If you ask around in Silicon Valley, you’ll find many people who can give you a step-by-step guide to starting a company. If you’re not already located there, the most obvious (and often unspoken) first step is to move to Silicon Valley. Once there, it is disturbingly simple to follow precedent and best practices when making a range of seemingly complex business decisions. Where and how should it be incorporated? As a Delaware C corporation. How should the technical team be built? Locally from the ready talent pool. Where should the product be piloted, and where can the first customers be found? From the ready local market in the San Francisco Bay Area. Where should the market scale? The United States is a $21 trillion economy, and the largest technology and software market globally. For most startups looking for a niche to target, the United States is sufficiently large.
For entrepreneurs operating beyond Silicon Valley however, there are no obvious answers to these questions. My own journey to the innovation industry has been as an investor, a regulator, a consultant, or an investment banker—advising CEOs and entrepreneurs around the world and teaching future entrepreneurs in my MBA classes. In particular I have been trying to make sense of questions about innovation in emerging ecosystems. I have invested in startups across the globe and had an eye-opening journey through the unique challenges and opportunities of scaling a business outside Silicon Valley.
Those at what I call the ‘frontier’ of innovation, in developed and developing locations outside Silicon Valley, can’t take the same time-worn path to growth described above, and don’t share the Valley’s myopic local view. They build their startups in a different way, and the most successful are “born global.”
‘Born Global’ Frontier Innovators build companies that can sell in multiple markets and capture global opportunities. Among the most successful Frontier startups are those based in Southeast Asia and their relative ability to expand swiftly to multiple markets is directly linked with success.
Among the ten unicorns built in Southeast Asia over the past ten years, seven scaled rapidly internationally. Of the three that stayed local (for now), two were based in Indonesia. Instant access to a market of 264 million people allowed business growth to remain domestically focused for longer. Perhaps symbolically, when Garena the technology unicorn, filed for an IPO in 2017 on the Nasdaq, to reflect its pan-regional presence, it changed its official name to Sea (now also its ticker symbol)
There are a few intertwined reasons that being born global is increasingly a strategic imperative. The first is a realistic assessment of the addressable market. The size of a company’s total addressable market (TAM) is a key metric by which venture capitalists gauge a startup’s potential. Unfortunately, in many markets, the local TAM is too small for the company to scale to a meaningful size. However, for strategic entrepreneurs, the smaller the local market, the larger the total market. Entrepreneurs in Estonia or Singapore are forced to think globally, whereas startups in India and Brazil often focus locally. As Daniel Dines, co-founder of UiPath (Romania’s first ever unicorn), observes, “Being from this remote part of Europe helped us think big.”
So frontier startups expand to other markets early in their life cycles. In our Southeast Asia sample, the average startup entered its second country by year four and its next market within another year or two.
Having a small local market allows startups not only to sell in multiple markets but also to start from anywhere. Being born global can also function as a learning strategy. It helps innovators improve the core product, evolve the business model, and benefit from economies of scale. By expanding across markets, the whole organization is forced to improve and build a product offering that is competitive everywhere.
Ultimately, being a multimarket company translates into an offensive advantage. Frontier Innovators who are born global can lay out their stakes first in the most-attractive markets, increasing the cost for second movers. Indeed, in many cases, staying local is not even an option. Other companies from elsewhere will eventually arrive on the scene so being born global is often a requirement to survive.
But It Doesn’t Work for Everything
It might seem that being born global may seem like a natural strategy. Yet its application is nuanced. Many startups have learned this the hard way. Uber expanded rapidly around the world. It entered Singapore in 2013, and China in 2014. But by 2016, after spending more than $2 billion, Uber exited China and sold its local operations to the national player, DiDi. In Southeast Asia, a similar story played out, and Uber sold its operations to Grab – and we are now witnessing the ride sharing battle Grab is now waging with Go-Jek. Why is it that some models seem destined to be truly global while others are not? Three drivers explain whether certain players come to dominate markets globally while others remain more regional or local.
The Nature of the Network Effects
The first success factor is centered on the nature of network effects. Some startups have global network effects, while others have more regional or even local network effects.
Google, for instance, has become a global standard in search engines, in part because searching the internet has global network effects. The value of information isn’t regional. North American users get greater value from the platform when knowledge from Europe or Asia is cataloged. The value of information is global, and thus winners have tended to enjoy global monopolies. Facebook enjoys a similar dynamic.
In contrast, there are business models that have regional or local network effects. Ride sharing, again, is one where network effects are localized. Local players, be it Gojek in Indonesia, 99 in Latin America, or Careem in the Middle East, are equally placed to create the right network effects to dominate their local or regional markets.
Resource Intensity
The second driver that predicts whether global models succeed relates to resource intensity. Where there is higher resource intensity, global winners are more likely to emerge, whereas models that are more asset light are more likely to be local or regional. Cloud computing is a great example. Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, have amassed leading positions, together enjoying approximately 50 percent of the global market because offering a cloud computing product is extremely resource intensive. So these markets trend toward global monopolies.
A similar dynamic exists in certain markets where access to limited, highly specialized talent is required. For example, in the artificial intelligence market, the most precious resources are data scientists and datasets. There is a shortage of available talent and this situation will likely yield some global winners.
Local Complexities
The third predictor of whether startups become truly global relates to local complexities—and in some cases veto-like dynamics that exist in certain markets or industries. The outright government ban that exists in China is an exceptional barrier preventing external companies from getting much of a foothold. Yet much more subtle complexities exist as well. Many industries have specialized local regulations that make it challenging to port models across borders. Financial services is a prime example. Most countries impose strict standards on institutions that want to become custodians of their citizens’ savings or provide them with credit or insurance products. That’s why historically fintech has been a local game, although this is slowly changing.
Strategies for Frontier Innovators
Every industry is unique. Before going global, Frontier Innovators must evaluate their particular industry dynamics and understand the likelihood that a global, regional, or local model will win the market.
Assuming that resource intensity is high, network effects are global, and there are limited local complexities, then Frontier Innovators should scale as fast as possible to responsibly capture as much global share as possible before someone else does. If the opposite is true—if there are regulatory barriers, low resource intensity, or more regional network effects—then they should instead focus on their regional or local markets.
Understanding this dynamic is critical to determining your strategy. Ultimately, any course of action will be an educated bet. If the decision is to be born global, then a few strategies are essential for success. This includes prioritizing and then staging expansion, developing a product that localizes easily, and building an organization that functions across markets. Let’s explore each in turn.
Born Global Market Selection
Being a multi-market company doesn’t mean taking a shotgun approach and expanding haphazardly from Mauritius to Mongolia or Botswana to Bali. The first step for a Frontier Innovator is determining the market selection, prioritization, and staging strategy. A key question is whether some markets are testers and others are must-win.
Tester Markets
Broadway is famous for testing its shows in small markets before committing them to the big stage. Similarly, using market laboratories can be a powerful strategy. SkyAlert, which operates an earthquake early-warning system, took this approach. Through its network of distributed sensors, SkyAlert promises its users a head start to evacuate buildings and can work with companies to automate security protocols (e.g., gas shutoff). SkyAlert began in Mexico City, which Alejandro Cantú, its CEO, describes as his innovation laboratory. The early versions were focused on research and development rather than commercialization. Developing SkyAlert in Mexico City was much more affordable than other major cities for product innovation. Salaries and cost of acquisition was cheaper. Mexico was Cantú’s early base of operations and testing ground, but, to scale, he will look elsewhere, starting with the United States.
Must-Win Markets
For some Frontier Innovators, there are certain markets that are must-win, without which they will never reach scale. In the Middle East, you need to win Saudi Arabia. In Southeast Asia, of course, Indonesia is a linchpin. The must-win market may not always be a place. In some industries, it could be a particular set of anchor clients (e.g., to win in the sea shipping market requires partnering with one of the few large global shipping conglomerates) or a high-profile subsegment of the market. It is crucial to identify these industry dynamics and target these must-win markets.
Building a plan for future expansion early on is critical. Of course, there needs to be some level of flexibility, but is crucial to understand which markets can serve as testers, whether any markets are must-win, and what an expansion rollout might look like over time. These decisions drive hiring plans, capital raising, and, of course, product development.
Build an Adaptable Product, and Localize
Like all successful entrepreneurs, Frontier Innovators think deeply about building great products that customers value. Unlike most of their Silicon Valley counterparts, however, they layer a global mindset into their product development from the get-go. Products are built with an architecture that can be modulated for different price points, adapted to local languages, and tweaked to reflect varying customer needs. If executed well, this inherent flexibility allows startups to scale globally at speed.
Build an Organization That Can Grow Across Markets
Launching in different markets is a challenging endeavor that requires an adept leadership team. Companies typically aim to combine an internal global expansion expertise with localized ownership strategies when they develop their teams. Some Frontier Innovators assemble a specialist team to help build new geographies and carry the culture across borders.
Born Global: The Bottom Line
For Frontier Innovators, being born global is often a necessity rather than a choice. Their local market may not be large enough to sustain the company at scale. By taking a multimarket approach, Frontier Innovators piece together a large opportunity from fragmented regional markets. A born global strategy is not only an offensive move to capture market share but also a defensive one. If you don’t go global, your competition will, and it will come to you. In the coming wave of technological innovation, entrepreneurs won’t look to Silicon Valley for best practices on managing dispersed operations from an early stage. They will instead aspire to emulate the entrepreneurs on the Frontier, who have been doing this for years.
Reprinted by permission of Harvard Business Review Press. Excerpted from Out Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley.
Copyright 2020 Alexandre Lazarow. All rights reserved
The book is available for purchase now on the Harvard website and Amazon.