Exporting the Risk
How to set up direct sales abroad without going broke
Alain Hanover was certain of it: going direct would be the company's next step abroad. His only problem was figuring out whether that would be a step forward or a step back.
To much of the outside world, cutting out foreign distributors would be the signal that Viewlogic Systems Inc. had come of age. In just five years, the Marlboro, Mass., manufacturer of engineering software had amassed enough European sales to justify establishing a direct sales force.
But that particular corporate rite of passage came at a steep price. Steep enough to cut into the profits that the company had first glimpsed in 1988. And just the mention of the $4-million price tag for setting up offices abroad would disillusion investors and erode confidence among managers. "I faced a lot of skepticism," says Hanover, who is Viewlogic's president.
Not that Hanover could afford to back down. For one thing, he knew his distributors were sitting on sales. He couldn't let that go on. Furthermore, even as he began mulling over the dilemma in mid-1989, Western Europe was making plans to dismantle its trade barriers by 1992. It was becoming clear that those U.S. companies that were entrenched on the Continent by then would enjoy substantial benefits. "It was important that we get in under that 1992 window," says Richard Finigan, chief financial officer. "It wasn't apparent that we could."
Not at first, anyway. But this year Hanover, who expects revenues to reach $30 million, has opened sales offices in the United Kingdom, Germany, France, and Italy. And Viewlogic will still post record profits. The company's secret? An ingenious -- and original -- plan.
Viewlogic has always pursued an aggressive exporting strategy. When the company introduced its first product, in the summer of 1985, it quickly began signing up foreign distributors, at the rate of two per quarter. Each major foreign market, Viewlogic calculated, would bring in about $1.5 million a year in sales.
None came close. In 1987, to bolster its distributor in the United Kingdom -- and cut down on its own transatlantic airfare costs -- the company established a London office to offer technical support. Still, by 1988 none of Viewlogic's distributors had gone beyond $500,000 in sales. While the company's competitors were reaping as much as 25% of their total sales -- and most of their earnings -- from Europe, it frustrated Hanover that Viewlogic was "floundering along with 10%."
Even switching distributors produced no noticeable difference. Hanover couldn't help noticing, though, that Viewlogic's U.K. sales had more than doubled after he set up a sales team there to work with the distributor. "If we wanted to increase sales, we had to go direct," says Hanover. "It didn't take an Einstein."
But it might have required a Rockefeller. After drawing up some projections, the Viewlogic executives concluded that the company would have to spend $1 million for each major European country it went direct in. To go direct in Germany, France, and Italy, and expand in the United Kingdom, the executives were looking at a multimillion-dollar price tag. Well, they figured, we could expand piecemeal, taking one country at a time. But, Hanover argued, "the longer you wait, the smaller your market." And then there was that 1992 deadline looming ahead. Baby steps might not get the company there fast enough.
Viewlogic couldn't afford to take a financial tumble. But while Hanover was discussing the dilemma with some venture capitalists, he started hearing talk about some European venture firms that were financing U.S. companies.
Would it be possible, he wondered, to raise money from the European venture capitalists to launch a separate foreign company? That entity -- its numbers never tracking mud on Viewlogic's pristine balance sheets and income statements -- could serve as the company's European counterpart.
In the late fall of 1989, after discussions with several international venture capital groups, Hanover settled on Atlas Venture, which has offices in Amsterdam, Munich, and Cambridge, Mass. By giving Viewlogic Europe BV controlling ownership, accountants advised, the new concern would be able to maintain separate balance sheets and income statements.
By December Atlas Venture had become the lead investor and had begun sending out executive summaries of Viewlogic Europe. Atlas targeted potential investors using two major criteria: the investors had to be spread among the countries Viewlogic planned to enter, and they needed to understand Viewlogic's product, either through other investments they had made or through in-house expertise. "I wanted investors who could give us contacts and assistance," says Hanover. "We're small and our competitors already have direct-sales subsidiaries. This is the best way to become credible fast."
During a two-week trip last January, Hanover visited the dozen or so venture firms that wanted to hear more, leaving them with a business plan. On a follow-up trip in April, he touched down in four countries during one 30-hour time period. He spent half his time explaining the intricacies of the deal. The new entity would have its own five-member board of directors and would pay Viewlogic Systems a percentage of gross sales, Hanover explained. Furthermore, its U.S. ancestor could buy out Viewlogic Europe when it hit agreed-upon sales and profit targets.
When Hanover chose the final four firms, he got the diversity he wanted: two venture capital firms in Germany, one in France, and one in the United Kingdom. What's more, one German venture capital firm includes a potential customer of Viewlogic among its investors, and one associate in the French firm used to work for a Viewlogic competitor. With commitments of $4.5 million from the four -- and Atlas Venture, which owns the biggest chunk -- the deal closed at the end of May.
Even before financing was set, Viewlogic lent its new offspring approximately $500,000 for the start-up. "Investors rapidly assented to the deal when they saw the quality of the people we were hiring," says Hanover. For instance, Kanti Purohit, formerly Viewlogic's vice-president of worldwide sales, agreed to serve as president of the European venture. By June, he had opened offices in France and Germany and was working on beefing up the U.K. operation and starting up in Italy.
Hanover foresees the new company hitting $10 million in sales as early as 1992. That same year, when Europe consolidates, Viewlogic Europe should benefit from lower tariffs, simpler documentation, and fewer packaging requirements.
"Distributors can develop a market for you, but they only pick off the cream of the crop," Hanover reflects. "We've handed the risk to the foreign investors, and they've taken it. Now we'll see how well it works."
EN FRANCE ON PARLE FRANÇAIS
Getting money from strangers
Companies raise foreign venture capital funds for different reasons. Some want to set up a service, support, or assembly center. Others seek to ramp up R&D efforts abroad, where certain skills or strategic advantages exist. No matter what the reason, some of the same rules apply:
* Show sensitivity. Americans generally have a poor reputation for showing sensitivity to other cultures. To help overcome that problem, Viewlogic Systems Inc. president Alain Hanover inserts references to the World Cup or to major European business organizations into his presentation. And, when necessary, he even breaks into fluent French.
* Be patient. Hanover first talked of raising foreign venture money in the fall of 1989; he closed the deal about six months later. Arranging meetings and convincing people over a 3,000-mile distance is never easy. Hanover had to adopt a long-term focus and keep a packed bag nearby.
* Have a successful strategy. In explaining his goals, Hanover pointed not only to numbers but also to a definable approach to business that could be copied from sales office to sales office. For instance, Viewlogic pairs a salesperson with an applications engineer on sales calls. "Investors have got to believe in your ability to replicate your success," says Hanover.