The below is an excerpt of Octopus Ventures’ report on US expansion, “Question the Questions.” To read the full report, scroll down to the embed or visit it here.
Is expansion abroad critical to your company?
A US entry is expensive. If the business is not yet resilient in the home market, the expansion adds strain to a vulnerable position. There’s no silver bullet: in our portfolio support and in conversations with over 100 VC-backed European executives, we’ve seen companies succeed (and fail) by being fast or slow, first or late, big or small. However, successful US expansion cases were always extensively planned. Failures succumbed to a sense of “inevitability” and rushed to entry without robust validation.
We know it’s big, but what does size mean for you?
In 2016, 52% of the $584B venture capital invested globally was invested in the US. Meanwhile, the total amount of funds raised in early stage deals in the US dwarfs that of Europe and Asia. The US dominance in technology markets, investments and exits is hard to overestimate.
Most companies are drawn to the absolute size of the US, unaware of how it is fragmented and regional. Differences in consumer preferences, regulatory environments and regional costs can all pose challenges to achieving scale in the US.
With a population of 323m, internet penetration of 88% and smartphone penetration at 81%, the US is a prime market for new technologies. As of 2016 the US GDP stands at $18.56T (versus the UK at $2.62T). According to Gartner’s 2015 assessment, annual IT spend of Fortune 2000 companies tops $2.7T. With a large opportunity comes large competition.
Who else is going after the problem you are solving?
Most Europeans underestimate how crowded and loud the US market is, as well as the sophistication of the marketing and lead generation efforts of the competition. In 2016, US per capita advertising spend was $588, compared to $365 in the UK, $267 in Germany and $175 in France. A great product, crisp value proposition and effective differentiation are paramount to traction in the US.
Before you take your product to the US, do your research and find out if your customers like what they buy. Do you have significant inbound requests from customers?
Just as you did at home, you’ll need to test your value hypothesis. What are the features you need to offer in the US? Who is the audience that is likely to be interested? How will they buy your product?
Once you’ve arrived, how fast should you scale?
Your company might be lulled into believing you’ve found a repeatable formula for scale, when renewals slip, churn increases, growth slows. A study conducted by Startup Genome concluded: “Startups need 2–3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely. In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.”
If you don’t have product-market fit in Europe, moving to the US will compound your problems, not solve them. What “tells” can you see that demonstrate that fit is real? Is your product growing in the US with no marketing?
Who should go?
The choice of US lead is critical: You need someone trusted by the CEO to build, sell and have complete dedication to the effort. We’ve written before about the various lessons learned by over 50 VC-backed CEOs in the US, and the consensus around one particular issue is clear: CEO and/or Founder DNA is a necessary — if not sufficient — condition for success in the US. When asked about the #1 insight the CEOs tell other entrepreneurs about entering the US, the most cited phrase was a variation of “a founder has to move to make it work.”
Business culture shock: how severe might it be?
Companies in the U.S. spend nearly triple the amount on legal services for every dollar of revenue than their counterparts around the globe: On average, 0.4% of revenue versus 0.15% for the rest of the world. The substantial difference stems from both higher legal costs and requirements for more services. In the US, each party to a lawsuit bears her own legal costs. If you’re sued, you’ll have to pay your legal bill regardless of the outcome of the case. Given the high costs of litigation, the opposing party knows you’re likely to settle instead of fighting the case in court. This practice leads to a much more litigious culture, and the threat (and fact) of litigation is used more extensively to further business outcomes.
Could the Land of the Free cost you the earth?
Without a well-developed, strategic rationale for international expansion, companies under-resource their foreign entry, under-commit executive time and focus, and struggle to scale operations abroad. Stress-testing your answers to these questions can help ensure your team and Board are fully committed to the success of the US operations.
The US will demand all your tenacity, focus and hustle. If you’re ready to take the challenge head on, the rewards can be tremendous.
Successful US deployments have taken many and varied forms. However, one element seems to have been consistent: every entrant questioned what they thought they knew.
Asking questions doesn’t mean dampening your ambitions; instead, it signals deliberate action with measured risks. The opportunity is massive if you’re prepared for it.
What other questions will you ask?