Entering a new market with a new team is tricky, with plenty of pitfalls along the way. To help guide companies through the complexity of international expansion, we recently hired Juris Krumins (also co-authoring this piece) to lead this element of our operations team. He does that with hard-earned credibility, having spearheaded and managed Bolt’s expansion across 10+ markets. This topic is also very close to my heart, as I previously was part of driving international expansion with talent investor Antler across the Nordics, U.S., East Africa, and Central Europe.
When to make the jump
The decisive factor in expansion is whether you have established product-market fit in your home market and can maintain growth while directing your focus outside.
There are two reasons this is important. First, it’s pivotal to have a deep understanding of your customers and a clear reference point toward what PMF in a new market looks like. Second, the revenue engine must be nailed down, enabling steep and forecastable revenue growth. International expansion means that you’re suddenly going to be splitting your focus!
The signals you’re looking for could be a high degree of repeatable sales, a higher share of inbound than outbound leads, and when you’ve passed the point of only selling to early adopters. History has shown that this is critical, as the graveyard of startups is littered with companies that scaled without initial and repeatable product-market fit.
Deciding where to expand first
Being smart around international expansion pays off.
As one example, our portfolio company Wolt was — by all measures — late to the game. When Wolt was founded in 2014, German and UK-based delivery startups had already raised massive war chests. But rather than competing head-to-head, Wolt expanded to cities not immediately prioritized by the incumbents. While several food delivery companies bled out going head-to-head with a flurry of competition in the Londons and Berlins of the world, Wolt went on to win in the overlooked cities of Western and Eastern Europe.
But this requires sufficient market research. Entering the wrong markets can be detrimental, as major investments and huge opportunity costs are at stake.
The process we recommend when working with our portfolio companies is 1) create a framework leading to a hypothesis of prioritized markets, 2) gather market intelligence to support your hypothesis 3) budget to understand ROI and make the ultimate decision.
Here’s how to do that.
1. Create the initial framework and hypothesis
The best structure to help form your hypothesis is to create a matrix of key variables influencing your success in a given market. Rank each market after collecting data. The most important factors influencing market attractiveness will vary by company but could include market size, core growth drivers, ideal customer density in the country, regulatory fragmentation, and competitor density.
Give plenty of time and thought to what the factors driving success in a market really are, before starting to fill it out. Nuances and details are critically impacting a company’s success when entering new markets. At the mobility unicorn, Bolt, markets with higher unemployment rates tended to provide bigger pools of driver supply, which in turn drove potential for higher order volumes, which drove lower prices for customers, enabling a growth flywheel. But pay attention to nuances and consider how it impacts your model. At Bolt, drivers were paid on a weekly basis hence the app didn’t support same-day payouts. But in one country, drivers expected same-day payouts. When Bolt first entered, they struggled with high driver churn!
Aside from company-specific variables, there are a few generic things to keep in mind. First of all, the market has to be big enough to be worth it, as plenty of fixed costs are involved in entering a market. Second, does the estimated cost needed to make a meaningful dent in the market interlock well with your current funding and funding outlook? Entering a competitive and highly regulated market without sufficient resources can significantly damage growth (and, subsequently, next round funding opportunities).
After your matrix is bulletproof, the first draft of data gathered for this matrix could be fetched, prioritized, and ultimately result in a list of 3–5 markets.
2. Gather marketing intelligence to support the hypothesis
When you’ve created a shortlist of markets to enter, it’s time to collect intelligence to validate your hypothesis. This data can take different shapes, but the main goal is always to get data on your potential customers to understand whether the market is worth entering.
You may already have received market signals through inbound interest from new geographies or can easily reach out to local clients with multinational offices to understand their needs. These customers are very likely first adopters in new markets and will provide you with stellar reference cases.
Additionally, one can run Google/FB ads on a small budget to understand conversion rates for your product (ads & product must be localized for this to work properly). After that, we could get in touch with those users (and other sources, e.g., FB groups) and make a pipeline of potential clients. In the end, we have an idea of the cost per acquisition and conversion rates via online channels and cold calling.
The competition also provides plenty of clues to the new market, as analyzing direct and adjacent competitors provides founders with a tremendous proxy for how the market forces have adjusted to the customer base’s preferences. At the same time, you need to know everything about the local competition to craft a superior or at-parity value proposition. List your competitors and understand their value proposition, pricing strategy, operations, acquisition strategy, and quality of service through e.g., talking to customer support.
Try to get a sense of how much they invest in the market and whether they’re profitable. You may be surprised how much intel you can get from reaching out to ex-employees over LinkedIn.
Our Head of Expansion, Juris Krumins, provides some context on how their hypothesis impacted how they carried out market intelligence:
“At Bolt, our strategy was to go into markets where our competitors were the first market movers, had built a monopoly and thus extracted high commissions, which provided a great opportunity for entry with a cheaper solution.”
Thus, as we gather market intelligence, we got driver leads via Facebook ads, had employees or Upwork consultants call them and survey how many platforms they worked on, what their earnings, commissions, and bonuses were, the average selling price, utilization rates, along with asking for screenshots from their driver’s app.”
3. Budget to understand ROI
After this exercise, we should have data validating our hypothesis of which markets to enter. Then, prepare a budget to understand the return on investment in each market.
Informed by our market intelligence, make informed estimates around the key variables, e.g., pricing, revenues, incentives, local marketing budgets, local operational expenditure, regulatory approvals, and product localization. When we’re done with this exercise, we should be able to see which markets offer the best return on investment, in terms of e.g., GMV or ARR/burn.
This is just the start
Scaling internationally will be one of the most exhilarating and painful processes a founder goes through. Not only are you with a new team in a new market once again looking for product-market fit, but you also have to ensure that the organization on your home turf keeps developing as it should. We’ll cover this balancing act in a follow-up article.
Expansion can be ruthless, and you want to choose the right partners for the ride. Even when you think you got everything right, things can go wrong. As a worst-case example, Bolt had to shut down operations in the United Kingdom 3 days after the launch because instead of applying for a taxi license, the legal counsel advised it to acquire a company that already had it. The authorities didn’t like this work-around and Bolt had no other choice than to shut down the operations, resulting in massive losses and years to obtain the license and re-launch the market.
We’ve seen the expansion journey with both consumer companies like Wolt and Swappie, and with B2B companies like Haltian and Stravito, and would be more than happy to share our learnings over a call!
