Now’s Your Chance, Take It: The International Opportunity For Early-Stage US Start-Ups

It is a regrettable fact that despite the large number of innovative start-ups packing their bags and flocking to Silicon Valley from all over the world, movement in the opposite direction is significantly slower and more risk-averse.  By the time internet successes find the bandwidth and resources to look abroad, clones abound, valuations have skyrocketed and the original companies are held for ransom, as a few of my fellow Online Economy bloggers have pointed out here and here.

When it comes to the question of whether to shore up your domestic foothold or to expand internationally, the answer is yes… do both.  Building an international presence has become more and more valuable as the world has gotten smaller through the presence of and society’s growing engagement with the internet.  Populations today are mobile, knowledge is fluid, and global brands have weight.

International expansion provides revenue growth and cost efficiency opportunities, as well-built technology platforms can be scaled and initial learnings applied.  While cultural differences certainly exist and expansion of any kind is by no means easy, there is a reason why Apple products are valued the world over and the list of top mobile apps is more similar across geographies than dissimilar.  If what you’ve got is good, customers will want it, no matter where they live.

International growth can also be defensive.  When markets go south in one country, customer diversification provides stability to weather the storm.  Presence in a market can prevent copycats from outmaneuvering you, both internationally and in the original domestic market.  And at the end of the day, probably the most compelling reason of all, going international first prevents you from having to suffer the ignominy of paying some copycat tons of money for stealing your idea.

Good or bad, internet clones are a fact of life.  Little legal recourse is available to those whose ideas have been robbed; litigation is costly, time consuming, distracting, and unless the copycat is 100% identical, there is little chance of winning.  In 2009, Facebook sued StudiVZ, its German clone, for intellectual property theft and went nowhere; the judge had no sympathy even for alleged source code stealing.

And while some may argue that the acquisition of copycats is an excellent avenue for international growth (most fervently put forward by the copycats themselves), organic growth almost always trumps.  There are, of course, very valid reasons for growth by acquisitions – synergies or product line expansion, for example.  However, I have seen firsthand the executional challenges inherent in acquisition integration, and it can be very costly – merging technology platforms, redundancies, lack of cultural fit, knowledge gaps.  More often than not, the challenges overwhelm the benefits.  In the best cases, synergies are less than expected, in the worst cases, the acquisitions are blundered to the point that the target company is no longer in existence.  Just look to the graveyard of acquisitions US companies have made while trying to enter China… eBay, Amazon, Groupon have all tried to no avail.

The solution, instead, is to outpace and out-innovate competitors, who are self-proclaimed “executors” and not visionaries.  Speed is essential, particularly for online businesses grounded in network effects, where winner-take-all or winner-take-most dynamics rule the market.  The first mover gets the first crack at mobilization and there’s no room left afterwards.  According to Alexander Kudlich, Managing Director of the infamous Rocket Internet cloning factory, the runway is only three and a half weeks – the time it takes Rocket to identify an opportunity, build the platform in German headquarters and simultaneously hire a team on the ground.

This, then, is a call to both start-ups and their venture investors: when the threat of clones looms, it’s not the time to pull out, but rather the time to put more in – capital, human resources, you name it.  Make international expansion a priority.  After all, there is no better form of validation of a business model than others trying to profit off the idea.  And while you’re thinking big, why not take over the world?

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Over the summer I had the opportunity to work for both a booming start up – Airbnb – fighting its German copycat – Wimdu – and the dark side of the force in Rocket Internet’s version of Zappos in Brazil: Dafiti.

 I was therefore able to observe first hand how well the Samwer brother’s cloning method (basically pouring marketing dollars into the business) was effective when 18 months after it’s launch, JP Morgan invested 45M$ in Dafiti’s e-commerce business1.

 Simultaneously, barely a year after raising a huge initial round of funding (90M$)2, rumours of Wimdu closing its London and Paris offices reached my ears (the information has not yet been confirmed by RI). I couldn’t help meditate about the reasons why a similar method worked in the case of Dafiti and not Wimdu.

On paper, Wimdu had everything  to become a long-lasting competitor to Airbnb:

·      Platform is exactly the same

·      Marketing message is identical to Airbnb’s (“Travel like a human” vs. “Travel like a local”)

·      Value proposition to both guests and hosts are extremely similar (free listings and 3% commission for the host, 6-12% commission for the guests on Airbnb vs. 15% on Wimdu)

·      Wimdu had local offices in most major markets before Airbnb (Paris, London)

·      Both Wimdu and Airbnb’s pockets were as deep (90M$ vs. 120M$ funding)

Therefore what can explain this first-round knock-out?

1. The nature of the market called for a clear winner

It seems as though Rocket Internet bet big on this one. Indeed, the peer-to-peer industry for rooms / apartments has all the criteria to be a “winner-takes-all” market:

·      High positive network effects: the value of being a part of the “community” increases with the number of users for both hosts (increased demand / revenue) and travellers (competition driven prices on a given location, wider range of destinations). In addition, due to the trust factor involved in peer-to-peer transactions, the incumbent (Airbnb in this case) benefits from the higher number of past transactions (reviews of hosts and guests) thus strengthening these network effects.

·      High complexity to manage a listing on several marketplaces: although travellers are only one click away from another marketplace, hosts have extremely high multi-homing costs from managing a listing on two platforms (i.e. complexity to sync calendars and track bookings, etc…).

It is therefore not surprising to see one of the two emerge as the clear winner but what triggered such a quick victory?

2. Love mattered more than size

The two companies chose very different strategies when allocating their resources. Wimdu spent millions on “recruiting” listings3 via their sales force and travellers via online marketing to make up for being the underdog. In the meanwhile, Airbnb focused on its customer service and its community of users.

Unfortunately for Wimdu, in this industry, the viral coefficient is probably higher than anywhere else:

·      Every new host is a potential future traveller and every happy traveller is a potential new host

·      Additionally, the highly social nature of travelling (who likes to travel alone? who can refrain from “telling all about their vacation” the day they get home?) increases the importance of generating positive word-of-mouth

By focusing on customer service (24/7 customer service, 17 languages served, 90% of calls answered in 90 seconds,), Airbnb grew its community organically (in France, Airbnb had 4,000 listings before even having an office and a French website!). On the other hand, Wimdu let multiple incidents occur without reacting4=;

Additionally, Airbnb understood early on that with such a huge part of their business relying on “trust”, reaching out to their community of hosts was a key component of their success. By organizing offline events where hosts could “put a face on Airbnb” and enabling them to interact between each other, they created an offline community that powered their growth (in France, the number of listings doubled in the 4 months following the first offline meetups).  

Ironically, Airbnb could almost have been called a Zappos culture copycat for embracing Tony Hsieh’s perspective on customer service.

For all those romantics out there, it is a great story to think that in this day and age, “doing business like a human” can still overcome the aggressive strength of marketing dollars.  The question is: will Rocket Internet learn the lessons from this as they launch a Pinterest copycat (called “Pinspire”) in Asia5 ?





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