Off to conquer the world? Be aware of the difficulties of internationalization (although start-ups seem to be doing better)

Category: Analysis

Most SMEs in Spain want to grow beyond their borders. This is what a Study on the internationalization of Spanish companies carried out by the Chamber of Commerce last year has revealed. Seventy percent of the 1,300 executives from the small and medium-sized exporting companies who participated in this study considered that internationalisation “was a key factor to overcoming the crisis” and 80% said that their company would continue to “invest in their international expansion in the coming years”.

However, the study also reflected certain shadows. According to less than half of those interviewed (45 per cent), international business was more profitable than doing business at home; however most of them did not seem satisfied with their progress: 77 per cent felt that their share of international business should grow more in the coming years.

Beyond the SMEs that decide to go for other markets, global reality is quite different. According to data from the Spanish Foreign Trade Institute (ICEX), last year the number of exporting companies was 147,000, only 4.55% of the total. The percentage of companies that export regularly has increased, but growth has been very slight. In addition, Spanish foreign sales are too concentrated: 100 companies account for 39.2% of exports.

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Despite these figures, Alicia Montalvo, ICEX general manager of institutional cooperation and coordination, said a few months ago that managers had understood that internationalisation was “the way to grow” and a “strategic choice”, but added that Spanish companies still had much to work to do beyond their frontiers. In fact, this institution helps Spanish SMEs who wish to internationalise their business and consolidate their presence abroad, through its ‘ICEX Next’ support program.

Now, what obstacles do SMEs face to internationalise, in addition to their limited corporate dimension? According to the aforementioned Chamber of Commerce study, 56% of these companies consider lack of financing to be their main obstacle. The selection of a commercial or industrial partner in the target market and the regulatory aspects are other problems cited by the managers surveyed.

Startups, more funding and more success

Although funding is an obstacle for all SMEs, the situation is much brighter for start-ups. According to estimates by the Spanish Association of Capital, Growth and Investment (Ascri), Spanish start-ups received 659.4 million euros of financing last year, 83% more than the previous year. Foreign investment in Spanish start-ups rose 152% last year to 388 million euros, which shows that investors from other countries are also increasingly focusing on Spanish entrepreneurs.

“Spanish start-ups are being created with an increasing global conception”María Benjumea

Although investment declined in the last months of the year, the re-start of three new venture capital fund managers (Nauta Capital, K-Fund and Kibo) and the creation of Nuclio Venture Builder, an incubator founded at the beginning of the year by the entrepreneur and business angel Carlos Blanco, show that the machinery of investment continues to function.
Nuclio“There are many new funds and lots of money available to invest in start-ups,” says François Derbaix, cofounder and CEO of automated investment manager Indexa Capital, in Startupxplore. “There are many examples of Spanish start-ups that have grown a lot internationally, there are examples of Spanish start-ups who are leaders in Italy, such as eDreams, Idealista, Infojobs … and I do not have in mind any Italian one who is strong in Spain, to make a comparison”, says this entrepreneur and investor. i2 The shopping portal Tiendeo, which managed to be present in 31 countries in less than four years, or the start-up that sells knitting kits online We are Knitters, which plans to have this year a five million euros turnover and whose business in the United States is already 30% of its income, are two examples of successful internationalised companies in the opinion of this investor.   We Are Knitters

Hawkers, who has just received an investment of 50 million euros and has already extended its sunglasses empire to other European countries, in addition to the United States or China, is another case of success: its start-up market already represents 37% of its sales.

HawkersSpanish companies have even seduced other foreign companies in recent months: eBay bought the ticket resale web Ticketbis for 150 million euros and the French giant Vente-Privee has acquired the Privalia e-commerce portal for 500 million euros. Ticketbis

“Spanish start-ups are being created with an increasing global conception, knowing that their target is not only in Spain; they are born in a Spanish market but know that their market is global. I think this is a very important evolution”, confirms María Benjumea, president and founder of ‘Spain Startup’ and organiser of the South Summit, an event that annually brings together entrepreneurs and investors.

Nevertheless, in ‘Spain Startup’ they do not claim that internationalisation is fast or simple issue: adapting the product to different markets and think of long-term profitability are two of their advice before embarking on an adventure in other countries.

… But internationalisation is not for everyone

In spite of the numerous cases in which Spanish start-ups are doing well in the international field, there are also a few sounded failures.

“I think we tend to underestimate local specificities and the difficulty of internationalising a business” François Derbaix

One of them is Nonabox, a startup that sold baby care products. “The route they followed to internationalise was opening offices in different places,” recalls Benjumea. “The investment needed for that is immense and it is not guarantee of success.” Izanami Martínez, co-founder, acknowledged in an interview with Startupxplore that creating a structure in all the countries where they wanted to expand had been a real mistake.

“I think we tend to underestimate local specificities and the difficulty of internationalising a business,” adds Derbaix. “I’ve seen many cases in which the start-up was pushed to internationalise when it was not yet ready. It is much more expensive than one thinks. ”

This Belgian entrepreneur speaks from experience: the international expansion of Toprural, the web service he founded in 2000, did not go well. “We internationalised very soon, thinking that the international urban tourism sector was similar to the Spanish one and was not the case: from 12 countries where we opened Toprural, we really only succeeded in two.”

Based on his experience, Derbaix offers several tips that entrepreneurs should consider before taking the decision to internationalize their business. There are at least five keys:

  • Internationalisation is not the formula for success for all start-ups. “I try to escape universal recipes… There are markets where it makes sense and there are markets where it doesn’t make sense,” says the entrepreneur and investor. In his opinion, one of the companies that have succeeded at not internationalising has been Milanuncios, it being a local business and very difficult to expand. Nevertheless, its success took the Schibsted group, owner of Segundamano and Fotocasa, to buy this website for 50 million euros. So analysing beforehand if companies from the same industry have already tried to expand might be a good idea before getting down to business.
    Milanuncios
  • The entrepreneur must lead the way. “My experience is that when investors try to pilot [internationalisation] it does not work well,” says Derbaix. The CEO of Indexa believes the entrepreneur should lead the strategy. In this respect, having a working team that is already international can bring certain advantages. “Having a diversity of cultures within your own company helps when it comes to moving from one country to another”, agrees María Benjumea, who also believes that it is also fundamental to involve the team in the project as it gets bigger.
  • Slow and steady wins the race. Either the start-up is right for internationalisation by nature (for example, Carto, which works as Software as a Service (SaaS) and can be adaptable to anywhere in the world) or you’d better take it easy. “The ideal model is to have a sustainable and profitable business in Spain and then seek funding to expand it elsewhere.”
  • Look for investors at home and then abroad. Getting the support of a Spanish venture capital fund first to obtain a “local validation” and seeking the support of a foreign one later to boost international expansion is the best way forward. Not surprisingly, there are foreign funds as relevant as Accel Partners (behind projects like Facebook, Dropbox or Spotify) that have set their eyes in Spanish start-ups: this fund supported Carto, Packlink or Wallapop.
  • It is better to be the leader in one country than to fail in many. Expanding a company around the world can undoubtedly contribute to its growth. But what if we fail in the attempt? Although Derbaix encourages all entrepreneurs to internationalise their companies, he reiterates that in many cases it is better to remain strong at the local level. “It’s better to be number 1 in one country than number 2 in several.”

So, although in general more and more companies see internationalization as a pending issue and numerous Spanish start-ups in particular are working beyond their borders, we should not think that international expansion is an easy or necessary road for all of them.

Fotos: Pixabay y  Frankilieon | Flickr (3)

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