Large companies routinely take advantage of the enormous potential of international markets. They simply budget for the expansion, spending whatever it takes to build the infrastructure to support future revenue. Entrepreneurs, on the other hand, have limited resources, few connections, and tight budgets. When they go global, they need to be convinced that they are doing the right thing. They also need to stick with one guiding principle: grow as you go. In other words, finance global expansion as global revenue comes in–and not before.
News like this could send a lot of entrepreneurs running for cover. Why go global at all? One reason for many is that they must. Barely three years after the founding of our company, Evolutionary Technologies International Inc., a large company approached us, saying, “Who represents you in Europe? We’re ready to buy.”
At that time, in 1994, we had annual revenue of a tiny $3.5 million. We quickly realized we had to sell in markets other than the U.S. because of the nature of our product. Our software improves the consistency of data across entire enterprise computer systems. Were we selling applications particular to the U.S.–a package, say, for calculating documents for the IRS–it might not have been as necessary to go overseas.
These days, entrepreneurial companies are more likely to be selling products used across geographic boundaries. By entering international markets, even very small companies can increase revenue significantly–as much as 50 percent can come from international markets. They can open their doors to global customers, which buy locally rather than from vendors based only in the U.S. And they can boost market share.
Getting into foreign markets requires a minimal up-front investment, as well as decisions about which markets to enter and how best to do business in each–directly or through distributors. Here’s how entrepreneurs should tackle the job.
When ETI was dragged kicking and screaming into the global arena, we quickly decided to start in Europe. As a rule, small companies should select a first-priority region and focus on building operations there, rather than expanding into all regions at once.
Europe was a no-brainer for ETI, as it is very large and technologically sophisticated. In addition, customers in Europe require the least amount of adjustments to ETI’s software product.
In entering Europe, I assumed responsibility for leading the charge. This is another going-global basic for entrepreneurs: assign one person to be responsible, ideally with a commercial background, international experience, and familiarity with small companies in general and your company in particular.
With an overseer on the domestic front, hire a local manager to guide you through the machinations particular to each area. These might include accounting issues, such as how to record revenue (in Europe, it’s best to transfer revenue to the U.S. where it’s taxed at a lower rate), as well as prospecting and local hiring. Our European manager is a Frenchman, who had brought an enticing deal to our table when working for a North American reseller. We snapped him up immediately, giving him profit-and-loss responsibility.
Direct or Distributor?
With both domestic and local managers in place, a company must then decide whether to do business directly in a given country or to work through distributors.
The Case for Selling Directly
In our case, in Europe, the decision was easy. Our product requires a good deal of support, and we were concerned that distributors wouldn’t provide optimal care and feeding for our customers. So we chose to sell directly.
Working through our local manager, we hired only a few people at first, and only as revenue came in. In this way, we were able to reduce our risk, assure positive cash flow, and pay for the expansion. The strategy worked. With a staff of 48, our European operation now accounts for 28% of ETI’s revenue of between $35 million and $45 million.
The Case for Using Distributors
In foreign markets, however, what works best in one area of the world doesn’t always work best in another. Although ETI needs to support customers, we discovered that we couldn’t sell directly in Japan. Preparing to enter that market this year, we are currently selecting several distributors.
As a very “foreign” place in which to do business, Japan isn’t receptive to outsiders. The Japanese tend to buy from other Japanese. Its language serves as an additional barrier. If you haven’t been there and done that, there is a lot to learn. Selling directly can be too costly, and you could be shut out.
To get into Japan, we also turned to an American consultant to identify potential resellers. Our consultant is paid a retainer, and will receive a percentage of the revenue generated by whatever distributors we select. Tying the consultant’s compensation to results links ETI’s gains or losses to the consultant’s.
Turning to a third party isn’t necessary if you have regional experience in identifying resellers, negotiating deals with them, and working with them to produce sales. But know about what you don’t know. If you don’t have this expertise, don’t be shy about buying from the outside.
Either Path You Take
Whether you sell directly or through distributors, let necessity be your guide. Realize that in many cases, you must go abroad to expand your business. With 55% of our sales to be generated overseas once Japan gets underway, ETI surely wouldn’t have grown as fast without the foreign contribution.
Let global revenue pay for global growth . Try closing the first clients quickly by making deals as attractive as possible for them; they will serve as references for others. When others sign on, you can begin marketing and adding staff. If you go out and immediately hire a bevy of people, you’ll go bust.
With these guidelines, you’ll be on your way. Join all the frequent-flyer programs. Buy your melatonin. And good luck with your company’s international success.