Out into the great unknown
International expansion in software is pioneering. Of course, it comes with great opportunity if done right. However, there may be downside risk if a strategy has not been well thought through. It is therefore worth taking the time to consider all of the elements that will mitigate risk while embracing the available opportunity. An introduction on the practice of internationalisation.
When it comes to an internationalisation strategy software companies have a unique set of advantages. There is the inherent scalability of many software solutions, especially when these solutions are cloud-based and can be delivered as a service (SaaS). The limited marginal costs for software delivery and online onboarding of customers open great opportunities for international expansion.
The challenge of doing business abroad
Driven by this scalability, internationalisation has become a top priority for many software entrepreneurs. And not only are they drawn by the idea of scaling their offerings, they are drawn by the challenge of doing business abroad and of course by the scale of markets (other than at home).
So how about your business? Going across borders might have crossed your mind on multiple occasions. Maybe, your company has taken steps in this direction already and you would like to take it to the next level. If so, the most important thing to realise is: for all the opportunity out there, success cannot be taken for granted. Taking your software company abroad takes more than simply a ready to scale-product.
Pioneering: how to?
So, what does it take for a B2B-software company to be internationally successful?
Leading software investor Main Capital Partners (Main) has drawn lessons from nearly two decades of building European software champions.
Bram Kaashoek is Managing Director of the Market Intelligence & Performance Excellence team at Main. Every month, an average of five add-on acquisitions are completed by companies that are part of Main’s portfolio. A lot of the research on these companies and their markets comes from the Market Intelligence-team and the team also assists in creating the internationalisation strategies of these companies.
‘There are many pitfalls’
Kaashoek says: ‘There are many pitfalls – but the good thing is, they are often very similar. To turn internationalisation into a success, a thorough international expansion strategy can and should be created. We help our portfolio companies shape and navigate those strategies.’
Two different phases
If preparation is key, what then does an international expansion strategy or internationalisation strategy entail?
Phase one can be described as the soul-searching phase. Some of the questions that should be answered include:
Why does this company want to go abroad?
Perhaps growth in the local market is pretty much under control or there isn’t a lot more growth to be expected anymore and internationalisation seems like the logical step. Perhaps growth in the home market is even slowing down or perhaps, simply, a product is now suitable for international expansion.
What products are suitable then for internationalisation?
As companies like Adobe, Microsoft and WhatsApp have shown, some products can be internationalised seemingly effortlessly. This however, is seldom the case. Differences in legislation but also culture can mean that changes need to be made to a product.
Sometimes this means the content within a software product needs to be altered (think about translations, or actual changes to the content to suit new markets), and sometimes, the software itself requires major changes.
Is our company up to the task?
It is important to ask yourself if you have enough talent on board to get the job done, and if you know where to focus. When you are running a small company the question of how much attention your product and the local market requires are very important: is the product suitable, and can you sell it?
Most likely, it is a good idea to start with targeting a smaller market where the product requires few changes and your company needs little introduction rather than targeting a huge market where everything seems different.
Trying to conquer China, even with 100 employees and a couple of offices, is like building a castle with a toy crane.
The second phase can be paraphrased as: what will be our specific strategy to conquer this market? Main distinguishes three models. In the first, the remote model, software is put on offer in local markets without any local presence in that market. Perhaps, a local language website is created, and local marketing efforts are made.
The remote model
Christiaan Crouwers is Practice Lead at Main’s Performance Excellence Team: ‘There are multiple reasons to use this model. The remote model can be used to test how customers react to a certain product. And sometimes, products just need very little local support. In that case, the remote model can be ideal.’
Working with local partners
The second model is to work with local partners. In this model, the product or service is created in the home country. Partners abroad, with deep knowledge of their local market, will sell the product.
The success of this model is highly dependent on a highly focused execution. How many partners do you need in the local market? How is the co-operation between you and the partners incentivised? The devil is definitively in the detail but when executed professionally the partner model can lead to fast growth abroad.
A great benefit of this model is that it allows you to focus on the development of your core product. International sales, which can consume many resources, is outsourced to partners.
A local office
The third model is perhaps the most intense and most certainly the most expensive: having your own boots on the ground. By opening an office and starting from scratch, or by acquiring a company, local presence will be realised but with an upfront investment requirement.
Acquiring a company can be an excellent way to get a foot in the door for companies that would like to build a local presence fast. For example, in a fast-developing market. Bram Kaashoek says: “At Main, we think the strategy of add-on acquisitions can be highly effective. It increases your scale quickly, adds new products and features to your product portfolio and expands your knowledge base. The growth of textkernel, Assessio and Alfa eCare, three of our companies, has been fuelled by such add-ons. However, due to the high investment costs, one needs to be certain that this is the right strategy for your company in this specific market.”
Success and failure
Which strategy is best? The answer to that question pretty much depends on the answers to the questions in the soul-searching stage. Christiaan Crouwers: “In a partner model, scalability is optimal. With a local office – opened or acquired -, your position is strongest. What strategy to choose, really depends on the combination of your company’s product and goals.”
Main Insight Event DACH 2022: Internationalization as a growth driver
Main organises several events throughout the year on strategic topics such as internationalisation.
On the topic of internationalisation, Main will organise a (German and English spoken) event for the DACH region on 6 April 2022, in Düsseldorf, Germany. Read more if you would like to participate.
We will keep you informed on the most relevant developments of Main Capital Partners