
8. Find your Common?Culture
While national culture???and even regional culture???will have differences, it is important to establish the stamp of the non-negotiable elements of your corporate culture early and often in every geography.
The easiest way to do this is to hire and acquire teams that already share your culture and values.
You also have to live the culture and values, and reinforce them every day with your team. Ideally, you?ll find culture-carriers in your international locations as well???those key individuals you can build around, that are constantly reinforcing everything that makes your company great.
9. Team Building is a?Must
Building camaraderie among your team members across geographies is critical to the long-term success of your business. You don?t have to do ropes courses to build team spirit???but you have to spend time, and you have to cross pollenate your team. We have been sending our team members from one side of the Atlantic to the other at various stages to help each other out. We bring the executive team together a few times a year. We get the whole company together once a year. I personally travel to Europe four times a year.
You can?t get your team together often enough. And every time you gather for business, make time for the social connections. All of this team building will be expensive in the short run. But you?re investing for the long run.
10. How Do you Decide Where to go?Next?
The hardest thing to do might be deciding where to go first, and then where to go next.
My first recommendation on your first international expansion: follow your customers. It may be tempting to do labor arbitrage and to try to find a country with the skills you need at a lower cost. But in my view, an international business isn?t about where your work gets done, it?s about where you find your customers. Follow the customers as you expand.
Secondly, be opportunistic. International expansion, done right, is shockingly expensive. If you don?t find customers in that investment, then it isn?t just expensive, it is wasteful. But beyond that, when you have an opportunity that really works, seize the day or walk away. Those opportunities don?t come up very often???so if it is the right one, take it. If not, walk away and don?t look back.
Third, go where you can build critical mass. Remote employees in different geographies can work really well for your business. But the multiplier effect of the leverage of having critical mass is hard to under estimate. We observed that effect when we moved aggressively into the UK market in 2014???it energized and improved all of our efforts in the European market.
Fourth, as you evaluate your second or third expansion, it?s time to establish the parameters for expansion: what are the conditions for success, and what are the conditions for placing the bets. I can?t tell you what those parameters should be for your business, but for BP3, we?ve worked out a reasonable model that dictates when we incorporate in each geography and look to invest.
[Update: #11: Data Privacy and Protection]
Thanks to a comment below, but to make sure it has visibility, we should add that Europe in particular, and other countries in general, have different data privacy and protection rules. Even if you are SaaS and able to accept Euro you still need to comply with the rules.
It?s easy for companies that start in a large market in their home country to overlook these differences as they expand.