The Real Reason It's Hard For Startups To Scale Internationally

Over the past year, I traveled to 19 countries across Asia, Europe, Africa, and South America, meeting with global startups and researching startup ecosystems. Along the way, I learned not only about the unique opportunities in each place, but also the challenges–the reasons why startups falter and aren’t able to scale.

Conventional reasoning surrounding startup failure points to a lack of support or a lack of experience–a lack of funding networks or of people who have successfully built and exited startups. These are absolutely valid reasons, however I suggest a different perspective: one rooted in products and markets rather than money or people. The real reason it’s hard for startups to scale internationally is the same reason many of these startups are initially able to gain momentum domestically: developing a product that fits the needs of their specific market.

Product-Market Fit

The foundation of any successful startup is attaining product-market fit, a concept coined by Wealthfront CEO Andy Rachleff and summarized by tech investor Marc Andreessen: “being in a good market with a product that can satisfy that market.” In order for a startup to scale, it must meet both requirements in the above equation: the market requirement and the product requirement.

But many startups, especially those with a limited support network or those in less mature markets, are forced early on to either pursue a wide market definition or pursue a product that deeply satisfies a need in their home market in order to gain enough momentum to navigate the formidable obstacles confronting early-stage companies. This tradeoff is the reason it’s so difficult for startups to scale internationally. Pursuing each requirement on its own–a good market or a tailored product–hinders a startup from achieving the other requirement. Therein lies what I call “the startup localization paradox.”

The Startup Localization Paradox

The startup localization paradox posits that barring a select few exceptional countries, in many ways the path to growth within a company’s native country precludes growth outside of that country and vice versa. If a company is launched and built as a localized company (i.e. a Peruvian company targeting the Peruvian market) without also looking outside of the country for capital, resourcing, and importantly, additional customer populations, it likely won’t be able to get the support and investment needed, or have the addressable user population needed, to sustain itself in the long-term. This holds true particularly in countries that are either underdeveloped, or those with smaller populations. Furthermore, even if a localized startup is able to grow its user base and revenue domestically and has the support to expand, its model likely will not be nearly as relevant or transferable to additional markets. Because of these constraints, startups by definition must think beyond their home countries from the onset and adopt a multi-country market approach if they are to scale effectively.

If, however, a company initially foregoes a deeply localized product approach to cater to the needs of users in several countries at once, it’s likely the company’s product won’t get the initial boost of domestic engagement and adoption needed to get it off the ground. The product could be killed before it even has a chance to attempt to scale because it will be diluted to the lowest common denominator between its multiple target countries, and won’t be differentiated enough for consumers in the home market. Bottom line: it’s a formidable path to scale a company internationally, and it’s important for both founders and investors to carefully consider the tradeoffs involved in thinking locally versus globally to give a startup the best possible chance to succeed.

The Benefits Of Localization

In an era of globalization where giants like Amazon, Uber, and Google are expanding internationally and have their sights set on emerging markets, local companies starting up in these emerging markets must use every advantage at their disposal to gain traction and stay competitive. Before they attempt to scale, they must attract enough momentum to survive–to validate their product and prove their model. Consequently, many startups naturally focus on creating localized products that capitalize on their advantages, namely time and space.

Home Court Advantage

Time refers to the head start these companies have to establish themselves in their native markets before global companies enter and begin to capture share. Space refers to the deep knowledge local companies have about their country and its consumers–a knowledge that typically takes global companies several years to amass.

Having a head start as the first-mover allows local companies to establish a foothold and capture share early on. For example, Amazon entered the Southeast Asia e-commerce market in 2017, introducing its Prime Membership program in Singapore. Since entering, the company has faced stiff competition from entrenched regional players like Lazada and Shopee that dominate market share and have significant capital backing (Lazada is backed by Alibaba and Shopee is backed by Tencent). For now, these regional platforms are growing at a much faster pace than Amazon, and as of 2018, Amazon had not expanded its presence beyond Singapore. Even in India, a more consolidated market with one main leader, Flipkart (majority owned by Walmart), Amazon has had to invest an incredible amount of capital and resources just to catch up.

Additionally, following a localized product approach allows local companies to exploit their deep market knowledge to attract consumers by offering a highly customized product. This is a key differentiator for companies like the Vietnamese browser and search engine Cốc Cốc, which has challenged Google’s growth in Vietnam using a localized feature set. The Cốc Cốc platform factors in Vietnamese language tones and accents, focuses on locally relevant search results, and embraces a video-first approach given local consumer affinity for video content.

Local knowledge is also what enabled Southeast Asian ride-hailing startup Grab to successfully hold off Uber’s growth in the region, resulting in Uber selling its regional operations to Grab in 2018. For instance, while Grab always offered a cash payment option for users given the cash-heavy economies in Southeast Asia, it took Uber over two years from the time in entered the region until it updated its app to include cash payments.

Finally, home court advantage is a crucial benefit when it comes to government/regulatory support. Examples of local governments supporting the growth of local companies and challenging the growth of global companies include recent policies proposed by the Indian government dictating how foreign e-commerce companies like Amazon and Walmart operate in the country. These policies mirrors policies set by the Chinese and Vietnamese governments. Local governments in Latin America have also pushed back hard on Uber’s expansion in the region, and despite its rapid growth, the ride-hailing company remains unregulated in much of the region.

Using these advantages to create a localized product and user experience, one that fulfills the second requirement of product-market fit–a product that satisfies the market–is the best option for local companies in many countries as it is the only way the companies are able to gain enough traction and attract users in the face of increased competition.

The Drawbacks Of Localization

While localization is key to achieving traction in country markets, most country markets are not able to support startup scaling on their own. Even if a company succeeds in capturing substantial market share in its native market, many times it hits a growth barrier and can only reach certain scale without expanding abroad. This is because most individual countries are not “good markets” as referenced in the earlier product-market fit definition. As startups look to expand their market scope to support scaling, those with truly localized products are at a real disadvantage.

A Good Market

A “good” market, one with a large number of potential customers, is incredibly difficult to achieve. Consider that for a market to contain a viable user population, it must not only be home to a large population, but also a population of like-minded consumers or businesses with a similar need, and with the ability to pay for a solution addressing that need. If one of these criteria is lacking, others must overcompensate. For instance, for a customer population in a smaller market to remain viable for a startup, each customer must be willing and able to spend more money on the product or service. Conversely, particularly in developing countries whose consumers have less income, many more active customers are needed to support a startup’s growth.

The U.S. market, with more than 300 million relatively homogenous people many of whom have disposable income, is truly exceptional given its mixture of size, uniformity, and wealth. There are other countries with large populations and strong cultural identities, such as China, India, Indonesia, Brazil, Russia, and Mexico, but these countries are less economically mature than the U.S. Moreover, even these leading emerging countries can be considered exceptional when compared to the vast majority of world nations that don’t have close to multi-hundred million people populations, let alone multi-hundred million people populations with a tightly bound cultural and consumer identity.

Because most countries are not independently “good markets” for startup growth, at a certain point startups must look outside their home market and define a larger market–a better market–if they are to scale. The drawback of product localization is that when it comes time to scale, startups with localized products are in an incredibly difficult position because localized products are far less likely to effectively transfer and be adopted in other markets.

M-Pesa, an African digital payments product launched in Kenya in 2007, is a prominent example of a product that achieved remarkable success in its initial market but failed in its attempt to scale to South Africa because of market differences. M-Pesa took Kenya and other parts of East Africa by storm following its launch, and quickly revolutionized personal finance in Africa, offering a smartphone payments solution serving Africans without access to formal banking services. In less than three years the product had 10 million users, and in 2010 swiftly expanded to the South African market. This proved a significant misstep, as in the six years that M-Pesa was operational in South Africa until it was shut down in 2016, only an estimated 76,000 users actively used the product.

Among the reasons M-Pesa failed in South Africa was a misunderstanding of how the product could and would be used in the South African market. In East Africa, it served large portions of the population who were lower-income and did not have access to any alternative financial services. On the other hand, the product served much less of a need in South Africa, a country with significantly higher banking penetration and stringent banking regulations. Furthermore, Vodacom, the company behind M-Pesa, partnered with South African bank Nedbank, a bank catering largely to the middle and upper classes.

The Uniformity Myth

Why did Vodacom make the decision to expand to South Africa, and why do many companies miscalculate in determining their “good market?” There’s an incorrect assumption that markets within the same geographical region are similar and that products are transferable between them.

There are certainly similarities between different countries, especially within the same region. For example, most of Latin America is connected through a shared language and cultural norms, and both Southeast Asian and Middle Eastern countries possess cultural similarities. But, these similarities can be misleading, and can perpetuate a myth of uniformity–an artificial sense of connectedness when in reality the similarities exist on a surface level. It can be very dangerous to rely solely on perceived similarities in determining an addressable product market.

In reality, countries within large regional markets like Southeast Asia or Latin America that are thought of as consolidated can in fact be quite distinct and fragmented. What works in one country cannot be assumed to work in other countries.

What’s the Solution?

Scaling a startup is extremely difficult regardless of where the startup is based. To face the hurdles surrounding scaling a company head-on, startup founders and investors must be vigilant and thoughtful in their product research from day-one. This means using market research and customer research as a point of departure, and technology solutions and products as a destination.

The key is planning. Founders must employ a regional if not global mindset from the onset. This does not mean they should launch a business in multiple countries at once, as they might favor a localized approach at the start, which in many cases is a favorable approach as shown above. Rather, they must clearly identify which countries are part of their “good market” for future growth. These countries must be evaluated with local country management teams, and eventually R&D centers on the ground, understanding country similarities and differences. For both founders and investors, it’s critical to determine which countries share similar needs. If a common need exists across countries, a product can be tweaked to reflect small cultural or consumer differences (i.e. country specific layout or content). But, if there is not a common need across countries, a product that is localized to one country cannot and will not scale to another country. Taking the time to plan and define a market upfront is the best way, and the only way, to fully achieve product-market fit and build a company that’s scalable.