Why US scale-ups fail in Europe

I’ve previously written various blogs about specific issues that European scale-ups face in going to the US (such as http://bit.ly/USReadiness) and that US scale-ups face in coming to Europe. http://bit.ly/EuropeSurprises. I’ve also written generally about key reasons that companies fail when they try to internationalize. http://bit.ly/PathstoIntlFailure

This blog focuses on three clear reasons why US scale-ups fail when they try to expand to Europe.

There is no "Europe"

US companies are used to working in a broadly unified market. It is true that there are significant differences in business culture and consumer expectations in different regions of the US (a point that frequently surprises non-US companies coming in the opposite direction). Nonetheless, it is pretty easy to market and sell nationwide.

US companies tend to think that the European Union, similarly, is a single market – indeed, the European Commission refers to the European Union Single Market as one of the EU’s greatest achievements. Notwithstanding various efforts to harmonize the EU and regulation within EU countries, however, Europe is by no means a single market.  

First, the EU is not a single market in the ways that matter most – language and culture, including both business and consumer culture. Marketing a service or product in, say, Germany, is very different from marketing it in Italy. This is not simply a matter of language (even if, eg, many of the businesses in some EU countries may be comfortable communicating in English). The structure and nature of the business community, the level of competition, the expectations of consumers, the receptivity to startup innovation, and, indeed, the interest in engaging with a US-founded business (particularly in the current political climate) can vary substantially from country to country.

Additionally, products or services that are fit for purpose in the US may not work in some European countries without local modification (or, at a minimum, translation).

Many US companies choose to come to the UK first, on the assumption that it will be easier because “we all speak English.” However, there are significant cultural differences between the US and the UK -- frequently, the English that we speak is not the same English, or at least not expressed in the same way. It is easy for Americans who are not tuned in to these differences to misconstrue what they hear, and, in particular, to assume a level of interest that may not be present.

Additionally, depending on their area of focus, US companies may find more competition in the UK market than they would face in certain countries on the European continent.

There are also significant governmental and regulatory, legal, tax and other structural differences among European countries that may affect market choice.

Non-European companies coming into Europe are not alone in facing these issues – European companies moving out of their home markets face similar problems. Indeed, many European companies find it easier to set up in the US than to expand across Europe.

So what does this all mean: (i) approach the European markets as individual countries or, at most, on a regional basis (e.g., the German speaking (DACH) markets can perhaps be approached regionally); (ii) get local advice and do appropriate market research; and (iii) hire the right people (see below) with local knowledge and experience.

People, Structures and Accountability

Emerging US companies expanding into Europe need to address three difficult issues: (a) hiring and integrating the “right” people; (b) setting up the right management structures; and (c) ensuring accountability. These are all intertwined. 

Several of my prior blogs discuss the problems associated with recruiting and hiring the wrong people. Those issues are difficult enough on a domestic level, but they are magnified when you expand cross-border. http://bit.ly/SixRecruitmentMistakes

These issues become even more difficult in Europe, where cultural differences from country to country make it even harder to judge: (a) the quality and role fitness of the candidates; (b) their ability to integrate into your organization; and (c) their suitability for the particular European markets that are your initial targets. As to this latter point, an ideal candidate for operating a French business, for example, may be a disastrous choice in Germany. While candidates are available (especially among generation X and millennials) who have been educated, and lived, in multiple European jurisdictions, a US scaleup may find that they are difficult to recruit and, in any case, they may not be as “at home” in some of the places in which they have lived as one might imagine. 

More generally, I find that scale-ups significantly underinvest in performing due diligence on candidates. This is a serious error – it is much more expensive to live with poor performance and then incur the expense and time associated with managing someone out than to spend some money to get it right in the first place. The consequences of this underinvestment are more pronounced in a cross-border expansion context, where it may take longer to distinguish between the normal challenges of entering into a new market and evidence of business failure.

A second issue is management structures and accountability. There typically is a choice between having individuals in functions report directly to their functional counterparts in the headquarter and having them report to a local general manager. Both models have their strengths and weaknesses. My own preference is for the former model, but I recognize that there may be circumstances where local autonomy is preferable.  

What rarely works, in my view, is some kind of dual reporting structure (sometimes referred to as the “dotted line”). For example, if a sales and marketing head reports to both a counterpart at headquarters and a local general manager, who has the ability and responsibility to hold his feet to the fire and sack him if he doesn’t perform? I think that dual reporting structures generally result in a loss of accountability.

Undercapitalization

US companies coming to Europe frequently underestimate the amount of time, and work, that it will require to find the right people, achieve product/market fit, and gain traction in the relevant local market or markets. Of course, this is not a problem faced only by US companies coming to Europe – companies expanding internationally face such issues generally.

However, the national fragmentation of European markets exacerbates this issue. Even though some of the individual European markets (eg, Germany, France, the United Kingdom) are reasonably sized in their own right, these challenges need to be faced in multiple countries to address a total market comparable to the US in size.

Additionally, some business-to-business startups that operate on both sides of the Atlantic have told me that they find less receptivity in Europe to doing business with startups than they find in the US.

Thus, US companies entering European markets need to be sufficiently capitalized to cope with the risk that it may be much harder, and may take much longer, to achieve success than they initially anticipate.

Conclusion

International expansion is hard and risky. Those risks increase substantially if you just assume that things in your target markets will work like they do in the US. You need to do your homework, get appropriate local help, hire the right people, set up effective management structures, and then manage your expectations as to how quickly you will achieve success. 

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected].

You will find a listing of Bob’s startup and scale-up blogs on US and international expansion and other startup and scale-up matters here: http://bit.ly/StartupGuidesIndex