Overcoming US Expansion Challenges: an Interview with Oliver Birch from Octopus Ventures
Octopus Ventures is among the most active venture investors in Europe with many of their companies expanding overseas. We talked to Oliver Birch about the challenges these companies face when entering the US.
Oliver, an Englishman in New York. We’ve heard that one before. What are you doing in the Big Apple?
Cliché, I know! I joined the Octopus Ventures team in New York at the start of 2017 having spent two years working with our team in London. The role in the UK is slightly different to the US though. In London our team spend more of their time seeking talented entrepreneurs to back and then helping them day to day with the challenges that come with building a fast growing young company. In the US we are more focused on helping the entrepreneurs we have backed in Europe to scope, enter, and then scale in this market. This often involves both basic operational activities, such as incorporating a US company or discovering the optimal location to have a base, as well as more strategic decisions like determining who first to hire, which go to market strategies to leverage, when and how to fundraise.
Which of your portfolio companies are currently active in the US?
Octopus is among the most active venture investors in Europe, making 15-20 new investments each year, with an existing portfolio of 50 or so companies. While nearly all of the businesses we back are started in Europe, almost all are intent on building for a global audience – and success in the US is a critical milestone on this journey. By the numbers, just over half are currently operational in the US, with the majority based on the East Coast. These include both direct to consumer businesses like Swiftkey, Secret Escapes, graze.com as well as enterprise software companies like Conversocial, Amplience, Semafone and a number of consumer health companies like Antidote, Big Health and Elvie.
Let’s take a step back. What’s the story behind Octopus Ventures?
Octopus Ventures was started by four angel investors in a small country pub just outside Cambridge in the UK. Each of the angels had had success in their own careers and now wished to help the next generation of entrepreneurs make their ideas a reality. From this humble beginning over a decade ago, Octopus Ventures has grown rapidly into a team of 30, investing over $120m a year. We are headquartered in London but also have people in the U.S. and Asia specifically placed to help the teams we back scale in those markets.
Why are tech-based/online companies such an interesting investment opportunity in your opinion?
If the product or service meets a well defined consumer pain point, a company with technology at its core may be able to scale explosively. Given the ubiquity of mobile and cloud computing, these types of companies are also able to reach global audiences in a capital efficient way. This mix of attributes is very attractive to a venture investor.
Can you tell me more about the set-up at Octopus Ventures? Where are you present and, in particular, how do you support portfolio companies in entering and growing in new markets?
Our team is spread across the US, the UK, Singapore and China, with the weight of the team being split between offices in London and New York. We tend to invest locally to London and leverage our global reach to help the entrepreneurs we back scale in these different geographies. Our knowledge, our network and our collective ambition are what our entrepreneurs want. So we share ours, boldly and generously. Few entrepreneurs go back to their original investor team for their next venture. Ours do.
How much are you involving yourselves in the business decisions of your companies in your portfolio, in terms of overseas expansion?
Ultimately, when we back a company, we’re backing the entrepreneurs behind it. We always take a position on the management board but in practice, we’re here when they need us and we try to get out of the way when they don’t. For some companies we may work in a very hands-on manner and for others, it could be less frequent projects. Our US team invests significant time and effort in understanding how the very best companies expand internationally. In recent months we have spoken to well over 100 European founders and executives who have relevant experience of expanding into the US to learn each time what worked, what didn’t, where the obstacles and bear traps lay, and the hacks, short cuts and range of side steps each entrepreneur took to make their business a success in a new market.
The US is a very lucrative, but also tough, market. What are the different reasons for your portfolio companies to attempt to penetrate the US market?
Relative to most European markets, the US market is larger on almost all metrics and the Bay Area is home to many of the most successful technology companies of the last 50 years. As a result of this, European entrepreneurs are drawn to the US for a variety of reasons, but typically they start thinking about a US launch when they reach some sort of limitation in their home market. This may be a product, market, capital or hiring constraint. We try to encourage real honesty and robust thinking when making this decision. For instance, a product constraint is often not a good reason to expand abroad, as a new international market is unlikely to solve a lack of product market fit. Likewise, access to US venture capital is also often an insufficient reason to set up in the US because European companies are usually not well positioned to raise money from US investors before having a material presence here, despite the often-held belief that it is easier to fundraise in the US.
Not all companies going across the Atlantic make it, of course. What do you think it takes to make a successful entry to the US market for companies like the ones in your portfolio?
Expanding across the Atlantic is hard! The companies that succeed at this seem to start by asking: “Why expand internationally, why the US, and why now? Only when they have robust and sound answers to these questions, do they build a plan to execute on it. This process often requires patience and an acknowledgement that success is going to take longer than even the most conservative of plans. Conversely, those companies that struggle appear to have approached international expansion without asking these questions sufficiently honestly or without gathering data to validate their assumptions. Once the decision has been made to expand into the US, there are a number of strategies that have worked for several European companies including extensive pre-marketing prior to launch and network building among key stakeholders in the relevant customer segment. US entry also requires a dedicated focus from a company executive, as hiring strong local talent can be a challenge without an established brand or network.
If a company cannot afford to lose a core executive or founder from its European operations, it may be an indication that the company is not ready to make the move. This is an important consideration because time and again companies will start their US expansion by making a poor first hire – and this can easily set a company back six months to a year because of the ramp up in time and costs involved.
Often, companies – especially consumer facing ones – were able to achieve a level of product market fit in the US by selling and experimenting remotely from Europe or spending short stints in the US by flying back and forth. As such, by the time they eventually establish a more permanent presence on the ground they had de-risked the entry.
Without going into specifics, can you tell me of some cases where you’ve seen companies – in your portfolio or not, which have made strategic decisions in terms of product, management, marketing etc. that have contributed to a failed US market entry?
Of the businesses that we’ve spoken to, 90% found that going to the US led to detrimental consequences for the domestic business that they had not forecast. For instance, they witnessed decreased management time and focus, opportunity cost of investments, culture and organizational behavior challenges. The key learning here is: if the business is not yet successful and resilient in the home market, the expansion will often add strain to an already vulnerable position. This is particularly a problem because US revenues typically take longer to ramp up than expected, and costs are substantially higher than European markets – sometimes up to the point where they can undermine the viability of a company’s business plan.
How do you see Octopus Ventures and other investment funds offering even more support for portfolio companies considering and/or executing a market entry strategy?
Compared to our US counterparts, European investors tend to have a more limited range of “platform services” to offer the entrepreneurs they back. In part this is because many of the funds in Europe are smaller in size and so have a smaller management fee to invest in this type of infrastructure and in part this is because there is less overall competition between the funds, so there has been less pressure to innovate. This is changing now. The venture capital industry is becoming global and increasingly we have noticed both West Coast investors as well as Chinese and Japanese investors investing in Europe. Octopus Ventures is one of only a handful of European funds to have a global footprint although we expect this number to grow in the years to come.
Leverate offers companies performance advertising solution to help them grow and scale their business in new markets. How do you see the importance of marketing in general for your portfolio companies and such advertising solutions in particular in a successful market entry to the US?
Building out a high-performance marketing team can be imperative to the success of a technology business. Not being able to scale your marketing function can place significant constraints on a company’s ability to grow, which can be a challenge, especially for consumer facing businesses, where you are competing with agencies and established start-ups for the best marketing talent. From speaking to our portfolio and other European start-ups, we’ve found that a strategy that can work very effectively is building up an in-house marketing function whilst also using external agencies tactically to achieve specific goals, such as managing staffing shortfalls, coping with rapid periods of growth, exploring new channels, optimizing existing channels and entering new markets. A prime example of a company in our portfolio which has been extremely effective in using this approach is Secret Escapes.
What are the future plans for Octopus Ventures?
We think it boils down to building relationships and allegiances for the very long term. We want to invest in an entrepreneur not just in their first business, but over the lifetime of their entrepreneurial endeavors. Creating a team with this as our core focus and culture is critical.
Oliver, thank you very much for speaking with us.
This blog post is an adapted version of an article that featured in Leverate Media’s company magazine ‘Leverate ONE‘.