Categories: International Focus
by Bruce Hadley, SoftwareCEO
We've looked at the international software market from a U.S.-centric point of view in the past; for example, see "Going global: How to take your software overseas" in our Editorial Archives.
Because ours is a Web-based business, however, 25 percent of our readers are developers located outside the U.S. so we thought it was only fair that we take a look at the challenges they face in entering the North American market.
Those of you in the U.S. should pay attention, too many of the tips we uncovered for foreign software firms apply equally well to startups based here already. In other words, until you dominate your market or at least your niche, you are, in many respects, an outsider.
Tip #1: Create a U.S. corporation.
"Generally, you're going to be incorporated here in the U.S.," says Chet Sergeant, who's the CEO of NetSupport Solutions, Inc., the U.S. arm of German software company NetSupport GmbH.
"You have to look at how you're going to create value in the U.S.," Sergeant says. "How do you create a company that can build some value, and where would the value be? You have the IP, but you look at the U.S. market, and that has some value, too this market space is 47 to 49 percent of all markets."
Because Sergeant is the guy who set up NetSupport's U.S. operations, he has a keen interest in deal structure. The way his is set up, NetSupport Solutions Inc. owns the rights to the technology that NetSupport GmbH creates in North America. The U.S. company is a partnership with the German one, and Sergeant owns a 40 percent stake in that partnership.
If investors are involved, they'll want a legal tie to the intellectual property, Sergeant says. "The VCs want to have a piece of the company that owns the IP, which would be the European company that's the classic way. When you have limited partnerships, it's a bit different."
Legal and financial details aside, you need the U.S. corporation for public acceptance, says John Bromhead, president of 1-for-All Marketing, a San Diego-based firm that has helped a half-dozen European software companies make the trek across the pond.
"You need that U.S. address and U.S. phone number," Bromhead says, "though it may be an executive or managed office. A P.O. box alone is not sufficient."
In terms of qualifications, it's worth noting that Bromhead is British; he and his Scottish wife moved to the U.S. 11 years ago. Are Americans really that fearful of foreign software, we asked?
"Absolutely," Bromhead says. "What rapidly comes into play is, 'How the hell are they going to support me?' If it's an offshore address, prospects just wipe them out of consideration they'll not even bother looking at it.
"The prospect's attitude is, 'I have enough trouble getting support from U.S. software companies, let alone European companies. How am I going to get my money back if it doesn't work?' Plus, there can be an eight- or 10-hour time difference."
Bottom line, say both our experts, is that having a legal entity and physical location in the U.S. is a one-way valve that can't be ignored. "My experience is that having a U.S. address won't affect your European presence, but not having one definitely will affect your U.S. presence," Bromhead says.
"Create a U.S. corporation, either C or S. It costs something like $1,500 with a reputable lawyer to do it. You have to look like a U.S. corporation that just happens to do its engineering abroad."
"Reframe your Web site; make it look like it's a U.S. company with a U.S. office. On the contact page, list your headquarters as being in the U.S.; call the other office your European HQ."
The same goes for other marketing materials, of course: "Make your press releases come out from a U.S. city, with a U.S. dateline," Bromhead says. "Change the company boilerplate so that it's U.S. "
None of this is deceitful, Bromhead argues it's part of the mindset you must adopt if you wish to succeed in North America. If you want to win here, you must behave as a U.S. software company would. "You never want to lie, but neither do you want to feature the fact that the company was founded by Joe Blow in Birmingham, U.K.," he says.
Tip #3: Get naming issues cleared up before you start.
Global branding created a glitch for Sargeant when he set up the U.S. office of NetSupport GmbH. The German company was founded in Stuttgart in 1995, and has 1,600 customers and a 22 to 24 percent market share in Germany.
That clout and recognition in Germany didn't carry to the U.S. , however, and the waters were muddied by the fact that there's an Arizona-based company called Netsupport that owns the netsupport.com domain. Plus, there's a company in the U.K. that has a product called NetSupport.
So, as Sargeant points out, your corporate entity is small potatoes compared to the challenges of branding. He is now saddled with two company names NetSupport Solutions Inc. and NetSupport GmbH and must create unanimity in the customers' eyes.
"You're looking to build a business, and you want it to appear as the same organization an international business," he says. "How it's held shouldn't make any difference.
"The difficulty in the beginning, for us an nearly everyone trying to enter this market, is the naming, the branding. The decision that I had to make here was to lead with the product name: NetInstall.
"If I had to do it differently, I would have tried to accelerate the change of the company name, either in the U.S. or Germany. I don't care which, as long as it's one name."
Tip #4: For management, look for an inside entrepreneur.
Sargeant's situation is somewhat unique, in that he discovered NetSupport GmbH and flew to Germany to propose creating a U.S. entity that would benefit them both.
Interestingly, NetSupport GmbH was already here, albeit not entirely successfully, through a partnership with InstallShield. "InstallShield was looking in other directions, and the sales cycle for this product was different than what they were used to," Sargeant says.
"I was working with someone else at the time, but I knew some people at InstallShield, and I know this space. I looked at this product, and I saw it had some different twists. I began talking to Installshield about rolling it out from them."
That "twist," as Sargeant puts it, is ease of implementation. NetSupport Solutions sells configuration management software, to manage the environment around the desktop. Microsoft is the large competitor with its SMS product, but the field is still open, Sargeant says.
"There's no real leader; no one has come up with any real dominance, and customers are always looking for a better solution," he says. "The opportunity still exists for the right type of technology, and what interested me about this product is that it's designed for the administrator a person of average skills and can automate the process.
"Installshield had acquired the IP rights everywhere in the world other than a few small countries. I flew out to look at NetSupport GmbH, and then began talking to them about getting the IP rights back. Once we got those agreements done, we could set up the U.S. company."
If you don't have a Chet Sargeant knocking on your door, however, you're going to have to find one. "It takes an entrepreneur to be the manager of the U.S. office," Bromhead says. "They are mini-CEOs. At least for the first year, I would recommend that someone senior from the European office consider coming to the U.S.
"You can get an L1 visa good for three years, and it can be extended for another three. You only have to show that you've held a management position for more than one year; you don't have to go through any of the recruitment to show that you're not keeping American workers out of work."
Your top techie is probably not your best choice, Sargeant says: "I'd be looking to find someone from the sales and marketing side. You can't sit behind a desk; you've got to get someone who's going to go out and sell.
"You could have a headhunter go out and look, but can you unseat someone? You can also try to find the organization that would sell your technology, and as you're going through this process, you might find the person who can run your company in the U.S.
"One of the mistakes a lot of companies make is they hire a person who's at the level they're at: You are a $20-30 million company, so you hire someone from a $20-30 million company to run your U.S. operation but you should be hiring someone from the $50-60 million companies, who can take you where you want to be.
"It doesn't have to be in the same market space, it just has to be someone who understands the technology and can translate the values. I'd want someone I could turn it over to. And, I'd want them to share some of the risk."
The person you hire to run your U.S. office isn't going to want to take a pay step backwards, and, as already stated, you're looking for someone of CEO caliber. "At the low end you're going to be looking at a $150K base, plus incentives," Sargeant says.
If you don't have someone inside, how do you find your U.S. manager? It's tough. As with any high level position, your success will depend largely on the strength of your network.
"You might create an advisory board," Sargeant says, "but it gets back to how do you find or choose those advisors? There are industry forums, sponsored by Gartner and others; you need to take advantage of all those networking events."
Tip #5: For sales, you've got three models to choose from with a fourth as a dark horse possibility.
Sales option A: Reps. These are independent contractors who are "pure" sales i.e., they provide no marketing and no services, and they have no corporate ties to you.
"We used the reps model years ago," Sargeant says. "But if you're going to start a company in the U.S., you need to do all the things we're talking about here. Reps aren't likely to do that."
Sales option B: Agents. In our terminology, this is an "enhanced version" of sales reps. Agents carry your company's business card though probably not exclusively yours and usually provide implementation services and may provide tech support.
"The agent model can get you going, but it's short-lived," Sargeant says. "If you're looking to really commit, and you're trying to do some real revenue forecasting, you have to have control of that asset.
"There are some companies that will take 40 percent as little as 25 percent, depending on how much of the support side of the equation they're responsible for.
"But if you don't already have some contacts people who are doing this in the U.S. you're going to have a hard time finding good agents. The agents that we're finding now are usually services companies, and they have a specialty in this area."
Because Sargeant comes from a sales and marketing background, and because he's the CEO of a U.S. based corporation, his preference is to go with a third model:
Sales option C: Corporate. Namely, you hire your own sales people to work for your company. The big advantage, as Sargeant points out, is control. The big disadvantage is cost.
"At a bare minimum, it's going to cost you $1 million to get this going," Sargeant says, "and it can run up to $6 million or so. That makes a lot of small companies just choke they don't have it, and they see it as a huge risk."
This is why the agent model is more common, especially among smaller software companies; Bromhead thinks that's OK.
"I'd use virtual sales people rather than hire," he says. "You can get much more coverage, much more cheaply. You may need to hire one person for your U.S. team who's sales oriented, but, hopefully, your GM will have that experience."
If you're shopping for reps or agents, Bromhead suggests you look for product synergy: Ideally, they're already selling software to customers who have a need for your software, too. "Sometimes the best way to get into accounts is when the rep already has similar products, and they bring your software in," he says.
Sargeant still likes the control factor, especially when it comes to forecasting so he advises you use a hybrid. "My hipshot here is that I would be looking for someone who'd spend some time in the U.S. to sell the product.
"It's better to first find someone who has the contacts in the U.S.; their mission is to get a foothold. Put them on a salary, but everybody should be profit driven you have to get them somehow reinvested in the business.
"And, I'd be looking for U.S. partners. In essence, that's what InstallShield did for us. I did this once before, with a French company that eventually went public but coming in solo as a foreign country developer it was really, really difficult."
Sales option D: OEM. There's a fourth sales model, but most software companies U.S. or foreign find it difficult to make it work: OEMs. When it does work, however, OEM deals can provide the perfect mix of low risk and high exposure.
"If you can, find an American company that has a similar product to yours that wants to OEM and badge your product," Bromhead says. "They may even give it another name, but they handle all the marketing and distribution and sales.
"Particularly if you don't have the existing infrastructure and/or English familiarity, this synergy can play well. But the revenue you're going to get are OEM revenues — maybe 10 percent of the MSRP as opposed to maybe 50 percent you'll get if you sell it through virtual reps.
"To keep your options open, put a term on the OEM deal; if it's successful, renegotiate for a better deal for higher royalties or it may even become an exit path in that they buy you."
Tip #6: The corporate sales model comes with a big caveat: Hiring on past performance doesn't always work.
Despite his love of the model, Sargeant admits that sales staffing in the U.S. has been very difficult. "I was looking for people who had experience in this market space," he says.
"It's a much different type of sales rep in this over-marketed world we live in today; it's very different from the old days when you were turning over rocks to find customers.
"It was a big disappointment. We hired people who came with reasonable track records within our industry, but they had a difficult time with us. Their ability to prospect was weak; they're not geared to that.
"In the 1990s the software industry created a lot of sale reps who stacked up great records, but it's difficult to evaluate how good they really are there was so much marketing money being thrown around back then.
"A lot of our reps have been on their own for awhile. If you're going to have a remote office, they better know how to work on their own they have to manage their territory like it's their own business.
"We definitely made some false starts in finding the right reps. Now we have that part figured out, but it's still hard to find them."
"The longer learning curve is the technical side of it; getting people fully trained could take a year. To address that, I brought people over from Germany who could bridge the language and technology gap."
Tip #8: Leverage existing customers in the U.S.
You do have U.S. customers, right? If not, Bromhead and Sargeant both say that you should wait to enter the U.S.; it's pointless to try to establish a beachhead in North America if there is no beach.
"A common point of failure for foreign software firms trying to enter the U.S. is not getting reference accounts," Bromhead says. "Unless you've got U.S. companies willing to say they're using your products, you'll get nowhere.
"Even if it's beta level, that's OK, as long as they're willing to talk about it. You can play the games about writing case studies that refer to 'a large pharmaceutical company in San Diego,' but if there's not a name there, it won't do you any good. "
If you don't have strong references Stateside, work on your existing customers that have U.S. subsidiaries or operations. "You want to pick up the existing customers and make them feel warm and fuzzy and make sure they are referenceable customers," Sargeant says.
"We received some criticism at first because we had companies like Braun and Roche and Porsche on the customer list. Prospects would say, 'Wait a minute, these are all European customers.'
"You have to ask yourself, to what degree will your European customers help you bring your technology to the States? We now have tens of thousands of seats at those companies over here."
Bromhead concurs: "If you've got major clients in the Europe, plainly you should milk that, and follow that up the lead trail: Get your European account to recommend you into their U.S. counterparts."
In other words, don't locate in Boston or the San Francisco Bay Area just because all the other software companies go there; if you have two major, high-profile accounts in Chicago, you may want to open your first U.S. office in Chicago.
Without a clear imperative from existing customers or designated market, most foreign software firms choose Boston or the Bay Area. Many European firms tend to favor the East Coast, because it's a shorter flight and only a five hour time difference.
"Coming from Europe, I would think that the East Coast is a good place to set up things," Sargeant says. "It's a five- or six-hour time difference, and there's a good percentage of the U.S. corporate and government accounts within easy travel distance. I'd probably choose Boston or Philadelphia."
Bromhead, however, prefers the West: "My opinion is that you should favor the Bay Area because there is more talent that you can easily recruit without relocation, as well as a bunch of prospects. You can always fly to customers."
Also, it may sound hopelessly obvious to Americans, but those who've not visited the States often forget the scale of this country. You can cover a lot of Europe on a few quick flights; not so the U.S.
If you're going to start with one office, the economic advantages of locating in a major airline hub city are significant as long as it isn't a hub monopolized by a single airline, because that monopolization can drive up airfares.
Tip #10: If you don't have reference accounts, you may have to buy them .
Here's even more emphasis on the importance of referenceable accounts within the U.S.: If you don't have them, you'll need to do pretty much whatever it takes to get them.
"You may have to do some deals at 'founder pricing,'" Bromhead say. "You may give them a zero-dollar, unlimited license just to get them on board."
"Bigger customers may have a harder time with you," Sargeant says. "They're going to ask questions about support: 'How do I implement changes?' 'How do I support it?' 'If I have a problem and you don't have the developers here, how are you going to fix my problem?'
"The next issue, whether it's a large or small customer, is who you are and how long you are going to be around. Customers want to know, 'If I make an investment, can I count on you for awhile?' It's all about trying to get some traction, some exposure for yourself."
Even though NetSupport had the benefit of initial entry via the InstallShield partnership, that didn't pave a yellow brick road, Sargeant says: "We had people asking why we broke away from Installshield, and we had to figure out how to address that.
"We looked for strongholds industries where we might have strength and found we had a lot of customers in the energy field. Not for any particular reason that I could tell, but you get one and the others seem to follow."
Tip #11: You may want to delete pricing info from your Web site.
"We tend to put not as many pricing models online," Sargeant says. "Our contracts are based on the number of customers and number of products, and the price can range from $50K to $100K.
"But we don't put it online they always want to go to whatever country has the best rate. For example, for awhile we had companies based here that wanted to buy based on the Deutschmark; lately it's reversed somewhat.
"The Internet is definitely a tool for the customer. Most customers are multinational, and if they have an office in Germany or France they will go online to find the best price globally."
Tip #12: There is no such thing as universal marketing .
Bromhead's company acts as a virtual marketing organization for software startups and U.S. subsidiaries of European companies, so he's had a chance to watch what works in different countries.
"First, you need to build a go-to-market plan," he says. "Place a lot of emphasis on PR and creating buzz and getting as much reputation as you can, rather than spending on print ads and trade shows."
Where trade shows can tie to PR, however, Bromhead admits to exceptions: "We've had great luck in the network space using NetWorld + Interop show in May," he says. "Our client got a Best of Show award, which in turn creates the PR buzz."
This opportunistic approach to marketing is exactly where the U.S. startup and the foreign subsidiary in the U.S. overlap, Bromhead says; they're doing the same things.
"Whatever marketing success you have had in the past, you should Americanize it and try it here," he says. "But remember, not all your campaigns you used in Europe will work here.
"I remember Digital Research did one ad in the U.K. that had a photo of an aboriginal-looking fellow, complete with feathered headdress; the Americans went nuts, because it wasn't politically correct."
Another example: In the U.K. you can still do comparative ads, but they're illegal in Germany. Still, print ads are generally not a good bet for entry-level companies.
"You won't have the money to do big ad campaigns, so it's a mistake to buy big ads in the vertical pubs you can burn a lot of money that way," says Bromhead.
He puts product press releases in the same category: money burners. "The magazines won't even pick them up. The magazines have gotten so thin, they need case studies; they need to know the benefit, to understand how real customers are benefiting from your software."
When you're setting up in the U.S., you'll need to understand the perception of your country, Sargeant says. "The French are not known for technology, but selling German software hasn't been difficult for us at all.
"Do you have to bury the fact or gloss over it? I tend to blur those lines myself; you just talk about the company. They may ask us how many people are developing, but because we're presented as a U.S. company, they don't generally ask where."
Best advice: Forego any cultural pride until you know how it's going to play in the U.S. "Foreign companies sometimes do these things for the pride of the country that does the development," Sargeant says, "but it may not make a lot of business sense."
In fact, this isn't a trivial matter of cultural differences; it may well determine whether you should open an office in the U.S. or elsewhere, Bromhead says.
"If you're a French or German software company, it may make more sense to do another remote office in Europe first, before tackling the U.S., " Bromhead says. "It depends largely on the political climate. For example, I wouldn't' recommend to any French company that they try to enter the U.S. now.
"But if you're a European company especially an English-speaking company and you've already had the guts to open an additional office in Europe, and it's successful, then you sure as hell should open in the U.S., because the opportunities are so much larger."
Tip #14: Those cultural differences do count.
There's the social stuff that you've probably already heard about: Differences in humor, the opacity of American jargon, a U.S. tendency toward back-slapping informality.
But you need to keep in mind that these cultural differences will determine the way you do business, not just your social encounters.
"They don't do product comparisons over there," Sargeant says. "They tend to do a more technical sell." NetSupport GmbH gets 35 to 40 percent of its sales through resellers, so much of the information the German company created was very technical in nature.
"There wasn't a lot of features, advantages, benefits," Sargeant says. "They also don't have the same level of competition there. They generate most of their leads from CeBIT's two shows.
"That's not going to happen in the U.S. It's a more aggressive style here and we're over-marketed here, as well. Managers and CIOs and CTOs, they're beaten to death you have to get after them, you have to get in front of them."
Because the U.S. market is so important to NetSupport GmbH, Sargeant's U.S. company now handles all the marketing and sales. There's an American Web site, with a menu bar link to Europe.
"We control the marketing," Sargeant says. "Nearly the only thing we don't do here is the physical development of the software. They also have to provide us with English documentation; there are certain service level things they have to provide to us for us to do our job.
"But even some of those things are common to us: Do you want to have the same look and feel for the product in Europe and the States? Do you want to have the same color schemes? Will this icon fly in the U.S.? You have to have those discussions."
And yes, the social situations matter, too. "There are lots of cultural differences you need to take into consideration," Sargeant says. "No matter how fluent they are in our language, there's always the chance for misunderstanding — you've to be careful.
"You want to stay away from our clichés. If you say, 'That's no problem,' Europeans will take you quite literally you just said that you can and will take care of whatever they were asking you about.
"The contract side of our early talks [with NetSupport GmbH] took a lot of time of explaining. In the beginning, you're forming some kind of relationship, and Americans tend to lean on contracts that sound harsh and black and white; you've got to put a warm and friendly face on it."
Tip #15: Until you're a $1 million company, don't bother; build your business at home.
"If you're not doing at least $1 million in revenues and it might be $5 million these days don't bother, because you'll stretch yourself too thin," Bromhead says.
"You need to be a 20- to 30-person outfit in Europe to support the operation in the U.S. The U.S. market is at least 40 to 50 percent of the world's software market; your business in the U.S. market will be at least equal to what you already have.
"If you're looking at your gross margins and operations costs in Europe, it's going to cost you about the same in the U.S. If you're successful, you'll get at least the same amount of business but it will take you one to two years to get it.
"I've seen people do it with $100K, and I've seen people invest a million dollars. But there aren't many that have been that successful, quite frankly."
The common failing of software companies trying to enter the U.S. is the same one that plagues startups everywhere: Overestimating demand and underestimating the difficulty of marketing and sales. "Far too many don't allow enough time to get the foothold," Bromhead says. "They assume the revenue will be there on day one, and it never is."