U.S. companies are uniquely positioned when it comes to raising capital but often fail to expand to foreign markets due to the lack of local expertise. International investors can support global expansion and diversify risks.
Each country in the world is different and has its own risks that result from market structures and, very often, the government. Many investors in China, Eastern Europe, and Latin America are looking to diversify such risks by investing in other regions.
The U.S. has the most sophisticated and developed financial structure in the world to protect investors from systematic collapse. As of June 2019, U.S. GDP was $21 trillion, equivalent to 20% of global output according to FocusEconomics, a provider of economic analysis and forecasts for 130 countries.
However, American founders have their own unique challenges when expanding to new markets. In our research of the consumer market, we found out that many consumer trends have started in the U.S. and expanded internationally, adapting to local cultures and consumer behaviors.
Those trends flourished through foreign companies, while many of their original developers, U.S. companies, failed to operate outside of the U.S. Much of this failure can be attributed to a lack of resources such as sufficient capital and in-depth knowledge of local markets.
Adapting to local tastes
For example, despite its success in the U.S., Walmart has failed to expand to Asian and European markets. In South Korea, locals prefer to shop at local discount chains which are often more aesthetically pleasing in design.
These local competitors offer exceptional shopping experiences: they have large food courts, kid-zones that allow parents to shop without hassle, and sometimes even movie theaters. When trying to expand into the country, Walmart did not heed such local preferences. The U.S. food giant also didn’t succeed in Germany and France, where locals also prefer to go to small groceries. Walmart’s lack of flexibility and international expertise did not serve the company well. However, adapting their business model to local tastes has allowed other companies to succeed.
McDonald’s, on the other hand, has successfully launched and flourished in many global markets. The company did not push its original menu across the borders, instead offering menus exclusive to each cuisine. Moreover, the company changed store and service design to fit local preferences.
For example, in the early 2000s, McDonald’s first introduced 24-hour McDelivery in Singapore and South Korea. The 24-hour delivery service was an essential element in local Asian markets, and contributed to their success in countries like Singapore, South Korea, Hong Kong, China, and Malaysia.
Every market has different compliance rules and expectations. To soft land in foreign markets, U.S. companies need a local legal team, sales team, and point of contact. International investors could source these needs in local markets. Not only can these investors provide capital, they can also find local help to soft land and lead consumer trends.
What does your company need to keep in mind while negotiating with international investors? Businesses should be aware of potential compliance issues. Each country has different compliance rules and structures that may negatively impact their daily operations. Compliance issues can include data privacy laws and censorship, environmental regulations, insurance and security standards, as well as bribery and corruption laws and regulations.
For example, the Chinese data privacy regulatory framework is infamously different from that of the U.S. In May 2018, the Personal Information Security Specification took effect in China, which lays out guidelines for consent and how personal data and information should be gathered, used, and shared. American companies expanding into China would need to follow the fast-changing data compliance issues.
How can your company attract foreign investors?
Understand local appetites, culture, and legal structure. You should show your potential investors some flexibility and willingness to adapt to their needs. Be ready to provide information and explanations—many international investors lack deep knowledge of U.S. markets. As a result, they are extra careful and require more due diligence.
Moreover, personal connections are crucial to attracting many international investors, more so than U.S. investors. Therefore, we recommend having local advisors who can personally connect with the investors.
In Latin America, for example, you have to be your investor’s best friend. Invite them to your house. Take them out for drinks. The more they know you as a friend, the better of a chance you have.
In China, get ready to eat and drink a lot — more than you ever can imagine. You don’t have to finish all of the food on the table, but don’t leave any alcohol behind. In Finland and South Korea, don’t be surprised if your investor invites you to a sauna. And, in South Korea, don’t forget to drink and sing!
Wonchang Terry Choi is an Investment Analyst at 13 Ventures, a New York-based growth-stage venture firm.