Friday, November 14, 2008

Expanding Overseas

Your future may lie in international expansion

The distance between Boston and London is 3,325 miles while the distance between Boston and Frankfurt is 3,667 miles. To many, this may not seem like a staggering distance but in the eyes of entrepreneurs considering international expansion the distances can seem unfathomable.

Compound the distances with language; time zone, cultural, tax and regulatory differences, and international markets seem exponentially further away. Many of Polaris Venture Partners’ portfolio companies are facing this dilemma (read: opportunity) and we are spending a lot of time from a board of directors perspective helping them navigate the challenges.

Executives must answer two questions as they consider international expansion: where to expand and how to enter. Let’s look at the primary means to do so and how private equity firms can help.

Where to expand is the question to address first. Yes, India and China are all the rage, but that does not mean you should tackle those markets first. In many cases, those markets are best suited to hire talent and outsource certain functions. Historically, most companies have made the U.K. their first step internationally. The U.K. maintains language, cultural and regulatory similarities to the U.S. which can help companies more easily find their way. That said, Germany and France are also attractive, given the size of the economies, strong education systems and the presence of numerous multi-national corporations. We caution companies to not enter other parts of Europe, Australia, the Middle East or Asia first unless they have a very specific strategic rationale or strong direct connections.

How to enter international markets comes down to two methods: Buy vs. Build. Every circumstance is unique, and management teams need to understand their own strengths, weaknesses and competitive landscape. Buying your way into an international market has historically been the most common means of entry. You instantly gain a team and market credibility. If this path is best for you, follow three guidelines. First, send someone from headquarters to lead the integration process and learn from the acquired entity. Next, look for a target that is less than half your size but not so small as to be meaningless. Trying to integrate a like-sized entity will undoubtedly distract you from running your core business. Finally, do your homework on legal, HR, market and tax issues and spend the time to hire top-notch advisers. Don’t be afraid to spend time and money to ensure you are properly prepared for the inevitable challenges.

Building a local presence is often the simplest means. The rollout costs and timing can be managed with minimal disruption to your core operations. In terms of developing a localization strategy, use advisers to help recruit local talent. Failing to find the right people can destroy your credibility. Interestingly, certain embassies have staff that help companies enter foreign markets. Another important step is to get close to your current European partners. It may sound like a cliché but finding the right people and aligning yourself with trustworthy and symbiotic partners significantly improves your chances for success.

Finally, private equity firms can help you identify, negotiate and fund acquisitions. Utilizing people who do this for a living, and who have financial incentives to see you succeed, is one of the best aids you can have. Many can help you recruit country managers, and can also build out international advisory boards and recruit strategic partners. Most private equity firms are in the position of having strong relationships with smart and senior people throughout the world, and they have gained tremendous knowledge from both their successes and failures.

 

Bryce Youngren is a general partner and Scott Martin is a senior associate with Polaris Venture Partners. Both are actively involved with ACG Boston.