In the first 10 years of the SaaS industry, US SaaS companies didn’t need to go overseas to build highly valuable companies. But that dynamic has changed in lockstep with the growth of the SaaS market. Gartner forecasted that global spending on SaaS applications is easily going to exceed $1Trillion by the end of the decade—if not sooner – and expanding SaaS markets around the world is a big part of that growth.
High Growth SaaS Companies Get A Significant Portion of Revenues Internationally
OPEXEngine benchmarking data reveals an interesting trend. There is a clear distinction between fast growth SaaS vendors (over 50% annual growth) and slow growth companies (less than 25% growth) between $100M-$500M. Faster growth companies are taking advantage of overseas markets and expanding internationally faster than their slower growth counterparts—with fast-growth companies reporting almost 31-32% of revenue from international business. By contrast, slow-growth companies reported 20% revenue from international business in 2020. For a $250 million fast-growth company, that’s $80+M in revenue, making international expansion not just important—but important to know that you’re doing it right.
From an operational standpoint, however, international expansion has become increasingly complex for SaaS companies in every corner of the world. Accessing untapped international opportunities today requires a strategic level of international targeting, a clear understanding of evolving international tax implications, and substantial insight into regional legislation to ensure compliance.
Why Go Global?
For all this increasing complexity, why go through international expansion to sell to a global market? “If you can sell from home – do,” says Daniëlle Keeven, VP of Finance at paddle.com—a merchant of record for software companies around the world. “Ideally, a SaaS company would be light on its feet, and not have to register anywhere. Unfortunately, many international regulations force your hand to or set conditions that can limit your growth span. In reality—where you want to be local versus where you need to be—is largely legislation dependent today.”
A Matter of Timing
“A key consideration of moving internationally is the originating mission and vision of your company. What is your intrinsic motivation for it?” asks Keeven. “If your solution is built to make the world a better place, it naturally extends beyond borders. Why not share it? While most international customers come to the US, expansion can also be particularly attractive to US companies to insulate themselves from local market fluctuations. “
When questions come up as to why your solution isn’t available in Europe or another major market, that’s generally a good time to consider expanding globally. But scaling your business in the right place is critical. Where is the best market fit? Where does it have an ROI? Where will it make sense to invest the time, effort, and money to set up a local entity and scale it? It is important to prioritize markets and think about which market you want to tackle first, based on your bandwidth. Ten markets at once are just not possible. Start with one, listening to the best customer opportunities.
Do the research to figure out the market you’re considering. European, Asian, and Latin American markets are expanding rapidly for SaaS. Do you need to expand overseas to ensure your competitiveness or leadership position as a company in your respective market? Some countries are also easier than others to enter. “For example,” shares Keeven, “In China, you don’t have to be locally registered to sell, but you would have to be registered re-selling through a Chinese retailer to a Chinese customer. You can sell externally, but not locally - limiting your access to the entire market.”
Many American SaaS companies tend to expand internationally only when they’ve reached substantial maturity. One problem is that mature companies with established business processes tend to apply their well-worn operational formulas to new markets. But successful international expansion is not a matter of simply hiring international sales and finance staff overseas to sell into new territory. To be successful, you must go back to your startup origins, evolving quickly, with your entire team focused on launching the business.
Leveraging the Right Resources
While the software is not new in the world, it is in the tax and legislation space, especially cloud software. Ensuring that you are leveraging the right resources to help you navigate the market you hope to enter is absolutely necessary. “As soon as you decide to establish operations overseas, having the right team around you is critical, says Keeven. “One salesperson cannot do it all.” She recommends working with local finance, sales, and legal resources—and seasoned executives in-country. She also recommends leveraging specialty SaaS platforms like paddle.com and Avalara for global e-commerce and tax compliance expertise.
To say that the local requirements for SaaS company registration vary widely around the world would be an understatement. Where some countries don’t require registration, others can involve months-long adventures requiring a local Sherpa to move the process along. For example, in Mexico, opening an operating bank account and registering a company can be a five- to six-month process, made more difficult if you don’t have local representation on the ground. In other countries, you can set up an entity, and then easily look up compliance issues, corporate filings to submit, and tax regulations around that registration. To successfully navigate this variable universe, the first thing to do on entering a market is to seek out a local partner who can directly facilitate the process with you in-country.
Key distinctions also exist between local hiring regulations in markets throughout the world. Some allow companies to hire local talent by registering exclusively as a hiring entity, while others allow hiring talent as a business entity, or to operate in-country as an employer of record outside the country. Whatever the local regulations allow for in the market you’re considering expansion to—it is critical that you are compliant. Those not in compliance may be unknowingly subjected to local taxes.
Payment Processing and Currency Management
Local payment management is critical for several reasons. The first is garnering a high acceptance rate on your payments. Many companies opt for a local payment processing solution for better routing and acceptance. Some payment providers are also better or worse than others in processing international payments—making provider diversification a good idea.Market currency is another key consideration, with a number of options to choose from. For example, if your market is Brazil, you have a large customer base that likely uses credit cards, but others that use the Boleto Bancáriot—a popular voucher payment method that can either be printed or used as cash payment at more than 200,000 locations throughout the country or used to pay electronically through Internet banking. Keeven encourages the use of both to help scale your market the fastest.Beyond currency choices, currency values can also fluctuate tremendously from week to week, making central management vital. “Currency management is definitely complex,” shares Keeven. “Although the US Dollar is stable, the growing use of cyber currency complicates it all.” With a nod to what’s coming next, she adds, “It’s shocking to think SaaS may be paid in cyber in the future, signaling an even greater need for outside expertise.”
Associated with currency management, there can be wide swings in payroll expense. In countries like Argentina, with currency fluctuations and where there are a limited number of local employers of record, you may have to set up a local entity to employ talent. Depending on timing, you may pay more or less each pay period based on the local currency exchange.In many markets, there is also a different legislative approach for employee and contractor payments, that should also be matched to your business risk appetite. “If you don’t use an in-country employer of record to set up local payroll, my personal recommendation is to find a global provider that can support you across multiple countries through a central dashboard,” shares Keeven. “Your HR and finance teams will thank you.”
Reconciling benefits and pay scales between regional markets can complicate a company culture dedicated to transparency and equality. How do you benchmark salary when the regional market discrepancies may be huge? Do you adjust for the cost of living, or pay everyone a flat rate? A myriad of differences may apply regionally depending on whether your talent pool is made up of employees, or contractors, and whether those contractors are long- or short-term. Compensation is a complex issue that is not only financial in nature—but also a cultural decision by your company that requires management foresight.
Significant differences exist in the interpretation of what SaaS sales are taxable. Depending on the market—even if a subscription contract is held by the US headquarters of a SaaS company, it may still be governed by local legislation. Some countries have a set target revenue threshold before they tax, while others skip tax altogether. “An interesting trend in Latin American countries is switching to e-invoicing to monitor what kinds of revenues companies are making, which not all companies are compatible with or can easily comply with right now,” shares Keeven. “If you have a local partner in the market you hope to enter or work with an external tax or law firm—they can manage this in-house themselves.”
At the end of the day, international expansion requires a strategic and measured approach. To be successful, every SaaS company should follow these best practices:
- Focus on the largest market opportunity with the best fit for your product or service. Don’t take on more markets than you have the bandwidth for at any given time.
- Don’t go it alone—but leverage existing finance and operations platforms, like paddle.com and Avalara which are always being updated to the latest regulations
- Remember that international expansion is not simply hiring an international salesperson or sending a founder of the company over to France to establish a European business.
- Each new market should be managed holistically, from establishing your brand and marketing locally to making sure that you have the right product for the market as well as all the operational pieces in place to fully sell to and support your local customers.