European Expansion Can Lift IPO Valuation by 55%

As investors in companies expanding from the US to Europe, we at Frontline Ventures have worked alongside dozens of founders as they start to build their businesses beyond US borders.

Leadership teams at these companies often question whether Europe can meaningfully contribute to their revenue growth. Is expansion worth the time, effort and investment? Is the opportunity that large? Or will Europe just amount to a petit macaron against a triple whopper of the US market?

We looked back at 50 IPOs of B2B software companies over the last 15 years to understand the impact that European Expansion had on their performance.

The conclusions show that Europe is a major driver of later stage growth and ultimately valuation at IPO:

• Europe is a huge revenue opportunity for US SaaS: Europe contributes 28% of Global ARR for top-quartile businesses at the point of IPO. That’s around $80m ARR for a typical company going public today.
• International expansion powers later stage growth: Expansion improves companies’ growth endurance — the ability to sustain revenue growth at scale. Thanks to international revenues, companies arrive at IPO growing 5% faster year-on-year than they would have with their US business alone.
• European Expansion has a material impact on exit value: Top-quartile expansions delivered a +55% Enterprise Value lift at IPO. For a company arriving at IPO today, that’s around $740m — nearly a whole unicorn from European expansion.
• There’s a costly gap between the leaders and laggards: Bottom quartile performers left $390m in value on the table, primarily due to avoidable mistakes.

Europe is a major revenue contributor for US SaaS

Europe is the largest B2B software market outside of the US. Its scale and relative ease of entry means that it is nearly always the first priority for international expansion. From looking at S-1s of 50 B2B Software IPOs (full company set after this article) we were able to analyse the impact that expansion has on businesses revenue growth in the lead up to IPO.

US CEOs often underestimate how substantial Europe’s contribution can be, and the objective figures show that Europe can be a meaningful contributor. The median business arrives at IPO with 21% of Global ARR from Europe, while top quartile performers derive 28% from Europe.

International expansion powers later stage growth

Cracking open a new continent brings opportunity to grow in a ripe new market. And it often means going head-to-head with fewer incumbents or tapping an underserved market with latent demand. By expanding internationally, companies add a high growth revenue stream that materially accelerates their overall growth rate.

Below charts how the average US B2B Software business would have fared with and without international revenues — demonstrating how expansion enables companies to sustain their growth trajectory at scale.

Thanks to international revenues, the median company arrives at IPO growing 5% faster, on a $45m larger revenue base.

The impact is stark a few years after IPO — the heightened growth persistence that results from a well-executed International expansion has a strong compounding effect.

The difference that international markets can make on long-term prospects means it’s important to make a strong start outside of the US. Expansions are too often treated as scouting projects — a few exploratory sales reps scattered with limited cross-functional support to set the European team up for long-term success. The first steps in European expansion are foundational to building a $100m+ revenue line and so should command the planning, resourcing, and executive focus that reflects the scale of the opportunity.

Investing in Europe pays out at exit

We took a straightforward approach to quantify the value attributable to a European expansion at IPO. High-growth software companies are valued on a multiple of their forward revenues, so we assessed how companies’ revenue scale and growth rate compared with and without European revenue streams. We assumed no changes in other fundamentals (Gross Margins, Sales Efficiency, CF Margins etc) that could impact multiples.

European expansion means companies arrive at IPO with both a larger revenue base and an elevated growth rate — which results in an outsized impact on forward revenue outlook, and therefore valuation.

For the median company, Europe provides a 31% boost in Enterprise Value.

And if your European expansion is top-quartile in performance, Europe provides a 55% uplift. This equates to $740m at the typical IPO — nearly a whole unicorn, just from a well-executed expansion to Europe.

There’s a wide spread in European performance, and laggards are leaving $390m of value on the table

Despite the potential upside from Europe, companies arrive at IPO with vastly different shapes to their European business. Some have seized the opportunity, but the laggards are leaving substantial value on the table.

The wide variance in performance is not surprising, as many of the best companies still make a slow start in Europe. We’ve seen lots of misfires, with companies setting up HQ in remote jurisdictions for tax purposes, hiring English speaking reps to sell in non-English territories, expanding too rapidly, and moving too late — driven by fear instead of strategy.

Shifting from a laggard to a leader is achievable for nearly all B2B software businesses. There are edge cases in verticals where regulatory requirements or other structural differences may limit the market opportunity. However, the main determinants of success for most companies are a few critical decisions and behaviour changes that need to occur early in expansion. Expansions typically underdeliver due to a few common mistakes at the start of their journey — mishiring the first senior leader, succumbing to “success amnesia”, selecting the wrong HQ location, or failing to develop a global mindset back at the US HQ.

Now’s the time to look to Europe

There’s obviously an opportunity cost to investing resources into European expansion. Investment could be instead made into developing new product lines or breaking into a new customer segment, for example. However, we believe that European expansion is one of the most attractive growth levers that a scaling business can leverage. It’s a proven and well-trodden route to adding a $100m+ revenue line. And porting an already successful U.S. model to Europe carries lower risk than finding product market fit with a new product line, or overhauling your existing go-to-market to push into a new customer segment.

The opportunity is huge — we’ve focussed on how expansion can drive top line growth and value at IPO. But it also opens up exciting talent pools, reduces dependency upon your US core business, and is the critical first step in fully globalising the company.

Founders cannot afford to dwell on European expansion over the coming year. The pace of innovation in Europe is accelerating, with great entrepreneurs being backed by 6x more VC funding today than ten years ago. As Covid shifts into the rear view mirror, US businesses will need to move quickly to avoid ceding ground to local competition.

Europe has the potential to be the engine room for your later stage growth — if you’re a US Founder wondering how to make the first steps across the Atlantic, we’d love to talk.

About our methodology

Companies analysed include all US B2B software IPOs that reported international revenues within their S-1. Send me a note at jamie@frontline.vc if you’re interested in seeing the line-by-line dataset.