For growth stage B2B businesses in the US, Frontline X will help establish you in Europe
For early stage founders in Europe, Frontline Seed will help you grow your business nationally and internationally
How $$$ opportunity drives hiring decisions and enterprise value
In our last post we asked the question “are you ready to expand into Europe?”
After completing the checklist, it’s time to look at some numbers.
Namely, what’s the revenue opportunity? Is Europe a rounding error compared to the US or a major new market?
Without answering this question it’s impossible to make informed decisions about hiring and investment in the region.
When I arrived at Twitter in early 2012 I was faced with just this question. There was almost no revenue coming from the region at that point and there was only a nominal headcount plan with a few heads assigned to the big European countries. It wasn’t clear how big the European business could become. And in the last couple of years I’ve seen many B2B companies struggle with the same question. So here are a few practical approaches you could take:
This was the first approach I tried at Twitter: forecast sales rep productivity ($/head) by market and multiply by the number of sales reps you plan to hire. I started with actual rep productivity in the US, applied a 20% “discount” to the UK, 30% to the Netherlands, 40% to Spain and so forth — based on rough numbers I had seen at previous companies.
A note to US readers on sales productivity: lower $/head productivity in Europe is not driven by siestas and long summer vacations! Superior productivity in the US is driven by customer buying power and brand awareness combined with the scale efficiencies that arise in large, mono-lingual sales teams (hiring, on-boarding, sales support headcount and materials, etc.). Fragmented, sub-scale multi-lingual sales teams in Europe rarely match the $/head of their US counterparts.
This bottoms-up approach is simple and gets you to a rough short-term answer. But in retrospect I wouldn’t do it again. It’s just too hard to guesstimate future productivity and headcount growth.
Another approach is to count the number of target customers in each geo and make an assumption about ACV in order to get to the Total Addressable Market. eurostat provides a rich source of country-by-country data broken down by company size (enterprise, mid-market, etc.) and vertical (finance, tech, etc.). Figure 1 below is the result in ARR terms for a real US B2B SaaS company.
While Europe has more than 50 countries, the markets in Figure 1 represent 80%+ of the TAM for most US B2B companies. The chart lines up roughly in order of GDP, although the segment break-down yields some useful information — you can see Germany’s famously large mid-market (Misselstand) for example.
Germany’s GDP is 40% larger than the UK’s, its population 25% bigger, and Figure 1 shows it has more companies in our target segments. So Germany should be our largest source of revenue, right?
It turns out Germans are less likely to adopt cloud-based software than their British cousins. Half as likely, according to eurostat. When you adjust for this, the UK leapfrogs Germany. This is consistent with what we’ve observed in practice.
Germans are half as likely to adopt cloud-based software as their British cousins
This TAM approach is more useful and actionable than the productivity one. While the absolute numbers in Figure 1 are certainly wrong, the relative split across countries and segments are directionally correct and can inform resourcing decisions.
After this foray into eurostat nerd heaven, we get to the simplest and most useful approach for estimating revenue opportunity.
Having spoken to dozens of US B2B software companies that have expanded internationally in recent years, we’ve found one figure to be remarkably consistent:
25–35% of your annual global revenue should be coming from Europe within 5 years.
The majority of companies fall into this band, which gives you a reasonable target to aim for without having to resort to eurostat acrobatics (no offence eurostat, you guys are awesome).
Let’s say your global ARR is $5m today and 5% of it comes from Europe, via self-serve or a rogue AE in the US or whatever. We posit that if you get the big things right in the early days of a European rollout (see our first post) you’ll drive this up to 30% of global ARR within 5 years. Figure 2 below puts these assumptions into numbers by interpolating between our assumptions for Year 0 ($5m global ARR, 5% from Europe) and Year 5 (IPO-track global growth, 30% from Europe) on a curve that is common for high-growth companies that we know have done a good job of landing in Europe:
Figure 2: Projected ARR for IPO-track SaaS company landing in Europe in Year 1
The point of this exercise is not to accurately forecast European revenue; it is to roughly estimate the incremental revenue stream that can be expected from a European operation if it’s invested in properly. In Figure 2, the incremental ARR by Year 5 is $33.3m — a major business in its own right — when compared to the likely ARR if Europe had grown only at the same rate as the company.
Why should any of this matter to a CEO of a Series B or C company? Well, it matters in two ways:
Now that you’ve estimated the revenue opportunity in Europe, you need to figure out how to get your hands on it. For example, although the German market is enormous, it’s notoriously hard for US companies to access. The Nordic countries cumulatively are smaller, but easier to sell into in English. How should you adapt your US go-to-market model for a fragmented Europe? That’s the topic of our next post.