Doing a startup is really hard. No one in their right mind would consider doing two startups in parallel, would they? And yet that’s what going international is: A second startup inside your first one. And like any startup, it needs people and money to succeed.
Two key questions
Once you’ve got your strategy (see Part 2 for more on strategy), you still need to answer two key questions before you can pull the trigger on international expansion:
1. How are we going to staff it? There are two pieces to this, Visible and Invisible:
- Visible: New people dedicated to international, whether at HQ or in country.
- Invisible, but just as critical: Existing people in the current organization who will need to do additional work to enable it–engineers for internationalization, support staff for ticket escalation, HR people for recruiting and comp work, lawyers for incorporation and tax strategy, etc.
- Visible: Direct costs for new people, facilities, travel, etc.
- Invisible: The hidden costs of the additional work required from the rest of the organization.
2. How are we going to fund it? Again, two pieces:
While you can’t ignore the visible direct costs, there’s a great temptation to ignore the invisible piece: “Come on, we have a great team, they’ll just get it done.” That’s a big mistake.
In my first international startup role, I experienced that first-hand.
@Home: From beggar to banker
In early 1997, I was recruited to start up the international business for @Home Network. It was a unique opportunity. The two-year-old domestic business was growing like a weed, serving American consumers’ insatiable desire for the broadband Internet over cable the company had invented. Investor interest was equally high, and within three months of my joining, ATHM had become the newest high-flying stock on the NASDAQ, with a market cap of $30 billion on $48 million of projected 1998 revenue (these were, after all, the dot com days). The domestic business was on a defined track to profitability, with a plan that projected steadily shrinking quarterly losses and a near-term crossover into the black. Adding in the losses from my international “startup within a startup” would reverse that trend and push out profitability by several years. And therein lay my problem as the founder and so far only employee of @Home’s international business–a problem common to any international startup inside a domestic parent, whether private or public.
The more new countries we launched, the greater the pain would be–and while Wall Street loved the international growth story, they didn’t want to hear anything about more losses for a stock already priced to perfection. What’s more, the organization was already stretched to keep up with the intense demands of the exploding U.S. market. As a result, I enjoyed high expectations and lots of goodwill–but no resources to internationalize code and content, deploy network infrastructure, hire and train overseas teams, or anything else. Once we had an international strategy, we had to find a way to staff and fund it. Here’s how we did it.
For each country to be entered, we first developed a detailed two-year startup budget. Naturally, the budget included the dedicated headcount and other spending we would need to operate in country, but we also budgeted additional heads in each of the HQ functions whose support we’d need to get up and running. For example, if we needed three months of engineering work to support Japanese cable modems, we explicitly included a quarter of a headcount for that in the budget. If we expected the HQ support organization to provide Level 3 and 4 escalation support for our Australian operation, we budgeted heads for that too. If we needed a facilities guy to fly to the Netherlands to spec out a data center, we included that too. Having quantified the needs, the next challenge was how to fund them.
We found a solution by tapping into the appetite of overseas cable operators, whose cooperation we needed in any case to deliver our broadband Internet service. I generally don’t recommend joint ventures, but in this case they made sense. For each country, we formed a local venture (e.g. @Home Japan) jointly owned by @Home and the local cable partner. The local venture then awarded the @Home parent company a paid 18-month consulting contract to manage the startup–from finding an office to designing the network and server infrastructure to recruiting and training the local team. The local partner provided the funding (sometimes with some capital contribution from @Home). Although they grumbled about having to fund @Home’s startup resources, they ultimately realized that this was the way to get up and running faster and with higher quality than any other approach.
This approach transformed my new international organization from beggar to banker. Instead of going cap-in-hand to beg for support from the VP of engineering, we could tell him: “I can fund two new heads for you, and all their T&E for the trips they’ll make for the U.K. startup. As long as you meet our service level agreement, it’s up to you what you do with those two extra heads.” In many cases, VPs would choose to assign their most experienced high-performers temporarily to oversee the startup (which the employees viewed as a nice perk) and used the funding to backfill them with new hires. In a headcount-constrained company, this approach made international projects very popular instead of an unfunded headache. It also enabled us to get multiple ventures up and running and transitioned over to local teams quickly and effectively–which made our partners and our investors happy, too. The consulting dollars even gave us international revenues right away, to be replaced by royalties and other direct revenues once the business took off. Within a couple of years, we had over a quarter of a million broadband subscribers outside the United States.
In short, at @Home we figured out a way to cover the invisible people and costs required to make international successful. On the other hand, when @Home acquired Excite for $5.7 billion in 1999 and I added responsibility for their international business, I got to see the painful consequences of ignoring the invisible.
Ignoring the invisible
Like @Home, Excite (a major web portal) was already public and had launched in Europe and Japan by the time we acquired them. Unlike our international business, however, Excite’s seemed to be pretty unpopular, both inside and outside the company.
The general manager, whom I’ll call Dick, seemed highly stressed when I met him, and for good reason, as it turned out. Excite had hired 20-30 staff in five countries and formed JVs with British Telecom, Telecom Italia and Itochu–and they weren’t getting the support they’d been led to expect from Excite corporate.
While the JV partners were funding some of the local operations, there was no budget or headcount plan for Excite’s support of the international business. Dick was literally the only California employee with any responsibility for meeting the needs of five country subsidiaries and three large, demanding partners. Initial goodwill on the part of other departments towards the overseas business soon turned to negativity, as the list of internationalization requests grew longer and it became clear that there was no extra headcount or budget to support them. The result was weak local ventures, frustrated partners, low morale and a cloud over what should have been an exciting expansion of the business. As for poor Dick, he was practically afraid to answer his phone or read his email anymore, such was the mismatch between the expectations created and his ability to deliver.
The Excite case is not some exceptional example of particularly bad judgment or poor execution–just an illustration of what is almost guaranteed to happen if you don’t think through your international expansion all the way.
Several ways to proceed
There are ways to replicate the successful @Home approach above without doing joint ventures. At Opsware, we negotiated a distribution deal with a large Japanese partner, with $5 million in minimum commitments that allowed us to fund the product work, training and local hiring required to enter the Japanese market. At Silver Spring Networks, on the other hand, we bit the bullet and funded it directly. In every case, however, we mapped out up-front all of the work required to make our international startups successful, and assigned a funded budget for it–down to the finance, legal, and HR heads we would need to draw on for tax, incorporation and compensation advice.
The key takeaway to remember is this: If it’s unfunded, it’s not going to get done.
Up next: Wrap-up
Comments or questions?
I welcome your comments and questions. If the comments box is not showing up below, click on the title at the top of the post and it should appear. This is the fourth in a five-part series on building a global startup.
John O’Farrell is a general partner at Andreessen Horowitz. John led the firm’s investments in Facebook, Twitter and Groupon, and works with portfolio companies on partnering, strategic transactions and global expansion. Prior to Andreessen Horowitz, John held Executive Vice President positions at Silver Spring Networks, Opsware and Excite@Home. Earlier in his career, John worked in the United States and Europe with US WEST, Booz Allen, Telecom Ireland, the EU Commission, Digital Equipment and Siemens. John has an MBA from the Stanford Graduate School of Business and a Bachelor of Electronic Engineering from University College Dublin. He speaks English, German, French and Portuguese.
[Image: Flickr user Zavarykin Sergey]