What to do when your biggest customer tells you that, essentially, your company is too small for them.
This is not what you want to hear from your largest customer: “If you can’t handle our business worldwide, then we will have to look at other providers.”
That’s exactly what one of our portfolio companies heard, from its biggest client, three years ago. The portfolio company provided internet marketing services to US companies. When customers started expanding into Europe and Asia, the company’s network of overseas contractors was quickly stretched thin. That’s when the company (which we’ll call PortCo, for portfolio company) got the ultimatum: You have twelve months to build a real presence in all the geographies we want to serve. If you can’t do it? We love you, but you’re out.
Investors and managers talk about growth as an option, but often, it’s a necessity. This is especially true for companies that sell to businesses rather than to consumers. Almost every large business on the planet has a couple of key imperatives right now. Going global is one. Reducing the number of vendors they use is another. The combination means that if you become a key vendor for a U.S.-based company, you have to expect that, as they go global, you will be expected to follow. A company can have multiple suppliers of office supplies worldwide, because office supplies are not strategic (sorry, Staples). But if the product you are selling is strategic to your customers and makes a difference to their business, they are going to want to roll it out worldwide. You have to be there.
Not that it’s easy. In the year before PortCo’s largest customer laid down the law, 98% of their revenue was from the U.S. and rest came from Canada. Customers had been asking them to expand, but frankly, they didn’t listen. The money wasn’t there. They were busy. Now, there wasn’t any choice didn’t have a choice. And if you haven’t been listening closely enough, you may not have one either. Here’s what our company did:
They held a frank discussion with our customers, and they listened. PortCo sat down with their customers and tried to get a sense of what they wanted, and what they could provide. This was key. The customers knew PortCo was taking their concerns seriously. And it allowed PortCo to set up a moral commitment, if not a contractual one. If they invested in Europe, the customers would invest in them.
They raised money and bought a company. They considered building an overseas division from scratch, but they were lucky: There was already a local company that had been doing a great job reselling their product.
Other entrepreneurs may be able to take some baby steps toward going overseas if their customers aren’t pressing them as hard as PortCo’s were. A distribution agreement with the right partner can get you in front of customers. An outright partnership – again, carefully vetted – can also be a good place to start. But if your customers want a single worldwide vendor, these arrangements are really just placeholders.
They adapted to a new way of doing business. Sometimes they do things differently in Europe, and that’s okay. Other times, PortCo had to have the conviction that their way of doing business was just as valid in Europe as in the U.S., and they pushed their new colleagues to do it their way. In the U.S., many of their mid-size clients bought over the phone. In Europe, those customers wanted face-to-face interaction. PortCo is now using mostly telesales for this group – but it took a year of experimenting to make it happen.
One of their founders relocated. Integrating the acquired company was made enormously easier by having a founder live overseas as part of the new team for the first year. You cannot afford to have a team 3,000 miles away feel they are second-class citizens.
International revenues are now 30% of PortCo’s total, and represent the fastest-growing part of their business. They have offices in Asia and Latin America as well as Europe. More important is what did not occur: They did not lose key U.S. customers to a competitor or a subcontractor. That’s something that could easily have happened did they not realize that growth was not a choice, but an imperative.
RORY O'DRISCOLL is a managing director with Scale Venture Partners where he invests in mobile, Internet, and enterprise software companies. Rory holds a BSc from the London School of Economics. You can find more from Rory via his blog. @rodriscoll.