In my previous blog, I explained some of the main sources of funding for growth companies. Now I’ll go through why your company must be ready to scale in order to secure the funding.
In order to obtain funding for international expansion, the company needs to be ready to scale. For the early stage investors, this is a requirement, but it is also critical in obtaining loan funding as well. And while not necessarily required for public funding, going abroad without the readiness to scale makes very little sense.
Being ready to scale means that you have already demonstrated the product/market -fit as well as your ability to grow the operations. Also, the more expertise you can demonstrate on your next market the better, especially if this is the first foreign country you are expanding to.
As in everything in life, the first time is the hardest in setting up foreign operations as well. Thus, entering new markets should be approached like starting the business: Things will not just roll forward as in the existing operations, but there will be challenges like getting the first customers, learning the best go-to-market practices, getting the operations running smoothly, dealing with a different business culture, etc.
While your proven operating model from your home market works as the core building block for the foreign operations, it most likely needs to be tweaked to tackle the local challenges and make it more suitable for the foreign markets. Only once you have found an operation model that tackles the challenges, are you ready to scale in the new markets.
When planning for the international expansion funding, you should plan both for the challenges of entering into new markets as well as for scaling in the new markets. Be conservative in your sales plan and careful when estimating your expenses. A typical rule of thumb is that it takes three times as long to get sales running in the new markets, than what the company is expecting. It is better to have too much runway without using it, than end up raising funding when you have no runway left.
From a funding point of view, it is important to ensure that the raised funding is sufficient in achieving your goals in the new markets. If you need to raise additional funding before meeting your goals, raising further funding becomes a challenge.
On the other hand, once you have proven your ability to scale your business to foreign markets, obtaining funding for further international expansion becomes a lot easier. Once you are at a point where the investors can see that injecting cash to the company generates more cash, you can start reaching out to later stage investors. At this point, you are running a company that is ready to conquer the world.
Reima Linnanvirta is an angel investor and a board professional with a passion on helping startups and growth companies to fulfill their true potential. He acts as a Chairman of the Board of Innovestor and Vice-Chair of the Finnish Business Angels Network (FiBAN).
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Guest blog by Reima Linnanvirta