Dmitry Davydov


What US Software Companies Should Understand About The Rest Of The World.

I was born in Russia. Even though I’ve finished high school in US (fight, fight, fight for Del Oro High) and then graduated from UC Davis, after living six years in sunny California I had to return. I now live in Europe again, smack in between Poland and Lithuania (Berlin is about 8 hour drive away), working for a US company (Bitrix, Inc — the maker of the most amazing team productivity suite you’ve never heard about, it is literally Slack+Dropbox+Basecamp+Salesforce in one, only better and free). I am responsible for worldwide sales of Bitrix24, except former USSR republics. Even though US is the #1 market for us in terms of sales, we do brisk business in India, Mexico, Vietnam and many other places. I’ve actually written an article with tips how to localize your SaaS successfully. But I think it’s a good idea to give a general overview that would help US software companies to better understand what’s going on with the rest of the world and why they may be failing in the foreign markets.

1. You aren’t always #1

You may look at Google and Microsoft and think that having a dominant position in your home market guarantees you worldwide success. It doesn’t’. Salesforce doesn’t even have 3% market share in Russia as far as I know, and I am pretty confident that in China or India Salesforce sales are pretty dismal. Japan and South Korea are markets that are known to be extremely hard to sell successfully, if you aren’t local. Don’t think that the fact that you’ve made it to #1 spot in US guarantees you anything.

2. Your prices are probably too high

What you pay for a cup of Starbucks coffee is half a day worth of wages in many countries. And that poses serious problems for you. As I’ve written before, soft currencies are known to fluctuate wildly and you may find yourself priced outside the market through no fault of your own, simply because local currency devalued and your prices are in US Dollars. But more importantly, your local competitors know how to survive with LTV values (customer life time value) that are a fraction of what you are used to. You’ll also notice (if you are running a freemium SaaS) that your conversion rates from free plans to paid ones are much lower as compared to US.

3. You are paying your developers how much?

A good developer in Eastern Europe now costs $1000-$1500 a month. I kid you not. In many newly joined EU countries (Lithuania, Poland, Romania) $3000/mo salary for IT engineer is considered to be great. When you pay $100K a year to your developers — and let’s face it, you don’t have much choice — this means what you can do with a million dollars is a lot less then they can. It really helps to have R&D office in Europe, India or Philippines, you definitely should consider this if you want to keep your dev costs down.

4. Your government really fucked you over.

Americans are disliked in many parts of the world. PRISM scandal and many other similar ‘initiatives’ means that people are really, really concerned if their data is stored in the United States. Heck, even Canada now has a law that makes using Dropbox illegal if you are working with personal data (at least until Dropbox starts storing that data in Canada, or that’s what I was told). It’s called PEPIDA. You know shit is serious if Canadians get pissed off. And EU has passed a similar initiative Directive 95/46/EC long time ago. I bet you did not even know about that.

5. IT is seen as a weapon

A major power should have the ability to make nuclear weapon. That’s seen as a given. IT is seen this way by foreign governments too. Let me explain. You’ve heard many times that China doesn’t let Google work in China because Google refuses to сensor something. That’s nonsense. The underlying reason is much deeper. Sure, the Chinese are control freaks. We now know that they have every right to be concerned about safety of their data stored with US companies. But what’s more important, China believes that like having nuclear weapons, it’s a really good idea to have IT sector that is capable for producing its own search engine and social networks and working with big data. So it did the same thing as it did with the auto industry and many others — they allowed western companies only in a capacity that helped them build their domestic autoindustry.

Let me give you an example how US uses IT as a weapon, other than that whole PRISM debacle. Remember that Ukraine thing and Crimea sanctions? You’ve probably never heard about it, but US companies aren’t allowed to sell software in Crimea (among other things). If you own iPhone in Crimea, you can’t buy apps. You can’t use PayPal. Etc. Of course, it was never about apps. US Government simply sent a signal to Putin — did you know that your entire banking system runs on Oracle databases? Tomorrow we’ll pass a law that will prohibit Ciscos and Oracles to sell you software and updates and oh, how fucked your banking system will be in no time.

To which the Russians replied — roger that. And passed a law that allowed government and state corporations to only buy software from vendors that can guarantee that it will function in all Russia, including Crimea, essentially shutting out US companies from billions of dollars in government contracts. Good old ‘let’s see who blinks first’ routine.

The point is this — you may think you are outside politics, but you aren’t. Be aware of this fact. Don’t be surprised when a foreign government doesn’t want to buy from you simply because you an American company.

6. Silicon Valley is a bubble.

I am using the term in both meanings — as in ‘dot com bubble’ that’s bound to crash and protective bubble that prevents you from the hurts of the real world.

Let’s start with the first one.

A good chunk of US startups are now monetized via investors. Let me explain what it means. Regular businesses make money by selling to their customers, that’s known as monetization by customer and is simply not good enough for good ol’ American capitalists — it takes too damn long. Monetization by investors is a totally different game. You launch a startup. You take on VC money. VC then sells your company to a private fund or does IPO. Whether your startup generates profit or not, is not really important. It’s better if you are profitable, but it’s not required. The point is this — as a founder and/or early stage investor, you are looking to make your profit not really from clients, but from OTHER investors. Probably the poor suckers who invested in pension funds and can’t get decent return thanks to ZERP policy and are forced to gamble with tech funds and IPOs.

This severely distorts the playing field for US tech businesses, even if you don’t play the VC game. With so much money sloshing around, the cost of putting lipstick on a pig goes up, way up. Suppose your company provides task management solutions. Two of your competitors just raised a bunch of money. They now have to show big growth. So they dump millions in Adwords and new hires, competing with you. Remember, they don’t need to be profitable (at this stage), so they can outbid you by a factor of 5 or 10. Dumb money drives out smart money and dumb startups just may put your smart startup out of business too.

Of course this is a Ponzi scheme and of course it will crash, but that’s not the point here.

Let me now talk about the second type of bubble. I read a ton of articles about ‘bootsrapping’. They are fascinating. To me bragging about the fact that you’ve bootstrapped your business is like boasting to your Mexican friend that you’ve just made a tortilla from scratch. He’ll simply laugh at you, because that’s how his grandma made them her entire life.

This article is already too long, so the point is this. The rest of the world does not live with billions of VC capital. They bootstrap because there’s no other option. More importantly, these companies are prepared to function just as well when rates go up, or venture capital dries up.

7. Growth hacking is (mostly) stupid.

I hate to be stereotypical, but Americans are frequently viewed as aggressive and overcompetitive. I can only refer you to Nicolas Nassim Taleb and his ideas about antifragility. To put it simply, strategies that help you not die are more important than the ones that help you grow rapidly. There’s nothing wrong with growth per se, it’s actually a great marker for doing something right. However, if not growing means death to your company, that’s a bad position to be in. Growth hackers are selling snake oil, to put it simply. Buying growth is almost always a bad idea. More importantly, when you are obsessing about 500% grown next year, you probably aren’t thinking how the world will change in 10 years. To me growth hacking doesn’t just hinder with strategic thinking. It’s my belief that it’s a way to avoid reality for many. Rather than dealing with really difficult issues (getting product on time, fixing bugs, etc), you’d rather fantasize about viral ad campaign that will triple your business, so that you don’t have to deal with problems that you weren’t able to fix so far.

P.S. If you liked this post, you may want to read

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