Berlin/Tel Aviv/Singapore/Kuala Lumpur - August 2015
A selection of observations on the weaknesses of US startups in internationalisation - with initial theses on how to exploit or defend them. Seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A are increasingly able to exploit the structural weakness in US VC startups that tend to internationalise at Series B. There's some ways within this structure for a US unicorn to defend and they will increasingly gain adoption.
US startups looking to expand internationally, especially in the B2B space, usually have a rough time doing that (1). Tech media often assumes that unicorns that have made it in the US will move on and be successful in Europe. This is, more often than not, not true. Who would guess that, say, the European revenue leader in file sharing (2) is not Dropbox or Box - but SSP Europe which is pretty much unknown in the tech media?
Explaining the weaknesses of US startups in internationalisation
There's multiple structural reasons why this is the case. Based on discussions I had it seems there are two main ones.
Above all, internationalisation is a very late challenge in the US VC playbook - usually at B Series - and this makes US startups structurally bad at it.
Above all, internationalisation is a very late challenge in the US VC playbook - usually at B Series - and this makes US startups structurally bad at it. At B Series many US startups turn "stupid" - they gain a lot of the traits of the incumbent companies they despise and claim to be "disrupting": at this stage much of the product as well as process to market has become stable - with a US market bias. The B series cash comes in and this product and process is then scaled. The head count doubles and triples. External agencies are hired for each country and managed centrally.
People on these jobs often have low reputation within their organisations, but most often it's not them, but the their job structure to blame. Unicorns tend to hire corporate and consulting people to run additional markets, not entrepreneurial types. Instead of giving people room to play as advertised in the job section of their company website, they hire people that like rules and templates. (3) I have many war stories from friends in related losing job positions as this happens. Friends spending their day with 10 marketing/PR agency calls per day of 30min each, none of them doing a good job and them not having the time or power to tweak the process. Friends in BD positions not able to get an essential local feature on a product roadmap for months that would have taken a single engineer to tweak a day when the company was younger.
These problems tend to be significantly bigger if the first stop for internationalisation is London/the UK - a location which allows startups to continue to speak their language and where most of the business is in a single city.
The second reason - and the main explanation or line of defence why this structure is right for US B Series startups - is that non-US consumers are much less important for them to exit.
The second reason - and the main explanation or line of defence why this structure is right for US B Series startups - is that non-US consumers are much less important for them to exit (4). Most of the US acquirers most often value US consumer bases or BD partnerships only. For them distribution deals with AT&T, Sprint, T-Mobile or Verizon are more valuable than the ones with Telefonica, even if the consumer spend on the product may be similar.
This focus towards the US only changes if the startup IPOs - Wall Street is less discriminating and appreciates dollars wherever they may come from.
Related, I wonder what impact of the “private IPO” phenomenon has on the discipline of the US-backed unicorns in becoming international companies. Josh Kopelman recently pointed out that "if there’s one thing we can learn from the public IPO market, it’s that the VC industry isn’t always good at pricing large companies...Public companies reprice daily. Private companies don’t have to reprice for years on end." I also suggest private IPOs have the effect of putting much less organisational discipline on Unicorns becoming international than Wall Street would. The structural weakness I describe in this post, more often than not, is not priced in their valuations. Unicorns, on their internationalisation flank, are more vulnerable than their investors think they are.
How to exploit it
Famously, I am not the first one in Berlin who understands this weakness and how to exploit it. What was new to me, even as a Berliner entrepreneur, was to see the size of it on a recent trip to Singapore and Malaysia. According to Andreas von Maltzahn from Delta Partners Group, in 2013 80% of all digital investments in ASEAN was Rocket Internet. In 2014 the figure was still 60%. This effect has also moved beyond Rocket. On the ground, specifically in Malaysia with its foreigner-friendly immigration laws, I met multiple ex-Rocket teams.
The structure was always similar: a mix of 10-30 Berliners and a multiple of locals who were being trained with the relevant know-how.
The structure was always similar: a mix of 10-30 Berliners and a multiple of locals who were being trained with the relevant know-how. The results, at least the ones I saw, are impressive: multiple of them had found local product-market fit and raised A rounds, not seldom with US (Sequoia, Golden Gate Ventures, to a lesser extent 500 Startups) backing. Local unicorn representatives were mostly playing defence, their mere presence often mainly justified by Singaporean tax and law structures.
Multiple regional players (both internet corporations and VCs) I've met had also noticed, even though their organisations are early in the process of figuring out how to react.
Multiple regional players (both internet corporations and VCs) I've met had also noticed, even though their organisations are early in the process of figuring out how to react. Traditionally most of their operations and their corporate thinking has been geared towards the Valley. Multiple of them are now Rocket shareholders. From my observation, there's around 5 Japanese / 4 Chinese / 2 ASEAN funds either scouting in or looking at deal flow from Berlin now, many more in Tel Aviv. (5)
Going forward it will be interesting to see how seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A - will be able to exploit this structural weakness in US VC.
Going forward it will be interesting to see how seed startups from Berlin or Tel Aviv - who need to need to make internationalisation part of their game plan for Series A - will be able to exploit this structural weakness in US VC. European and Israeli playbooks are much more applicable to Asia than the US and here European and Israeli entrepreneurs have more chances to succeed. My guess is that we will start seeing regional heavyweights with global ambitions going more and more aggressively against their US brethren, even though they may have a couple of 5x or 10x more funding.
How to defend
I don't expect much fundamental change in the current US VC playbook structure.
The trend I am describing in this piece, admittedly, is not as important to the US as it is to us outside of it. US unicorns most of the times will prevail against their international counterparts, but they will so because of their superior access to capital - not their better skills, code or product.
Within the structure, as a simple step on how to defend, I would suggest not to start with London/the UK as one expands abroad. As mentioned it's too easy. With London/the UK your organisation will not face the hurdles it has to face and learn from when it internationalises at scale. Whenever I hear of internationalisation expansion announcements from my friend's companies and see that London is the first step, I worry for them. Very rarely even the most powerful CEO can start tweaking his organisation's playbook or personell when the organisation hits international market #2 or #5.
Within the structure, we have seen some of the more forward-looking startups run more of their internationalisation from outside the Valley.
Within the structure, we have seen some of the more forward-looking startups run more of their internationalisation from outside the Valley. Some of them invested into a B series tax by cutting local entrepreneurial teams in (e.g. Groupon - Rocket, Airbnb - Springstar). Some of them have established regional offices or have even bought regional startups that have done well in internationalisation. Here in Berlin the case of Applovin and Moboqo comes to mind, for example. I see more of that happening going forward.
Additionally I see the rise of more and more middle-men companies that pick up both sales as well as customer care functions.
Additionally I see the rise of more and more middle-men companies that pick up both sales as well as customer care functions. Companies like Global Dots (one of the world’s largest independent cloud and performance optimization integration partners, eg the largest seller for Akamai in Europe; Israeli-owned and based with their Head of Sales in Berlin) are doing very well and we will see more of them.
Interesting times ahead as we will see this play out.
(1) Like each diagram or model, also this model has assumptions and elements which it uncovers as much as it hides. The single counter-trend lately is possibly the rise of app stores and Facebook as a distribution platform. In a way these platforms offer plug and play internationalisation for a very specific type of startups that is much easier to deal with for US B series startups than described in this article.
(2) According Dieter Schneider, the CEO of SSP Europe, at a lunch a week ago.
(3) Thanks to Olga Steidl for point this out.
(4) Thanks to Raj Singh pointing this out to me.
(5) In the context of this piece I should have discussed the regional rise of other powers, specifically the Chinese internet corporations and various of the non-Google Android players who are now getting out of China, but this will happen in separate pieces down the road.