Exporting the Risk
Setting up direct sales abroad and raising money from European venture capitalists.
Published November 1990
EMAIL THIS ARTICLE
PRINTER FRIENDLY
COMMENT ON THIS ARTICLEHow 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."
