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Should Startups Be Global? The Language Factor
I was going to write a post on the mad rush of VCs into Brazil and how that will inevitably inflate valuations to unsustainable levels, i.e., bubble now, crash later. But, it is what it is. After all, an asset is worth what someone will pay for it – nothing more, nothing less – so who’s to say what's an unreasonable valuation?
Better, however, to focus on something positive, like the fact that the world has become a global marketplace for web-based startups.
The previous post dealt with the globalization of startups. Experience tells me that a startup should focus locally first and expand internationally only when they have sufficient resources to do it but there are major exceptions to this rule, especially for web-based companies.
As opposed to a device company, or a cleantech business, a web-based company can launch instantly in a geography-independent way (i.e., world-wide), with little additional cost. Physical borders no longer matter. Now, the biggest hurdles are language and culture.
Even the language hurdle, however, is disappearing.
Dave McClure, a well-know (and controversial) angel investor in the US, discussed language in one of the trends for startups in 2011:
… perhaps three billion people are online, or around half the entire population of the earth… English and Mandarin dominate the online conversation with close to 500 million speakers online and more than a billion offline. Also growing in online influence: Spanish, Arabic, Hindi, and Portuguese. What’s interesting is that these languages also seem poised to drive cultural trends globally. Looking at average GDP and Internet penetration by language, we can map out a geographic playbook for any Internet startup to prioritize how they lay the online smackdown on the planet, and use geographic arbitrage to move the point of innovation, production, and transaction to optimal locations.[emphasis added] For more info on this topic, see p.5 of this 2009 report on global language trends by MyGengo, a 500 Startups portfolio company.
Dave makes two critical points about language: first, that a startup can use hard data about language, GDP and internet penetration to determine exactly where it wants to focus its company and, second, that startups can access increasingly cheap sources of translation (through, e.g., MyGengo). The language issue is disappearing.
The reduction of the language barrier strengthens the case that startups should consider targeting multiple countries (after analyzing factors like competition, culture, etc.). The startup can use hard data about languages to optimize its geographical markets and then access cheap resources to translate its product into the necessary languages.
Should Startups be “Global”?
Interesting item from Venture Beat (I was on vacation and would have missed it had Michael Nicklas not tweeted it):
Emerging markets drive tech adoption — The days are long gone when users in emerging countries embraced older technology. With growing middle classes in Brazil, Russia, India, and China — and plenty of wealth in other regions has well — the demand for tech goods will continue to expand. That trend has been driving sales in tech for some time — 80 percent of Intel’s sales are overseas now. But it will also happen with web services such as social network games. [emphasis added] Accel and Tiger Management’s recent $30 million investment in Vostu shows that the Brazilian social game market has a lot of potential. Success in an emerging market can generate the growth that a startup needs to get to critical mass.[emphasis added]
Two points jump out at me. First, just as the microprocessor business bloomed in the US then matured into a truly global market, so will many web services businesses (see, e.g., Facebook). It’s not an overly complex point but it’s an important one and Intel provides a nice analogy.
The second idea, that success in an emerging market can get a startup to critical mass, is more complex. Of course, growth in an emerging market can help a startup get to critical mass, but at what cost? Specifically, should a startup really think “globally” or focus on winning local markets?
Generally, I believe that a startup should focus on local markets, then expand internationally only if strategically compelled and only after reaching critical mass. Going beyond local markets requires resources that most startups don’t have – as a young company, “if you chase two rabbits, you will lose both”.
On the other hand, that applies less to web services companies and, as the Brazil and the US converge, even less to web services companies that want to address those two markets. In fact, for reasons that I’ll address in later posts, I believe that bridging the Brazilian and US markets provides huge opportunities for entrepreneurs and investors, as long as they have sufficient agility and deep knowledge of both markets.
Final caveat: some non-web services startups can/should break the “local markets first” rule but they are rare and require an inordinate amount of investment capital. I see them mostly in the cleantech area – Amyris is an example.
