International expansion can present an exceptional growth opportunity for any company. But before taking that step, there’s much to evaluate and understand. In this four-part series, I’ll provide you with the criteria and principles you need to evaluate and better understand:
If you should expand internationally
If your business is ready or how close you are
Which key motives should drive your decision
What the best go-to-market (GTM) strategy is
When the optimal timing for expansion is
Which geo(s) you should focus on and at what cadence
I will also provide the framework for you to:
Evaluate the size and scope of the opportunity
Understand the risks and challenges
Create the right project plan and budget
And most importantly, I’ll throw in case studies and insights taken from personal experience that empower you to make smart decisions, avoid pitfalls, and achieve success.
In this first post, I’ll help you understand and evaluate the five most common reasons for international expansion. Some are valid… and some not.
1. Annual Recurring Revenue (ARR) Growth: Let’s start with the most common reason. You’re looking for additional levers to pull that will drive ARR growth. International/geographic expansion is an excellent way to achieve this objective. By expanding your total available market (TAM), you will by default increase the size of your potential customer base and ARR. However, there are a few things you should think about to determine whether or not your company is ready:
Current level of ARR: Have you achieved between $40m and $50m+ of ARR in your home market? If not, it’s likely you have a lot of untapped upside closer to home. Focus on increasing market penetration before taking on an international expansion project. Don’t distract yourself or your team until the time is right.
Proven Product Market Fit: Product market fit is measured by ARR, market share, and customer satisfaction. If you’re at $40m+ in ARR, have 5%+ market share, and 95%+ retention rate, it’s safe to say you have achieved optimal product market fit, and can now expand to other areas.
Proven Go-To-Market Strategy: Your GTM strategy is how you price, position, promote, and sell your product. Like product market fit, it’s important that the mechanics of your GTM are well established and working properly. If they aren’t fully honed, fix them before you launch into new markets. The issues you have at home will only be magnified abroad.
Mature Sales and Marketing Organization: Before trying to expand to new regions, you must ensure that your sales and marketing organization has a comprehensive and structured sales strategy, a clear system for defining, measuring, and meeting objectives, and solid new-hire coaching and mentoring programs in place. In addition, the sales and marketing team needs to have clearly defined processes that are repeatable and scalable so that what is working now will be replicable in other locations.
2. Necessity: If you’re currently operating in a small market with a limited TAM, have achieved $10m+ in ARR, have well over 20% market penetration, and have started to hit a growth ceiling, it’s likely time to look outside your home market to drive long-term ARR growth. However, product market fit, proven GTM, and the maturity of your sales and marketing organization are still important deciding factors. This scenario often applies to technology companies based in Israel, the Czech Republic, and, to a lesser degree, the United Kingdom, Spain, France, and Germany.
3. Baked In: International expansion may have been baked into your overall business plan from the outset. There are two situations where this approach is warranted:
Build vs. Launch: In this scenario, the research and development (R&D) are done in one geo and the product is launched and sold in a different one. This is common when the technical knowhow resides in one market and the greatest demand is in another. I’ve often seen this approach applied in Israel where the cyber engineering talent is well established but the largest demand is in the United States.
Prove It and Expand: You plan to build, launch, and establish product and market fit in your home geo, knowing you will expand within 12 to 18 months. This approach takes out much of the risk often associated with international expansion.
One of our portfolio companies recently leveraged the prove and expand model very effectively. After launching their products/platform in the UK and achieving over 20% market share in just under 20 months, they expanded to France. Leveraging their existing GTM strategy and lessons learned in the UK allowed them to gain significant market share again. They also spent a substantial amount of time building the organization, hiring and training, defining responsibilities, processes, and lines of communication between the new and existing organization, etc. Within ten months, they were able to refine and hone their expansion model and successfully launch in Italy, Spain, and the United States.
4. Shareholder/Board Directive: Depending on the depth and long- and short-term objectives of your investors, they may be able to assist you in your geo expansion efforts or push you to consider expansion for a host of other reasons. These include:
Strong Network: One or more of your investors may have a large network outside your current market. This can be exceptionally helpful if leveraged at the right time. However, it should not be the key driver behind your decision. I’ve lived through this scenario many times and in my experience, shareholder intros are helpful but by no means guarantee success.
Increase Valuation: Being seen as having, or planning to have, an international footprint is an exceptional future growth opportunity and positive valuation driver. However, if it’s a narrative meant to influence valuation, the story will inevitably end badly if there isn’t real intent and/or traction.
Market Trend: If international expansion is trending, it’s generally around a specific country, continent, or market with large growth potential, such as China or Africa. In this scenario, be cautious. It’s very important to understand whether the hype will be a short-lived distraction or long-term ARR-generating opportunity.
Not so long ago, I remember being pushed incessantly by my board to expand into China. I was told, “It’s the future, we cannot afford to miss this opportunity. It’s imperative that we put together a plan now.” Eventually, I succumbed for all the wrong reasons, pulled together a full project plan, budget, and GTM strategy, hired a team, partnered with two very large Chinese institutions, and launched our Chinese office. And… the results are a story and case study for another time. Let’s just say the learning experience was amazing!
5. Opportunistic: At some point you’ll receive incoming leads from outside your home market that could lead to contracts and real ARR. Your decision to pursue will to some degree depend on how hard it is to install your product, if it is cloud based or not, and if the sale is direct or through a partner. As a general rule, if it’s early in your company’s lifecycle, you should shy away from acquiring customers that are outside your home market, as these deals take longer to close and it’s often harder to provide onboarding services and support. And if you do either of these two things badly, it will likely result in customer churn that will end up hurting your brand and reputation.
On more than one occasion I’ve seen companies jump at the opportunity to close deals that are thousands of miles away - just to get a win. One particular example of this comes to mind. I was recently performing due diligence on a SaaS based company out of Germany and noticed a line item for $80,000 in ARR sourced out of Australia. After further digging I discovered that one of the founders had actually moved to Australia to open the market - based on just two new customers. And after two years in the market, he had added only one new customer and the original customers had churned. So, I ask you, was chasing two contacts that were over 7,000 miles (11,000 kilometres) away worth the effort? You be the judge, but the opportunity cost alone was off the charts.
In closing, it’s important to emphasize that no matter what the drivers for international expansion are, they should be properly identified and evaluated based on the criteria discussed in this post.
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