Early-stage start-ups challenges | Expansion

Thank you for joining us on our early-stage start-ups series blog series. In our previous 2 blogs, the insights shared focused on People and Culture and Scaling challenges. In our final blog, we share valuable lessons shared by the founders and VCs interviewed, whom we express deep gratitude for sharing their time and experiences to enable us to bring this series to you.

Our previous blog shared the challenges faced during scaling; it focused on how start-ups overcome specific problems to get their product to market. For example, one of the main concerns was long sales and procurement cycles, our interviewees shared that this risk could be mitigated by establishing a very strong network of mentors and advocates that can share best practice to expedite establishing a consistent pipeline.

Our objective for this blog is to look beyond establishing market-fit and operationalisation of the initial service or product and explore the challenges in bringing new products to market, identifying new customer bases, and increasing the international footprint. It is important to note that expansion will look different for every start-up based on their vision and ambitions; their readiness for expansion will depend on multiple factors, including the market positioning, product maturity, and level of financial security.

Entering new markets or developing new products

One recurring theme throughout our interviews was the ambition to expand internationally, within the next funding round, particularly to Europe and the United States, while a few were more concerned with diversifying to new customer bases and expanding their product offerings.

One of the key considerations as the start-up looks to expand is its ability to cope with new demand and capacity to deliver the new product or service, or to cater to a new market. A steady pipeline of retuning customers and a growing market share provides the start-up the reassurance it needs to seek further product and international expansion.

Securing allies in the start-up’s network that have strong international connections can support the start-up’s international expansion strategy by understanding the target market from a local perspective, ultimately helping shape the expansion approach. One of our interviewees noted that to penetrate the US market, the organisational culture needed adapt to better understand the target customer:

Penetrating a new market or industry brings opportunities for growth and diversified revenue streams. Usually, start-up founders think first about regional expansion rather than serving new sectors or industries. However, expanding to different industries can unlock a new client base and become a longer-term strategic decision which may yield higher returns.

For other start-ups, generating new business through international expansion is the objective. This is where founders can leverage the great networks established during scaling and make connections to truly understand the market they are trying to expand into, to better understand and mitigate risks. Most of the founders we interviewed suggested that the US was a much bigger market and therefore more attractive to build a presence in, and in some cases, this is now more accessible to start-ups with limited resources, as expressed by a Series A COO:

Another very interesting point shared by one of our interviewees was the impact of where the start-up was founded. The size of the market that the start-up operates in can be, in part, a deciding factor on how quickly the start-up will expand, more from one of our VC interviewees below:

Lastly, one VC Principal interviewed shared that post-Brexit, several Fintech firms acquired European Passports to begin or continue operating in the European Union to minimise regulatory barriers to entry. This means that the start-up organisation would acquire a company with an existing presence in a European country, effectively giving them an opportunity to expand their product set offering by leveraging the legal and tax structures of the European company already in place.

What can the start-up do to prepare for expansion?

Expansion is a big undertaking, building a completely new product or entering a brand-new market will require a lot of preparation, time, and effort by the team.

To help start-ups prepare for the next phase of growth, the startups interviewed mentioned three key areas of that concerned them before and during expansion as they did not have in-house expertise: tax, legal and regulatory requirements. In some cases, the start-ups tended to leverage the relationships and mentors established during scaling and diverse funding rounds to obtain the best and most relevant advice for the start-up. There are some very important lessons start-up founders can learn from companies that failed to take thorough and diligent care in ensuring full legal, tax, and regulatory compliance in favour of rapid expansion, ultimately leading to extensive audits, fines, or even the wind down of the organisation itself.

Before Expansion

Building a great foundation is the best way to demonstrate due diligence and sustainable compliance with tax, legal, and regulatory expectations. Establishing a robust governance and reporting structure helps maintain the current regulatory expectations before taking on more complex legal, tax, or regulatory requirements. Risk is one of the main concerns VCs will consider during funding, this is a great way to demonstrate that the start-up has considered the implications of an expansion:

During Expansion

Understandably, this may be one of the most challenging activities for an early-stage company with conflicting priorities. In many instances, the founding team will not have the SME knowledge or expertise in these domains and could be servicing a heavily regulated sector. The VCs interviewed indicated that this type of operational support most of the time is offered to the firms they fund so the team can remain focused on their growth objectives. Start-ups can also lean on partners, external support, and accelerators to manage the complexity of additional regulatory expectations. It is important to mention that some regulatory changes are unpredictable and can have a profound impact on the start-up’s expansion objectives.

Distribution Partnerships

Lastly, we consider distribution partnerships as part of the expansion approach. Identifying and engaging with a distribution partner can be a great way to reach a larger client base, mitigate risks, and reduce the long sales cycle, as presented in our Scaling blog. However, increased vendor and risk management requirements could put additional pressures on the start-up to meet specific expectations by the distributing partner, including demonstrated ability to meet SLAs and maintain continuity of service delivery. A distribution partner could also remove a level of control from the start-up and could land them in exclusive agreements, effectively preventing them from exploring other markets or at the start-ups discretion. A distribution partnership should be carefully assessed to ensure that it is aligned with the wider start-up’s strategic growth objectives.

Conclusion

All the above observations can be summarised into a few key takeaways from the start-up and the VC perspectives:

Start-up priorities beyond funding:

• Grow the customer base, through product development or international expansion,
• Manage procurement lifecycles and maintain a healthy sales pipeline,
• Establish a great leadership team and then recruit the right team for development and delivery,
• Navigate complex environments, sometimes with heavy regulation.

VC priorities when making an investment decision:

• Strong founding team with clear articulation of vision,
• Retention of core product offering within the start-up itself (don’t outsource your bread and butter),
• Product or service with a go-to-market strategy that fulfils a distinct need in the target market.

To conclude, the start-up leadership team should consider support in areas in need of SME knowledge, while retaining the core product development and primary service delivery within the team. Some of the key challenges to expand and how expert support makes a difference are summarized below:

Start-ups:

VCs:

Please feel free to reach out to any of the authors of this article if you would like further information or are looking for support in any of these areas.