For a startup the decision to expand does not always arise involuntarily or fortuitously, it is usually in its DNA to expand through products or markets. New product development has inherent risk and cost. Sometimes the expansion of new markets, which involves the offer of existing products and/or services in new markets, is ideal.
Have you thought about the expansion strategy that Spotify had originally? What strategy did they use and what was their competitive advantage vis a vis Pandora?
Initially, Spotify developed a solid product, established links with record companies and artists, and solved the regulatory issues. This allowed it to expand into new geographies out of Sweden, acquire new users with a freemium model, and develop new segments by adding different types of music.
Some elements that accelerate the expansion of startups are the following:
a. Limited market: Have you ever imagined developing a startup in a market of fewer than nine million inhabitants and being acquired for more than a billion dollars? This is the case of Waze, which began operations in Israel with the vision of being an global app. If you are an entrepreneur with a limited market, since the beginning develop your product or service to be able to expand to other geographies, reach other users and segments.
b. Dominate or get out: Being one of the first two players in the market where you operate is part of Uber’s strategy. This strategy leads startups to invest large amounts of cash in aggressive expansion. The dream behind the USD$20 billion investment in WeWork was to grow, expand, and dominate the coworking markets.
c. Increase in competition: As a startup grows, it faces competition from new entrant and traditional players, such as the case of Nubank in Brazil. This company has developed new business segments and today offers digital account services, credit cards, rewards programs, loans, and business accounts.
d. Financial profitability: Sometimes the products or services of startups are focused on unprofitable markets, therefore they seek expansion into new markets to achieve an economic benefit.
e. Stakeholder interests: Startups often have commitments with investors or other stakeholders (e.g. government-related funding). Sometimes these commitments lead to an expansion in certain markets, for example, expanding to a new geography or serving a specific group of users.
f. Context: External factors often determine the startup to expand into new markets, whether due to a pandemic, an economic event, a military conflict, or other circumstances.
According to CB Insights, 14% of startups fail due to poor market definition, 13% due to lack of focus, and 9% due to a failed geographic expansion. Some examples of failed expansions are OFO, PepperTap, and Walmart in Germany.
When you are thinking about expansion, think about these key points:
a. Timing. Consider the state of your business, your traction, and the life cycle of the technology.
b. Barriers to entry and unique capabilities: Keep in mind those elements that may block your expansion and how you deal with them with your strategic capabilities, such as economies of scale, product differentiation, absolute cost advantage, distribution channels (network: distribution and knowledge), required capital (retaliation with deep pockets)
c. Strategies for your expansion: Some strategies that you can use to expand into new markets are: exports, contractual agreements for franchise licensing, joint ventures, strategic alliances, or foreign direct investment (acquisition or greenfield).
Successful expansion into a new market (geography, customers, segments) requires a strategic vision, a robust and competitive product or service, and perfect execution. Consider the successful examples of Deliveroo and Instacart.
The proverb of the Art of War follows: “If you know the enemy and you know yourself, do not fear the result of a hundred battles; if you know yourself, but you do not know the enemy, for each battle won you will lose another; if you don’t know the enemy or yourself, you will lose every battle”.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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