Speedinvest Blog

Going International With Your Marketplace? Ask These Questions First

March 2, 2023

As an investor in early stage (pre-seed / seed) marketplaces, I have the benefit and luxury of speaking to hundreds of entrepreneurs about internationalization. That is, the process of expanding from just one market (ie. country) to another. 

A common trap I see early-stage marketplace entrepreneurs fall into is that they are pushing internationalization too soon in the life cycle of their business. They typically use various reasons to justify early internationalization, including, “We are already the biggest player in our home-country,” “Our current market is too small for us,” “We need to expand in order to be ahead of our competition,” and “Investors are telling us it’s important to internationalize.”

As a founder, you need to determine if your startup truly is ready for internationalization. That's why we're demystifying the topic for marketplace businesses by providing a simple, three-question framework to identify whether you're ready to take your startup around the globe.

The 3 question framework

I believe that it’s a good time to internationalize when you’re able to answer the following three questions in detail:

  • Why do you want to internationalize?
  • When do you want to internationalize?
  • Where do you want to internationalize?

Answering the “why”: What are good reasons for internationalization?

Generally speaking, I see three valid reasons for internationalizing your marketplace early on.

  1. Your marketplace benefits from cross-border network effects
  2. You significantly expand your Total Addressable Market (TAM) by going international
  3. Your market is driven by winner-takes-all dynamics

Your marketplace benefits from cross-border network effects

Not all marketplaces are created equal. Some platforms, such as Uber, require you to build local supply to serve local demand. Having one more driver in London is only increasing the value of Uber to London-based customers. When Uber wants to launch its service in another city, it will have to acquire both supply and demand in this new market. 

Other platforms, such as Airbnb, have different dynamics. As the platform is predominantly serving (international) travelers, adding one more host in London actually increases the value to all guests on the platform. 

Where Uber relies on hyperlocal network effects, Airbnb is driven by cross-border network effects. All other things being equal, when your marketplace benefits from cross-border network effects, it makes sense to internationalize your business earlier relative to when your marketplace is driven purely by hyperlocal network effects. In case you want to read more about cross-border network effects and hyperlocal network effects, I encourage you to read this post by Sameer Singh.

You are tapping into a significantly larger TAM by internationalizing

Another valid reason for early internationalization, in most cases, is when your home market is too small to sustain the size of business you want to build.

In venture, we typically speak of TAM to reflect the total revenue opportunity in a given mark As an aside, TAM is often used as an equivalent of potential gross merchandise volume (GMV). Instead of looking purely at TAM, we would rather focus on the (net) revenue opportunity that is there based on the marketplace’s take rate. 

In any case, in case your TAM is small, it might make sense to open up another market that yields a much higher opportunity. If you’re coming from a relatively small home country, like Finland, Denmark or the Netherlands in Europe, moving your business to larger markets such as Germany, France, or the United Kingdom will significantly increase your TAM. Pushing internationalization for the sake of increasing TAM can be a tricky argument for multiple reasons. First, in my experience, the argument is often triggered by investors rather than entrepreneurs. The reason for this is that VC investors, in order to have their own business model work out, need to look for outsized returns. Venture Capital is characterized by a power law distribution whereby most of the returns come from a very select group of winners that win really big. Hence, in order for an investment to be attractive to a VC investor, the target company needs to address a significant TAM and operating in a small country often does not cut it. 

As a founder, you need to understand these dynamics in order to not let yourself get lured into premature internationalization. When you bring a VC onboard, recognize they want to understand if and how your product or service could work in other markets. A valid strategy here is to run small-scale pilots abroad while still focussing predominantly on your original market. This allows you to prove the potential for TAM increase without too much distraction to your core business. 

Secondly, the issue with scaling internationally early on is that it significantly increases complexity (typically costs as well). Especially when you haven’t fully found product-market fit (PMF)––more on that below––internationalizing for the sake of increasing TAM might lead to adverse effects. When you believe your home market is too small and you want to go abroad to have a bigger TAM, a potential consideration is to not just open another market but simply pack up, close your home market, and move directly and fully to your desired target market. 

Your market is driven by winner-takes-all dynamics

In some cases, being early in a market can pay off tremendously. In winner-takes-all or winner-takes-most scenarios, marketplaces have the ability to obtain a dominant and persistent lead over the competition, yielding great returns over time. Under such circumstances, it might make sense to internationalize early. However, and as we’ll see in the next section, going international in such a scenario typically means having less product-market fit, a less sophisticated go-to-market playbook, and therefore, usually quite a capital inefficient play. 

In order to leverage winner-takes-all dynamics, marketplaces need to lock in at least one side of the market. Using a combination of tactics to acquire critical supply while preventing the multi-tenanting of market participants has given many B2B marketplaces a significant edge over their competition. Good examples here are SaaS-enabled marketplaces that focus on digitizing workflows (and thereby creating lock-in), such as our portfolio company byrd in ecommerce fulfillment. 

Another example where winner-takes-all dynamics take place are heavily regulated markets in which market participants are dependent on governments for obtaining a license to operate. Although not always the first market entrant, our portfolio company TIER did manage to win competitive tender processes in key markets like London, Paris, and Madrid, allowing them — together with the other winners — to effectively dominate the markets. 

Answering the “when”:  Are you ready to internationalize?

When you’re clear about why you want to go from serving one-market to serving multiple markets, the second question you need to answer is, “When do you want to internationalize?”

Broadly speaking, I believe there are three main criteria to answer this question:

  1. There is evidence of product-market-fit in your home market
  2. You have a playbook in place to enter new markets
  3. You have the necessary resources to internationalize

There is evidence of product-market-fit in your home market

One of the main problems I see with premature internationalization is that founders go abroad without having a good grip on the business and operating model in their home market. They lack product-market fit. 

In my experience, it’s very unlikely to find PMF in your second market, if you’ve not been able to find it in your first. In simple terms, if you start internationalizing before reaching PMF, your current mistakes compound and complexities and costs will multiply. 

But what exactly is product-market fit? There’ve been a lot of articles and tweetstorms written about the topic. Good references can be found here and here. Below, I’ve re-shared a simple framework to determine if you have product-market fit, previously presented by former Uber executive Jambu Palaniappan at the 2019 Marketplace Conference.

You have a playbook in place to enter new markets

So you have PMF in your home market. Amazing. Well done! The challenge now is to translate all the learnings you got from trying to get it right in your first market into a written plan to enter the second. Enter: The expansion playbook. 

Your expansion playbook is a detailed description of the steps you need to take as an organization to launch your business in a new market. When you started operating back in your home market, you most likely struggled your way through numerous iterations, tests, and pivots to arrive at some sort of PMF. While entering the second market, you want to make sure you don’t repeat all the mistakes you made in the past, so you write down all the necessary steps you need to launch more quickly and efficiently in your second market.

What needs to be included in your playbook? This probably merits another post, but the best way to think about it is to pull together a step-by-step process for launching new countries. Since it’s hard to get it right from the beginning, my simple suggestion would be to pull together a v.1 and iterate from there.

As your company matures and you enter new markets, the general expectation is that you’re becoming increasingly better at launching. With that in mind, investors are typically interested in metrics describing how long it has taken you to get to successful market penetration in new markets relative to your older markets. This ‘time to product-market fit’ is represented in the chart below.

Finally, a word of caution. The second country is always the hardest. It’s the first time you’re reorienting your company from a single-market operator to a multi-market operator. Therefore, take your time to get the setup right, and cherish the thought that expanding to a third, fourth, and fifth market will be easier for your organization. 

You have the necessary resources to internationalize

Internationalization comes at a cost. You need the time and (human) capital to do it. Ask yourself if you have the necessary resources available and whether you have sufficient supply in order to make your international push successful.

A major constraint is having the right people. In many instances, going international for marketplaces means building native sales and customer support teams. In some cases, you’ll be able to build those teams directly at your HQ. However, there are plenty of examples where companies ended up building local, on-the-ground operations, typically led by a newly recruited country manager. Ensuring that your team has a good understanding of local differences is often key, and a lack or inability to hire local leadership teams with an in-depth understanding of local market particularities is one of the main reasons we see companies struggling to internationalize. 

Capital is a second resource that is hugely important here. You don’t want your international efforts to fizzle out due to an insufficient war chest. Hiring the right people, setting up operations, and conducting sales and marketing efforts all require capital. 

Anecdotally, long before Booking became the hotel juggernaut it is today, it was actually a small startup battling incumbents and other industry scale-ups. At the time, the founders realized there was no point in going to the US as long as they weren’t able to fight their much-better-funded competitors. That’s why Booking opted to focus on second and third tier countries and cities where they faced little competition and were able to generate profits to fill up the war chest. Only when they felt confident they had the capital (and know-how) to outcompete their rivals, did they re-enter the US market. 

Answering the “Where”: Finding markets that work for you

The final question you need to answer is, “Where do we want to internationalize?” As you’re preparing to internationalize, it’s important you do your homework, determining what market(s) would be attractive for your business. To do this effectively, I would suggest integrating a short-term perspective with a more long term view on what ideal markets are for you. 

Starting from the short term perspective, you focus on quick wins. Perhaps your marketplace already starts to get traction from international supply or demand, validated by inbound requests, web traffic, or other parameters. Perhaps some neighboring countries have similar language, making it easier for you to enter these markets without adding new staff to the team.

Following a longer term perspective, you might want to focus on other variables, such as where’s the biggest TAM, where do local demographics support your platform, and in what countries are local regulations supportive for your marketplace to operate. 

When drilling down the question of “Where,” what you ultimately want to do is map all of the main market characteristics that either facilitate your marketplace business or present potential obstacles, and then rate them individually in order to determine an ‘attractiveness score’ per country. Founders typically do this by building a simple spreadsheet, where these characteristics are turned into line-items and then scored.

Solve PMF First

If there is one take-away from all of this, it’s this: don’t internationalize your marketplace before you have PMF in your first country.

The cost of premature internationalization is high. You layer unnecessary complexity onto your organization, scaling processes of which you’re not certain they work, and end up spending capital inefficiently. Especially in the current market environment, in which fundraising is tough, money is less abundant, and there’s a stronger focus on capital efficient growth. Scaling for the sake of ‘land grabbing’ with a less developed internationalization playbook and poor unit economics is a hard sell. 

At the same time, even if you have PMF, you need to think twice before you internationalize. Is your home market large enough to support a big investment case? How much localization is required, and what’s the strain on the organization in order to do so? And do you have the right resources to internationalize successfully? 

In any case, the decision to internationalize is an important one. You are reorienting your company from one to multiple markets with the risk of spreading yourself too thin. From a financial point of view, doubling down on the market where you already have PMF is typically more attractive than launching another market. Yet, at the same time, not expanding to other markets leaves your competitors with lots of time and space to move ahead and lock-in critical supply or demand. 

As such, there are plenty of things to consider. That's why I recently sat down with the Rockin' Your Marketplace podcast to discuss the topic in depth. Whatever you decide to do in terms of internationalization, tread carefully and let these three questions guide you along the way. Best of luck, and feel free to reach out to our Marketplaces & Consumer team in case you want to discuss your company’s internationalization plans in more detail.

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