The Digital World Is Not a Flat Circle

The Family, 2015-10-23

False Premises

  • In the eyes of tech entrepreneurs the world is flat, no borders and no friction.

  • Your startup should be global from day one.

Rebuttals

  • 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.

Tax Compliance

  • 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.

Capital

  • 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.

Closing Thoughts

  • 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).

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