The Digital World Is Not a Flat Circle
The Family, 2015-10-23
In the eyes of tech entrepreneurs the world is flat, no borders and no friction.
Your startup should be global from day one.
Building global companies is increasingly becoming harder.
Startups are increasingly operating more tangible businesses.
Regulations are increasing as startups progress.
Why Many US Startups Became Global
SV had an early start due to the semiconductor business and the availability of critical resources ($, people and rebellion)
Since the end of WWII (Marshall plan) the US was very successful with their investment into soft power. US internet services were considered superior as a result.
Now the cost of founding a software startup is $0. The capital can be used to finance global expansion once the product-market fit is found. Friction [marketing, distribution] for digital goods is gone.
Domination is key for growth since the cost of entry is $0. Lack of defensibility must be offset by the scale of/in the market.
The first disrupted industries were intangible and unregulated (advertising, anyone?). MK: or maybe regulated with no practice of enforcement, see Airbnb.
Why Startups Fail Internationally
Lack of understanding of the customers [it’s waaay deeper than just localizing a product]. (MK: Aviasales lost some $$ in China as a result).
Attempting to inflict the US-dominant design an UX on unsuspecting international users. (MK: Expedia was guilty of this)
Growing within a country in terms of # of locations is harder abroad.
Compliance with local regulations may make the business model unprofitable. And non-compliance – expensive.
The Digital World Is Tangible
Firms have tangible operations (people, content production) and assets (servers, buildings). Tangibility stifles scale, in many cases it can sink the business.
The solution is increasing returns on the digital side of the business model.
Easier for B2C (except the price/margins pressure, which is managed by branding, which millennials ignore, go figure). For B2B it’s harder due to the lack of network effects.
The geography of tangible assets is quite narrow. Marketing and content have to be local.
Proximity (aka hyperlocal) explains Apple Stores where this becomes part of the overall experience. But again, Apple is a global company.
The Digital World Is Regulated
Different markets —> domestic rules —> compliance, no one-size-fits-all.
Many companies are following the “permissionless innovation” – better to apologize than to ask for a yes. MK: turned out quite sour for Airbnb in some regions.
Complying with known rules is a good starting point. Not sure how the promise of AI helping with automatic compliance with evolving rules will hold, so far it looks like a pipe dream. Beneficiaries: healthcare and education, not sure about fintech.
At the same time, involving users in not-so-compliant activities is easy and is widely used. Savings are more important than rules.
MK: my old boss always said that NOT starting a business because of possible tax issues is stupid.
Large global companies are in a good position to minimize their tax exposure.
Paying taxes if you’re a leader can actually get you way ahead of competition and increase returns.
EU: the core issue is not the market fragmentation, but the lack of capital.
Different risk approach to funding post-product-market fit.
JVs sometimes are a better approach to reduce the country risk —> more fundable.
The more you grow – the faster you grow.
Increasing growth requires increasing market size —> go global (highest return to scale) and/or build an ecosystem.
The global product should be [MK: substantially] the same to keep the brand promise and the network effects (if any).