Key takeaways: Scaling and market entry

I listened to two great podcast episodes today on scaling and market entry. I like to write and rewrite the key points I’ve learned to understand them more thoroughly. Both podcasts were in Finnish. Here are my key takeaways in English:

I’ll start from near the end of Kasvun rakentajat episode with Miki Kuusi from Wolt.

Three universal stages most startups go through:

  1. Product/market fit: Identify a sector and approach that has demand
  2. Business model. Ideally with good unit economics. Some companies skip this and start only with a hypothesis that they start validating later, after some scaling (risky)
  3. Scalability model. How to really grow the company

Every new country for Wolt undergoes surprisingly many steps from scratch, although not necessarily the above ones. They make use of the technology built and lessons learned from previously conquered markets, but they will have to get clients, restaurants, and delivery people starting from zero, and with a different culture, competition, legal and other aspects of the environment.

Business model development stage varies a lot between companies. It’s about unit economics, how does it scale. If it does, it’s a question of how big is the sector, which leads to how much should you raise capital and how fast to grow. The bigger the sector, the higher likelihood that someone is going to grow fast there, so the faster and better funded you need to do it.


The above were from the last few minutes of the podcast. There were many other interesting points earlier. Here are a few of them.

Efficiency of raised capital

The aim of startups is to build more value than the money they’ve raised and invested. The more value for investment, the more efficient company.

There’s a rule of thumb for 1/3. That is, after scaling, the capital you raised along the way should account for less than a third of the company’s value.

For example, if you’ve raised €15B and your company is now valued at €50B, 30% of your value is the capital you raised. This is not bad, but not very efficient either.

Many later-stage investors are very interested in this efficiency of raised capital to value created. The more value you create for every euro invested, the more interested they will be in investing into your company.

You can also backtrack from your potential company value to the amount of capital to raise. If the market size and competition mean that your company could realistically be valued at €100M, you will have a much easier time attracting investors if your realistic plans seek for a total of €20M than €50M down the road. One creates five euros of value for every euro invested, the other only two. All else (like company stage and risk) being equal, the less efficient one is the far less interesting for investors.

On the other hand if your company could be a ten-billion-euro one, a €50M total funding goal would be just 0.5% of that. This would be extremely effective and make for a theoretically attractive investment opportunity. However, it might not be enough considering the likelihood of plenty of other players entering such a huge market with bigger budgets to compete with. Your sales will not be very high if your competitors will be able to offer similar solutions much earlier and with better marketing everywhere on the globe.

Scaling to new markets

Miki mentioned that after reading the early parts of Blitzscaling he noticed he had a different view on some aspects of scaling. To simplify, his impression was that blitzscaling means the extreme approach of going fast and breaking things while entering new markets. Uber is a prime example of this, having entered dozens of countries with the same operating practices, regardless of whether those practices were appreciated or even legal in the country. This is highly inefficient for almost anything other than raw speed of market entry. While there are benefits for being the first in a market, there are huge losses to be done with ill-advised market entries.

The approach Miki had learned from his mentors was to first build a scalable operation in one market, and then expand it one market at a time. Every market will be different, and some things you did in the previous markets won’t work in the next ones. By entering many markets at once you would be multiplying your mistakes, so better enter only one or very few at a time.

As a testament to Wolt’s approach, they are now operating in 23 countries and almost 100 cities. They’ve grown faster in every new market they have opened due to learning from all of the previous ones.

Comparison: Goodio

This is very similar to what Jussi Salonen, Goodio‘s head of US said in the episode of the Puttonen & Vilkkumaa podcast I listened to today. They talked about three different countries where they’re selling their chocolate now: Finland (their home country), US (the most competed market in the world) and Japan. The markets work very differently.

In US, consumers want packaging to be big and to contain as much product as possible. In Japan, packaging should be small and it’s not expected to contain very much of the product. It’s more important that it’s kawaii, cute. Another person on the podcast (Vilkkumaa) added that the associations with colors and packaging are also very different. For example in Japan people prefer golden color in packaging. Some traditional Finnish chocolate packages were not regarded highly due to their similarity to Japanese tobacco packages, and others were similar to that of a non-edible product (rubber bands or similar). The markets have other differences as well, such as wholesalers and other partners playing a much bigger role in how your FMCG product succeeds in Japan than in the US.

Using an approach that worked for one country they would have had big difficulties in another of these markets. They’re still producing the same chocolate with the same value-based story (radical openness in the food industry; knowing where your food comes from and where it’s made) and branding, but with many adjustments in how it is offered in each market.

Must-win markets

Regarding market entry, Goodio realized in the beginning that the Finnish market is not big enough for them, but the US is and they had experience there. They chose US as their must-win market and made sure their products were appealing to US customers and retailers.

It took them two years to get the deal with Whole Foods in the US, and some additional hassles to sort through before getting their product on Whole Foods’ shelves. As this was a must-win market, they might not have been able to afford conquering Finland and only then starting the long process of entering the US market.


Wolt vs. Goodio strategies

As a thought experiment, let’s take an imaginary setup that might be similar to what Goodio faced:

  • A US market team costs €1M/year and it takes them two years before first sales, which quickly ramp up to €10M/year in gross profits
  • A Finnish market team costs €100k/year and takes a year before first sales, which quickly ramp up to €500k/year in gross profits
  • The HQ expenses will be €500k/year

Alternative strategy 1: Focus on the Finnish market first, start to enter US market after first sales in Finland.

Alternative 2: Go into both at once.

Alternative 3: Go into the US only, forget about Finland.

Total differences (not annual):

After 1 yearAfter 2 yearsAfter 3 yearsAfter 4 yearsAfter 5 years
Alt. 1 gross profit0500k1,000k11,500k22,000k
Alt. 1 fixed expenses-600k-1200k-2,800k-4,200k-5,800k
Alt. 1 net-600k-700k-1,800k7,300k16,200k
Alt. 2 gross profit0500k11,000k21,500k32,000k
Alt. 2 fixed expenses-1,600k-3,200k-4,800k-6,400k-8,000k
Alt. 2 net-1,600k-2,700k6,200k15,100k24,000k
Alt. 3 gross profit0010,000k20,000k30,000k
Alt. 3 fixed expenses-1,500k-3,000k-4,500k-6,000k-7,500k
Alt. 3 net-1,500k-3,000k5,500k14,000k22,500k

All three of these scenarios are good after five years, but have plenty of differences both then and along the way.

Alternative 3 is the simple one. You go for the big market and minimize other complications. However, you need a lot of capital, and this might require a big part of your team to be based in the big market to keep your learning speed high. It’s always easier to learn about a market when you’re in there.

Alternative 1 is almost as simple. You start with just one market, but it’s your small local one. You have fast learning with minimal costs. Unfortunately your company won’t get profitable there, only once you’ve conquered the big market, which is delayed in this strategy. Goodio said they avoided this to avoid the danger of optimizing their product for the small market, and because they had the expertise and resources to go after their must-win market right away.

Alternative 2 combines both of the above. It has almost the same expenses as going after the big market alone. It’s a bit more complicated to manage, but you can learn things about your product from two markets at once, which makes it easier to expand into new markets once you’ve conquered the must-win one.

Goodio chose strategy 2 of going after their must-win market and tiny home market simultaneously. Wolt chose strategy 1 of sticking to their home market and expanding only once things were going well there. They faced a different situation than Goodio in both numbers and otherwise.

One aspect is fundability: it’s likely that once Wolt proved good unit economics and scalability in Finland, their funding opportunities increased significantly. Also, conquering a new market requires much more of that funding when you have to build a new multi-sided network of clients, restaurants and drivers in each country and city, compared to when you can make one deal with one retailer and start selling chocolate nationwide.

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