Many technology companies founded outside of the U.S. dream of tapping into the vast U.S. market. Success in the U.S. market can lead to a dramatic increase in the mass appeal of the product which helps prove that it can be an international success. This in turn can lead to a higher company valuation, additional capital infusion and ultimately lead to more attractive exit opportunities.
Establishing a presence in the U.S. is no simple task. Before you crack open your checkbook and start expanding your business, you need to have a solid understanding of what it takes to establish a foreign office in the U.S. Below are seven assumptions that we see companies make which have led to many failures. Building an awareness of these assumptions and putting a plan in place to avoid these pitfalls can help get your business off to a better start.
- A $1.0M investment in the U.S entity should be enough to produce revenue for sustaining operations.
It always costs more than anticipated. Even the best laid out business plan and market research cannot fully predict performance. A McKinsey study conducted for the Norwegian Trade Commission found that the average Scandinavian company takes 3 to 5 years to reach profitability in the U.S. market. This included an average upfront investment of US $300K – $500K, plus an annual spend of US $1.0M / year for personnel, office, and marketing. The study also found that if your company is slow to produce U.S. revenues, this investment can reach US $3.3 – 5.5M. With U.S. revenues, companies need to be committed to spending US $2.0M – 2.5M on average before a solid ROI is realized.
- Our people know our product best so they should be the ones to promote it.
Product knowledge is extremely important, but in the U.S., relationships often trump product knowledge. Some of the best new products have failed their U.S. introduction because the international company tried to push adoption through their own team of expert product managers. U.S. buyers, like those in other countries, are looking for trust and comfort. In the past, they may have been burned by other products which did not live up to expectations. For new product introductions, a trusted relationship is critical to gaining the initial U.S. traction.
- We will be able to directly manage the complexity of the U.S. corporate system.
To be successful with expanding a business to a foreign country, risk and cost must be tightly managed. A typical approach may be to jump in with both feet and set up an entire company foundation to manage employees, pay payroll and taxes, establish health care benefits, and much more. However, the mental anguish and time spent on learning and managing these corporate requirements often distracts from your core focus of launching a new product. You can dramatically lower risks by outsourcing some or all of these corporate tasks to local companies. This allows you to put more focus on getting your product accepted in market. Once there is significant market traction and a sustainable revenue stream, these services can be centralized in house as appropriate.
- We are very good at managing people in our home country, and the U.S. can’t be that different.
From hiring to firing, the U.S. employment market is very unique. In the U.S., benefits are not universal. It is common for employees and new-hire candidates to shop companies to find the best benefit packages. From retirement plans, to health care coverage, to workman’s compensation insurance, to disability insurance, it is extremely difficult and expensive for a foreign company to offer U.S. based employees a competitive benefits package. However, without a competitive package, employees will likely seek higher base salary compensation or a larger equity stake to offset a weak package of benefits.
U.S. based human resources professionals have trouble themselves staying abreast of the constant changes in employment laws, regulations and trying to keep their employers out of court. The U.S. is a very litigious society where employees are known to sue employers over the most minor offenses. Even if the employer is in the right, protecting the company’s reputation can be expensive and a drain on time and resources. It is important for the company to have access to a resource that can provide oversight and guidance on U.S. labor regulations.
- We can effectively manage the U.S. operations from our corporate office.
Remote management is also a major challenge and local oversight is critical. This local oversight can be provided by a company executive who is overseeing the expansion, a local independent management board, or a local experienced team who can frequently monitor progress. We often hear stories of foreign companies that expand into the U.S. and hire what they think is a full time resource, only to find that this person is not putting 100% of their effort into the engagement.
- We have an effective marketing and web presence in our home country so we should be able to replicate this with minor changes for the U.S.
Through our experience, we have come to understand that successful marketing in the U.S. requires different strategies and tactics than marketing in Europe and other foreign markets. Competition is typically very formidable in the U.S. market, which puts an emphasis on differentiation, messaging and value creation. Every single company we have helped expand in to the U.S. market has required a complete workover of the marketing strategy and on-line presence. We have found that on-line presence takes precedence over all other marketing vehicles. A sleek mobile presence is critical because it is typically the first contact prospects have with your company when they hear about your product. Messaging must be value driven and not technically focused. It must clearly define how the product can drive out operational costs or bring in additional revenue. Marketing should focus on value creation, as opposed to providing feature demonstrations of how a product works.
- We can gain enough traction without partners, so there is no need to build revenue sharing arrangements
Building early trust in the market is critical to success of a new technology offering. Strategic partners can provide avenues into an existing client base where a foreign company would have limited access. Like a trusted advisor, they can leverage a relationship to open doors. Sharing revenue initially can lead to a vital referral needed for the next sale. Tapping into an existing channel of potential clients may be the spark needed to start the fire of wide-spread acceptance.
However, many mistakes have also been made by signing up with the wrong strategic partner who limits your ability to sell independently or reduces your market size dramatically. When considering a partner, you need to ask, “If this partner fails to produce on their promises, what are you left with?” Partnerships need to be mutually beneficial and mutually restrictive. If one party has more upside than the other, then the partnership has a higher chance of failing.
With the right approach, the rewards of entering the U.S. market can outweigh the risks. Leveraging well-connected local resources who understand the challenges of a new product introduction can dramatically reduce risks and the time it takes to gain market adoption.
Tim Howard is the founder of multiple technology companies and has helped numerous foreign-based technology companies launch new technologies into the U.S. EMCO Partners offers an accelerator program which simplifies the introduction of new products into new markets while keeping the risks for companies predictable and manageable.