Further to our international expansion survey analysis and case studies, we are breaking down the expansion stages. Our first piece focused on when to expand- this piece focuses on deciding where to expand.
In this article, we outline a 5-step process you can use to decide where to expand. We have produced a set of sample scorecards you might want to use to help you in your process. We hope you find the guide helpful!
Introduction
Depending on the budgets associated with expansion, the decision on where to expand, like all the others included in this series(!), can make or break a company, particularly in the eyes of investors. Brighteye likes to invest in companies that are approaching market fit in their first markets and have an eye on expanding their operations internationally. If you’re looking to align your fundraising with your expansion priorities, it is worth engaging with investors as you begin the process of deciding where to expand. It’s hugely beneficial for your raise if you can prove international potential via a considered expansion plan and positive, early user engagement in potential markets. We will walk through this process in this document, based on our experiences helping portfolio companies to understand their expansion options.
It’s important to remember that companies can expand to more than one market at once and also that expansions shouldn’t be considered statically. They should be seen as part of a longer-term expansion pathway that can lead a company towards realising its ambitions- whether regional or global domination!
Understanding the suitability of your expansion options requires a comprehensive understanding of your performance in your domestic market including understanding how you have achieved (a degree of) market fit.
Many businesses will have organically achieved penetration to markets beyond their first market, particularly if their product is wholly digital (e.g. Zoom), translated appropriately (e.g. Netflix) with broadest penetration possibilities if in English or Spanish, or if their existing customers are using the product across their own international businesses (e.g. universities with multiple international campuses or international corporations). Barriers to expansion are lower for companies with these operating models. Companies with primarily digital products can use data on existing traction, achieved without a dedicated team, to assess and prioritise which markets to enter. Others, particularly operating B2B, will need to make a concerted effort to assess suitable markets and make a successful entry.
This article is arguably more appropriate for these companies, less able to follow their existing, organic traction in new markets. However, it’s worthwhile all companies considering the steps that follow, to ensure that they follow the most suitable expansion routes and opportunities and not simply early traction figures. The only thing we assume Is that you have built a sustainable and growing business in your first market.
For reference, ‘first market’ refers to the market in which you first operated and 'expand' and 'internationalise' are used interchangeably.
The process of deciding where to expand
The process of deciding where to expand involves comparing environments and opportunities in a range of markets. In order to do this effectively, we need to decide factors against which to compare markets. Below, we outline 5 steps you should undertake to help inform where to expand, building towards a final scorecard template you can use to compare markets as well as consideration of execution and early user engagement. This includes sample indicators and context, which should be tailored to your business.
From experience, this process of scorecard creation and completion should take no more than 4-6 weeks. Steps 4 (understanding execution implications) and 5 (workshopping and customer engagement) should take a further 2-6 weeks, including assessing findings.
The 5 steps are:
We will now work through these 5 steps.
Step 1: Understanding your first market business and performance
What are the conditions in your first market that suit your product?
In our when to expand piece, we highlighted the importance of stable and improving performance in your first market. This suggests that you have found or nearly found product market fit, which reflects the suitability of your product within the market conditions.
It’s important to understand both that your product is performing well and why it’s performing well. This ‘why’ when deciding where to expand will partially reflect the market conditions for your product. Therefore, you will need to consider factors including the size of the addressable market, customer clustering, the policy context, marketing channels and others, with varying degrees of direct relevance to your business.
We have included some example questions below for you to consider, but these questions will need to be tailored to your business.
- What is the size of the addressable market?
This helps you understand both the growth potential within the market as well as your rate of successful customer acquisition i.e. you need to know how big future markets need to be for you to reach your acquisition objectives. You should try to be as accurate as possible in your estimations, but it’s important to consider indicators / figures that are findable and as comparable as possible between markets.
- How is your revenue spread across customer groups?
This helps you understand the demographic and structural factors that are most likely to lead to your success in the new market. This helps you build a more focused model for your addressable market estimations, set out above.
- How are your customers clustered and how do you reach and market to your customer groups?
The importance of this will depend on the type of business (whether your business offers or facilitates in-person exchanges) and the type of marketing that you employ (dense populations and customer groups make analogue marketing more likely to be effective whilst dispersed populations make digital marketing more likely to be effective, for example). You will need to understand your success by channel. This will help you understand the importance of customer clustering and likely avenues of marketing success in the new markets.
- How have you structured your team?
This helps to inform how you will need to prioritise, make and structure your hires in the new market, partially dependent on necessary product localisations. If opting for an entry to a market with a shared language and time zone, for example, it’s possible that few localisations will be necessary and that the team in the first market might be able to serve customers in the new market.
- Are there particular policies, regulations or other nuances in the market that suit your product?
This helps you to understand how your progress and performance in the first market has been affected by the policy environment, and therefore, what conditions to seek in the new market.
Example: education procurement models, government education budgets, government support for corporate or individual training, regional government policy etc..
What to do with this information:
With these kind of questions in mind, you can form a table, detailing the aspects and attributes of your first market and how they suit your product. These should reflect the most important market variables to your business. It’s important to assess this suitability, as it provides a useful comparator when considering new markets. This is why we advise assigning a score (with a key) to each indicator as well as relevant comments. Some of the responses will be numerical and therefore easier to score, others might be yes or no, but others will be qualitative. You should create a ranking system that reflects your priorities, but it’s important not to get too hung up on the scoring itself- it’s intended to provide a framework, rather than a hard direction. You will develop a sense of markets’ suitability as you progress. This said, you should feel able to weight each of the scores depending on your priorities. For example, you may be confident that you can be successful, regardless of the number and strength of competitors, given your confidence in the superiority of your product, so you may afford low weighting to the competitive environment.
For reference, here's the data from our international expansion survey, featuring respondents’ views on priorities when deciding where to expand (60% of respondents had already expanded). The chart on the left shows respondents’ top priority and the chart on the right shows their aggregated top 3 priorities. You can read the full survey analysis here.
Here are two examples of how you might rank qualitative indicators.
If your business would suit an education system with a centralised curriculum (because it means one version of your product will have relevance across the market), then you can form scores based on the degree of centralisation vs. decentralisation (local control). A score of 5 might reflect central curriculum management, 3 might reflect regional ownership (where regions cover large school age populations) and 1 might reflect school-level curriculum ownership.
If your business would suit an environment with individual training budgets (paid for by the state and used by individuals), then you can form scores based on the level of training support and degree of personal ownership of training. A score of 5 might reflect a generous individual training budget managed and deployed by the individual with broad freedom in what courses can be funded, 3 might reflect individual training budgets managed by companies with a limited number of courses or perhaps a tax deduction for specific trainings and 1 might reflect very limited training support beyond formal education (typically to age 18 or 21, depending on the market).
As with these examples, upon exploring the topic, you might find that you need to breakdown the indicators within your scorecard. This would be particularly important if there are nuances within your indicators – i.e. a centralised curriculum might be a positive for your business, but less so if the state tightly manages schools’ / local governments’ procurement processes and decisions. Your scorecard should reflect both indicators.
The process of understanding your first market will help you to form a hypothesis on market suitability, which you will consider and develop in the later steps. The factors in the table will indicate the profile of a suitable market, assuming you have reasonable product market fit in your first market. See the example below, featuring sample indicators that should be tailored to your business and market.
Here is a simplified, sample scorecard.
Step 2: Modelling a ‘suitable’ market
What is your hypothesis on market conditions that best suit your product at the macro level and value proposition level?
Now that you’re understanding the indicators in your first market that reflect its suitability, you can develop and confirm your hypothesis on what a ‘suitable’ market looks like. This hypothesis represents a theory on why your business is succeeding in your first market and therefore the profile of other markets in which you’re most likely to have success. It should pull together your thoughts on market size, business-specific indicators, policy indicators, competitive environment and practicalities, as outlined in the scorecard above.
For example, it could be: we are looking to expand to a market of X size, with Y and Z education structure(s), no more than two competitors with more than X funding, Y government policies in place, within Z time zones and opening up X expansion pathways.
Within your hypothesis, it’s arguably most important to focus on business-specific indicators, such as number of schools, school procurement models, number of teachers per school, and employment rates of specific groups, rather than macro indicators on items like school-age population and others. This is because there is more variation in the business-specific and policies indicators- i.e. we could expect several markets to pass the macro indicator thresholds but fewer to pass the business-specific indicator thresholds.
Indicators for suitable markets will likely be a range- for example, an addressable market size between two given figures where your market share opportunities represent a worthwhile entry. However, all should certainly emphasise the best case (i.e. would get the maximum score on each indicator).
This ‘suitable’ market should consider the same set of indicators included in the first market assessment. However, it’s perfectly sensible to revisit the indicators included in your first market assessment if you decide that there are other indicators/ adjustments you should consider in this step.
With this in mind, here is a short set of questions for you to consider and tailor to your business that follow on- and in places cross over- those in Step 1.
- What’s the size of the total addressable market necessary to justify an entry?
As explained above, you should consider and define a suitable range of market sizes, based on definable and comparable indicators across markets.
You need to consider whether you are aiming to enter a market of a similar size or a smaller/larger market. It’s likely that your competitors will also be aiming to enter larger markets, so you will need to establish what portion of market share you believe is both attainable and sufficient to justify an entry within your set-up parameters.
- Is there a type of ecosystem and market structure that would suit your product? Is there a particular type or group of customers that you would like to reach?
This might relate to the structure of key customer groups both within your existing products and those further down your product roadmap. This might refer to how they are clustered, how they are reached and their current behaviours, particularly in relation to incumbent competitors.
- Is there a particularly suitable regulatory environment for your product?
Building on examples set out above, an example query here might be: is the procurement process in schools and universities important and if yes, what does a suitable process look like? A second example might be: how does the government support given employee/ personal trainings?
- Are there language, time zone or cultural barriers that you should consider?
This is fairly self-explanatory and partially relates to necessary team and product localisations.
- Assuming a successful expansion, how would you be able to move through subsequent expansions?
Here you should consider your possible expansion pathways, and longer-term ambitions, particularly transcontinental moves, such as from Europe to Asia or North/ South America. You might desire an entry to LatAm for example, in which case it might make sense to first expand to Spain. You can consider some of our wider comments on expansion pathways within our expansion survey.
Below you can see how we might present this, adding a column(s) to your template, to include the suitable market. This should also include data/ score/ comments, as appropriate.
Some of the phrasing of the indicators will need to be adjusted when considering other markets. For example, ‘team structure’ might be adjusted to ‘hiring priority’ reflecting the key early hires you believe you would need to/ like to make in the market.
Step 3: Assessing your market options
Which markets would you consider entering and which markets best match your hypothesis?
Now that you have a solid understanding of your first market and compiled thoughts on a suitable market, you are now ready to compare a range of markets against your hypothesis. Don’t be afraid to include as many as 5-15 markets in this phase.
We have included some example questions below for you to consider, but these questions will need to be tailored to your business.
When deciding on the list of markets you would like to consider, you should first filter options in and out based on existing knowledge and your known preferences. This will help you streamline your research down to a smaller number of promising markets.
- Are there specific markets you can rule in or rule out at the outset, perhaps based on addressable market size?
- Would you prefer to prioritise expanding to a nearby market or a ‘gateway’ market? (A gateway market is a market that unlocks subsequent expansions). On a related noted, are the time zones and travel times manageable?
Here, you are assessing whether to make an ‘easier’ expansion to a nearby market (on the assumption that the context will be most similar to you first market), or whether to make a strategic entry to a larger market or one that more quickly unlocks further markets.
It’s important to remain open-minded to the possibility of making multiple entries simultaneously. Our research showed that it’s increasingly common for companies to expand to more than one new market at once, often opting for one ‘ambitious’, larger market and one smaller, ‘safer’ entry to a nearby market.
- Do you have any intelligence on likely market suitability in the team or via connections?
Is a member of your team from one of the markets you’re considering? What insights can they share on suitability and local market context?
- Do you have an existing partner or key customer that can help you get started in the market?
Partners in new markets can help you make a running start and quickly make necessary localisations.
- How is the competitive landscape looking and can you beat the incumbents?
It’s worth considering the top 5 competitors in each market, by a combination of media coverage, search volume, web traffic, partnerships, funding and employee numbers.
Here is the scorecard, updated to include the markets you’re considering. Each column should include data, score, and comments, as per the table in Step 1.
Depending on the markets you are considering, you may wish to do a second stage of market assessment, considering regional indicators where a regional entry would be helpful or better aligned with your scale (for example, if you plan to target a specific US state or school district).
Step 4: Understanding execution implications
Are you well-placed to execute an entry?
By this point, you would have a good idea, via the findings, scores and summaries of each of the possible markets, of which markets represent promising avenues. A smaller number of markets, usually around 3-5, should move on to Step 4, which is understanding execution implications.
Here, you should consider operational questions on hiring, sales and marketing, budgets and other items to better understand the feasibility of an entry. This should take into account performance in your first market and your funding.
Questions might include:
- What level of budget do you think would be necessary for a successful entry?
This would likely be a function of your performance in your first market, as well as possible investment from VCs and alternative sources of finance. In the first instance, this might reflect the amount of investment you can afford, rather than the amount you need for a successful entry. For some companies, less certain of their hypothesis, market fit and the competitive landscape, initial budgets might be quite low, but for companies entering markets with high scores and high confidence, larger bets can be made on new markets.
- How would you secure your first X customers/ users?
Your approach would likely reflect a combination of existing market intelligence, key customers with market presence, and insights from your scorecard (such as how schools procure technology or how companies work with digital training providers). Your approach should also take into account how you reach and work with customers in your first market. It might involve a regional or local focus in the first instance- for example, focusing on a specific city or set of organisations that you expect to be keen on your product(s).
A number of Brighteye portfolio companies have had success via members of their first market team having networks in other markets. Unfair advantages of this nature should be exploited to avoid standing starts, where possible!
Regardless, you should develop an outline idea of how you would market and reach your target customers, starting with those you consider most likely to be early and loyal adopters.
- What product localisations would be necessary?
This will depend largely on how your business operates. It might be as simple as translating a platform and relevant marketing materials, but it might also involve more significant localisations, to reflect local curricula, training priorities, time zones and other factors.
It’s important to understand what localisations would be necessary and then to consider how these localisations might hold relevance to other markets further down your expansion pathways. For example, if you are considering expanding to Spain and translate your product appropriately, then your product will be more easily transferable to LatAm- the same is true for English in shifting between North America, Australia, the UK and the Netherlands. Another example would be if you’re a training provider and the skills demanded in a particular market are the same in other markets on your expansion pathway(s).
You should understand how long it would take to make relevant localisations and the relevant teams necessary to make such adjustments.
- What hiring sequence would best suit the market?
Once in the process of developing your budgets, understanding what localisations will be necessary, and understanding how you would reach customers, you should have a good idea of how you should sequence your hires in the market and also whether it makes sense for a founder to move to the new market (a founder is more likely to move if the new market represents a far larger opportunity than the first market). In short, you will be deciding whether your first hire is a sales and development person or an operations person. You should consider if and how your team in the first market can split their focus with the expansion market and how you might sequence your first 5-10 hires in the market.
- What are the implications of deciding to pursue a single entry vs. multiple entries?
For obvious reasons, it’s arguably harder and riskier to expand to more than one market at once. You should consider the execution implications of this decision within the questions outlined above.
Step 5: Workshopping and user engagement
How can you test the markets?
You should now have a set of indicators you’re happy with, a firm hypothesis, and an idea of which markets appear to match your hypothesis and are promising via your scorecard. You might also be developing an idea of the high-level execution implications for the top options, but it’s worth noting that steps 4 and 5 could be undertaken simultaneously, given their close relationship. For example, it’s likely that you would discover and confirm necessary product localisations within user engagement.
Workshopping and user engagement enables you to pick up on nuances specific to your market and product that it’s nearly impossible to recognise within Steps 1-3. Early testing should not be considered as an expansion in itself, but rather as a series of fact-finding missions. This will be entirely tailored to your product and business. You should seek answers to questions like:
- Does the hypothesis appear accurate? Are there nuances we should be aware of?
- What localisations would be necessary to achieve market fit in the new market?
- Who are the key decision makers and what are the procurement processes?
- How should we reach key customer groups?
- How are our competitors performing and how are they perceived?
Final thoughts
With your hypothesis, market analysis and user engagement completed, you should now have a clear idea of where you should prioritise expanding and how this fits in with your longer-term expansion priorities. This will be relatively robust, particularly if you have considered the execution implications and have a clear plan on how to acquire your early customers.
Several markets might seem promising, even after these 5 steps. This is an excellent problem to have- if this is the case, you should focus on developing your expansion pathways. If you’re right, it won’t be long before you can expand to several of the new markets.