Should European Founders Look to the East?

Today: Asia is different, figuring out a new playbook for expanding there, David Galbraith.

Oct 16, 2020

The Agenda 👇

It isn’t easy to expand into Asian markets
Yet European businesses have managed it in the past
What changed? What’s the new playbook?
David Galbraith on alternatives to venture capital

Asia, as many people know, is a different world: impenetrable customs, hard-to-decipher languages, high-context cultures that make it difficult for outsiders to fit in, and a historical and geopolitical path that make for a very different way of life and vision of the world.

These sound a bit like clichés, but it’s exactly how most people, especially Europeans, in the Western tech world have long looked at Asia. As explained in My Personal Journey with China, I’ve always had a theoretical interest in what was happening there, but also found it difficult to understand what exactly was going on; the idea that long dominated was that we were effectively worlds apart. The probability was low that Asian tech companies would end up doing business here in the West, and vice versa.

Still, Europe has had its fair share of large companies whose growth has been boosted by successfully expanding on Asian markets—the likes of LVMH, L’Oréal, Airbus, large players in the financial services industry, car manufacturers, and a few others. But in retrospect, we can see that all depended on a favorable context:

Many East Asian countries entered a phase of rapid economic growth in the second half of the 20th century, cleverly catching up on the West. As Joe Studwell explains in How Asia Works, the best in class were (in chronological order) Japan, Taiwan, South Korea, and Mainland China.
Back then, many people in the West assumed that Asian economies catching up with the West from an economic development standpoint would soon translate into these countries embracing liberal democratic values. Articles about China being on the verge of becoming a liberal democracy were numerous as recently as 10-15 years ago.
The last three decades of the 20th century were driven by the idea that free trade should become the norm at the global level. Trade barriers were brought down from the 1970s onward, several multilateral trade agreements were negotiated in the 1990s, and Mainland China joined the World Trade Organization in 2001.
Finally, this all happened long before the digital economy was a thing. Most international trade at the time was about exporting tangible goods. And tangible goods is the category of products that best lends itself to global trade. Goods are easy to ship, and nobody assumes that they should be adjusted to the local context.

However, the shift to the Entrepreneurial Age now reveals a very different picture:

A big part of Alibaba kicking eBay out of China was about Jack Ma and his colleagues understanding the specific preferences of Chinese customers better than a foreign competitor. This is a story that’s been told at length in Porter Erisman’s masterful documentary Crocodile in the Yangtze, as well as by Steve Yegge here: Jeff Bezos, Jack Ma, and the Quest to Kill eBay.

Success takes more than having a team of local employees on the ground. Indeed, anyone with an experience in a tech company operating across borders knows that most business decisions require validation from the company’s headquarters:

As Paul Graham wrote in How to Make Wealth, “A McDonald's franchise is controlled by rules so precise that it is practically a piece of software. Write once, run everywhere”. The more you tweak the product to make it fit the local customs, the more you degrade those increasing returns to scale that are needed for scaling up and getting rich in the startup world.
Clearly having a local team staffed with local people doesn’t make much of a difference if the product is not customized for the local market. Tech companies know that, and yet they usually refuse such customization.
Here’s a revealing passage in Kai-Fu Lee’s AI Superpowers, in which he details the problems he encountered with Google’s top management in Mountain View regarding customizing Google’s search engine for the tastes and preferences of Chinese users (emphasis mine):

American companies treat China like just any other market to check off their global list. They don’t invest the resources, have the patience, or give their Chinese teams the flexibility needed to compete with China’s world-class entrepreneurs. They see the primary job in China as marketing their existing products to Chinese users. In reality, they need to put in real work tailoring their products for Chinese users or building new products from the ground up to meet market demands. Resistance to localization slows down product iteration and makes local teams feel like cogs in a clunky machine.

Overall, the four trends that used to make it easy for European companies to expand their business on Asian markets aren’t valid anymore:

Economic development is slowing down in most parts of Asia, especially Eastern Asia. Hence the renewed interest in India—not because the Indian economy is doing well, but rather because most decision makers in the Western business world think India is the next frontier for piggybacking on fast-paced economic growth in developing countries.
Many Asian countries are revealing an idiosyncratic cultural identity that only bears a vague resemblance with the Western way of life. As Bruno Maçães wrote about the concept in The Attack Of The Civilization-State, “As a civilization-state, China is organized around culture rather than politics. Linked to a civilization, the state has the paramount task of protecting a specific cultural tradition. Its reach encompasses all the regions where that culture is dominant.”
What about international trade? Well, there’s what I call The Great Fragmentation: trading with each other might be in everyone’s best interests, but for many (mostly contingent) reasons, most countries are opting to erect trade barriers and relocate production on their territory.
Finally, today’s economy is less about shipping tangible goods and more about getting people to install online applications for their desktop or mobile phone. And this, as I’ve been explaining since at least 2012, comes with a much higher degree of intimacy: online applications are so ingrained in the everyday life of everyone, you really need to tread carefully. In theory, software is easier to scale up to a global scale; in practice, well-designed software resonates so much with the user’s identity and sensibilities that it really must account for the local culture.

It’s actually difficult to figure out the best approach to expanding across borders in this more fragmented world. Two approaches have caught my attention recently:

One is that which has been embraced by large US tech companies to enter the Indian market: basically, you invest a few billion in Reliance Industries or its subsidiary Jio Platforms, and you have a blueprint for doing business in India. (It remains to be seen if this approach passes the test of time, however—Facebook may be an investor in Mukesh Ambani’s business empire, but it’s not a platform that’s used by hundreds of millions of Indian users yet.)
The other is to rely on a well-designed algorithm that compensates for the impossibility of understanding the other person’s culture. That’s how TikTok, an application operated by a Chinese company (ByteDance) staffed by mostly Chinese people with scarce international experience, has managed to successfully expand at a global level, as explained by my friend Eugene Wei in his masterful TikTok and the Sorting Hat:

I don’t think the Chinese product teams I’ve met in recent years in China are much further ahead than the ones I met in 2011 when it comes to understanding foreign cultures like America. But what the Bytedance algorithm did was it abstracted that problem away.

What does it tell us about the ability of European tech companies to expand on Asian markets? Recently I’ve been discussing that topic a lot with Alexandre Olmedo and Martin Pasquier of Fast Track, and we’re about to launch a series of blog posts and interviews to highlight how specific European tech companies have succeeded in expanding to Asia.

I’ve long been convinced that a key part of growing successful tech companies in Europe is to inspire an expansionist mindset whereby European founders will tackle the challenge of scaling their businesses beyond Europe: either in the US (see Index Ventures’ excellent Expanding to the US, or Africa (I wrote about it in Is Africa the Future of European Tech?), or obviously Asia—a much more populated and still fast-growing continent.

Alexandre, Martin and I have already been gathering a list of European tech companies that have successfully expanded in Asia. It includes (in alphabetical order) Adyen, ASML, Avaloq, Believe, Criteo, Dathena, Deliveroo, Delivery Hero, Farfetch, King Gaming, Lingvist, Minecraft, Mirakl, Revolut, Rovio, Skype, Skyscanner, Spotify, Supercell, TEADS, Tractable, TransferWise, UIPath, Unruly, Vestiaire Collective.

If you have other ideas, as well as potential introductions to European founders who have embraced Asian countries as their next market, please let me know!

And remember: Asia is so much more than China. We’re talking about Japan, Australia, Indonesia, Malaysia, Vietnam, South Korea, India, and many other countries.

🌏 What do you think? 🌏

A significant portion of my attention these days is dedicated to reflecting on alternatives to traditional VC—what I call the Diffraction of Venture Capital.

It’s not that I’m criticizing the VC approach to investing; rather it’s that Europe, because it is such a fragmented continent, might have an interest in the rise of other approaches, such as revenue-based financing for SaaS businesses or funding that’s positioned somewhere between debt and equity for businesses that aim at reaching profitability earlier and might not have the potential for Reid Hoffman’s “blitzscaling”.

Here are my recent writings on the matter:

Above all, here’s a very recent blog post by my friend David Galbraith of the global VC firm Anthemis, writing about Sustainable Capital. A new way to invest in modern businesses—an absolute must-read:

We now have the perfect storm where a large percentage of businesses can’t be funded either by debt or by equity, and at a time when the cost of capital (what they should in theory have to give up to receive funding) is at an historic low.

Also have a look at this thread on Twitter: