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four perspectives on international business
going global: challenges & opportunities

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Mr. LeBlanc: Thank you. Our next panelist is T. J. Jubeir, founder and Managing Partner of New Horizons Venture Capital. He's got a pretty eclectic background, if I may say so. Capitalizing on his experience in structuring and negotiating highly complex, cross-border transactions, he raised the necessary capital first to launch a leveraged buy-out firm, Capital Partners in 1997, and, more recently, the Internet-related early stage investment firm New Horizons Venture Capital. He founded and is Managing Partner of both firms with combined assets of approximately $200 million. He sits on the boards of a number of companies, has worked in the International Finance Corporation as an adviser in the Office of the Saudi Arabian Minister of Petroleum and Mineral Resources and has represented that country in several high level, multilateral negotiations, including the multilateral convention on climate change.

t. j. jubeir: investing in geographic scalability

Thank you, Jim. I will take the approach of a venture capitalist, and an early stage investor in companies that have an international dimension or the potential for an international dimension. Let me start with some brief background on the venture side of our firm to help you better understand the context from where I'm coming in our discussion today.

                Effectively, we're an early stage investor in the technology space. We typically come in at about $1 million to $4 million in an initial tranche, with follow-on that's typically $3-$5 to every dollar we put in. From our perspective, this approach requires a long-term commitment to grow the business with our partners. We fundamentally believe that the international dimension is critical. We put a premium on growth options, and we look at growth options as scalability in two ways¾vertical scalabilities and scalabilities across geographies. Our belief is that not only do we put a premium on it, but subsequent financiers and acquirers put a premium on scalability, as well, which improves our returns in making those investments in the first place. Consequently, when we evaluate business plans, we seek out those firms that have the greatest growth options, in particular, those that are scalable across both verticals and geographies. Most of the plans that we see are able to show scalability across verticals, but they underestimate or ignore the international dimensions in the evaluation of the venture itself and its growth prospects.

                In essence, when we look at a business, we look at it from four factors¾The international dimension cost across all of them in one way or another, and I'll pepper in the international dimension as I work through them. The four factors are: What is the opportunity? What is the context of that opportunity? Who are the people who are driving the opportunity? And, what's the deal structure being contemplated and consummated that will, hopefully, not only support, but reinforce the other elements?

                Within the opportunity itself, we define it as a function of a number of different things. We undertake analysis¾the industry analysis, the competitive analysis, the value sustainability and all that¾but we fundamentally look at it from four sides. We look at it as a function not only of cash in/cash out, we also look at it from the perspective of the risk profile, the timing and then the growth options. Again, I'm coming back to this notion of growth options. The international dimension is one that we feel is underestimated and that we tend to look for. If it's not there, we tend to try to grow it with our investee companies.

                When we turn to the context of a particular opportunity, what we are really asking is, “What is the particular and general environment of that opportunity?” We're looking at the macroeconomic environment, the fiscal environment, tax environment and any sort of special regulatory environment. Once you introduce international elements to the story, which may be present already or are about to be made present, you start to get into more exciting areas relating to foreign exchange issues, interest rate issues, currency risk, political risk, repatriation of profits, varying customer profiles, varying buying powers, cultural issues and so on. They all play an important role.

                The third factor that we look at relates to people. Who are the managers? Who are the entrepreneurs that are involved? Who are the advisers, the directors, the service providers and partners in the venture? What kind of skill base do they bring? What kind of competencies, context and relationships do they have? What kind of leadership and management skills? This becomes especially critical in a strategy that pursues international elements because you are superimposing a different level of complexity upon the organization. Originally, you had a functional and, presumably, business units dimension to the company, but now you're adding another dimension of geography. The question is, how do you manage it? How can you manage it without losing focus on the core of the business, especially when you're an early stage company trying to grow to the next stage?

                The deal side is the factor we have the greatest influence on as an investment company, and it is also the one that's the most intriguing for me. It’s one that’s the most exciting from the perspective of what it tells you about the people you're involved with. What kind of risks are they willing to assume? What are they stating by taking certain preferences in their positions? Obviously, there are a lot of elements within the deal structure that are pretty standard, such as those relating to preferences,  capital commitments, liquidation rights and all that. We tend to focus on the structure being proposed and the structure we're trying to promote, one that's conducive to allowing us to bring in future investors. If we're trying to grow the international side at one stage or another, it probably leads to bringing in a foreign-based fund. That’s because we see our expertise in leveraging our capabilities to grow or extend into the international arena, not in trying to make the international arena your core business. As a US-based entity, that's not the kind of capability we have residing here.

                With our investor base, contacts and relationship, we try to help our portfolio companies enter foreign markets by helping them in better assessing which markets to go after first and how to enter those markets. Some of those challenges involve asking what market makes sense for them? Is it the one with the greatest potential consumption? Is it the one that's the easiest to enter? Is it the one that's most similar to your own? That gets into the issue of context when you're dealing with the big macroeconomic or environmental issues. We tend to look at it from the perspective of optimizing the selection, helping our portfolio companies to identify the markets and leveraging our relationships, including those with  our limited partners, which include offshore investors. We try to leverage that in our portfolio companies as a way of introducing them into the foreign markets and proving to the next round of financiers that you've got something scalable, not only across verticals, but also across geographies.

                Then there is traction, because, for us, the most important thing in the international dimension is being able to prove that you're pursuing a systematic, sustainable, international approach. You're trying to prove that this is a business that is scalable across geographies. We’re also trying to avoid the “one-off” opportunities. They're great from a cash flow perspective, but they don't really prove the viability of the international dimension. We put a tremendous premium on businesses that are able to prove that both growth options are available, including the fact that the company has done something to show us that there is some traction in the international arena. That's when we come in and try to assist.

                The international arena is not an easy arena to enter, however. It's got its complexities, as I mentioned earlier, with respect to figuring out which segments you want to enter and how. Do you want to enter it through a joint venture? Through a partnership? Through building your own resources? Through acquiring somebody local? There are a lot of issues relating to all that, and there are complexities to running the business with respect to the strain it puts on an organization. We try to help by alleviating some of that strain and saying, “Let us help you get into those particular markets, prove the early traction internationally and then use it as a base as we move forward in the next round of financing to further develop that story.”

                We are fundamentally true believers in the international dimension, and we tend, pretty much, to look only at deals that have the potential to grow that international element. A company may not have it today, but we want to be able to sell it as part of the next round of financing¾not just as something that's out there, but something that we can actually work on between now and the next round. Thank you.

Mr. LeBlanc: Now, it's my pleasure to introduce Mario Morino, Chairman of the Morino Institute and founder of Legent Corporation, a company that grew to become the world’s seventh largest software company by the time of its acquisition. Mario is a technology investor and advisor, a great champion of this region and a driver of the kind of entrepreneurial spirit that everyone here in the audience exhibits.

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mario morino: war stories from a veteran

First, thanks to the panel. There were a lot of very good insights presented, and we very much appreciate that you were able to participate today.

                I have a number of comments stemming from what I lived through as our business grew internationally. I want to go through this with you and tie it into what some of the panel members discussed, but I also want to point out that some of my comments may be, to a degree, out of date because I haven't been in the field for a while. I think that the last time I was actually involved with international business was in 1992. At the same time, however, I'm a Special Partner with General Atlantic Partners, which is the largest global investor in information technology and the Internet in the world today. Because of that involvement I am blessed with access to partners around the world and in-depth analysis. At least once a quarter, I get the benefit of the firm’s perspective from people who see how rapidly international markets and businesses are changing, and, I might add, who see how difficult it gets. With that, I'd like to touch on a few points.

                First of all, I think that “global” is probably one of the most misused and misunderstood terms. Please understand that very few firms are global. “Global” means that when you do anything, you are thinking worldwide in every possible step of your business, from how you write code to how you do distribution. You can probably count on two hands the truly global businesses in the high tech industry. Most firms are really “international,” and they serve specific markets in the world, reacting to them individually, and, at best, aggregating this activity to a corporate level. That's not wrong, but that’s not being global. I'm just telling you to be honest about it because people who know will spot it in your literature, especially outside the US. The minute you go beyond the US saying that you're “global,” it's amazing how fast you will lose credibility in a sophisticated buyer's mind. It's very important to be honest about what you are and how you're penetrating international markets. Again, there's nothing wrong with that because most businesses today, even Fortune 500 businesses, are simply aggregation strategies in various regional markets on a global basis. But, it’s not a global strategy by definition.

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                I think it's important to understand that simple, basic point about who and what you are as you go overseas in all directions. For example, I don't know if it’s still true today, but the firm that I admired in the technology field was Hewlett-Packard. When you went to the West Coast, chances were, if you were talking to one of their three or four top executives, they were from a different part of the world. These were people who, anytime they acted, it appeared from a global perspective. They didn't think “US” at all; they thought globally, and you could see it in their dialogue and their actions.

                The thing I want to warn you about is that what normally happens when you go outside the US with your business¾and I will be so brash as to say it probably happens to 95 out of 100 businesses¾is that you are a US-centric business that thinks about international business as an afterthought. I'm going to talk about how you can work against that and how you can develop your management strategies to function more effectively internationally.

                From a startup point of view, the thing that's the most relevant is to point out the enormous international opportunities. In fact, one company based in this region, Landmark Systems, basically focused on Europe first. They made their money that way and came back into the US. That's a very different kind of thinking for a lot of people. I've got to tell you, also, it is just loaded with traps and pitfalls beyond belief. You’d better be ready when you do it because it's a very seductive process, and, in a seductive process, to be very candid, you can get screwed real easily. I'm going to take you through some of the ways people have done it, and there are some scars from the process.

                First of all, be very focused in how you move outside the US. It is dangerous, for example, to go after different markets at the same time. Know what markets you're going after, and I'm not talking about demographics. To say that you’re going after the “European market” is generally too broad a statement. You're going after very specific markets in Europe. Very seldom does a startup, or even an emerging business of significant size, say that they’re putting the whole European market in play. Based on the nature of your product, you may be starting a German-centric marketing effort, or an Italian-based marketing effort or a UK or Scandinavian country-based effort, but you very seldom say all of Europe. That’s because, as was pointed out, the cultural differences, issues, tariffs, taxation, etc., all tend to complicate things, and that doesn’t even touch on issues of talent and getting people who know the markets intimately. I'm just dealing with Europe in that example without even touching the Middle East, the Far East, South America or Africa. All these are radically different moves for you, and, I'd argue that they’re very difficult to take on concurrently. You don’t have to do it all slowly, but be very methodical in your sampling.

                I think, also, that one of the traps is to assume that there's a model of doing business globally. I'm going to give several models, and I'm probably just scratching the surface; I defer to the panel on this. If you're a telecommunications business today, your business is remarkably different than, for example, an enterprise software company. It’s night and day, and you can't even make a comparison. Telecom is totally constrained by regulatory and political issues, whereas the enterprise software market is almost devoid of that in many cases. As a result, the talent you bring on board and how you build the organization are very different. In a similar respect, if you're an integrator like EDS or TRW/BDM, there’s an entirely different set of issues. You're dealing with multi-million dollar contracts and trying to get high visibility in a country. And all of this is very different, again, in a consumer business operation. I would argue that telecommunications/infrastructure, commercial software, systems integration and content/consumer require radically different business approaches. You're going to have to align, learn and find somebody in your space to see how they've done it. What somebody else has done in other models cannot necessarily be transferred to yours.

                When it comes to demographics, “know your markets” may sound basic, but things are so much more advanced today than when we had to face it. You have to know your penetration rates and where the potential sales are. The information is there. You have to find out where the money is moving in your space. Forget all the grandiose numbers; you have to look at the market reality of where you are, where the demographics best fit, what you're trying to sell, what you'll have to put in place to sell it and how you will support what you sell effectively in that market.

                Some questions were brought up about management, and I think that is essential. Going international without an international understanding is difficult, to say the least. One of the first things you have to do is hire somebody who is your “international” person. You've got to have that person onboard, and they've got to breathe, sleep and eat with you. I can't say it any more clearly. If you want to be international, this person has to begin to “culturalize” your team to think beyond the US. I can tell you story after story where we did something, and it was defined subconsciously to a North American marketplace. International can’t be an afterthought. We thought we could tweak what we were doing for France or Italy, but we missed things in doing that. If somebody had been with us at the time, we would have caught some very simple things early. Instead, we paid the price in the field, and it's a hard price. Right away, get somebody who understands the international markets as the interpreter for your management team. This person must be an advocate for your markets and customers outside the US, just as a salesperson should be your customer's advocate.

                I can't emphasize enough how easy it is to seduce yourself into thinking that the world revolves around the US. You can say that you believe otherwise, but I'll tell you something¾doing it in execution is extremely difficult for even the most liberal minds. You need somebody there who knows these other markets and is constantly prodding you; someone who’s a total pain in the butt all the time, helping you realize that you're being myopic in your management practices¾human resource practices, payroll issues and more. I'm talking basic issues. Go ahead and try to fire somebody in Germany. Start right there and try to learn how that works for the first time. All of a sudden, you realize that you have a whole country office down for 12 months because you thought you could deal with it the way you do in the US. Now, all of a sudden, bingo, you're out of luck. It changes your recruitment policies, and you'll be much more diligent in how you recruit in other countries because the cost of exiting is much stiffer than in the US. It affects a lot of things, including your reputation, by the way.

                To the question of how you run the organization, everybody does this differently, but I can't emphasize enough the importance of face-to-face contact, even in the virtual world. In our case, we had quarterly meetings with all executives. No matter where you were in the world, you came together in a quarterly meeting. Period. Those meetings rotated, and we made sure that they were occasionally in countries other than the US, both for substance and symbolism to our client base and to all of the hundreds of people we had working in other countries. At least one board meeting a year should be someplace outside the US, preferably in one of your largest markets; and, when your board is there, leverage the members with your top clients. You have to have the face-to-face presence. If you're a CEO and you're doing business outside the US, you’d better believe you're going to be in an airplane. It's not unusual to be in Europe for a day, then back here for a day. That's your business. If you're going to sell internationally, you're going to be in an airplane or you don't belong as CEO. I'll be that blunt about it. That's your life, and you've got to be where your markets are. At the end of the day, you've got to understand your client, and your clients are very different in different parts of the world. You can have your infrastructure here, but having the empathy to deal with your marketplace is crucial.

                There are subtleties as you expand out. Let's start with perks. If you go overseas, at least in Europe, every executive gets a leased car or they won't come to the table. They won't even talk to you. Then listen to what they ask for in their offices. Mansions. I'm not kidding. They are mansions. If you go to some of the international headquarters of US firms, even mid-sized firms, you’ll see palatial estates. That's the way business is done there. It's not unusual for somebody to say, “You're going to hire me? I'm the first person to run Europe for you? Here’s what I need. There's a lovely castle right outside Scotland that would be a perfect headquarters for us, and, by the way, we need a fleet of BMWs.” Now, try to resolve those perks with your US executives. You've got to tell them that it's the cost of doing business in that country.

                Issues like monetary exchange and taxes are profound. Don't assume that your CFO understands them, because you can lose. You can set up an entire operation in one part of the world, then take a total shot in your profits because you did not anticipate monetary exchange or do your hedging in your forecasting. Hedge management and tax management on international business are crucial. And, again, it’s typically the type of thing that is learned in process as opposed to having it aggressively defined up front. That’s a very costly way to do it. Think it all through for your type of business. It definitely differs by the types of markets or models you're in.

                The previous comments about culture the other speakers made couldn't be more accurate. You’d better believe that the sales cycles are different, they are longer and they involve a lot of things. If you go to Japan, you’d better be ready to sit and drink like you never have in your life for lot of nights in a row. That's not a social criticism, just a fact of life, a mode of business. If you're in certain parts of Europe, you're going to go to lunch at some of the finest restaurants you've ever seen, and you're going to spend two, three hours at a minimum. It's going to be slow. If you rush it, you're going to come across as the superb “ugly American.” They're going to mark you, and word is going to spread quickly. They'll know who you are, and that's why you get executives who understand the culture and can sell to it. On the other hand, don't let them play you, either. They know that you're green, so they'll push you for every one of the luncheons and palatial estates and BMWs that they can get out of you. There's a balance in there, but you don't want to take the American view that says, “Hey, we do business this way, and we're going to do it the same way in that country.” The road kill is enormous on that subject. Spend time, as an individual, getting to know the culture you're going to do business in. Have that common courtesy. I've been embarrassed many times in my career seeing how other Americans act in foreign countries. It’s a lack of courtesy in not having come to understand and respect the culture. That's why it's important that you don't just speak English. You don't necessarily have to speak the native tongue yourself, but your people in that country absolutely have to. If nothing else, it’s pragmatism, but it's also a cultural respect.

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                Now, some other nuances. In certain countries lineage is critical. The reason McKinsey & Co. is so entrenched in Germany is that they are linked to the major families there. In certain countries you’ll find that the lineage of certain businesses and certain personalities is crucial to how the culture moves. It goes even further when you get into government issues. Sometimes, you have to get in and read tea leaves. It is not just Marketing 101, there are a lot of nuances involved in different markets. Nationalistic spirit is one, especially in the Far East. Go over to China or India and listen to their reaction to domain name discussions involving ICANN. They are ferociously, vehemently against the US model and they'll tell you, “Forget it. We're big enough. You think you're going to do it your way? Do you know how many Indians we're going to register on the Internet? How many Chinese? We'll dwarf you.” And chances are they will. You want to respect the strength of the nationalistic spirit, just as you want to respect the culture. It goes to how you're going to develop the mode and culture of your business working globally.

                There was a comment made earlier about agents and distributors, that they’re not necessarily a safe haven. A better phrase would be that they’re probably a box of Hell. Agents and distributors are absolutely necessary in channel relationships, but you’d better do really strong due diligence. This is a lot more defined than it was 20 years ago, but I still come back to the issue of being seduced. If you haven’t been there, or even if you have, you'll get a suave person coming through the door who will give you a song and dance. You're going to think that he or she knows the market, but you could be talking to the biggest jerk in the country. You really have to get in there and understand who you're doing business with.

                The issue of trust internationally is vital because you're here and they're there. We heard of a country manager kidnapped. We had at least two countries where the numbers were cooked. We had the issues of payoffs. Go down the list and it’s fraught with problems. Who you recruit, the integrity of the people you put in place, the relationships you build with them and how you set your checks and balances becomes vital. You don't want to be a public company, or one trying to go public, with all your forecasts ready and your numbers looking good, then, all of a sudden, have someone realize that they've been baking the numbers on you. You're supposed to be at $2.4 million in net profit coming out of three countries and it’s really at about $100,000. You have just gone down the tubes. Everybody else in the rest of the world has worked hard, the US numbers are strong, the Japan numbers are strong, Australia did well and, bingo, two guys in some European country cooked the books. You are dead meat.

                As I said, it means that you have to travel. You have to know your sales staffs well and trust your managers. You have to create this seamless relationship with a lot of people, and you, personally, have to know your leading clients and investigate the major deals. Too much is at stake and the distance is too great. You want to incentivize and trust. You've got to get people you can absolutely depend upon, and, if you see one ounce of an issue, execute and move on it as fast as possible. And “execute” often means terminate if there was a “taint.” You cannot afford to do otherwise. It's too far away and the down cost is too great to have those failures. When they hit you, they hit you at the absolute worst times, like the end of the quarter or in your end of year numbers.

                I know that I'm giving you the dire side, but you can also build a very good agent/distributor network. What you need is somebody running distribution who understands the development of agents and distributors and who has first-hand knowledge of those relationships on a global basis. If they don't, they have to know who does so that they can pierce through all of the falsehoods. You don't want to get into a situation where you've just done an agreement, then realize that the agent is marketing two competitive products. This happens. At least know in advance what the conditions are and what the performance clauses need to be for your sales.

                One last note about languages. One of the misconceptions about technology, especially distributed technology, is that it's just about translating code and translating words. Internationalization can have fundamentally different design premises to it. Some astute work is being done in the internationalization of code today, and someone on your team has to be assigned to that process if you're going to work on a global basis. There are parts of the world where how you bring up screens and the order in which you bring up menus and pop-up windows are different culturally. It has nothing to do with language. Then there are language issues, as well. We always used to do simple things. For example, when we posted something like a product brochure, our marketing team would post it up on the server for our major markets. Then we’d get a first-level translation put up with the raw text and all the raw graphics. A country marketing team in France or Italy or Japan could take it all down, move it around, refine the translation and quickly tailor it for publication in that country. That was 15 years ago. It's just using common sense and realizing that things have to be tailored for the marketplace. That's what we're able to do in the global business economy.

                In summary to all this, I would start off by saying: assume nothing. Assume absolutely nothing about working outside the US. Orient your team from the get-go before you even start. Bring the right people in. In this region, by the way, you have a number of people who have a very good understanding of international business. The systems integrator market is a classic case where you could find at least 15 or 20 people who are true experts. You've got people here who are playing international on the services side, and you've got telecom companies and people running distribution on a worldwide basis from here. Get them on your advisory board. One thing I would suggest to a startup is to get somebody on your advisory board who understands international business. They're likely a good business person to begin with, but they’ll also give you insights as to when to finally go international. Orient your management team to what life is like working out of the US. Do your homework. Understand what markets you're going to go into, in what order and what it's going to take to deal with those markets. One of the big fallacies today, in some cases, is that the Internet gives you a global business setting. Even with the Internet, it’s all about relationships, the nationalistic issues, the legal issues and a half-score more. There are now companies that specialize in taking online businesses and helping them understand the culture by country and market.

                Finally, stay very close to your markets and stay very close to your executives, then execute like a fanatic. In the US, you've got some recovery when things go bad because you're so close to it and you understand the markets. Over there you don't have this luxury of proximity, wherever “over there” is. As the CEO, you've got to stay very close to execution yourself, and your management team must get assimilated into the entire global thinking process.

                Thank you, very much. I'd like to thank the panel again and thank everybody for coming. Good luck and happy holidays.

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