Local Winners
Today at dealflow we discussed a company building software to power AI generated video ads that can then be published to social media channels.
We’ve seen lots of players in the same space, many of which violate rule number 1: Please Be Different, but essentially the argumentation from the founders was that nobody has really cracked it in Europe. It got us debating on whether (and when) an “X for Europe” positioning is robust: why doesn’t the U.S. player just win globally in the end?
This needs more thought, but…
The default answer, I think, is “no” - at least in software, which is globally distributable directly to the customer at effectively zero marginal cost. U.S. companies have deeper capital markets to develop product and scale internationally - it’s usually hard to see why the simple fact of being European is a durable competitive advantage.
There are a few circumstances, though, where you could make a case for it. Specifically, where markets:
- have different regulatory frameworks to navigate
- have different cultural idiosyncrasies that mean a global product doesn’t work (though localisation is getting easier with AI)
- have different integrations and dependencies with third parties that are either (i) a slog to rebuild; (ii) exclusive; or both
- have inherent local network effects (of which there are very few) that can be built up before a U.S. player internationalises
- have other tangible first mover advantages (in particular, regarding switching costs) which make it hard to dislodge an local player for anyone that isn’t focused there from day 1
- have features which mean sovereignty matters for governments / regulators / customers (e.g. foundational AI models, defence)
- are too small for the U.S. equivalent to care about entering in Europe (in which case a tough fit for venture returns potential)
I’d love to flesh this out - if anyone has feedback on the initial list, please get in touch!