Investing in new markets without draining company resources.
Say you want to invest heavily in a new market area but don't want to drain resources away from the rest of the company. How do you go about it? One option is to set up another company and finance it separately -- with a new set of investors. That's what Chipcom, a designer of computer-networking systems, recently did, and other growing companies are taking similar approaches.
In Chipcom's case, management wanted to make sure it wasn't crimping future product development or domestic marketing efforts as it poured money into building up its European distribution system. "We had a lot of conflicting needs," says Bob Badavas, chief financial officer. So the Southborough, Mass., company went out looking for -- and found -- investors who were interested in financing its European operations. The deal, which closed last June, worked like this: Three European venture capitalists put up $3.3 million to buy 96% of Chipcom Europe. The U.S. company, which holds the remaining 4%, has a contract to manage Chipcom Europe and to provide products and support. And the U.S. company has an option to buy out the foreign investors with its own stock (according to a preset formula) within two years.
Chipcom went after European money, notes Badavas, because it wanted investors with an understanding of its particular marketplace. But the basic strategy could work just as well with domestic investors, he thinks, for financing a new product line in the United States. "Anytime you're contemplating a new business area with new risks, this could be an effective way to go." -- Bruce G. Posner