European Expansion for CEOs: A Proactive Strategy

Navigating Growth Amidst Global Shifts

The year 2008 marked a period of transition as I relocated to London, coinciding with the onset of the global financial crisis which significantly hampered the progress of numerous enterprises.

Prior to this, in 2003, I was assigned to Dublin from Google’s central offices in Mountain View to oversee the company’s expansion throughout Europe. Despite substantial growth, the prevailing economic conditions necessitated a shift to a more cautious strategy, leading to a curtailment of our initial, expansive objectives.

Recent Economic Challenges and the Current Landscape

More recently, approximately a year ago, the emergence of a global pandemic prompted businesses worldwide to adopt emergency protocols. Workforce reductions, budget cuts, and the postponement of growth initiatives became commonplace.

However, as spring 2021 arrives, a notable transformation is evident. Technology sector stocks have demonstrated resilience, achieving record-breaking initial public offerings. With the availability of vaccines, revenue growth has once again become a primary focus for B2B SaaS companies.

Strategies for Startup Growth

Fundamentally, there are three primary avenues for fostering growth within a technology startup: broadening the existing product suite, penetrating new market segments, or venturing into new geographical markets.

While product development or segment expansion may appear less challenging, achieving scale through international market entry offers substantial financial benefits, especially when implemented effectively.

The Power of International Revenue

Consider the performance of leading SaaS companies in recent years. A significant portion of Zoom’s revenue – 31% – originates from outside the United States. Similarly, Slack generates 38% of its revenue internationally, Asana reports 39%, and Dropbox achieves 48% from global markets.

If your organization successfully navigated the challenges of the past year, the present moment represents an opportune time to transition from a defensive posture to an offensive strategy, prioritizing international expansion.

International expansion offers a significant opportunity for sustained growth and market leadership.

Here's a quick summary of key takeaways:

• Global crises often necessitate defensive business strategies.
• A shift to offense, prioritizing growth, is possible with changing conditions.
• International markets represent a substantial opportunity for B2B SaaS startups.
• Successful companies demonstrate significant revenue from outside their home markets.

Europe Presents the Most Significant Growth Potential

The EMEA region, with a gross domestic product of $27.5 trillion, accounts for 38% of global GDP. This makes it the largest potential market outside of the Americas. Europe stands as the world’s second-largest market for business-to-business (B2B) software.

For over twenty years, it has consistently been the preferred destination for U.S. companies seeking expansion beyond their domestic market. The increased accessibility of software distribution channels now frequently results in companies organically generating 10%-12% of their total revenue from European sources.

However, by the time of an Initial Public Offering (IPO), these same businesses typically derive an average of 30% of their revenue from Europe. What factors contribute to this shift, and how can this substantial growth opportunity be leveraged efficiently?

Companies demonstrating strong performance are currently investing in and prioritizing expansion into Europe, even considering the difficulties experienced over the last year. A strategic focus on the European market is proving vital for sustained growth.

Figma, a rapidly growing and innovative company, recently announced the establishment of its new EMEA headquarters in September. Similarly, Clearbanc initiated its European expansion in the fourth quarter, committing to invest £500 million in U.K.-based startups over the coming year.

While many growth-stage Chief Executive Officers (CEOs) opted to delay international expansion plans in the last twelve months, a “remote testing” approach has provided a temporary solution for some. However, this is not a sustainable long-term strategy.

Forward-thinking CEOs maintain global ambitions and recognize that realizing Europe’s full growth potential is a crucial milestone on the path to an IPO. Successfully navigating the European market is key to achieving long-term success.

Recognizing the Optimal Time for European Expansion

Transitioning from a focus on sustaining operations to pursuing growth can present challenges in identifying the appropriate moment for expansion. Nevertheless, the crucial indicators signaling readiness to extend operations into Europe are readily discernible.

Initially, a stabilization and subsequent acceleration of both customer acquisition and revenue generation should be observed.

Furthermore, a demonstrable ability to consistently and efficiently replicate your market entry strategy within the U.S. is essential. Should this be achieved, an increase in unsolicited demand originating from European regions, notably the United Kingdom, is likely. During my tenure at SurveyMonkey, a premature global rollout of our enterprise solutions, prior to establishing a robust U.S. foundation, hindered the success of our international teams.

Ultimately, a key sign of preparedness is the presence of a capable leadership team and supportive organizational structures capable of functioning effectively across departments. The widespread adoption of remote work models prompted by COVID-19 has, in many instances, better equipped startups to meet the challenges inherent in becoming a global entity.

What if progress is being made, but all criteria aren't yet fully met? Prioritize establishing a solid foundation to ensure a swift and effective launch when the time is right. Begin tracking and reporting key performance indicators at the country level to detect emerging demand. Conduct thorough analyses of the local competitive environment and identify any necessary product modifications or regulatory approvals required before entering new markets. Avoid premature expansion, but seize the opportunity as soon as your business is adequately prepared.

The Importance of Prior Experience for European Expansion

Successfully navigating European expansion necessitates a strong foundation of experience. Challenges frequently encountered by SaaS companies during international growth are often predictable and addressable. A recent analysis of data from over 175 U.S.-based B2B software companies expanding into Europe revealed crucial questions CEOs should consider before initiating international operations.

Securing capable local leadership consistently ranks as a top priority. However, misjudging this aspect represents a prevalent error.

Specifically, 45% of General Managers (GMs) in the EMEA region do not remain in their positions for a full two years. The combination of travel limitations and a remote workforce further emphasizes the necessity of recruiting an experienced GM at an early stage.

Cross-functional investment to bolster the expansion is also vital. This includes aligning sales forces with localized marketing efforts, as well as dedicating resources to product localization and remote employee onboarding. A successful European expansion requires a unified, company-wide commitment.

Furthermore, identifying necessary modifications within the headquarters structure is crucial. These adjustments should aim to both empower and provide support to teams operating within European markets.

During my time based in London and Dublin, I observed numerous meetings scheduled during late-night hours, and decisions originating at headquarters without sufficient input from local teams possessing valuable market insights. Thankfully, current best practices for distributed team collaboration and asynchronous work management are now more widely understood.

Launching into Europe provides an opportune moment to ensure a globally-minded approach across the entire organization.

A Call for Immediate Global Action

Numerous investors often advise Chief Executive Officers to concentrate on the U.S. market this year, potentially broadening their product lines or targeting different customer groups. However, it’s crucial to remember that 95% of the global population resides outside of the United States.

The European startup landscape is experiencing significant growth, with venture capital investments increasing by 80% since 2017, reaching $41.1 billion in 2020. New, local competitors are emerging constantly, especially within the B2B SaaS sector.

The Benefits of Early European Expansion

When a company establishes a consistent sales methodology, observes demand from European customers, and assembles a capable leadership team, initiating international expansion as soon as possible maximizes the potential for market capture. The market will not pause its development simply because travel may remain challenging in the coming months.

Forward-thinking founders understand that venturing into Europe isn't merely a pathway to growth; it’s also a strategic move to lessen reliance on the regulatory environment and economic stability of a single nation.

Navigating Challenges and Seizing Opportunities

All growth initiatives necessitate investment and inherently involve risk. Direct experience has demonstrated the considerable effort needed to achieve successful international expansion, even under ideal circumstances.

Despite the continuing pandemic, geopolitical uncertainties, or economic recessions, the potential within the European market has never been more substantial, and commercial activity is progressing.

Long-Term Commitment to Global Growth

Constructing a global enterprise demands a CEO fully committed to a long-term vision. If expansion is a priority, delaying action is not advisable. A proactive, offensive strategy is essential at this moment.

*Frontline holds a financial stake in Clearbanc.