Pawel’s blog

I originally posted the below text regarding internationalisation of startups on my old blog, pawel.ch, in March of 2014. Having just come across this story about how Uber is losing vs. local competitors in some countries reminded me about the characteristics of multi-local marketplaces and how tricky their internationalisation can be. If you are interested in this topic, I hope you will enjoy this blog post or maybe even find it useful, especially if you did not read it back when I posted it.

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At Point Nine, we spend a lot of time thinking about how startups internationalise. As we are mostly active in Europe and given it is hard to build a really large company only addressing one of the European countries, most of our portfolio companies face the challenges of internationalisation at some point in their lives.

My current thinking is that as far as internationalisation is concerned, there are two types of startups: global and local/multi-local startups. It is very important for founders to understand which category their company is in, as it will have significant consequences for how the internationalisation process will evolve and how it will impact the development of the company.

Global startups

Global startups address an international audience from day one. They will typically launch their product in English and might add additional localised versions later. Many of our SaaS startups, even those based in Europe, are global startups. For example, Contentful, infogr.am or Algolia all fit this definition of a global startup. Being a global startup has following consequences:

- It is “easy” to go international. You sell to international audience from day one.

- Sooner or later you will have strong direct competitors, so better get funded and move fast. If the opportunity is significant and it is global, someone else out there will notice and try to exploit it.

- Especially in software, if you are global, you have to be strong in the US market, the biggest software market in the world. If you lose the US, it can be hard for you outside of it.

- First you need to master the English / US version of your product and sales and marketing. Local language versions or localised sales might be necessary at later stages of the company to scale it really big, but not to get to the first significant scale.

- The financial outcome of your startup journey will probably be binary - either you will create a very significant company or you will be crushed by competition or die of other problems.

Local and multi-local startups

(Multi-)local startups are different. They typically start with a product offering tailored to one country and after gaining some experience in the initial market go to another market and another, in a country by country fashion. Examples from our portfolio would include Delivery Hero, Kreditech or Docplanner.

- (Multi-)local startups are “hard” to internationalise. Every new market is a new logistical challenge. This can be especially hard in ecommerce, but marketplaces are not easy either. Figuring out a fast and efficient way to rollout new markets is key.

- Competition in the local markets will vary between zero and moderate, rarely will it be very sophisticated, aggressive or well funded.

- As you gain experience in a multitude of markets, it will be hard to compete with you.

- US is not a must. More importantly, US competitors will typically not be a threat. US competitors who start with a local business model in the US, frequently do not internationalize at all or go only into a few countries, do it late or are not good at it (see GrubHub Seamless, Zocdoc or Amazon).

- It is hard to get to a really big scale as it will typically require winning a large number of countries or winning in the biggest, most competitive countries (like Germany, UK or France).

- The outcome does not have to be binary. You can make it in one or a few small and mid-sized countries, fail in bigger markets and you can still have a decent exit.

Of course, the world is not as black-and-white as painted above. One can imagine that a company launches a global product offering following some success locally. Or that a company is not easy to categorise, like in the case of Spotify which goes country by country, but is building a global brand.

While certainly not perfect, I like this way of looking at the internationalisation of startups. If you have any thoughts or experiences that support, contradict or simply add to the above, I would be thankful to read about them in the comments below.

When I discuss investment strategies with other VCs, founders or LPs, I frequently feel like we are quite an exotic animal in the VC land, especially with respect to our international activities. We are very international, at least by European VC standards as we see them, and the chart below illustrates this fact well. Our current fund had 29 active companies as of Q3 2014, spread across nine countries. Whereas continental Europe is where the vast majority of our activity is happening, we are also active in North America and sometimes beyond it.

We believe that there is a lot of merit in going international as a VC.

a) The cost of starting a company has decreased dramatically in the last years. This is a well known fact and it results in an environment in which new companies pop up everywhere. Literally. If you are after early stage investing, you need to go where the companies are born, not where they scale (which we agree is more likely to happen in a hub).

b) If you call yourself a European investor, you have to be active and connected to the community in a number of European countries. As more and more local funding options for companies emerge and the ecosystem continues to improve, it is impossible to cover Europe by sitting in a major city, however relevant it is, and only invest in the companies which come by or who want to move. Investing long distance in Europe is a must, not a choice, if you do not want to miss too many interesting opportunities.

c) We like to eat our dog-food. We convince our companies to go multi-local or global and are well aware of the importance of the US market for SaaS, one of the two key investment areas for Point Nine. Furthermore, we believe that remote company setups can work, even across continents, and can have benefits. We practice what we preach.

At the same time, international investing is associated with a number of challenges. Below I listed some that come up frequently, both in our internal discussions, as well as in comments or questions from outsiders.

a) How do you get high quality local dealflow? It must be very hard to compete for investment opportunities against local investors who most of the time have much better access to the companies. And it must result in adverse selection, i.e. you only get to invest in companies that everyone else did not want to invest in.

b) How do you do due diligence on a company that sits in a country you do not know, or sometimes even on the other side of the planet?

c) How do you work with the companies post investment? They are far away, so you cannot just pop by and meet for lunch to hear what’s going on.

d) How do you deal with the legal side of things? All these legal systems must lead to enormous legal bills. Impossible with such a small fund!

e) The travel must be gruelling!

This list certainly is not exhaustive, but I think these are the most common themes that come up in discussions about international investing. And they are all valid, to some extent. Importantly however, the fact that something is a challenge, does not mean it cannot be dealt with. Here is our toolset:

Re a) and b)

We are very focused on specific types of businesses. We are business model driven and SaaS and marketplaces are our key focus areas. This makes finding the companies easier and more efficient.

We believe that business model focus and the resulting ability for quick understanding of key issues makes it easier for us to be contrarian and invest where others have passed, if we like a company.

Furthermore, we believe that being focused on specific types of companies results in accumulation of relevant expertise which resonates well with entrepreneurs and can make us an attractive partner of choice, even if we are not geographically close.

We invest mostly in businesses that can become international / global leaders, so perfect knowledge of one specific geography is typically not required.

Re c)

We have grown very comfortable working long distance with the companies we invest in, using skype, online project management tools and the telephone. Sometimes we actually find it much more productive than the traditional format of day long board meetings.

Re d)

It is actually not that bad. With a number of trusted lawyers in our network we think we are quite efficient with legal. Admittedly, seed deals are typically not very complex from the legal perspective.

Re e)

Yes, we travel quite a bit. And it is fun, but sometimes it hurts. No pain, no gain ;-)

Plus, we are an international team, with people from countries such as Germany, Poland, Spain and the US being part of it. This helps us keep an international perspective and an open-minded attitude.

Overall, we are very happy with our approach and will continue working internationally. If you are interested in finding out more, please leave a comment or ping me with a question.