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What U.S. Startups Get Wrong About Expanding into Europe?
Expanding into the European market can be a significant boon for U.S. tech companies, on par with a new type of customer or a new product line. Why then, do so many companies get it wrong?
U.S. software firms are the most successful companies of the 21st century. From software-as-a-service pioneers like Salesforce and Zoom to ads-powered giants such as Google and Facebook, software firms represent close to 30 percent of the S&P-500 index. But despite their ascendancy, these companies have an Achilles’ heel: they make costly and avoidable mistakes when they venture overseas. I know first-hand because I was a Europe-based executive at Google and Twitter from 2005 to 2016, when those companies first expanded abroad. Today I invest in software-as-a-service (SaaS) companies on both sides of the Atlantic.
Europe is the default first stop for U.S. companies for good reason: a well-run SaaS company at IPO derives about 30 percent of its global revenue from the region. In 2019, SaaS companies went public with a median global ARR of $278 million, implying more than $80 million from Europe. Revenue opportunities of this magnitude are rare. To re-create something comparable in the U.S. would usually require a new type of customer or a new product line — both of which are heavy lifts.
By contrast, transporting an already-successful U.S. model to Europe should be relatively straightforward. Nonetheless, even strong software companies make an awful mess of it. One now-public SaaS company initially located its European headquarters on the beautiful Portuguese island of Madeira based on tax advice. Now Madeira has many charms, but as a location to build a sales and support team, it was an unworkable choice. Although the company rectified its mistake, it lost a year doing so.
A blunder like Madeira might be an extreme example, but software companies regularly waste effort and forego tens of millions in revenue. Most do so by making four common mistakes: mis-timing of the expansion, forgetting the root causes of domestic success, hiring the wrong leader, and over-delegation by the CEO. If companies get these big things right, they can afford to get many smaller things wrong. Here are some practical steps that executives can take to overcome each of them.