Proximity and social physics in the software industry – still worth while paying attention to?
No one will question that any software-driven business must strive to become a global market leader. The nature of especially the B2B software business favors the market leader and makes it tough to be number two, three, four and five, not to speak of being number twenty-two or thirty-four.
Let’s assume that you are a B2B software-driven company with a compelling value proposition. Let’s also assume that your solution is a combination of your software and services required to customize and implement the software with your customers.
You are currently exclusively operating in your domestic market (Norway, Finland, Denmark, Estonia, Portugal, Greece, Israel or some other small market). You are successful here, have growing revenue and a solid EBT. You know that if you do not go global, you will not be able to grow your company to withstand the competitive pressure that will sooner or later be applied from other local contenders or from large international players.
How do you grow your company whilst maintaining control and profitability?
Thousands of software-driven companies all over the world are facing this challenge. If you are so fortunate to be located in a big domestic market (USA, Germany, France, the UK and a few others) you can postpone the decision for some years, but never forever.
Cash is King
The #1 critical issue for any smaller B2B software company is cash-flow. Small software companies with cash flow issues have extremely high mortality rates.
Growing you company globally will expose you to two main challenges:
A: The financial implications of your global endeavor are highly unpredictable.
B: Any negative deviation from the forecasted performance in your domestic market will impair your global project.
The notorious unpredictability of entering new markets
Although a lot of people (consultants, civil servants, potential employees, lawyers, potential partners, potential agents etc.) will tell you otherwise, don’t make any mistake: Penetrating new markets is like exploring the South Pole for the first time. You can listen to other people who have made the journey, but no-one has ever made YOUR journey.
You may be able to control your cost, but time-to-revenue is very difficult to predict.
Your globalization effort must be sponsored by your current operation. What happens if your current operation falls short of their budgets (maybe because your attention is elsewhere!)? Actually, your global project may be right on track, but your domestic operation fails to deliver the cash you need to move on.
Think big – start small – stay close to home and leverage from strength
Have you heard about the fantastic growth in the BRIC countries? Does your government offer special incentives for you if you are prepared to make your bets in Brazil, Russia, India or China? Have you heard about Silicon Valley? Does your government offer special incentives for you if you are prepared to make your bets in the [slider title=”Valley?”] If you are the next Facebook or the next Twitter (needing tons of money to support an untested and uncertain business model) then the Valley may be a good choice for you. However, if you are among the 99.9999% who are serving mid-market customers with solutions requiring that you (or your partners) are near to them, then the Valley is NOT your best bet.[/slider]
Don’t listen to “incentive pushers”! They are probably honestly convinced that they are serving a just cause, but they are paid for selling this cause to you. You must run your own show and assume full control of your expansion projects. Don’t listen to government civil servants when they make recommendations for how you should run and where you should take your business.
There are only gold medals. Your objective must be to become the global market leader, but it will not happen tomorrow and it will not happen by penetrating 10 countries at the same time (maybe later, but not now). Thinking big means that you have a clear understanding of your own business model and that this business model (at least theoretically) is applicable on a global scale. Test your business model at home first. The probability that you can grow globally with a business model, which is different from the one you operate domestically, is very slim.
Understand your strengths and understand that your software is NOT your strength. It is what your software does for your customers compared with the alternatives, that constitutes your strengths. If you serve your customers through a channel of partners, then you need to include them in the business model. Understand that your partners are NOT your customers, they are a part of your business model and your value chain.
Start with steps that you can afford. Failing is not so unusual, so don’t bet more than you can afford. Take one step at a time. Accelerate fast when things start to work, but not before.
Stay close to home
If you are a Danish company start in Norway, Sweden or the Netherlands. If you are a Finnish company start in Norway, Sweden or the Netherlands. In a B2B context Brazil is smaller than the Netherlands. Why travel all the way to Brazil when it takes you 90 minutes to get to Schiphol/Amsterdam within your own time zone. The Dutch speak excellent English and they are quite open to foreign technology. The business culture is very close to the Scandinavian culture and they make decisions very much they way we do. You can invoice them out of your current operation without any bureaucratic withholding taxes and the probability that they will pay the invoice on time is pretty good. Unless there is a specific compelling and verified reason for doing business in the BRIC countries, they should be at the bottom of your priority list NOT on the top.
If you know nothing about the markets available to you other than what you can find in The World Factbook, then my recommendation will always be: Stay close to home! Don’t jump to the conclusion that because certain markets are growing fast (BRIC) then they offer small software companies more attractive opportunities that established markets. That is a myth and a misconception invented by people who have a vested interest in pulling you in their direction.
Why not start in the US? It is the biggest market in the world! The US should not be on the top of your list until you have a solid position in at least 10 other markets. Making it in the US is very expensive.
Leaverage from strength
Make yourself familiar with the “Law of diffusion of innovation” and the principles of “Crossing the Chasm“.
Doing business with you represents a considerable risk for your potential customers (and your partners). Moving into a new market accentuates this risk for your potential customers (and your potential partners) in that market. You need a compelling value proposition and some solid reference points (strengths) for customers (and partners) to mitigate this risk associated with applying a new solution from a new supplier.
If you have a truly disruptive solution, you may be attractive to the early market (15%), and not to the main stream market (85%).
If you do not have a disruptive solution, you are not attractive to the early market, and must find your customers in the main stream market. Main stream customers base their decisions on references and recommendations, not on technology. This means that you have to use current references to convince new customers that you are a safe choice.
In both cases you are much better off staying close to your home turf. References loose their value with distance. The [slider title=”time”] is an extremely scarce and critical resource for any company standing on the doorsteps to global growth.[/slider] required for penetrating and serving new customers or partners close by are magnitudes lower than having to fly halfway around the globe. I will argue that the cost of serving foreign markets grow exponentially with the distance.
The strength you may have in your domestic market diminish exponentially with the distance to your next market. Be very careful when you choose where to go next.
Getting past the tipping point – then scale like crazy
Any company with serious growth ambitions must consider how to get past the [slider title=”tipping point.”] The concept of the tipping point was introduced by Malcolm Gladwell in his book “The Tipping Point: How Little Things Can Make a Big Difference” first published in 2002.[/slider] The tipping point in a market is around the 20% market share. Past this point demand becomes self-reinforcing. Your sales and marketing cost per sold unit will drop, you will enjoy economics of scale and all the bright people looking for a salaried job will want to work for you. Having 7% market share in your domestic market, 1% in Sweden, 0,5% in Finland, 0,025% in Germany and 0,0001% in the USA is not going to get you anywhere. Learn how to get past the tipping point in at least one market, then scale like crazy.