Purpose: This paper investigates market entry decisions of the U.S. software SMEs by analyzing the impact of the most obvious factors (cultural distance, geographical distance, country risk, and three market size variables) in traditional internationalization theories to target country selection. By investigating the influence of these commonly cited macro-level factors, this study proposes the best indicator for market entry decisions of the U.S. small and mediumsized software firms. Design/methodology/approach: This study uses quantitative research approach applied on a sample of 100 U.S. small and medium-sized software firms. Findings: Empirical findings in this study indicate that vertical (software) market size in a target country is the best single indicator for market entry decision, explaining alone 63% of market entries. Thus, the findings in this study suggest that the vertical market size gives a better explanation for market entry decisions of software SMEs than the earlier widely used variables. Research implications: Integrating earlier findings related to firm-level factors with findings of macro-level factors will help theory development and will facilitate obtaining a more holistic view of internationalization of knowledge-intensive SMEs. Practical implications: Findings in this study imply that managers should take an active role when they develop network relationships for the market entry. If a firm takes a passive role in networking, it might lose market opportunities available in the leading markets and end up in countries where the real market potential is low. Originality/value: This paper highlights vertical market size, which has been largely ignored in earlier studies, as the most important indicator for international market entry decision.