Challenges Start-ups face in Global Growth
Last month, I had a discussion with Futurpreneur on business expansion. That discussion focused on evaluating some specific criteria for assessing whether your start-up is ready for expansion and which would be a probable target market for expansion. Based on this evaluation, you, the entrepreneur, might decide that it is indeed now time to grow your start-up and explore new global opportunities outside your local market. At this point, you, the entrepreneur, need to look ahead and think of the potential challenges that an entrepreneur entering a new market might encounter. Below are some of the potential challenges to consider that might doom your entry into a new market.
Is your Start-up ready to Go Global?
An entrepreneur needs to make sure that her start-up is absolutely ready for growth. This means looking at four key areas of your start-up. The first focal point should be management commitment i.e. are you and the investors of the company ready to put in the time, effort and resources required to succeed in a new market? The second important area to consider is the product offering i.e. whether you will have competitive advantage in that specific new market because of your superior product or service. The third necessary condition for growth of your start-up is whether you have sufficient cash-flows to enter into a new market as this is an expensive endeavor. Finally, the entrepreneur has to be realistic about the capacity and capability of their start-up to deliver the additional sales that may happen as a result of this expansion. If a start-up enters a new market before these necessary conditions are met, the start-up can incur significant damage to its reputation. This can lead to catastrophic result and even end in the failure of the expansion effort.
Market Entry Method and Partner Selection
One of the most significant challenges that start-ups need to overcome while entering a new market is to decide the ideal Market Entry Method. This can have great consequences on future business to the company. There are two possible options. The first is to directly or indirectly export to this new market while the second option is to open a new sales and market office in that location. This decision does not depend upon the size of the company but on the business strategy defined for the company’s expansion. There are a number of factors which determine the strategy to employ including International experience requirement, management focus, speed to go-to-market, financial commitment and the risk profile of the company.
Whichever Market Entry Method is ultimately selected by the company, finding the correct partner(s) to enter a new market is another crucial step in this journey. In order to do this, your start-up must clarify the requirements it has from the partner. Questions such as which market(s) will the partner focus on? Is the partner only a sales partner or would it also add value to the delivery of the products or services? What would be the revenue-share model for such partnerships? These and many other questions need to be answered to build long-lasting relationships which are mutually beneficial for both entities.
Impact of culture
Culture has huge impact on business and it is imperative for an entrepreneur to immerse himself in the culture of any new market in order for his venture to succeed in that market. A very simple example of culture impacting international business is language. Any foray into a new market is defined by an entrepreneur’s ability to communicate in that market’s language and understand the nuances of the spoken and the written word. Other differences between cultures could arise from factors such as economic philosophy, social mobility, religion, education system, and history. These cultural differences have major impact on business functions such as customer support, advertisement, negotiations, public relations and consumer choices. Understanding these cultural differences and their influence on business practices is always a significant challenge for any venture entering a new market.
International pricing strategy is always a major challenge while entering new markets. A start-up is focused on keeping it costs to a minimum while having maximum revenue. However, the associated cost and pricing structure is based on its domestic market and the entrepreneur has to consider a number of additional variables in order to determine the best pricing model for a new international market. These variables include additional costs to entering a new market, foreign exchange fluctuation, Tariffs, legal considerations, consumer affluence and local market conditions.
There are two major challenges when it comes to legal considerations while going global. The first is to understand the extent that your product and service are protected under Intellectual Property Rights in the market that your start-up is planning to enter. Your IP is usually applicable only in the country that you have obtained it in e.g. Patents and Trademarks issued by Canadian Intellectual Property Office are only valid in Canada. You need to understand how vulnerable your IP is in the markets you are entering and what are the protections that can be obtained for your IP in those markets.
The second area to understand are the applicable laws of the country that you are entering and those of your home country. Canadian laws that focus on foreign corrupt practices or restrictions on Export of Canadian products and services to certain countries must be studied before entering any new market. Similarly, the entrepreneur must comprehend the impact of the laws of your target country on areas such as product liability and International contracts.
Tax and Accounting
Tax and accounting is another significant challenge for would be entrepreneur going global. These cover a whole range of issues such as Transfer pricing, Duty Drawback, Foreign Trade Zones, Value Added Tax (VAT) and Tax incentives for exporters. Again, these need to be looked at and it must be ensured that your company is meeting its tax obligations in all the markets where the company operates as a business.