Think the race to liquidity is tough on you? Here are three overseas Web startups facing low online penetration, inadequate infrastructures and cultural quirks.
In this story:
Discover the problems of doing business in different cultures Learn the survival strategies of overseas startups Understand the vagaries of going public abroad In Latin America, local funding is harder to come by, unless you have an "in" with regionally formed incubators or family-run companies that control much of the financial capital in these countries.
The rate of Internet adoption in the Latin American countries is still between only 3 percent to 5 percent of the population, depending on the country.
For better or worse, Europe never experienced the all-out Internet craze that swept the United States.
Love and dotcom dreams were in the air when Jim Moliski attended his former classmate Richard Chen's wedding in the summer of 1999. During a break in the reception, Chen, who had gotten his MBA with Moliski at the University of California-Berkeley, brought up the idea of starting an e-mail marketing concern in Japan. Moliski was all ears. He had just made a tidy profit by selling a U.S.-based dotcom he had founded to handle direct e-mail messages to consumers for other companies. Although Japan was still in a nasty recession, Moliski and Chen wanted to provide the same services there and were excited by studies showing the exploding number of Japanese consumers going online. But Moliski, a Florida native, hadn't counted on Japan's distinct economic and cultural landscape. Right from the start, Moliski and Chen had trouble attracting the right people to work at their startup, called OptoMail. Japanese workers are famously loyal to their employers and wary of working at startups. Infrastructure was also an ongoing issue; it took more than six months to get high-speed Internet access in the OptoMail office, and telephone service was exorbitant. Office space is outrageously expensive (rent for OptoMail's 15-person Tokyo office is more than US$10,250 per month). And e-commerce has not yet taken off (Japanese consumers are leery of online fraud, and most don't use credit cards anyway, preferring cash and wire transfers to pay for purchases). To top it all off, the large Japanese companies Moliski and Chen are targeting for e-mail marketing seem to prefer doing business with companies they already know.
"You have things good in the United States, believe me," says Moliski, 33, who spends half his time in Tokyo and half in Berkeley, Calif., meeting with the U.S. parent companies of potential Japanese clients.
Like Moliski, many online entrepreneurs are learning that the overseas climate can be harsh - or at least one heck of a learning experience. It's not so much that money is a problem - although funding is always a great challenge. A bigger problem is that other countries have much lower rates of Internet penetration than the United States (see "Level of Internet Penetration," right). Half of the U.S. population is estimated to have Internet access, compared to only 12 percent in Japan, just over 30 percent in western Europe and not even 5 percent in Latin America. Infrastructure problems are largely to blame. Most foreign countries do not have high-speed Internet access and are plagued by antiquated phone lines. Even pricing systems can be a problem. In Japan, for example, telephone customers are charged for every call; there is no such thing as free local calls, so people tend to curb their Internet usage.
Local traditions also get in the way. In some Latin American and Asian countries, for example, customs snafus make it all but impossible to get a package overnight. Delivery costs are much higher too. And those two-hour lunches, common in Europe and Latin America, can sure cramp a startup's speed to market.
As in the United States, it's getting tougher for Web startups to find funding, especially if they sell to consumers. But many countries now have newer, more tech-friendly stock markets, akin to the Nasdaq in the United States, that make going public a possibility. For instance, while Japanese startups have no hope of meeting the stringent requirements for going public on the traditional Tokyo Stock Exchange, they have a better chance of competing on Japan's two fairly new technology-heavy stock markets, Nasdaq Japan and Mothers Stock Market.
In Latin America, local funding is harder to come by, unless you have an "in" with regionally formed incubators or family-run companies that control much of the financial capital in those countries. There, who you know is more important than what you know. "Fresh ideas and a solid management team will find a venture capital audience with either crowd, but contacts are vital," says Grant Smith, a senior analyst with the Yankee Group in Boston.
For the most part, however, going public - the Holy Grail for all startups - is no more remote for overseas ventures than for their U.S. counterparts, if they can survive the hard knocks of early startup life, such as funding crises, personnel pitfalls and jittery markets. The three overseas startups profiled here are all at different stages of the new-venture life cycle. Whether headed for an IPO, mere profitability or oblivion, these companies' survival skills have enabled them (by press time at least) to hang on in the face of uncertainty. We follow their twists and turns as they struggle to avoid the global dotcom shakeout.
The $7 million chauffeur
In the spring of 1999, Marcos Galperin was fresh out of the Stanford Graduate School of Business with nothing but an MBA and an idea when he caught a lucky break. Moved by the spectacular success of eBay, Galperin dreamed of creating a person-to-person auction site for Latin America. "Latins are very used to bargaining, and they don't throw away used stuff. It was a fantastic model for these countries," says Galperin. He reasoned he had better insight into the diverse Latin American cultures than any U.S. company and would be better able to handle intercountry customs and bureaucracy. The then 28-year-old Argentinian had stayed in touch with Stanford Graduate School of Business Dean A. Michael Spence (now retired), and he brought the idea to him. Spence liked it and offered Galperin the chance to take his friend John Muse - who just happened to be founder of the Dallas VC firm Hicks, Muse, Tate & Furst - to the airport. Galperin walked away from that trip with seed money for his venture, called MercadoLibre ("free market" in Spanish). Shortly thereafter, other investors ponied up a total of US$7 million for the first official round of funding.
Within a few weeks, Galperin, his cousin Marcelo Galperin and Hernan Kazah (all Stanford MBAs from Argentina) had recruited several of their Stanford classmates to join MercadoLibre, which started business in Buenos Aires in July 1999. (MercadoLibre was the fourth largest recruiter of Stanford grads that year, behind Goldman Sachs, Boston Consulting Group and McKinsey.) But a top education wasn't the only criterion. These new hires were all natives of the countries in which MercadoLibre operates - initially Argentina, Brazil and Mexico, and then Venezuela, Colombia, Spain, Uruguay and Chile.
Galperin organised MercadoLibre as a U.S. corporation because it inspired confidence in the company's investors, which are for the most part located in the United States. Having a U.S. headquarters also puts the company in a good position to go public on a U.S. stock exchange, should the chance arise. "The ideal would be to go public in the United States because of the liquidity and relevance of the market to our business," says Ignacio Vidaguren, vice president of business development. "But there is always the chance to go public in local [Latin American] exchanges too. The Brazilian and Mexican exchanges are very important."
Vidaguren, an earnest 29-year-old Argentinian with wavy brown hair and arresting green eyes, opened the company's U.S. office in Miami, shortly after joining MercadoLibre in November 1999. Miami seemed the right place for the headquarters, since it is the gateway to Latin America and has a large Hispanic population of its own. Vidaguren had friends at a Latin American investment site that headquartered in South Beach, so he made a few calls to real estate agents there.
By December, MercadoLibre had settled in on the ninth floor of a squat 1970s office building in the chichi Lincoln Road section of South Beach. "By February or March, every single dotcom was trying to get space here. The line was going around the corner," recalls Vidaguren. The manager of the building even asked Vidaguren and his colleagues to vouch for the newer startups that were clamouring for space, including ZDNet and B2bwine.com. But after Internet stocks took a beating on the Nasdaq in April and May, some of the dotcoms that had reserved space never even moved in. Now only a handful of Web startups remain in the building, a constant reminder that existence can be fleeting. (When stressed, MercadoLibre's Miami staff - almost all natives of Latin America - blow off steam at Finnegan's, a nearby Irish bar with a palm-ringed patio.) Much like eBay, MercadoLibre charges a commission of 5 percent to the seller on each successful transaction (for sales over $200, the commission is 2.5 percent). The site also charges special posting fees of between 50 cents and $3 (a plain vanilla posting is free). Another source of revenue: licensing MercadoLibre's home-grown auction platform for companies that sell to the Latino market. Vidaguren knows of no other auction platform that is written in native Spanish and Portuguese. Translating an English site can be a huge task. Although officials decline to disclose financial details, MercadoLibre has licensed its auction technology to several sites targeting South and Latin American consumers, including UOL (another South American portal), StarMedia (a South American Internet portal) and Viajo.com (a South American travel site).
MercadoLibre's customised Oracle 8i platform has certain features that make it inherently more desirable to Latin American users, according to Vidaguren. For example, most auction sites (including eBay) won't allow users to enter a bid lower than the minimum bid. Through a feature called Contra-Oferta (counteroffer), sellers can choose to accept bids lower than the minimum starting bid. So if the auction is about to close without any bid, it might make sense for the seller to entertain a lower offer. This appeals to Latin Americans' love of haggling, says Vidaguren.
MercadoLibre seems secure for the moment. To date, it has hosted 200,000 transactions with a total value of US$55 million. The average price of an item listed on the site is an impressive US$300 compared to eBay's US$50. Electronics and signed soccer jerseys are top sellers. In the depressing days after the Nasdaq correction, the company managed to raise an additional US$47 million from several U.S. companies including Chase Capital Partners, Flatiron Partners, GE Capital Group, Goldman Sachs and Ventech International. Galperin says the company should be able to conserve its funding until 2003, in part because it does not have to pay for a delivery and logistics infrastructure (since consumers send the goods to each other). He expects MercadoLibre to break even by December 2002.
The cash infusion gave MercadoLibre the necessary credibility to hire more people, some of whom were nervous about going to a dotcom. Today, the company employs 12 in Miami and 180 worldwide. Speaking Spanish is a job requirement, but company e-mails are in English so that they don't offend Brazilian workers, who are Portuguese speakers and sometimes resent the predominance of Spanish.
MercadoLibre's money goes further than many startups, because U.S. dollars buy a lot of labour in Latin America (the company's technical staff of about 25 is in Argentina). "In Latin America there are very good resources in terms of people. The levels of unemployment are much higher than in the United States, and the degree of development of the Internet is lower. More people are interested in working with Internet startups," says Vidaguren. Salaries are much lower in Latin America than they are in the United States, and the Argentine technical team is able to maintain the site much more cost-effectively than a U.S.-based team could.
Although the Galperins and Vidaguren swear they're trying to build a sustainable company, not just to get rich quick, going public - whether in the United States or abroad - is never far from their minds. Another possible endgame: acquisition by the big kahuna, eBay. "We could be acquired by eBay - it's up to them, not up to us. We would like to be the obvious choice," says Vidaguren.
The journey so far has not been without unwelcome surprises. For one thing, the rate of Internet adoption in the Latin American countries is still between only 3 percent and 5 percent of the population, depending on the country. Fear of online fraud has been a significant factor since consumers are not typically shielded from liability for fraud, unlike in the United States where most credit card users are liable for only up to US$50 in fraudulent charges. It's not surprising, then, that Latin Americans are not big credit card users, although Galperin says this is slowly changing. Concerned by the slow acceptance of e-commerce in its target markets, MercadoLibre began a pilot study early last year, targeting the 30 million U.S.-based Hispanics. "The studies at the time were saying that there were 6 million to 9 million Hispanics online in this country," says Vidaguren. That makes for a very attractive segment - a higher number of online consumers than all the Latin American countries combined. Surprisingly, the U.S. pilot did not reveal much interest by U.S. Hispanics. "Many were indifferent to whether the site was in English or Spanish. We found that the people who do prefer Spanish to English in the United States are generally not as comfortable yet doing transactions on the Web. So we'll have to wait a little bit for that group to blossom," says Vidaguren.
Despite this setback, Yankee Group's Smith thinks MercadoLibre has legitimate value for Latin American consumers. "MercadoLibre's model takes advantage of what the Internet does best. The fact that they aren't trying to sell bricks or pet food - along with their relatively early, well-funded start - means that they've got a chance," he says. However, he cautions that MercadoLibre will have to start showing some solid success (in terms of increasing revenues and eventual profitability) this year because a significant percentage of the highest income Latin American residents are already online, Smith says.
Bringing in the grownups
One of the luxuries of doing business as a B2B rather than a B2C Web startup - whether in the United States or abroad - is that your customers are likely to be much readier to accept your offering. For the founders of Stockholm-based Jobline International, there has been precious little in the way of waiting around. Jobline was founded in Stockholm, Sweden, in 1997 by Lars-Henrik Friis-Molin. Friis-Molin had been conducting online research on university students' attitudes for another company, Universum, when he realised that the personal data the students had entered would make an excellent job-hunter database. So, with the students' permission, Friis-Molin created a database (now up to 644,000 CVs) for recruiters and job boards for students. Clients pay Jobline about 10 percent of a successfully placed candidate's salary - a major savings over the traditional 25 percent employers pay off-line headhunters.
In 1998, Friis-Molin forged a profitable partnership with Bonnier Group, the largest Scandinavian publisher, which positioned Jobline to expand from Sweden into Norway, Denmark and Finland. U.S. venture capital firms invested in the growing company in late 1998. At the time, European VC firms were just getting up and running, and it was easiest to start with U.S. investors.
By 1999, Friis-Molin's leadership had carried the company successfully through its first growth spurt. But he was smart enough to realise his venture - like many others before it - was in danger of imploding from too much growth too fast. So he called in a team of seasoned managers, including Toon Bouten as CEO and Tom Nyman as COO, to help take the company to the next level. Bouten, 42, spent six years as vice president of the European consumer division for Compaq; prior to that, he had been with Philips Electronics for 10 years. Bouten feels that the young entrepreneurs who start these ventures often don't know how to pace their company's growth, and they expand too fast. "At a certain point, things can go out of control," says Bouten, mindful of the highly publicised fate of his Swedish countrymen who founded the B2C fashion venture Boo.com.
During late 1999 and 2000, Jobline has added eight countries of operation (Austria, France, Germany, Italy, the Netherlands, Spain, Switzerland and the United Kingdom) to the original roster of four, for a total of 12. The trick to ramping up so quickly, says Bouten, was to find the right property at the right price and then follow detailed processes for increasing operations. Of course, it's not always possible to find good space at a decent price. Bouten had to settle for a tiny office on the outskirts of London; he calls rents there of $500 per square meter "outrageously expensive." The trade journal Realty Times puts London at the top of the global rent heap at US$126.85 per square foot, with Tokyo a distant second at US$95.63.
Jobline contends with the cultural challenges of operating in so many different countries by trying to instil a sense of corporate - rather than country - culture. For instance, the company has an international sales conference once a year, and managers in all countries "meet" in weekly phone conferences. Still, misunderstandings sometimes crop up. "Swedish people are more introverted," says Bouten. "In group discussions it can sometimes appear they are not interested in a subject. But that's not true. You have to approach them actively to get their opinion, whereas Italians, for example, are always answering."
Last September, Jobline went public, raising 83.3 million euros (roughly US$73.1 million) in its IPO on the OM Stockholm Exchange. Jobline has 477 employees and so far this year has hit revenues of 15.6 million euros (about US$13.3 million). But the company is not yet profitable, although Bouten expects to achieve that crucial milestone in the near future.
For better or worse, Europe never experienced the all-out Internet craze that swept the United States. So while it was harder for European Web startups to obtain money in the beginning, fewer of them are now in the position of being overvalued, according to Therese Torris, Amsterdam-based research director of European Internet commerce for Forrester Research. "There were a handful of overfunded enterprises but very, very few - unlike the United States," says Torris. True startups like Jobline also faced a tougher road because European venture capital firms tend to invest in Web spin-offs of brick-and-mortar companies as opposed to pure plays. Now that Jobline has successfully gone public, it will have only a short time - eight to 12 months - to prove itself by achieving profitability, Torris says.
A Remote Dream
Going public will likely remain a remote dream for Moliski and his colleagues at OptoMail. Japan's cultural differences and its more conservative business community may prove too difficult an obstacle to surmount for this particular startup. As Moliski has learned to his chagrin, even a little thing like a creased business card can damage business-customer relations. When he offhandedly handed a potential client the last business card in his wallet, the businessman chastised him severely for the card's rumpled condition. Moliski has since mastered the Japanese ritual of presenting business cards. (Executives proffer their cards with two hands and slight bow. Next, each makes a polite remark about the other's card. Only then can business begin.) But it may be too late. Though OptoMail has a handful of clients, profitability is remote. The funding won't last forever, and prospects for another round are faint. "We'd always hoped to be profitable. It hasn't happened yet. Some type of exit event would be nice," says Moliski wistfully, no doubt thinking of the successful sale of his first venture. It would be nice to get his life back, though he admits he may still be infected by the startup bug.
"This job is so all-encompassing that I don't spend a lot of time thinking of what I'd like to do next,'' Moliski says. "I don't know if I'd have the energy to do another startup. But there are plenty of entrepreneurs who said the same thing who are now on their third and fourth companies."
E-mail Senior Editor Alison Bass at firstname.lastname@example.org with your own startup tales.
Lauren Gibbons Paul is a freelance writer in Waban, Mass. You can reach her at email@example.com.
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