Lessons Learned In International Expansions - Tips From An Investor

For companies that may be reaching their home market limit potential, international expansion is a must to grow. The U.S. has been the world’s largest economy since 1871 and current trends show it is expected to remain strong over the next few years. Overall, the country is still relatively free of quotas and non-tariff barriers, it is open to imports, and has well-developed distribution channels to customers. Together with its massive size and growth potential, the U.S. is a lucrative market for foreign companies.


In order to share real-life experiences and knowledge about international expansion and entering the U.S. market in particular, we interviewed Petri Laine, Partner at Innovestor Ventures. He is an experienced investor and has had a unique viewpoint of companies’ expansion efforts during his career.


Petri Laine has a background in Finance and Accounting in both Finland and the U.K. Before joining the venture industry, he worked in the academia as well as in corporate finance. In that role, he advised companies in mergers and acquisitions, in raising funding from investors and eventually became one. Petri has built his professional life largely around technological companies in all stages, from start-ups to listed companies. However, most of his experience is with early stage tech companies. As both an investor and advisor, Petri has worked with hundreds of companies during his career.


Through his role as an investor, he has been following many companies accessing foreign markets in Europe, Asia and the United States, with most having been successful. There are as many international expansion stories as there are companies making these efforts.


“I believe that whenever companies think about entering a new market they should view it as a project, meaning there should be a detailed plan with a target and checkpoints. That way there are points where the company can evaluate if they are on track or if it is time to pull back. As a growth investor I would say that the first instinct for most companies is to charge but sometimes it makes sense to pull back, perhaps just temporarily, if it looks like there is no product-market fit at the moment.”


In your experience, what have been the best growth strategies for companies?


“There is a lot of variety when it comes to successful growth strategies but in most cases, they have been able to find people that have feet on the ground, meaning a partner or a service provider that has a good local network. Another good example are companies that have a customer in their home market that has operations in another country and slowly enter that market through them. This is a good incremental market entry process as opposed to making a big investment opening a whole new market in one go.”


Have you witnessed any successful international market entry strategies?


“In my experience, especially with early stage companies, it’s more about execution rather than big market entry strategies. A larger company might have a strategy to buy a company and expand to a new market that way. I have seen some SME companies enter a new market through a joint venture in which the company owns 51% of and the local partner owns the other 49 %. The local partner has a good motivation to grow the business but on the other hand, there is a clear model on how the company is valued so that in 3-5 years time it is possible to get the 100 % ownership. That has worked well in several cases.”


Have you seen companies successfully expand to the U.S. market?


“In short, yes, I have seen companies successfully enter the U.S. market though that is probably the most difficult and most expensive market to enter. In the perspective of Nordic companies, they have to offer a really unique product that cannot be found in the local market. One good way to approach the large United States market is to focus on smaller markets inside it, meaning the individual states.” In their investment portfolio, California and Illinois are two of the states with the most activity. Some companies may have sales through an Incorporated company in Delaware, which would be considered more as an accounting unit rather than proper operations. Mr. Laine has also seen companies set up operations in Canada and that has been a stepping stone to the U.S. market. In one instance there has been an acquired company in Canada whose business is mainly in the United States.


Are there any types of companies that are more likely to succeed?


“It depends on the resources. Software is maybe easier as it is not as capital intensive to invest in items to run a software company, such as people and marketing. It is more difficult for a manufacturing company to succeed since it requires more resources. Or perhaps the company has services in the U.S., but manufacturing is somewhere else in which case there has to be a good value-added product to counter the cost of logistics and other added expenses. Some service companies are likely to succeed too, such as consulting where the company sells knowledge.”


On average, how much would you say it costs to enter the U.S. market?


“I would say that if a Nordic company has entered any other European markets, expanding to the U.S. would cost roughly 3 times as much. I have unfortunately seen several failed attempts where companies have entered the market with a low budget or without sufficient investment in the pre-entry research.” Mr. Laine believes that making a sub optimal investment in the market entry process is a fast way to lose the whole investment. “I encourage companies to do their homework and invest in proper market research and find the right people. It may take time, and although entrepreneurs are often impatient it is sometimes better to take your time and do your research.” He suggests that companies could set a time and a goal to reach by that time. For example, after 12 -18 months when a certain milestone has been reached, the company can start the U.S. expansion process. “My estimate, based on the businesses that I have worked with, is that this crucial market exploration phase can take anywhere from $50-$100k, depending on the business that the company is in. It is possible to learn a lot even with $10k. There are a number of service providers and also universities that offer market exploration services.” There have also been some lucky strikes, one in particular where a company was at a trade show and connected with a U.S. company that was looking for the exact offering that this company was providing. They were able to expand to the U.S. through this one customer.


What are the best ways of securing funds for international expansion?


“It is always best if money comes from the customer, meaning from the company looking to expand internationally. This is usually possible when the company is in a position where they can support their own operations and, instead of trying to maximize their profit, can choose to invest in growth, even though it might hurt their profit in the short-term. Often profit is not as important as growth although eventually the company will want to be profitable or at least break even as it increases their freedom a lot. One good stand point to raise capital is to show that you have done the studies, and need a certain amount of money to expand to the U.S. market. It is a risky investment so I would recommend using equity instead of getting a bank loan for example. In the worst case scenario, the company has burnt the money they have borrowed and now they owe it to the bank or other entity. No revenue but instead a big debt in the balance sheet is not ideal. There is also public support, such as grants and different types of programs available for companies looking to expand internationally."


In your experience what have been the main reasons the U.S. expansions have failed?


“When companies have used solely first timers in their market entry process. I recommend using people that have real experience in the market, who are either living there or have a good network in the country.” As an example he tells about a classical case where someone the company knows moves to the U.S. and suggests they can do the U.S. entry for this company without any practical experience. Unfortunately these cases rarely succeed due to lack of proper knowledge and a network in the market.


Do you have anything else you would like to add?


“From an investor’s point of view, I would say that the U.S. is the biggest market still and offers the best exit usually by U.S. buyers. We have seen very good European exits as well but typically U.S. buyers are willing to pay a better price. They know they are making a strategic acquisition. However, you won’t get a U.S. buyer unless you have had some operations in the U.S. so that they know of you. Most of the companies I know of that have been acquired by a U.S. buyer have had operations or at least customers in the U.S. market.” He suggests that companies looking for a buyer need to make a splash, meaning trying to make themselves look bigger than they really are. This is to get the attention of the acquisition team and to get visibility. One good way is to be very active on social media. ”If you don’t make any noise about yourself, no one will hear you.”


“For closing I would like to add that the saying still holds true - go west young person.”


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Author: Anna Storti | July 6 2022

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