Doing Business in America

A Handbook For Finnish Entrepreneurs

by William L. Paulin, Ph.D. & Victor V. Vurpillat, Ph.D., Kenneth Jacobsen, Editor in Chief with Juhani Saukkonen, Jussi Nukari & Eero Peltola

4/13/01 Draft 4.4

This is the Final Draft Remaining editing to be added in Finland

Examples for and from the Finnish software industry

Preface from Tekes

Editors Preface Purpose Of The Hand Book

To provide Finnish high tech SMEs (Small and Medium sized Enterprises) with useful information and special insights for successfully launching their businesses in the USA.

Trends In The Global Economy: Core Concepts Behind This Handbook

This is the first in a series of simple and easy to use Handbooks providing practical contacts, advice, information, techniques and processes - from a highly qualified variety of expert authors for Finnish high tech entrepreneurs on how to internationalize their business in general, and into the USA in particular. This is an extraordinarily important subject, not only to Finnish entrepreneurs and the Finnish National economy, but also to the emerging global economy. In todays economy, the high tech SME is emerging as a premier source of technological and product innovation for the world. The next stage of international economic development is the globalization of high tech SMEs, not only as a source of new industrial giants, but also as a major technological resource to the leading, large and modern, open business system, Silicon Valley-type companies. And Finland is at the forefront of providing these high tech SME resources to the world. Finland is truly a leading prototype of the New Entrepreneurial State a country that can provide innovative technological resources to the world. And so, this handbook is not about traditional management. Rather it is about new and innovative ways of doing business development in this modern and changing economic world about new and innovative ways of building and managing the globalizing SME in this New Entrepreneurial State.

Who Should Use This Handbook?

First, the handbook is written specifically for the Finnish SMEs - their investors, members of the board, CEOs, CTOs, VPs of sales and marketing, CFOs, etc. - and their supporting infrastructures universities, banks, accounting firms, consultants, etc. . . . and of course, the high tech SME entrepreneurs, themselves. In addition, the Handbook should be useful for managements of the larger, more modern, Silicon Valley-type open business system companies that are the potential beneficiaries of the High tech SMEs technological and innovative prowess.

What Will You Learn How To Do & Whom Will You Know After Reading This Handbook?
This handbook will teach you how to expand your business globally in general, and into the USA in particular, using the most effective business development process possible. Many of the right processes seem to be counter-intuitive for many Finns because business is done so differently in the USA than it is in Finland - but using them will double your chances of success and halve the time and cost to break-even. 3

And in this handbook, you will meet all of the right kinds of people that you will need to know to be successful. Here is a general outline of the practical information and advice that you will find in the handbook: The vital role of cultural differences they will make or break your effort. The most effective management processes of international business expansion. Building unique strategic approachs to sales & marketing adapting to the new world Building alliance and partnerships are vital, but different in the USA Building your practical business organization in the USA Financing and funding your business in the USA Operating And Succeeding In The USA

About the Editors: Dr. William Paulin began working with Finland over nine years ago as a visiting professor at Oulu University. His consulting practice has aided many Finnish companies to establish their business in the United States. When the Global Software Program began at Oulu University, he was the American part of the team that helped organize the program. He recruited his business associate, Dr. Victor Vurpillat to assist, who in turn invited another associate, Mr. Ken Jacobsen. Dr. Vurpillat serves on the board of numerous startup companies and is a highly experienced entrepreneur in his own right. Mr. Jacobsen has been a Silicon Valley marketing consultant for over fifteen years, specializing in mobile computing and communications. Mr. Vurpillat and Mr. Jacobsen both live in Silicon Valley and have extensive networks that provide valuable contacts for the Global Software program as well as contacts for strategic alliances. Mr. Juhani Saukkonen, Mr. Jussi Nukari and Dr. Eero Peltola form the management team of the Global Software training program. The training started in 1998 with preceding pilot project, which was a joint effort of Oulu and Jyvskyl Centres of Expertise. All together 45 Finnish companies have participated this program. Mr. Saukkonen has been responsible for this training. Among other things Mr. Saukkonen has been a major player in developing the Oulu Software Industry Cluster and organizing many pioneering support activities in order to help the cluster and its companies to grow in global market place. Dr. Peltola has a long career in information technology research and development, especially in the field of software. He has acted as an associate professor in computer science at the University of Helsinki and had chairs of computer science at the University of Jyvskyl. The most recent of these was focused on software business - the first one of this type in Finland. Dr. Peltola has also worked as the director of the Laboratory for Information Processing and as a Deputy Director of the Division of Information Technology at the Technical Research Centre of Finland (VTT). He is a cofounder of some new companies. Presently Dr Peltola works as a software business consultant and as a board member in some software and other companies.

Mr. Nukari is responsible for this Book project. He was also responsible for developing the "Growth Strategy for Finnish Software Industry", which was published in 1999. This national strategy was developed in cooperation with major Finnish ICT growth centers. Nukari is working as a director of ICT sector in the Jyvskyl Science Park, where he has coached the business development of numerous startups. He is also a board member of some growth companies. All the Finnish editors are also members of the advisory board of the SPIN (Software Product INdustry) Technology Program organized by Tekes.

Table of Contents
PREFACE FROM TEKKES .................................................................................................................... 2 EDITORS PREFACE ............................................................................................................................ 3 FORWARD BY THE PRESIDENT OF NOKIA: ......................................................................................... 9 Pekka Ala-Pietil ................................................................................................................. 9 INTRODUCTION: .............................................................................................................................. 11 ....................................................................................................................... 13 THE GLOBAL ECONOMY: THE OPPORTUNITY ........................................................................... 13 Introduction by Jussi Nukari ............................................................................................. 13 CHAPTER 1 ...................................................................................................................................... 14 The New Global Economy ......................................................................................................... 14 By Dr. Bill Paulin, Owen Greeson and Ken Jacobsen ....................................................... 14 CHAPTER 2................................................................................................................................... 17 Going to America with what? ................................................................................................. 17 By Kenneth Jacobsen ......................................................................................................... 17 CHAPTER 3 ...................................................................................................................................... 26 Global Markets .......................................................................................................................... 26 By Jussi Nukari .................................................................................................................. 26 .................................................................................................................... 30 CHALLENGES AND HURDLES TO GLOBALIZATION .......................................................................... 30 Introduction by Jussi Nukari ............................................................................................. 30 CHAPTER 4 ...................................................................................................................................... 32 Developing A USA Success Mentality ................................................................................... 32 By William L. Paulin, Ph.D. .............................................................................................. 32 CHAPTER 5................................................................................................................................... 44 Why Cultural Differences Could Determine Your Success or Failure ...................................... 44 By James L. Creighton, Ph.D............................................................................................. 44 CHAPTER 6 ...................................................................................................................................... 49 Understanding Cultural Differences.......................................................................................... 49 By Kenneth Pasternak ........................................................................................................ 49

PART I

PART II

PART III ................................................................................................................. 53

PLANNING USA BUSINESS MODEL........................................................................................ 53 Introduction by Eero Peltola .............................................................................................. 53 CHAPTER 7 ...................................................................................................................................... 55 The Mechanics of Success in the USA ....................................................................................... 55 By Victor Vurpillat and Ken Jacobsen .............................................................................. 55 CHAPTER 8 ...................................................................................................................................... 67 Purpose and Construction of Business Plans ............................................................................ 67 By: Arthur Lipper III, ........................................................................................................ 67 CHAPTER 9 ...................................................................................................................................... 69 Business Plan Process ............................................................................................................... 69 By PricewaterhouseCoopers LLP ...................................................................................... 69 CHAPTER 10................................................................................................................................. 75 Processes of Thinking Outside The Box: The Marketers Traps ........................................... 75 By Jack Peregrim ............................................................................................................... 75 6

CHAPTER 11................................................................................................................................. 78 A Feature, Product, Business, or a Totally New Catagory? ..................................................... 78 By Dr. Charles Fishal ......................................................................................................... 78 .................................................................................................................. 83 MARKETING AND SALES IN AMERICA ............................................................................................. 83 INTRODUCTIONBY JUHANI SAUKKONEN (JUSSI &EERO) ................................................................. 83 CHAPTER 12................................................................................................................................. 85 Selling vs. Marketing vs. MARCOM .......................................................................................... 85 By Owen Greeson .............................................................................................................. 85 CHAPTER 13................................................................................................................................. 87 Marketing in the US ................................................................................................................... 87 By Jeff Holmes .................................................................................................................. 87 CHAPTER 14 .................................................................................................................................. 101 What Is Public Relations (PR) and How Does It Relate To Marketing? ................................. 101 By Jay Shotwell ............................................................................................................... 101 CHAPTER 15 .................................................................................................................................. 104 Alternative USA Entry Strategies & Tactics Product-Market Segmentation .......................... 104 By Owen Greeson ............................................................................................................ 104 CHAPTER 16 .................................................................................................................................. 107 Sales Channels in the American Market .................................................................................. 107 By Ken Jacobsen .............................................................................................................. 107 ................................................................................................................ 112 FINANCING THE PROCESS .................................................................................................. 112 INTRODUCTION BY JUHANI SAUKKONEN (JUSSI &EERO) .............................................................. 112 CHAPTER 17 .................................................................................................................................. 114 Conquering the Chicken and Egg Problem ............................................................................. 114 By William Cardwell ....................................................................................................... 114 CHAPTER 18 .................................................................................................................................. 117 Funding the USA Entry ............................................................................................................ 117 By Wally Eater ................................................................................................................. 117 CHAPTER 19 .................................................................................................................................. 121 Business Plan Process ............................................................................................................. 121 By PricewaterhouseCoopers LLP .................................................................................... 121 CHAPTER 20 .................................................................................................................................. 127 IPO in Finland VS. IPO in The USA........................................................................................ 127 By Jarkko Viherivaara.................................................................................................... 127 CHAPTER 21 .................................................................................................................................. 131 How the Investment Community Evaluates Your Company .................................................... 131 By Victor Vurpillat .......................................................................................................... 131 CHAPTER 22 .................................................................................................................................. 133 Startup Company Valuation Model ......................................................................................... 133 By Mario Rosati ............................................................................................................... 133 CHAPTER 23............................................................................................................................... 138 Three Keys to Obtaining Venture Capital ............................................................................... 138 By PricewaterhouseCoopers LLP .................................................................................... 138 CHAPTER 24 .................................................................................................................................. 145 Banking on America................................................................................................................. 145 7

PART IV

PART V:

By Larry Lopez ................................................................................................................ 145 ...................................................................................................................... 151 Building and Managing a US Company .................................................................................. 151 INTRODUCTION BY JUSSI NUKARI ................................................................................................. 151 CHAPTER 25 .................................................................................................................................. 153 Management of Finnish-Owned American Businesses ............................................................ 153 By: Arthur Lipper III, ...................................................................................................... 153 CHAPTER 26............................................................................................................................... 157 Choosing Your Start-Up Team................................................................................................. 157 By Sharon C. Ballard ....................................................................................................... 157 CHAPTER 27............................................................................................................................... 167 Legal Considerations ............................................................................................................... 167 By William D. Evers, Esq. ............................................................................................... 167 CHAPTER 28 .................................................................................................................................. 185 Where to locate? ...................................................................................................................... 185 By Henri Grundsten ......................................................................................................... 185 CHAPTER 29 .................................................................................................................................. 190 US Immigration Law ................................................................................................................ 190 By James M. Mei, Esq. .................................................................................................... 190 CHAPTER 30............................................................................................................................... 196 Building a Team in America .................................................................................................... 196 By Pat Zilliacus ................................................................................................................ 196 CHAPTER 31 .................................................................................................................................. 203 Sharing The Wealth.................................................................................................................. 203 By William L. Paulin ....................................................................................................... 203 CHAPTER 32 .................................................................................................................................. 209 Ten Tips for Doing Business .................................................................................................... 209 in the United States .................................................................................................................. 209 By: Nina E. Andersson .................................................................................................... 209 ................................................................................................................... 215 Lessons Learned...................................................................................................................... 215 Introduction by Eero Peltola ............................................................................................ 215 CHAPTER 33 .................................................................................................................................. 216 Lessons Learned: How to Avoid Common Mistakes ............................................................. 216 By: John D. Saunders ...................................................................................................... 216 CHAPTER 34 .................................................................................................................................. 220 Action Research: The Method For Success ............................................................................. 220 By William L. Paulin, Ph.D. ............................................................................................ 220 CHAPTER 35 .................................................................................................................................. 234 The Finnish Entrepreneurs of Silicon Valley ........................................................................... 234 F-SECURE / CHRIS VARGAS ...................................................................................... 234 Solid Information Technology: JUSSI HARVELA ........................................................ 238 MIKAEL ROOS: SCANDINAVIAN SOFTLINE TECHNOLOGY ............................ 243

Part VI

Part VII

Forward by the President of Nokia:

Pekka Ala-Pietil
President Nokia Toimitusjohtaja, Nokia There is little doubt that Finland has produced, and will continue to produce, excellent technology and products. Yet it still remains hard for many companies to break into the global markets. Becoming a global company is more than just setting up an office or an R&D center in the US. Several crucial elements are necessary for a company to step outside of Finland and take a place on the global stage. First, it is important to have a strong corporate vision. A memorable, well-crafted strategic intent, shared by all your employees, will focus each and every daily task on meeting your ultimate objective, whatever that may be. Without a clearly articulated and visionary idea of where you want to be, the journey becomes much harder. Invest the necessary time and effort to think seriously about your business and what you ultimately want to achieve. The second element is obvious, but cannot be overemphasized: you must have a good product. Global markets demand that your product and/or technology is world class. Success in a local market does not translate into success in the global market, if you are not able to prove to customers the competitiveness of your product. Next, good products need good marketing. You need a clear understanding of your customers and the markets in which you want to operate. Doing your homework well will ultimately pay dividends in your ability to anticipate where customer needs and the markets are headed and how best to capitalize on those developments. In the Internet age, speed is often promoted as the deciding factor between those companies that succeed and those that don't. However, speed itself is not enough. Your timing in the market and your ability to follow the rhythm of market changes are just as important. A dynamic and flexible strategy allows you to make rapid decisions based on the changing day to day realities of the global marketplace. Finally, be an entrepreneur. While this is an easy statement to make, what does it actually mean? It means taking risks. It means being open to new opportunities and a commitment to continuous learning. It means feeling personally responsible for the success or failure of your business and having a passion to win. Translating this personal passion to a corporate culture of teamwork and persistence will help you succeed in your business. It is not easy to create a winning team but developing a strong entrepreneurial culture is a big step to the right direction. While these elements are not in themselves a recipe for global success, they are definitely key parts of any company's plan to expand on a global level. While the global market is competitive and often fierce, the rewards are many. Finnish companies are now going global more than ever before. Don't be afraid to join the team. Pekka Ala-Pietil

Mr Pekka Ala-Pietil President and Member of the Group Executive Board, Nokia Corporation Pekka Juhani Ala-Pietil was born on 13 January 1957 in Asikkala, Finland. Pekka Ala-Pietil holds a Master of Science de-gree in economics and a D. Tech. h.c. Degree. Pekka Ala-Pietil originally joined Nokia Data, back in 1984, moving on to the position of Business Development Manager Americas for Nokia Mobile Phones in 1988. In 1990, he became Vice President for Strategic Planning of Nokia Mobile Phones. Between 1991 and 1992, Mr Ala-Pietil, was made Vice President, Product Marketing after which he became President of Nokia Mobile Phones, a position he held until 1998. In July 1998, Mr Ala-Pietil became President of the newly formed Nokia Communications Products unit as well as becoming Executive Vice President and Deputy for President and CEO Jorma Ollila of Nokia Group. He was made President of Nokia Group in March 1999.

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Introduction:
The wisdom and experience of 100 years is contained in the following pages. Not by a single Finish individual or a single Finland company striving for success in the United States, but the story of those who tried and succeeded. You will do well to heed the advise of those who have gone before you and you will benefit from the resources they have identified in these pages. The US is not a homogeneous country in ethnicity , culture or ideology. The common shared value is that merit is the primary arbiter for success. However, having the Best product is not the only or even main component of merit or success. Contrary to popular belief a US customer will not beat a path to your door if you build a better mouse trap. The three most import keys to success in America is are Marketing, Marketing and Marketing. Just as in Real Estate its they are Location, Location and Location. It may seem a little silly to repeat the same theme over and over but failure is more often than not driven by a lack of understanding of the demands of the market and the channels of distribution. A company may have the greatest product since sliced bread but if you they have to educate the market to your products need and usefulnessabout the need their product fills and their products usefulness you they will fail for lack of time and money. There is not enough money ever available to educate the US market, its too big. The successful company will have a Pain Killer product for an identified large market need, (Vitamins are not killer apps).To be successful a company must have a Pain Killer product that fills an identified large market need. Vitamins are not killer apps! Even after you have identified and created your product there is a tortuous mine file field of market entry barriers to overcome. The good news is that Finlands products are truly world class and can compete with any US company if you know the rules of the game and the have established your network of friends and supporters in the US. Geoffrey Moore (Crossing the Chasm) describes in detail the journey for a successful penetration of the high tech market place. While access to US markets is a feature of this book we also provide additional incite into the process of raising the necessary Venture Capital to expand and grow your business globally. VCs in the US demand, and usually get, deals that allow them a return of ten times their initial investment back in three to five years. It may sound greedy but most of their investments fail. (Some estimate between 60% and 90% failure rates). After you have met and given your Elevator Speech to a VC he will no doubt ask you fo r an Executive summary Summary if you have excited him. If he is still interested, the next thing he will do is look at your Business plan Plan (remember, the average VC is getting 400 to 500 business plans a month, your elevator speech really has to be goodso your elevator speech has to be very, very good!). He will then try to determine if you have an unfair advantage in your chosen Market. The second thing he will do is look at the management team to see if they have done this kind of 11

deal before, The third thing he will do is look at the financial projections, which he wont believe anyway. Assuming you pass all the smell testssmell tests he will then hand you a large bag of money in return for at least a third or more of your company, all the while recognizing that you have probably underestimated every thing and will at some point need more money. and thenThen he will take another third of your company. In the end the company will change direction from what it started out to do and wind up doing something entirely different. At that point the new management team will execute the new plan.. --- So much for the omniscience of Venture Capitalists. However that will only happen it you fail to digest all of the following information.

Victor V Vurpillat Ken Jacobsen Bill Paulin

12

PART I
The Global Economy: The Opportunity

Introduction by Jussi Nukari

In this part there are three articles, of which William L. Paulin et al write a brief introduction of the ideas behind the New Global Economy. They agree with Peter Druckers opinion, that There is only one economy and one market. And America is definitely the largest market in the world and it has a greater hunger for high technology products than ever before. Kenneth Jacobsen discusses the paradigm shifts of the software industry. He emphasizes, that although we have moved from mainframe to mini and then to PC computers and now we are moving to PDAs with field automation applications, and there is no end in sight. The next shift is automating the home and after that-- automating the person. These paradigm shifts continually create new winners and opportunities. While one winner may stand out in each paradigm, many other companies have become very wealthy and successful in their shadow. There will always be emerging business segments like ERP, educational or gaming software. There will always be new players that take advantage of the disruptive technologies characteristic of paradigm shifts. Jussi Nukari describes the worldwide software market by regions from the European viewpoint. Although the big bang disrupted many Internet companies, the software industry continues to prosper. The business models are changing at ever accelerating speed and there are still lots of very fast growing sectors. From Finnish point of view, field automations wireless applications are growing with the average growth rate of more than 100 % per year offering excellent new business opportunities for Finnish products and companies.

The business environment of the software industry worldwide has changed dramatically over years. In the near future the only thing certain is the continuously accelerating change. New disruptive innovations are coming and business models are emerging rapidly. It is important to realize, that the applications do not change that much from paradigm to paradigm. It is the targeted user, the host domain and the access terminal, that evolve. We still have word processing. The user, the device used perform the word processing and the place where the document is stored are the only things that change. These items are the packaging, and not the content. Currently, Finland is like a piloting laboratory for many emerging mobile products and services. These technologies are candidates to become major killer applications in the coming Mobile Society. Because of this, some Finnish entrepreneurs will have an unfair technological advantage in certain sectors of the Mobile Society. These companies should be organized as global corporations from their beginning. As Nokia has shown, it is possible to develop world market leader products based on Finnish technology. With such advanced technological companies, Finland is sharing its contribution for the benefit of the world.

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Chapter 1

The New Global Economy

By Dr. Bill Paulin, Owen Greeson and Ken Jacobsen
Dr. Michio Kaku is an internationally recognized authority in theoretical physics and also the environment. Now you may wonder what could an expert in theoretical physics contribute to this book. In the forward for Hyperspace And A Theory For Everything Dr. Kaku relates as a child he viewed fish in a Japanese Tea Garden. Here is an excerpt from that forward. When I was a child, I used to visit the Japanese Tea Garden in San Francisco. I would spend hours fascinated by the carp, who lived in a very shallow pond just inches beneath the lily pads, just beneath my fingers, totally oblivious to the universe above them. I would ask myself a question only a child could ask: what would it be like to be a carp? What a strange world it would be! I imagined that the pond would be an entire universe, one that is two-dimensional in space. The carp would only be able to swim forwards and backwards, and left and right. But I imagined that the concept of "up", beyond the lily pads, would be totally alien to them. Any carp scientist daring to talk about "hyperspace", i.e. the third dimension "above" the pond, would immediately be labeled a crank. An analogy can be made that the small nation of Finland is like the pond described above. For many years Finns have viewed Finland as the only market just as the fish considered the pond their total universe. While historically a great trading nation, the Finnish economy was based upon its abundance of natural resources such as lumber and rubber. If Finland were manufacturing conventional consumable goods there would be little need to leave the pond. To compete with other less industrialized nations that have cheaper labor costs on a global scale would be very difficult. Finnish humility and pragmatism would not envision their country to be a world technology leader. But perhaps those characteristics of Finland long dark and cold winters, that have made it seem inhospitable, have also enabled great software and ingenious engineering. Because Finland has state of the art technology in wireless and other high tech areas it is now time to leave the metaphorical pond mentioned earlier and cross the Atlantic pond to America. Finland is a world class technology leader and needs to assert itself. America is the largest market in the world. Japan knew this fifty years ago when its industry and factories were in ruin. Yet still they came to America , first with laughable items that were poorly made and broke within minutes of purchasing them. Today we have countless examples of superior Japanese technology and a balance of trade very favorable to the nation of Japan. Finland can easily emulate the Japanese model. America has a greater hunger for high tech products than ever before. Currently Silicon Valley is stumbling and the time is ripe for Finland to fill the void. 14

Wireless service providers need new streams of revenue that Finnish technology can provide and their customers will readily embrace. Finland has other high tech offerings in addition to wireless technology and should be exported globally also. There are many reasons to own a business. Not all people who start a business want it to grow beyond their ability to manage or participate on a hands-on basis. Others envision the creation of global businesses and some modicum of wealth and success. At a certain level, the art of running and growing a business becomes more important than the vision that initiated the business. For some, the start of a business includes an exit strategy for liquidating ones interest in the business. If you wish to grow a large business, and you live in a small market, you must globalize to be successful. The globalization process is risky and has historically been fraught with failure. There are many reasons for this. This book was designed to address some of these reasons. Globalization means that you open offices in other countries and empower these offices to conduct business on your behalf. It necessitates giving up control to some extent. You cannot be two places at once. You cannot work twenty-four hours a day. You should not put impediments upon your remote outposts that they can only conduct business the way it is done in your local offices. If you violate these observations, you will most certainly fail. Globalization does not require that you enter the US market first. In fact, the first moves to globalization may be to other Scandinavian countries or Northern Europe. The American market may be easier, however, than many Asian markets where there are more severe language barriers. However, because the American market is huge and has numerous competitors many of which have substantial resources, does that mean that there is no chance of success? Does that mean that you are doomed to failure? Absolutely NOT! In the early 1990s, the Finnish Ministry of Trade and others estimated that the typical systematic process for Finn firms to enter the USA took 24 to 36 months and costs $400,000 to $600,000 - 1/2 for market assessment/strategy development and 1/2 for non-reoccurring set-up/launch. They achieved an extremely poor success rate of 10% to 15% despite these companies excellent products and high potential. This book is a compilation of resources to help you become successful in your endeavors to grow your company by entering the American market. This, in fact, is a perfect time to be changing your business and equipping it to become a global entity. As the climate and dynamics of business continue to evolve, it opens more opportunities for aggressive businesses to supplant the current market leaders. In the new world economy, starting and thriving in Finland may be a better prelude to success in the future than being a legacy constrained American corporation. It seems that the economic world order continues to change entreprenuerizing and globalizing at an ever accelerating pace - with no signs of slackening. And this change is forcing ever more extreme changes to fundamental business and management paradigms around the world how we believe businesses should be organized and how we believe managers should think and act. There is indisputably, A trend toward smaller, independent and shorter-lived business organizations. 15

A trend toward globalization of markets and business organization of all sizes.

Recently, Peter Drucker said, The unique 20th-century creation, the corporation, is not going to survive in the 21st-century (NY Times, Nov. 14, 1999). While we are not quite ready to hold the funeral yet organizations seem to have remarkable survival instincts - the trend toward more numerous, independent, dynamic and short-lived high-tech organizations and jobs is clearly accelerating at a dramatic pace. Secondly, Dr. Drucker also said, the truly revolutionary impact of the Information Revolution is just beginning to be felt . . . In the mental geography of e-commerce, distance has been eliminated . . . There is only one economy and one market (NY Times, Nov. 17, 1999). Once again, while we are not quite ready to hold the one-world-market birthday party as yet cultural differences still seem to us to play an extraordinary, mitigating role the trend toward global markets and businesses is also accelerating at a dramatic pace. Thus this book is about how to do business in this globally emerging, rapidly changing and uncertain business environment, whether you are in a huge corporation or an incipient start-up . . . and whether you are in Finland or Israel, Germany or the UK or Japan or Russia or . . . the USA. Our focus is upon Finnish companies that are considering whether they should open business in the United States. While the specific answers and recommendations vary depending upon the situation, the articles contained herein can be translated into any country. The dynamics will be analogous.

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CHAPTER 2

Going to America with what?

By Kenneth Jacobsen
By Ken Jacobsen Connexus
Most European companies that decide to migrate their technology products to the American market receive a tremendous shock in the execution of this decision. Marketing technology in Europe (and especially in Northern Europe) is significantly more straightforward and rational than it is in the American economy. Most of the marketing and sales programs in Europe are considerably more targeted and homogeneous. The sheer size and diversity of the American market often is makes this task overwhelming. Consider that in 1999 VarBusiness Magazine reported1 that there were 127,222 separate companies2 involved in reselling, supporting or providing consulting services to the American IT market place. The vast majority (nearly 75%) of these companies is are part of the "Value Added channel" (what?) while the remaining quarter represent traditional manufacturing retail, retail and distribution companies.3 VarBusiness Magazine reported in the December 2000 issue that there are 93,500 Value Added reselling firms in the US, and one-third of these deploy or support wireless technology solutions. WhileWhile IT revenues are still growing, solving thise Gordian's knotpuzzle of how and through whom to sell a high tech product in America (What knot?)is a daunting task. Yes, there is money to be made but how does one untangle the intricate maze of distribution?

The problem is compounded with the reality that there are few technology products in Europe without existing alternatives in the United States. Those few (European) sole-source solutions that may exist probably do not have significant markets in the United States. Taking technology the opposite direction (to Europe from America) suffers the same fate. For example, in the past some American companies noted the lack of spell-check programs in Northern Europe. However, they miscalculated the market demand since misspelling is largely a problem in Englishin English-more than in the Scandinavian or Germanic languages.

1 2

March 20, 2000 Located in 259,893 separate sites (offices). 3 The value added channel are usually non-storefront resale organizations that are often consultant companies, vertical market sales organizations (e.g. they sell only to restaurants etc.) or service providers. 17

So, how does a company "break into" the American market.market? The answer is complex and possibly more of an art than a science. But a rational analysis of the opportunity reveals a number of critical dynamics that can contribute to the potential success of this effort.

Not the least of these considerations is the newness (state of the Art) of the product. My reference is not to how recently the product was completed, but to whether the product has been packaged for the active and high growth domains of automation.

18

(productivity enhancement).

Paradigm Shifts Create New Opportunities

Appliances 2000's Home

Domains of Automation

1 billion PDA's

1990's Field Automation 100 million PC's 1980's O ffice Automation

10 million Mini

1970's Science/Engineering 1 million Mainframe 1960's Finance Cobol $50,000 Fortran $5,000 Note taking Communications PIM $50

? Fig. 1 Every ten years, or so, we have experienced a radical paradigm shift in computer technology. Each shift has been characterized by three phases: These new things are fads.... Hoola hoops.... Real men use mainframes. OLD IN NEW: Old paradigm applications put into emerging technologies NEW PARADIGM: New applications, form factors, in new established technologies DENIAL:

Word Processing Spread sheets $500

PHASE 0 PHASE I PHASE II

In the 60s we automated finance because they paid the bills. COBOL was the primary software, which sold for about $50,000 per module. During its reign, about one million mainframes were sold to deploy this paradigm of computing.4 Appliances The paradigm is characterized by centralized 2000's administration of software and applications. 1 billion Home Domains of Automation The computer scientist/system analyst was PDA's the magician who controlled the mysterious 1990's boxes in dark rooms. Gangs of keypunch Field Automation 100 million operators performed endless data entry tasks. PC's The winner was IBM. They won because they
10 million Mini 1980's O ffice Automation

1970's

Science/Engineering Sales of Mainframes, and mini computers continue. Over the decades, mainframe installations 1 million Mainframe have grown to the tens of millions, and mini computers to nearly 100 million. 1960's Finance Cobol $50,000 Fortran $5,000 Note taking Communications PIM $50

Word Processing Spread sheets $500

19

provided the essential element for success-- the software (OS-1). Fig. 1 In the 70s we automated science and engineering. They had some tough problems to solve. Fortran became the primary software, and solutions sold for about $5,000 per module. Automation was decentralized. Small companies and teams could afford the minicomputer. Programmers proliferated. About tenTens of millions minicomputerss were sold in its reign, though sales continue to be robust. The winner was Digital Equipment (DEC). They won because of UNIX. Office Automation was the goal of the PC revolution. Software moved to shrink wrapped applications costing $500. Even secretaries now had their own computer. Hundreds of millions of PCs have been sold embody this paradigm. The winner was Microsoft. They owned Windows. We are now in the midst of the field automation paradigm. Computers have mobilized. They are taking on new form factors. Instead of PCs we have PDAs and Personal Communicators. Software is selling now for $50 per module, and by the time the paradigm is mature, a billion units will be installed.5 We have entered Phase II of a paradigm shift into field automation. In the beginning of this shift, the HP-95LX was bundled with Lotus 1-2-3, the penultimate application of the last paradigm desktop computers. By 1995, the Palm Pilot and Smart cell phones had defined some of the basic motifs for field automation and products are starting to proliferate. There are a number of analogous patterns emerging that can guide us as we prepare for this future. Palm Pilot, the Symbian Quartz, and the Nokia Communicator seem to be the emerging winners. We have also begun the next phase of automation, home automation. The home in this case is a broader concept than the physical house. It refers to your personal space. The infrastructure will become automated and customized for the individual. Office automation and even field automation is still an enterprise concept. Home automation is personal. Devices will not be computers any more. They will be appliances. Tens of billions will be consumed. Software will be $5 per titleapplication. The players are still lining up. Microsoft is making a big play to dominate this segment through interactive television technologies. Each paradigm is based upon different characteristics. The original Main Frame paradigm was remote. Computers were hidden in arcane rooms, visible only through terminals. Only the Wizard of Oz knew what was behind the curtain. The Mini computer revolution took the computer out of the hidden room, but it was still only the tool of the EXPERT. The Office Automation paradigm democratized access to the technology, but it was tethered and stationary. Field automation has untethered the computer. It is now mobile. In automating the home, computers will become diffused into the environment. They will be ubiquitous. What is the final domain of computerization? Automating the person! That will not begin to occur until 2010-2020 by our scenario. Paradigm Dynamics We notice many dynamics about these shifts that create new winners and opportunities every week. And while one winner may stand out in each paradigm, many other companies have become very
5 Formatted

AT&T promotes this forecast since smart telephones are included in this category and they believe that by 2010 such devices will have displaced Plain Old Telephones Services (POTS). 20

wealthy and successful in their shadow. Thus, IBM shareds their success with Unisys and Fujitsu, along with software vendors such as MSAComputer Associates and Oracle. DEC shares the limelight with Prime, Honeywell and Seimens. . Microsoft has enabled the success of Novell and Cisco. First, wFirst, we note that each paradigm shift has included reduction in the average price of the significant software by an order of magnitude. Secondly, wWe note that many of the market leaders from the previous paradigms fail to make the transition. Thus Wang, who should have owned the PC word processing market, is now bankrupt. They could not make the transition from a $5,000 product to a $500 product. They had blinders regarding the new paradigm and they missed the new market. Pricing was a key cause of their failure. Of course, the MSAsIBMs, Computer Associates and Cullinets are still strong and viable companies, but their growth potential is greatly limited. Companies of the old paradigm grow with the industry ( 10% CAGR) while companies developing new paradigm products have phenomenal growth rates. Many old paradigm companies, such as DEC end up acquired by winners of the newer paradigms, e.g. Compaq. Secondly Finally, we should note that most of the winners in the PC Revolution were startups. Likewise, in this any new paradigm, we should expect a plethora of new companies that will grow to become major players by the end of the decade. These new winners will be those companies who first create applications and solutions utilizing the new paradigm. The new winners will not be companies who simply translate old systems onto the emerging technologies, but those that truly innovate. The establishment owns the old paradigm. There is no more room for a new word processor or spreadsheet. Microsoft, in their brief to the US Courts regarding the Antitrust suit filed by the US Government, 6 noted in their defense against the claim that they have a monopoly in the software industry, that whenever a new category of software is developed, the first publisher of that product usually maintains dominance. While acknowledging that Quicken (which was NOT the first personal accounting application) is an exception, Microsoft contends that it has no monopoly on invention. Therefore, any publisher with a new category (i.e. paradigm) of software can compete in the market place. Of course, the new winners can be old companies, depending upon their ability to adapt to the new opportunities. Apple is an example of a company who has tried to catch the new vision. They attempted a major restructuring of their products and business models in preparation for the future. Their failure is not from a lack of vision, but from a corporate inability to adapt to disruptive technologies. They discarded the Apple Newton, which would have been regarded as a brilliant success if it were a startup company, because corporately this pioneering PDA drained too many resources for too small of a return on their investment.
7

Each new paradigm of computerization has created new market dynamics and created new market channels. Each of the five paradigms has introduced new users to the benefits and productivity of computerization. New players take advantage of the disruptive technologies that accompany the paradigm shift. New users demand new levels of performance and applications. Each paradigm is based upon different characteristics. The original Main Frame paradigm was remote. Computers were hidden in arcane rooms, visible only through terminals. Only the Wizard of Oz knew what was behind the curtain. The Mini computer revolution took the computer out of
6 7

Civil Action No. 98-1232 (TPJ)See Chapter XX, See Chapter XX, 21

the hidden room, but it was still only the tool of the EXPERT. The Office Automation paradigm democratized access to the technology, but it was tethered and stationary. Field automation has untethered the computer. It is now mobile. In automating the home, computers will become diffused into the environment. They will be ubiquitous. The final stage of computerization? Automating the person! That will not begin to occur until 2010-2020 by our scenario.The Architecture of Automation Besides domains of automation, another paradigm of computing that must be considered is the architecture of automation. The industry vacillates between centralized architectures and decentralized architectures. The mainframe was centralized. The minicomputer was decentralized. The PC was centralized, and the PDA decentralized. Home automation will predictably return to centralized computer architecture. By centralized, we mean that there is a single point of data synthesis. The mainframe with terminals still collected data into a central processing point. Minicomputers distributed the processing into multiple sub-processes. While the PC is arguably a smart terminal in a distributed environment, Windows has been a single-user, single-computer operating environment, making its dominant architecture centralized. Networking has facilitated data sharing (communications), but not multi-user applications. Field automation demands data synchronization. Data synchronization is an evolutionary development of decentralized computing. The appropriate environment for such synthesizing architecture is not Microsoft Windows, but its major competing operating systemthe Internet. Thus the data for productivity is available to the user while mobile, independent of the specific CPU or host-operating environment. Wisely, Microsoft is bifurcating its strategy by developing its operating systems into two evolving domains: Office Automation and Field Automation. In the first case Windows 2000 is decentralized to model Unixits most established competitor. This supports the continued evolution of increasingly sophisticated Office Automation applications. In the second case, Windows ME is more Web centric to support decentralized Internet synchronization. The upshot of these changes suggests that the software industry is undergoing a radical paradigm shift. Predictions and forecasts are therefore vulnerable, other than to predict that there is an opening for new winners and new opportunities.

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At the beginning of any new paradigm, it is often difficult to identify the real components of the future paradigm from the false starts. In the desktop revolution, CP/M was a necessary, but false, start for the ultimate typical product. The initial products were modeled after minicomputers with S-100 bus and plug-in cards. Ultimately, the real paradigm was a single board system with a Winchester drive and bit mapped color graphics with a WIMPY8 interface. . What is the essence of the field automation paradigm? Its perimeters are still emerging, but some likely components are maturing at this point. It will be mobile; it will be wireless. It is likely to be content oriented rather than application oriented. That is, it may be focused more on the data being used than the software application that creates the data. Above all, it will be different from todays desktop computer.

An acronym for Window, Icon, Menu, Pointer 22

True to the dynamics of a paradigm shift, those companies and the technologies that won the desktop paradigm, consider the new paradigm to be their domain. Many strides have been made in the maturation of the desktop paradigm: Strides that have left an indelible mark on user expectations and usage models. However, history suggests that the new paradigm will create new software and new applications, brought to the market by new winners. Enabling this transition are many technologies. The Internet with its distributed kernel/scripting languages such as Java offer to become the real alternative to Microsoft's dominion over the operating systems world. Symbian and Palm OS may offer viable alternatives operating systems for mobile devices. Together with Linux, it is possible to envision a future where Microsoft no longer dominates technology with mediocrity. Microsoft's concern about legacy with Win CE may well be its undoing. Paradigm Shifts as a Disruptive Event Forecasting techniques have matured over the years. The elaborate calculations render adequate results in mature industries providing that the assumptions underlying the formulas are correct. During a paradigm shift, all bets are off. A paradigm shift truly represents a disruptive event. When Xerox invented the copy machine, it was a disruptive technology. It caused a primary change in the way business was conducted. It totally disrupted the mimeograph and carbon paper industries (to over simplify). The inventors at Xerox who were asked to forecast supplies for the new copier could only base their calculations on the number of sheets of carbon paper that were sold in previous years. Needless to say, they were off by orders of magnitude. The Word Processor was a disruptive technology to the typewriter. The Spreadsheet was disruptive to the calculator. Often a disruption is so complete as to eventually close down entire companies. Factories that made vacuum tubes closed down while the radio manufacturer simply used a different part a transistor. For the radio manufacturer, the invention of the transistor was not disruptive-- it was evolutionary. Often, new technologies are evolutionary, and not disruptive. The same companies that produce analog televisions will produce digital televisions. No one will be put out of work because of this technology shift. It is relatively simple to forecast evolutionary products. Interactive television, however, may be disruptive. Interactive television (in the Home Automation domain) may disrupt the desktop computer industry. It will definitely disrupt the software industry, which will have to write applications for totally different platforms with radically different I/O environments. It may also disrupt the telecommunications industry. Your local television broadcasterand not the telephone company may bring video conferencing to you. In the last paradigm (Office Automation), there would have no basis to predict the number of copies of the various word processing programs that would be sold based upon the number of turn-key word processors or typewriters that had been sold in previous periods of time. In that case, it turned out that the number of users who now have access to a word processing application on their computer is greater than the sum of the extrapolated forecasts for turnkey word processors and typewriters COMBINED. If our analysis of the impending paradigm shift is correct, we should expect that many of the published forecasts (especially for software) are off base. Most of the forecasts for software are 23

based upon the assumptions that the existing channels will continue and though their market shares may shift, the status quo will prevail. This does not factor in the new channels that will emerge uniquely to address the new categories of solutions. In the 1970 s one could not predict the advent of Computerland. In the 1980s one could not predict the advent of the Superstore. While we see the Internet at the end of the 1990s, we cannot adequately predict its impact on software distribution over the next five years: Nor can we foresee new channels that may emerge. We can see a few trends whose impact can only be guessed. We can see that packaged software on retail shelves will diminish over the next decade. We can see that ASP (Application Service Provider) models for renting or leasing software are increasing in popularity. We note the decrease in retail pricing to the $10.00 to $50.00 level for mass merchandized products. Finally we note the increased importance of synchronization features in all applications. Over a year ago9 Scott McNeally, CEO of Sun Microsystems, forecasted a future where consumers won't care about software, but only services. "There is no software industry (in the future) and there should not be one, It is certain that the industry will not exist, as we know it today. New Product or New Packaging? Each new paradigm of computerization has created new market dynamics and created new market channels. Each of the five paradigms has introduced new users to the benefits and productivity of computerization. New players take advantage of the disruptive technologies that accompany the paradigm shift. New users demand new levels of performance and applications.
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This analysis does not mean that only products created for the new paradigm will be successful. As noted earlier, mainframes and mini computers are still being sold today and desktops will be around forever. This analysis does suggest that prior to bringing a product to the American market, the creators should package their product with a focus upon how it relates to these emerging paradigms. This may entail little more than adding an Internet interface, or support of HTML. It may involve support remote data access from mobile devices, or even a re-write in Java to support ASP implementations. The specifics will vary from product to product. It is important to realize that the applications do not change that much from paradigm to paradigm. It is only the targeted user, the host domain and the access terminal that evolve. We survived the shift to office automation even when we allowed salesmen to have access to a computer (Heaven forbid!). It is very likely that we will survive the next shifts when grandmothers, grandfathers and kindergartners are automated. Even if aif a product is not directly targeted towards this new audience (grandparents), the, the terminals that will interface with your products will be designed for their use. Packaging for the future helps to assure a successful launch in the American market. What to Expect? Forecasting a New Paradigm The professional forecasts for high tech products (including hardware and software) are generally based upon linear projections, which depending upon the algorithm, yield reasonable numbers. Without a history this method does not work to project market demand for a new category of product.
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November 17, 1999 24

Forecasting in the consumer electronics industry has often taken a different approach. There, forecasting is often based upon market penetration models. Market penetration curves for historical product category launches are used as analogies for new product launches. Critical data points are such factors as how long it takes for a new technology to penetrate 10 million households, and what percentage of the total households have access to a given technology. The answers focus on when will certain penetrations occur for a given technology. Such an analysis can also predic t the Beta Max failures based upon the number of manufacturers embracing a technology and channel acceptance. The poorly understood aspect of this equation for high tech products is the relationship between market share and advertising and the correct advertising media. Product availability (channel acceptance) has been the prevailing dynamic for market share over the past decade. Will the Internet change this? How much? Where and how do you promote the product? In the consumer electronic arena these answers are clearly understood. As the CE channel becomes more prevalent in the distribution of mainstream high tech products, such answers may become clearer. Regardless, it is known that certain segments of the market continue to grow such as ERP software, which is evolving and thus replacing old solutions. Educational software and gaming software segments also continue to grow for various reasons. The linear forecasts are adequate for tracking this growth. Linear forecasting will also document the decrease importance of retail packaged software. But for many new categories of software and other high tech products, the anchors required by such forecasting techniques are grossly inadequate for predicting the tornado that may occur when the world goes crazy over a new product. About the Author Mr. Jacobsen has been a high tech consultant for over 18 years. During this time, he has served numerous startups as well as large corporations such as Toshiba, Kodak, HP and others. Much of his consulting was through SRI, International. He participated in the creation of the PCMCIA and, as a consultant and patent licensing agent for HP, organized the InfraRed Data Association (IrDA).

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Chapter 3

Global Markets
By Jussi Nukari
Software Companies Should Be Developed Based on Fast Growing Global Markets Western Europe and the USA accounted for three quarters of the worldwide Software Product Market in 1999, with a market about $ 134 B: the software product market, market share and EITOs estimate for annual growth from 1990 to 2000 in major regions, are shown in Table 1.
Software Products ($ M) share % annual growth rate Western Europe 39165 29 14,3 Eastern Europe 732 0,5 13,3 Rest of World 20939 16 14,3

USA 61394 46 14,5

Japan 11855 9 12,6

World 134085 100 14,2

Finland 455 0,34 14,4

Israel 374 0,28 7,7

Table 1. Software Product Market ($ B), market share in 1999 and annual growth rate in some regions and countries in the world from 1999 to 2000 Source: European Information Technology Observatory (EITO 2000) Looking the Software Product Markets from the Europe, it is worthwhile of dividing the European market by major countries. More accurate estimates in 2001 (EITO 2000) can be seen in Picture 1.

Rest of World

23,5

46,0

USA

Japan Israel

8,6 0,25

Finland 0,34 Italy France

2,1 4,1 6,5 8,6 Germany

UK

26

Picture 1. Software Product Market in 2001 by some countries and regions, totally worth $ 175 B. The biggest software product markets in Europe projected for 2001 are Germany, UK, France and Italy. The market in Sweden is 0,73 %, in Finland 0,34 % and in Israel only 0,25% of the worldwide software product market. The host environment, where software is deployed, is changing very rapidly. While it took some 30 years to get a tens of millions mainframe users and about 20 years to get a few hundred million PC users, it is generally beleived that it will take only 10 years to reach one billion mobile Internet users.
ICT users (million)

1000

Re-structure industries

100

Re-engineer processes

Gain effiencies 10 Automate the back-office 1970 1980 Automate the front-office and field

Networked Market Place

1990

20000

2010

Picture 2. Most significant drivers of growth in ICT adoption (EITO 2000, p. 25)

The serial entrepreneur Toby Corey said in one of VentureOne keynotes (November 2000, San Jose) The 21st Century sees the Internet become more powerful than the Book, TV and Telephone combined and the landscape drivers will be mobility, bandwidth and connected people. Corey divided the landscape impact into four categories: economy, education, culture and government. The economy has benefited the most from the opportunities generated by automation. Education and culture are quickly following while the category least benefited today is government. Reality is that the process has just begun throughout our society: the full impact of our Digital Economy is yet to be realized. 27

Networked solutions, mobility and online business services are vital in the New Digital Economy. These will also offer excellent business opportunities for software vendo rs. According to EITOs estimates, the Telecom Equipment and Carrier Services Markets in 2001 in major regions, are shown in Table 2.
Western Europe Eastern Europe Rest of World

Year 2001 Telecom Equipment ($M) Telecom Eq. share Ann. growth 2001/2000 Carrier Services ($M) Carrier Serv. share Ann. growth 2001/2000

USA

Japan

World

Finland

70500 44 16,1

3905 2,4 16,6

22492 14 2,5

11558 7 3,1

51077 32 13,1

159531 100 8,2

1097 0,69 7,1

199189 29 7,3

15481 2,2 13,9

193773 28 6,5

66536 10 6,9

214148 31 9,7

689126 100 8,8

2933 0,43 6,0

Table 2. Telecom Equipment Market and Carrier Services in 2001: Markets, worldwide share and annual growth rate in certain regions (EITO 2000) Telecom Equipment sector in Europe is, at the moment, much ahead of the rest of the world. At the same time, European Carrier Services are very advanced. In Finland, mobile phone penetration was about 70 % in 2000, the highest in the world. Respectively the infrastructure and carrier services in Finland are in the stage of servicing these users with high quality. Today, Finland is a piloting laboratory for the emerging Mobile Society. However, in the USA, the number of users having access to the Internet over a wireless phone is estimated to grow from 2 millions in 2001 to nearly 50 million in 2005, covering 45 % of households10. Another, even more optimistic forecast is offered by the Strategis Group in their recent study US Mobile Data Marketplace: 2001,11 They predict the size of the market will increase exponentially, with mobile subscribers growing from 5 million in 2000 to 172 million in 2007. All of the pundits agree that even though they follow Finland in many regards, soon there will be an enormous opportunity for mobile communication solutions in the United States. The world is evolving very rapidly towards a Digital Economy, which means huge opportunities for software vendors. During this development the only thing certain, is the very fast and continuously accelerating change. There are numerous opportunities for discontinuous innovations. At the same time, business models are chancing very rapidly. One major paradigm shift, which is certainly coming, is that software distribution model is evolving into a software as service paradigm. Many forecast that software will be rented on an as-needed basis, radically changing todays distribution channels.
10

Content generation in the Wireless Space, Technology Review 97/2000, Tekes, Finland, genuine surveys conducted by Forrester Research, International Data Corp., Dataquest. 11 http://www.strategisgroup.com/corporate/index.html 28

In the wireless market place, the shift to more bandwidth, like GPRS, EDGE, UMTS, are extremely important. At the same time, technologies like WAP, Bluetooth, W-LAN and GPS, are offering totally new, discontinuous opportunities for software developers. According to Arthur Andersens experts (New York, February 2001) wireless software will be 4 % of the worldwide software market in 2004 totalling $ 13 B. The CAGR from 1999 to 2004 is estimated to be 94%. Further, wireless technologies will continue to play a greater role in Internet Infrastructure. It is estimated, that mobile content will be 12 % of the Internet Infrastructure in 2003 totalling $ 2,6 B. The CAGR from 1999 to 2003 is estimated to be 135 %.12 Although the Internet Big Bang took place in early 2000, and has led to the decline of many Internet based businesses, on-line businesses based on new opportunities with a path to profitability have started to emerge. Mobile Solutions innovations are now emerging to offer new, opportunities for investors. There is still significant Venture Capital seeking excellent opportunities The software industry and its business models are changing very rapidly. Whatever business models are in use, it is likely that software vendors will receive their fair share from the value chain for their products. Software will definitely grow with the paradigm shift. If the CAGR of software industry will be 10-15 %, there will be new business opportunities in 2010 worth $ 200 to $ 400+ B, totalling up to $ 600 B. It is obvious, that for P2P (path to profitability) businesses there is plent y of room in the fast growing software product based markets, although nobody knows, what kind of business models are in use and what kind of paradigm shifts the software industry has met before the year 2010. About the Author Mr. Nukari is working in the Jyvskyl Science Parku Ltd as a director of ICT sector. He has been one of the pioneers of developing Science Parks in Finland. He also has been mentoring numerous software start-ups for 10+ years. During recent years his empasis has moved more for coaching and mentoring growth companies, and at the moment he is a board member or advisory board member of six companies. He has worked also with many national development projects in cooperation with other major Finnish ICT growth centers and major service providers. Among these, he was responsible for writing The Growth Strategy for Finnish Software Industry in 1999; he was a founding member of the Global Software Training Programs management team and he is responsible for book Going to America project. He also works as a program manager and as a member of advisory board in the SPIN (Software Product Industry) technology research and development program organized by Tekes.

12

Actual surveys conducted by IDC and Solomon Smith Barney. 29

PART II
Challenges and Hurdles to Globalization

Introduction by Jussi Nukari

In this part there are three articles, of which James L. Creighton (Ph.D.) is writing generically about various aspects of cultural differences and how they could determine your success and failure. He also explores more specifically the Silicon Valley business culture, which you must consider when Going to America. Kenneth Pasternak, an American living in Finland who has been involved in many businesses in various countries, has a deep understanding of the Finn and American business cultures. He empasizes that understanding of the US business culture will have an extremely important role of making Finnish companies to success in the USA markets. The communication and networking skills are vitally important. Both potential strategic partners and investors are looking at your company with their cultural biases. William L. Paulin (Ph.D.), an American worked with Finnish high technology SMEs for nearly ten years, has written many articles of topic of Coming to America. Here, he explores the whole business development process with the empasis of the vital role of cultural differences. Although he has also academic backround, he gives excellent real life advices for the FIN USA business model.

Typically the backround of Finnish entrepreneurs has been engineering-driven with business experience only in our very small markets. In such a small home market, you havent had to put major efforts on marketing and sales. Going to the global market or even just to the U.S. markets will necessitate dramatic changes in the thinking, planning and execution of business practice. Finnish entrepreneurs have not been familiar with the American business philosophy of Growing The-Pie. In the Finnish home market, you have normally functioned on the basis of a Zero-SumGame. This kind of basic differences in mindsets will definitely set hurdles and challenges for the development of really successful global businesses if based on Finnish technological excellence alone. However, this is changing and has to be changed very rapidly. The most valuable commodity in the U.S. markets is time. The customers, partners and investors want to know very fast what is in your business proposition for just them. You have to be able to give your elevator speech very rapidly with matching value proposition want to see U.S. style leadership and management with great international business opportunities. The Finnish young-persons style in management doesnt convince Americans of your credibility.

30

This positions your company at a disadvantage in the global market place. Thus you should consider to use the American-type combination of both old and young managers, which together have the experience to grow the Pie and make wise decisions. If your company is targeting to globalize or just enter the U.S. markets, you will be working with partners, investors and employees with different cultural backrounds. They will look you and your company with their own cultural biases. An old saying is that when in Rome, do as the Ro mans do. This is an important policy if you wish your effort to be successful. The most important things are the right attitude and behavior. You are now in the learning curve to understand and adapt to what is really needed to build the succesfull global business.

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Chapter 4

Come To America Developing A USA Success Mentality

By William L. Paulin, Ph.D.
This is the fourth version of Coming To America that I have had the good fortune to publish in Finland since 1996. It is more or less a personal chronicle of my adventures and learnings about high tech Finn firms Coming to America during the past ten years a most remarkable period for the development of Finlands entrepreneurial infrastructure. This has been a most incredible decade for Finland . . . one that I have been extremely honored to observe and to participate in. Thank you. I hope that this edition of Coming To America will help all of us make the next ten years even more remarkable. -William L. Paulin, Ph.D. San Diego, California April 2, 2001 ONCE AGAIN, I INVITE YOU TO COME TO AMERICA! In 1996, when I wrote Come To America I, times were difficult. Finland was in the midst of a severe recession with 20% unemployment and a widespread lack of confidence in the entrepreneurial experiment. And Finland had a very poor track record of doing business in the USA.13 But the Come To America advice was as right then for many Finn SMEs as it is today. Why? America Is A Big, Homogeneous Market: It is the largest, most homogeneous and technically sophisticated market they will face. For an admittedly large investment, they can earn a superior return - if they can learn to compete. Finns Have Excellent, Needed Products: Finn firms have excellent/superior products for the American market - if they come early enough in the product/industry life cycle. Americans Welcome New Products: Americans are flexible and pragmatic and welcome good products from anywhere. And, being from Finland can often be turned to your advantage High tech Finland-the Silicon Valley of Europe works in marketing oriented USA. Americans Love To Do Business: Plenty of help is available - so long as there is money to be made. And Americans do like working for Finns because they tend to treat employees well.

13

Finland's Ministry of Trade then estimated that only 10% to 20% of Finn entries into the USA were successful. An 80% failure rate after using a typical Finn systematic process that took at least 24 to 36 months and cost at least $500,000 to $1,000,000 for the market research and nonreoccurring strategy making and launch set-up. 32

Americans & Finns Complement Each Other: If we can develop good working relationships, Finns and Americans have characteristic strengths that complement each others weaknesses. For example, while both Americans and Finns are innovative, Finns tend to develop more refined products and Americans tend to market and sell more aggressively. And, while both Finns and Americans tend to be good managers, Finns tend to be more refined internal managers and Americans tend to build bigger, more aggressive businesses.

So in most industries, if Finn SMEs want to become globally significant, they should consider Coming To America early on. And they should expect to improve upon the low overall FinnUSA success rate if they can learn to adapt to the USA to learn to learn. Why? Finns Can Do As Well As We Do Here: Why should Finn SMEs, with products developed and proven in Finland fail at a much higher rate than do raw start-ups in the USA?14 There Are Systematic Fixes: There are systematic reasons for Finn failures in the USA that we can control, change or avoid to raise the FinnUSA success rate to at least 50% to 60%.

So lets look at these systematic reasons for high Finn USA failure rates and explore how Finn SME firms can explore, learn, adapt and do much better in the USA. ON STEREOTYPES & PARADIGMS To discuss systematic causes and cures for excessive Finn USA failure rates, we will necessarily speak in terms of cultural and business practice stereotype and paradigm differences between Finland and the USA. First, the use of stereotypes is not intended to insult anyone, Finn or American. While stereotypes may fit large groups of people and thus can be useful they are not likely to describe any individual very well. While most stereotypes do have a good basis in fact and thus can be helpful in dealing with complex situations, they can also be overly simplistic and lead one astray in specific situations. So we do have to be careful with stereotypes. Never the less, we have found Finn vs. American stereotypes to be useful in achieving our common goals of more rapid and more successful FinnUSA business. They do provide Finns with good initial clues of what to watch out for and where they might need to learn as they begin their Finn USA adventure. To really be successful however, aspiring international businessmen must go beyond simple stereotypes to more sophisticated generalities called paradigms. Paradigms are complex forms of stereotypes. They are whole sets of key beliefs and values about how things are or should be. They are what we learn from our parents and our culture about "what is right" or the right way to do things. Paradigms tend to be deeply embedded, subconscious mental templates used to filter, evaluate and judge what goes on around us. For most of us, our most important paradigms become totally accepted and unchallengeable rules for life.. And this is what inevitably gets us into trouble when we first start dealing in other cultures and business practices. If we tend to see other cultures and/or other business practices as either good or bad (which is almost everyones first reaction), we get into trouble due to paradigm clash.
14

Only about of start-ups tend to fail in the USA . . .and high techs tend to do a good bit better than this, on aver age (20% to 40% fail). The Finn USA 80% failure reate is too high.

33

Therefore, we must not only train ourselves to recognize significant paradigm differences which is difficult in itself - but also to not judge the differences as good or bad just differences to be factored into our evolving business model. And this is a big change for most of us. What we call the Finn culture or American culture are complex sets of social and business paradigms. They are what Finns or Americans are - what they stand for. And since Finn and American cultures and business practices both successful - differ significantly, judging the others culture by ones own (both ignoring the differences and/or evaluating them as either good or bad) will lead to serious misunderstandings business failures. An example of our very different money paradigms will illustrate. First, it is more acceptable to talk about making money and getting rich in the USA than it is in Finland. So entrepreneurs can be much more open about their wealth creation goals here. But even more different and damaging are our paradigms of frugality in business. In the USA, start-ups typically seek sales growth first with profitability scheduled for 2, 3 4 or even 5 years down the road. Trying to make a profit too soon here is seen as unnecessarily hindering the companys growth, market position and future prospects. In Finland however, it seems to me that making a profit the first year approaches a moral imperative with some folks. These two contrasting points of view will obviously result in very different start-up strategies - ones that frequently put Finn firms at a disadvantage in the USA. Now lets look more closely at several major, success-impacting paradigm differences between the USA and Finland.

PARADIGMS OF CORPORATE CAPABILITY: ON PRODUCTS, MARKETING AND MANAGEMENT

FINNS DEVELOP GREAT PRODUCTS - A MOSTLY TRUE, PARADIGM The excellent products Finn self-paradigm is generally true in our experience. Finns, in general, do build excellent products for the USA we have found. All Finn firms who we have helped here, have products that were clearly excellent by USA standards - in many cases the products are the best in their field. And, so far, the Americans to which we have introduced Finns have easily and openly acknowledged this Finn product superiority. High Tech Finland, the Silicon Valley of Europe, seems to be a great marketing approach in the USA. But, like most things in life, this sword seems to cut both ways. Finn product excellence doesnt seem to come without an accompanying steep price in the USA. Excellent Finn products often arrive in the USA over-perfect and late. Unlike Finlands engineering driven economy, the USA is a customer/market driven economy. Sometimes Finnish over-perfection - perfect for the engineers; not the customers - tends to have serious consequences for Finn SMEs: Products Arrive Too Late: Frequently great Finn products arrive in the USA too late to have the market dominating impact they could. No amount of product excellence will win back a market that is owned by a competitor with a merely satisfactory product. Products Arrive Too Complete: US business practice anticipates new products arriving 75% to 80% ready by Finn standards. Late arriving, overly complete products are slowed even further

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by USA product localization tasks. It is the role of American sales people to facilitate this process - at taking care of customers after the sale of early stage products. Products Are Too Expensive: The engineering driven desire to build the best possible product at a fair price, usually narrows the potential customer set beyond the poin t of profitability in the USA. Techie/early adopters wont long support a company here. Mainstream markets must normally be addressed to survive in the USA. Products Serve Too Narrow A Niche: Generally, American customers are seeking a solution that solves an entire problem set. Many of the Finn firms we have seen come here did not have this. Rather than bringing a business proposition to the USA, they were brining only a product feature or a portion of the total product necessary to establish a viable business here. Early market exploration is critical here. Lack Of Market Segmentation = Too Many Unrelated Products: The huge, hyper-competitive USA market requires careful market segmentation for success. But many Finn firms we have seen tend to behave like project companies not product companies that is they will design and build any remotely related products for which they can find a development sponsor. To be a product company in the USA requires extreme, segment focused, product discipline. Great Products Sell Themselves: No, no, NO - not in the USA. In the hyper-entrepreneurial and hyper-competitive USA, exactly the opposite is true - the businessman has to beat a path to the customers door. While great products do have great customer demand potential, sales and marketing make the USA go. This is very different than the Finland we know, causing Finns natural instincts to lead them astray here. If you dont believe this and/or cant learn to love selling and marketing in the USA, we advise you to think twice before Coming To America.

FINNS ARE NOT GOOD SALESMEN/MARKETERS A PARTLY TRUE PARADIGM The USA is a sales and marketing driven economy by necessity. There are so many firms, competing for so much business, spending so much money on so many sales and marketing activities that it is quite difficult to rise above the noise here. Any firm entering the USA has to do a lot of effective sales and marketing or they wont be noticed But many Finns seem quite uncomfortable with this idea. They act as if USA-type marketinghype is just so much foolishness . . . and maybe even unethical. Well, it isnt! While we will be the first to admit that some USA marketers go too far, for the most part selling and marketing in the USA serves a significant, and sometimes even noble, economic purpose. It serves both the communicative function of getting customers attention about something they really want and the consultative function of teaching customers how they benefit from the product - all for the customers own good. Salespeople contact and inform - as well as persuade - both vital social and economic functions. But our impression is that most Finns dont see it this way. Were told that the Finn culture mitigates against standing out - of appearing different or better - that marketing and selling the USA way is too much like bragging - a socially unacceptable lack of modesty for Finns. But you cant look at it that way in the USA. Selling is good. It is convincing the customer that your product is better for him or her than alternative ways of spending the same money.

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And the interesting European idea that businessmen somehow make people continually buy stuff they dont want, simply doesnt wash. People are just not that st upid. By and large, people buy what they want (no matter how much we dont like what they do want). For sure, most Finns have a lot to learn about the USA style of selling and marketing when they first come here. Most are typically not ready for the USA. Beautiful; 6 color, graphically well done literature that contains no benefit claims or value propositions say almost nothing to Americans. Rarely do we see or hear USA novice Finns advance controversial, difficult to prove unique selling propositions things like benefits, superiority claims against competitors, descriptions of the intangible benefits, etc., etc.- irresistibly selling in brief sound-bites that cannot fail to get the customers attention every time. It seems to us that most USA first-timer Finns are more concerned with being not wrong or with not looking pushy - than with selling. To be successful here, this has to change. Finns coming to the USA must learn to sell more in the American way. They must learn to actively convince the customer to buy in the customers own self-interest or they will not be as successful as they could . American sales folks lean forward and get into their customers heads - get into their wants and needs and prejudices - and, in this context, explain persuasively why buying this product now is a great solution for the customer why it is in the customers own interest. And customers here expect this. They expect the salesman to show how much he really wants to sell by trying to sell hard . . . and they try to help him do just that. Here, selling hard is a complement! If course, this must be why Americans are noted as being pushy in Europe . . . we are pushy - by European standards. But here it is not rude; it is essential and helpful. But there is also some very good news here the Finns dont market well in the USA paradigm is not always, and does not always, have to be true. Once they gain the mentality, we have found that many Finns learn to sell and market extremely well in the USA. While Finns often do need to learn to segment markets, learn to multi channel market and learn to aggressively sell in the USA, most start out as excellent technical salesmen (i.e., selling technical products to technical customers). They simply need to add new selling skills; to learn the selling rhythms here; to learn to sell to nontechnical people; and to learn to put direct selling ahead of indirect marketing when ever possible. Ive had several client-friends do just that . . . with spectacular results. FINNS ARE POOR INTERNATIONAL MANAGERS A MOSTLY NOT TRUE PARADIGM The third element in our evolving model of successful FinnUSA business cooperation (in addition to great products and great marketing) is great management - entrepreneurial management. Self critical Finns have told me countless times that Finns are, by nature, not very good global or entrepreneurial managers. This, in my direct experience, is wrong. While young Finnish entrepreneurs may well be inexperienced in international business venturing, poor managers they are not, once they have gained suitable experiential learning. The Americans I speak with really like working in Finn companies like Nokia, Fiskars, Solitra and others. It seems that Finn managers treat people rather well by our standards Most high-tech start-ups in the USA are well-funded affairs staffed both with extremely senior, experienced and successful business managers as well as younger, more energetic but inexperienced folks. But, until recently it seems that most Finn high tech start-ups were populated almost 36

exclusively by very young entrepreneurs. And these folks do sometimes suffer from a lack of longterm business and management experience. But they can and do learn well. It is just a matter of time and experience. So we think that if Finn entrepreneurs can be flexible; can learn to learn; and can adapt both their business strategies and personal behavior patterns to the business environments of the USA, they can become very successful managers here. Never the less, if the entrepreneurship game in Finland is much more of an exclusively young-persons game than it is in the United States, then it may mean that young Finn start-up companies are being positioned at a disadvantage in the global market place. Thus, we also think that the American-type combination of both old and young entrepreneurs populating globally significant start-ups is a good combination that Finland would do well to emulate. And, we are glad to see that this does seem to be a trend in many aggressive Finn up-starts in the USA. With an adaptable and young plus experienced manager strategy, we believe that Finns can count management as a competitive strength along with technology. Now lets turn to some more complex but equally important paradigms of personal business behavior.

PARADIGMS OF INDIVIDUAL ATTITUDE & BEHAVIOR: ON OPTIMISM, FINN-MYTHS AND BRAGGADOCIO

OPTIMISM OR NAIVETY? TO PLAY A ZERO-SUM-GAME OR GROW-THE-PIE? Compared to Finns, most Americans seem naively optimistic, expansive and aggressive. Compared to Americans, most Finns seem careful, conservative and overly cautious. Americans want big growth, then profit. Finns want profit and prudent risk. Americans think big with aggressive marketing and selling. Finns think technology with precision and planning. Americans try to hit the home-run. Finns persevere. Americans try to win. Finns try not to lose. What is going on here? What is at the core of these stereotypical differences? And what does this mean for FinnUSA business strategies? It does seem to us that there is a deep, built-in mentality or natural biorhythm difference between Finns and Americans. It somehow seems to fall along the dimension of positive-optimism to negative-pessimism. And it does seem to affect our native business strategies. We constantly hear from Finns who have experience in the USA that Finns must learn to think big when Coming To America. We readily agree but must add that thinking big does not mean being foolish. Lets look more closely at these native strategy issues. We have been told by the Finn Council General to the United States that the struggle to remain safe and independent against almost insurmountable outside physical and political forces has become a key component of the Finnish character. This clearly contrasts with the anything is possible - growth, expansion and environmental dominance USA attitude derived from our recent open-frontier history. This, we believe, is why many Europeans tend to find Americans naively optimistic to the point of silliness and why Americans sometimes find Europeans cynical

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to the point of being jaded. But if these differences are characteristic and we think they are - the impact upon our natural business strategies will be significant. Let me give an example. I once did a business project with a Finn TV commercial maker. I asked, how do you know if you made a good commercial an effective one? The surprising answer (to me) was, we dont. You mean you dont ask? I responded. No, they said, we ask, but our customers wont tell us. As an old -American sales and marketing executive who damn well made sure his ad agencies knew how well they were performing - firing ones that didnt work and hiring ones that did - I could not understand this at all. For heavens sake, why? I asked. And when I finally did understand the answer, it amazed me. It was a break-through in my understanding of Finn vs. USA business attitudes. Since that time, I have made this example a one question business culture test for Finns and Americans. Please let me give the test to you now. The question is: Why wont Finn companies tell their TV commercial maker if their commercials were successful or not - if they produced better business results or not? I have given this test to literally hundreds of Finns and Americans. To date, only 2 Finns have ever missed the right answer. And only 1 American has ever gotten the right answer. The answer that seems so obvious to my Finn friends but is so totally foreign to Americans, is: The commercial maker might raise its prices! Now this way of thinking is a Zero Sum Game. If the commercial maker can raise prices because they find out they did a good job, we will get less. For this to be true, however, there must be a fixed amount of benefit from the commercial to go around. By assuming this to be true, the essential business competition becomes seeing who gets the biggest part of it the biggest percent. If I get more, then you get less is thinking in percents - the bigger percent I get the better off I am. But believe me, most American business folks wont think this way. They will think, let them charge more. If the commercials work well sell enough more grow enough to more than cover the added cost. Well both make out. And if the commercials dont work, well fire them, save money and then hire someone better. Americans will assume that the pie will grow almost every time. They wont think in percents; they will think in terms of growing dollars the more dollars I get the better off I am, even if I get a smaller percent. The differences between Zero-Sum-Game thinking and Grow-The-Pie thinking on corporate strategy is huge. Zero-Sum-Game thinking makes the essence of business strategy to be a competition between enemies for scarce resources and rewards. Grow -The-Pie thinking transforms many business competitions into cooperations in this case a cooperation to develop the best possible TV commercials. In the high tech world, where innovation and change are the norm, Zero-Sum-Game thinking tends to kill cooperation cooperation that could lead to more for everyone. Grow-The-Pie thinking, when realistic, is at the heart of the art of business cooperation. So we respectfully

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suggest that when Finns Come To America they examine their own native zero-sum/growing-pie paradigms, in order to adapt the ones that will work best. And when you Come To America, we think you will happily find that this Grow-The-Pie thinking makes high level American in most high-tech firms quite open to you - surprisingly so from the Finn perspective so long as you: a) have something to offer and b) can quickly get their attention, c) via an effective elevator speech, d) about your value proposition. BEWARE OF MISLEADING OR INCORRECT FINN -MYTHS ABOUT THE USA Many Finns, along with other Europeans, seem to believe most of what they hear about the USA. Unfortunately, much of what one hears in Europe about the USA is distorted at minimum, and unreal at worst (Im sure that the reverse is also true). Our advice is simple: be careful what you believe about the USA without direct, first hand experience seeing it with your own eyes, as we say. Believing inaccurate Finn-Myths about the USA can have very unwanted business consequences for FinnUSA business expansions. An example of a very persistent Finn-Myth about the USA is that new Finn entrants into USA business markets usually get sued by their competitors to keep them out. One young Finn entrepreneur even told me that his company was afraid to go to the USA because if their software didnt work perfectly, they might get sued. This is simply not true. While lawsu its in the USA are a small worry for all firms, including Finns, they are one of the least strategically important things for Finns to worry about when going to the USA. As a Nokia VP who once ran Nokias R&D operation in San Diego told me When I first went to the USA, I was quite concerned about being sued after all that I heard at home. But after 2 years in the USA without being sued, I almost felt neglected by our competitors! Another, more misleading but delicate to discuss - Finn-Myth about the USA has to do with the relative trust worthiness of our two cultures. Many Finns seem to us to have a strong, almost built in cultural distrust or even fear - of doing business in the USA. More than once, I have personally watched this distrust/fear, incorrectly placed, destroy otherwise high potential business relationships. I am convinced that unreasoned distrust of the USA is at the root of many Finn business failures in the USA. Finns who want to come to the USA need to recognize that, in addition to bad and untrustworthy people in the USA, there are plenty of good, trust worthy people for you to do business with here. You just have to find them. Many Finns probably will probably have to learn how to find them or get help from trusted parties - because the USA is a very different place than Finland. But dont ever plan to do business with bad folks. It wont work. And you dont have to it here. So my advice is dont believe the Finn-Myths about the USA. But how do you know which Finn beliefs about the USA are true and which are myths? The answer is simple. Come over here, make the right friends ones that you can learn to trust over time - and find out what it is really like for you and your business. Most Finns simply need to realize that they can learn to do good business in the USA if the market wants your products or services you can learn to adapt to the USAs differences, and learn to avoid most of the missteps that unreasoning distrust or fear will produce. Learning and adapting are the keys. And coming here to explore is how that is done. 39

AVOID UNREASONING DISTRUST AND/OR FEAR OF THE USA Please note that I am not saying that Finns should always trust or be comfortable with all Americans. That would be foolish. There are plenty of good and bad folks over here. What I am suggesting is to try to avoid the unreasoning distrust or fear of all Americans that often leads to inaccurate Finn-Myths about the USA. Excessive focus on these unreasoning fears and FinnMyths, will inevitably lead your FinnUSA business efforts astray. You will likely see all the bad things that you subconsciously want to see. You will probably misinterpret normal business practice differences as something bad. You will possibly end up working with the wrong folks and shunning or insulting the right ones. And this will greatly increase your chances of going home, failed and blaming the wrong reasons. Finns should have a reasonable and healthy distrust and fear of doing business in the USA. You should be reasonably concerned about the differences, dangers and risks of Coming To America. These exist, for sure. It is the unreasoning Finn-Myths that could be your undoing. For example, I have recently seen an increase in the use of what I call punitive non-disclosure agreements in Finland ones that require a predetermined $500,000 damage penalty for any improper disclosure - in an apparent attempt to deal effectively with dishonest people. These are legal but seldom used in the USA because most people wont sign them and the courts often invalidate them after the fact because of unfair, non-mutual consideration. I generally wont sign these types of punitive agreements and I wont ask Americans to sign them on behalf of Finns (or visa versa). Why? Because it is bad business. I dont need a $500,000 club over my head to make me be honest with Finns and I really dont want to work with folks that do. I only want to do business with folks with whom I can build an effective, trusting business relationship. A basic rule held by most good business folks in the USA is that contracts keep honest people honest - they are necessary for good business understandings, but you cannot build good business relationships with skunks via contracts. So simply dont do business with bad folks. I know you have the same ideas in Finland. My advice is to stick to these ideas when Coming To America. They will work for you once you lean how to identify to vett trust worthy Americans. JUDGING PEOPLE & BUILDING RELATIONSHIPS IN THE USA - THE BRAGGADOCIO FACTOR How do Finns meet the right people in the USA? How should they network and vett (evaluate and judge) the important people that they meet. There seems to be three important steps: First, realize that the USA is a huge, diverse place where this requires a somewhat more difficult, time-consuming process than required in Finland. The second step is to learn to make up your mind about people more slowly than you commonly do in Finland . . . and to be especially careful of people who tell you just the nice things that you want to hear. The third step is to learn to access, then accept and then get along with the good USA salesman-types the ones who often exhibit too much braggadocio for most Finns. 40

Finland is a land of 5 million engineers, were often told. Not a bad generalization? Quiet, reserved, slower to become close, honest, reliable, technically oriented, thing oriented, independent, systematic, studious, intellectual, capable, problem solvers, well trained and so on are all adjectives that seem to apply well to many engineers and to many Finns. And to many Americans, too. Whole subsets of the American population are engineers in the behavioral sense. But we dont think you can characterize the USA as a land of engineers, the same way you might Finland, though we - like Finns - can be characterized as innovative product and technology developers. While Finland is a smaller and rather more homogeneous culture that may be reasonably well characterized by simple stereotypes such as the engineer paradigm, the USA certainly isnt. Because of its size and cultural diversity (my childrens great grandparents, for example, were English, English, Swedish, Swedish, Norwegian, Dutch, German and French), it is really quite difficult to use a single stereotype to describe the USA. Therefore, the most likely answer to the question what are Americans like? is that it depends upon which group you are talking about. It seems to us that a much more important question to ask than what are Americans like, is: who are the good guys and who are the bad guys . . . and how can we tell the difference? Too often, it seems to us, that new to the USA Finns are very easily fooled by bad people here, despite their suspicious nature and fear of the USA. Many Finns just seem to trust too fast the Americans who tell them the nice, flattering things that they just love to hear. Most American businessmen have learned from painful experience not to trust or to at least further vett those who seem to tell us too much of what we want to hear. Conversely, we sometimes see Finns distrusting good Americans too long. After all, they are expensive, they say negative things and they are not so quiet and polite as we Finns are, think many of my Finn friends. Thus the Finns can sometimes go too slowly in important relationship building situations. This, in-turn, causes the good Americans to become suspicious of the Finns motivation and character. And things inadvertently get worse. Thus, we have found it very useful for Finns to learn to use several behavioral stereotypes to characterize different types of Americans and American business behaviors. We have often found the contrast between the Engineer, Salesman and Bad Guy stereotype to be helpful. Obviously Finns are quite comfortable with engineer-types and work well with them and sell well to them over here. But Finns in general do not seem to be as good at distinguishing between the good salesmanbusinessman-types and the bad guys over here. In fact, Finns sometimes seem to distrust the wrong people the ones that they can trust - the good salesmen and businessmen. These folks tend to be more exuberant, opportunity and promotion oriented than the more sober, modest, technical and administratively prudent engineer-types. Salesman-types tend to be everything that engineertypes are not - outgoing, instantly open, erratic and sometimes unreliable, people and action oriented, unsystematic, intuitive and so on. This makes them quite different that the classical Finn -Engineer stereotype. There are a lot of good folks here who use approaches quite opposite to the logical, rational, analytic and systematic 41

engineering type approaches - that seem almost to be a religion with Finns - and get excellent results. These differences seem to make many Finns uncomfortable and I often see Finns seeking to deal only with Finn-like Americans instead of adapting to the differences here. But sometimes this can be a mistake. In the USA, virtually all good entrepreneurs tend to be the salesman-type. They tend not to be engineer-types, as entrepreneurs in Finland may be. While USA entrepreneurs may be engineers by profession, to be successful, they have learned to behave as salesman-types in their business practices. Our experience suggests that most Finns would be wise to do this too. Unfortunately, we have found that Finns often seem to take a more black and white view of salesman-type behavior and judge these folks to be bad, unreliable braggarts or liars when they arent that at all. We expect a little to a lot of exaggeration - but not going over the edge to lying in the USA because people are competitive and exuberant. Correctly assessing the salesman/promoter-type can be most troublesome for Finns when they are trying to partner with Americans, or hire sales channel representation. The difference between lying and just exaggerating seems to be different in Finland than it is in the USA. Weve often been in situations where Finns have expressed very negative (and incorrect) opinions about USA salesman-types - just because they bragged too much or sometimes didnt exactly keep their word. But here, salesmen often do acceptably exaggerate things things like how complete the product is, how fast they can do something or how perfect a result they will guarantee. But these folks may not be bad by the fuzzier USA paradigm of honesty. In the USA, we have gotten used to extraordinary claims by good and bad salesman-types. We apply Kentucky Windage (i.e., where we subtract a bit from what salesmen claim to end up with reality). There is a large gray area we have just learned to deal with. Weve l earned when to rely on, and when not to rely on salesmen-types and to work with them well as valued members of the team. We advise that USA bound Finns plan to learn how to do this too. This wide diversity of stereotypical behavior is why Americans te nd to use so many vetting or checking-people-out techniques such as small talk, probationary hiring periods and private investigators and why we have developed the patience to take enough time to do this important task right. We have to figure out who we are dealing with and this is not easy in the USA. It almost goes without saying that Finns, who havent had to develop these exact skills, will be fooled the first few times they hire or partner in American sales channels. In America, as in Finland, it is quite difficult to hire just the right people. But the game is quite different here, I think. For Finns who are new to the USA, we usually suggest they get help with the transition. By using and adapting both Finn and American techniques and instincts - together - we'll do the best possible job for Finn SMEs. FINNS & AMERICANS - DIFFERENT, YES, BUT WHAT A COMBINATION! The bottom line here is not to either brag or find fault with either of our business cultures and practices. They are what they are. Rather, our intent is to simply to compare them, to size them up and to find better ways to do business together. And the beauty of these comparisons is that Finns and Americans seem to have very complementary strengths and weaknesses if only we can get past the problems our different cultures, styles and business practices seem to cause. 42

I believe that, if we can get past these kinds of behavioral and cultural difficulties, the right Finns and Americans can form unusually great combinations. By working together, we can create unusual and mutually beneficial opportunities. Reliable and innovative Finns who develop great products, when partnered with the right, entrepreneurial Americans, can market and sell at rapidly growing high volumes in the USAs huge and open marketplace producing significant profits and business valuations for each. ABOUT THE AUTHOR Dr. William Paulin has been working in Finland for over nine years. He has been a visiting professor at Oulu University. Dr. William L. Paulin is the founding principle of Paulin, Vurpillat, Early Associates - an internationally based firm of virtual executives who work with client/partners in the areas of business development, new product/marketing, strategic partnering, venture funding and general management. In the years immediately preceding the founding of PVE Associates, Dr. Paulin held senior, Fortune 500 executive sales and marketing positions at Emerson Electric and Square D Company where he also served as manager of strategic planning. Earlier, Dr. Paulin participated in two successful start-ups and led two successful small business turn-arounds. Since founding PVE Associates, he has also served as an advisor or on the board of directors of 17 firms. Prior to entering the business world, Dr. Paulin was Professor of Business Administration at the University of Southern California

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CHAPTER 5

Why Cultural Differences Could Determine Your Success or Failure

By James L. Creighton, Ph.D.
The idea that cultural differences could be a make-it or break-it business proposition is strange to many people because they think of culture as things such as music, dance, costume or cuisine. These are indeed aspects of culture, but only the most visible and formal aspects. The part of culture that is of greatest importance to a new business enterprise is what is usually described as subjective culture. Subjective culture refers to the manner in which different cultures interpret behavior. The same behavior may mean entirely different things in two different cultures. Edward Hall, in his classic book The Silent Language, describes significant cultural differences in how close people stand in a face-to-face conversation. In U.S. culture (which is largely based on Northern European Protestant culture) people in a face-to-face conversation will usually stand about 18-24 inches apart. Anything closer than 18 inches is likely to be interpreted as an effort to be intimate (if with someone of the opposite sex) or aggressive (if with someone of the same sex). In most Mediterranean cultures, however, important conversations take place in a range of 8-12 inches. In fact, most people from Mediterranean cultures will feel like they are not really connecting with or getting through to the other person if that person maintains a distance of 18-24 inches. The author once observed a manager from Latin America attempting to connect with a U.S. manager. Each time the Latin American manager moved closer in an effort to establish good communication the U.S. manager stepped back. Watching for a period of 10 minutes, I observed the U.S. manager backing up almost 50 feet down a corridor. The Latin American manager felt very frustrated he wasnt getting through while the U.S. manager felt threatened and pushed. The meaning of behavior can change over time. Most American boys who were raised in the 1940s1960s were taught that behavior such as opening doors for women, deferring to women when leaving an elevator, etc., were signs of respect. Me n who didnt engage in these behaviors lacked good breeding. But with the advent of the feminist movement in the U.S., a number of women began to interpret this behavior differently. Some women will interpret such behavior as sexist, reinforcing stereotypes that women are weaker, or cant take care of themselves. The problem is that this leaves men no longer sure how their behavior will be interpreted. Cultural differences can have important implications for businesses. A friend of mine recently described how an American consulting firm lost a major consulting contract in Latin America due to a lack of understanding of cultural differences. The misunderstanding had to do with how to show proper respect. In Latin America, respect is shown by spending time at the beginning of a meeting inquiring about peoples health, asking how their family is doing, and other social 44

discourse. In the United States, business people often believe they are showing respect by getting down to business instead of wasting time with social chit-chat. In this case, when the American consultants failed to inquire about health and family at the beginning of the conversation, the Latin Americans interpreted this as a lack of respect and the Americans did not get the contract. The issue of culture is particularly challenging for companies that operate in a relatively homogenous culture, with shared ethnicity, shared language, and shared history. Media critic Marshall McLuhan once observed that culture is like a glass dome; as l ong as you are inside, you dont know you are enclosed. If everyone around you is from the same culture, its very difficult to realize the degree to which your interpretation of behavior is shaped by culture. Since everybody else interprets behavior the same way, its obvious that this interpretation must be correct. U.S. companies have problems with cultural differences when dealing with cultures that are significantly different, such as Japanese culture. However, U.S. society includes people of sufficiently diverse ethnic and cultural background that cultural misunderstandings can occur even between two people from the U.S. Not only are there significant differences based on ethnicity, there are significant cultural differences between companies. Some of these differences are regional, some have to do with the size and age of companies, and some have to do with the unique demands upon high technology firms. ETHNIC DIFFERENCES The author has been involved as a meeting leader (facilitator) in hundr eds of meetings, some of them involving cross-cultural settings. In some cases it is very obvious that there are cultural differences. For example, in meetings with Native Americans (Indians) there are major differences based on the pace or timing of the meeting. In U.S. business culture, the normal time between one speaker and another is about one second. In many Native American cultures the time between speakers is about six seconds. For a Native American, this pause shows that the listener has been carefully considering what has been said. To respond more quickly would show a lack of respect for the speaker. Business or government officials often become extremely impatient, even uncomfortable, with the long pauses. They may begin speaking again themselves to fill the awkward pause. To the Native American this is the height of discourtesy since they are not being allowed to respond. Sometimes the miscommunications are less obvious. The author observed a meeting between the head of the U.S. Environmental Protection Agency and citizens of a small rural town who lived near an industrial plant that discharged pollutants into the air and water. The citizens, largely African American, felt a deep sense of grievance, believing they had been unfairly exposed to health risks for a number of years and that the EPA had failed to act in a timely manner. The head of EPA believed she had come up with a plan to address these concerns and expected to be well received by the audience. Instead she was met by anger and confrontation that only became more aggressive as she begged the audience to calm down. As the meeting went along she became increasingly withdrawn, almost unable to speak. She left the meeting complaining about how badly she was treated and the local residents left the meeting convinced that EPA still wasnt listening to them. This miscommunication was rooted in cultural differences. In mainstream U.S. culture, once an individual agrees to come to the table it is considered rude to continue to yell or be h ighly emotional. To continue to be highly emotional is to prejudge the outcome and act in bad faith. Many African Americans, even though they have ancestors of people whove lived in the U.S. for 45

several centuries, still hold many African cultural values . They talk of acting white while in the business world, and acting black when among other African Americans. There is a much higher tolerance for emotionality in African culture, and expression of strong feelings is not viewed as a sign of aggressiveness but as a sign of how deeply the individual cares about the issue. To tone down the expression of feelings is to say that the issue wasnt really that important in the first place. When white people withdraw emotionally (in the face of what they perceive as African American aggressiveness), African Americans perceive this as an unwillingness to deal with the issues. CORPORATE CULTURE In recent years, U.S. management literature has spent a great deal of time discussing corporate culture. Corporations have different values and beliefs about what constitutes desirable behavior, and these cultural norms shape how creative people in the organization are, how willing people are to work together in a cooperative manner, how much time it takes to reach decisions, and other factors that impact on organizational effectiveness. There are very different cultures among U.S. corporations. This was not always the case. During the 1950s 1970s, the image of management was shaped considerably by the experience of many U.S. managers in the military (and the fact than many World War II officers became corporate managers). There was supposed to be a well-defined chain of command, with information passing up and down primarily within that chain of command. Decisions were made by the people in command and passed on to others in their chains of command for implementation. There were dramatic differences in rank and status between management and labor, and even between different layers of management. Silicon Valley has played a key role in questioning the assumptions of this kind of hierarchical management. As early as the1960s, Hewlett Packard decided that individual offices, particularly individual offices denoting differences in rank or status, were barriers to communication. HP began the open cubicle concept that is in use by many Silicon Valley companies today. Also, at coffee breaks, any employee in the company could approach Bill Hewlettt or Dave Packard out at the coffee wagon and engage them in a personal conversation. Intel Corporation took this approach one step further, abolishing signs of rank or status such as reserved parking spaces and office size based on rank. To this day, Gordon Moore and Andrew Grove have offices the same size as any other manager, park in unreserved parking, and eat in the cafeteria with all the other Intel employees. As Andrew Grove describes it, when there are big differences in status and rank, it takes months for ideas to percolate up through management. Intel believed it was in such a competitive business that it literally could not afford the trappings of rank and status because it slowed down decision making. Intel has carried this thinking one step further with a concept it calls Team + 1. Major decisions are made by teams that include people from a number of organizational layers and units. Junior engineers are expected to argue vociferously with vice presidents if think they are right. If possible, decisions are made by consensus. But because people are encouraged to argue their positions enthusiastically, there is always the danger of impasse. This is where the +1 comes in. One person is designated as the person who can make a decision when a team cannot reach agreement. Interestingly, this person is not automatically the person in the room with the highest rank. Intels 46

approach breeds a very aggressive culture that not everybody likes, but it does reduce the time it takes to make decisions and reduces the danger that decisions are being made by upper layers of hierarchy who may know less about the reality of what is going on in the organization or with customers. There is considerable variation in culture among Silicon Valley companies, but most pride themselves (not always accurately) on being far less bureaucratic, more open, and more nimble than more traditional U.S. businesses. Some of the differences between companies are rooted in regional differences, size, and age of companies. Regional Differences Generally speaking, companies based in the eastern U.S. are likely to be more traditional in terms of hierarchy, rank and status. Going to the proper schools and having the proper breeding plays a greater role in employee selection. This is particularly true of older established businesses or professions like banking or law. The western U.S. has always been much more egalitarian, much more interested in an individuals ability to perform than an individuals pedigree. Among companies in the western United States, high technology companies are among the most egalitarian, because of the demand for technical expertise. Size Inevitably, as companies become larger they also become more bureaucratic. In knowledge-based companies, there are great dangers in bureaucracy, as one part of the company may have knowledge that is essential to the success of another part of the company. The newly emerging Knowledge Management field is an effort to solve these problems by providing better access to corporate knowledge through the use of information technology. Many Silicon Valley companies work hard to mitigate the effects of bureaucracy, even designing work space that endeavor to break down the separation between various organizational units. Age Older, established companies, even those in high technology, are more likely to be hierarchical. For years, IBM was among the most hierarchical of companies, until it was forced to recognize that this placed it at a tremendous competitive disadvantage. On the other hand, some start-up firms are so busy getting their product to market that the y havent had time to put even the most essential business systems in place. As a result, things can be very ad hoc, even chaotic. OBSERVATIONS ABOUT SILICON VALLEY BUSINESS CULTURE Here are a few general comments about Silicon Valley business culture: The most valuable commodity in Silicon Valley is time, not money. People in the Valley are often under pressure to work incredible hours (the catch phrase is 24/7, meaning that people are working 24 hours a day, 7 days a week. While this is slight exaggeration, many younger programmers even sleep under their desks so they dont have to waste time with the commute to their homes. There is, of course, a price to be paid in terms of burnout and troubled family relationships.

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People in Silicon Valley tend to be wired at all times with cell phones, beepers, and other wireless devices. There can be major disagreements when people choose not to turn off their devices during meetings, movies, in restaurants, etc. Those who leave their devices on do not seem to understand that other people perceive this as a gross discourtesy. Unwired people in Silicon Valley have begun to fight back. Many finer restaurants have signs asking diners to turn off their cellular phones while dining, and there may be announcement made during movies and other entertainment events about the need to turn off all devices with buzzers. In most Silicon Valley companies, and particular in newer companies, dress is almost invariably informal. In larger, established companies, executives may wear ties. In smaller companies, allowances will be made for visitors from foreign countries, but Americans who show up in full business suits are dismissed as suits, people who are incorrigibly out of touch with the Silicon Valley milieu. The informal dress code is so strong that Wall Street bankers and lawyers are now wearing informal clothes rather than expecting the Silicon Valley startup executives to dress up for them. So dont assume the grungy person next to you in the cafeteria line is a low status person he may have just cleared a cool $100 million when his stock options vested! Theres much more talk about consensus in Silicon Valley companies than there is in most hierarchical companies. Partly this is a matter of cultural values; partly this is a function of the fact that work is often accomplished in temporary cross-organizational teams where there isnt time for hierarchical reviews. The countervailing pressure is time. Even though people may talk about the value of consensus, they are often so driven by a sense of time urgency that they move ahead before a real consensus is reached (and, as a result, often end up having to do it over again later). Be aware that many Silicon Valley executives talk about the values of openness and consensus but are in fact rather controlling people who often dont engage in the behaviors they espouse. In most Silicon Valley companies, if you have something to say during a meeting you are expected to say it. Its considered your own fault if you dont. Dont wait to be formally called upon to speak. In some companies, people raise hands to be recognized. In others, you just speak when you can. But it is your job to represent your interests and present your knowledge and you will be judged based on the contribution you make. Status is based on contribution. Particularly within technology firms, a scientist or engineer who has made a major technological contribution will be far more respected by other technical people than an executive who is just a bean-counter.

These are a few, somewhat obvious, pointers about the culture of Silicon Valley companies. Its worth your while to learn more about this culture if you are serious about bringing your operations to the United States. At first glance, Silicon Valley may look a lot like your own country, but without fully understanding the culture of the Valley there are dangers that cultural misinterpretations could have a dramatic impact on your success. Authors Background: James L. Creighton is the President of Creighton & Creighton, Inc. in Los Gatos, CA. Creighton & Creighton provides consulting and training on team productivity, dispute resolution, and crosscultural communication. His most recent books include CyberMeeting and How Loving Couples Fight. 48

Chapter 6

Understanding Cultural Differences

Can Impact the Success of a Finnish Company Targeting the US Market

By Kenneth Pasternak
Inter Associates Ltd Jack Welch, the widely admired former CEO of General Electric was asked what it takes to succeed in todays competitive, internet-based business environment. He replied, Theres no such thing as an old economy and a new economy. Commerce is the same as it was 500 years ago. People sell and people buy whether its from a wagon or the Internet. T he implication is clear. Leaders must demonstrate fundamental competencies whether their companies are large and making steel bars for construction or small and writing new software for mobile phone applications. Among these crucial competences are effective communication skills and networking capability. In addition, perhaps in need more than ever before, is the capability to maximize your businesss potential by engaging in various forms of partnership. Developing and demonstrating these capabilities on a consistent basis are difficult enough in any business setting. They become even more challenging when working with partners, investors and employees from other cultural backgrounds. The potential impact on your business from crosscultural differences can be profound. It is therefore important to understand the assumptions and perceptions that drive decisions made by U.S. managers and investors. In Finland we have ample opportunity to be exposed to various aspects of the U.S. culture. It is seen and heard in written media, radio, television and films. This tends however, to be a very passive exposure. We do not necessarily encounter problems with another culture until we actively interact with it. The good news is that on the surface there are a number of similarities between the two cultures. Among them are an appreciation of technological development, a tendency towards analytical thinking, and punctuality. However, no matter how global or international a U.S. business may appear from their annual report or advertising, many retain a surprisingly limited viewpoint on the world beyond U.S. shores. The United States is big and complex enough that the mindset of U.S. managers often becomes rather insular. What works for us within the fifty states should work elsewhere, is often the sentiment behind decision-makers actions. The same can be said for many U.S. investors. They are seeking international opportunities and portfolio diversification, but at the same time, want to see U.S. style leadership and management from the companies they invest in. While this view may paint U.S. business with a broad brush, it is no less a general statement as the stereotyping we do when we look at cross-cultural behavior. Discussing how the British do this or 49

why the French do that, are stereotypes built upon impressions and experience. They do not mean that all people from that culture will exhibit those characteristics. But knowing beforehand some of these often-displayed behaviors may be of great assistance in your business dealings. Potential strategic partners or investors will look at your company with their cultural biases. It cannot but help to be aware of some of their potential perceptions and beliefs. Here are a few thoughts to keep in mind when working in the U.S. as they relate to the core competences I referred to earlier. Communication and Selling Skills When you have a chance to present your company to U.S. investors or potential partners in the form of a presentation either within a conference or one-to-one, make no mistake, this is a sales opportunity. You will be expected to sell the audience on your business plan and all that it includes your product or service concept, competitive differentiation, ability to produce, financial outlook, etc. Your product or technology will not sell itself. Even more importantly, since you are a small, early stage business you are as much selling yourself as you are your business concept. The U.S. audience will expect to see a leader who displays not only an understanding of the market and product, but the energy to drive the basic concept into a successful business. They will want to get a feel for how you will deliver business results from the technologies developed in the laboratory. To do this effectively requires skills at making presentations, not necessarily strong points for entrepreneurs who have started their businesses from experience and expertise centered in technological fields. Professional support to improve presentations and presentation style can be found, however. From there it is a matter of your desire to practice in order to improve this skill. U.S. audiences like to see presentations that include: Your conclusions upfront. They prefer to see where you are heading at the beginning and then see how you build to the conclusions set out earlier. This also helps reduce a common problem that the audience will interrupt and pick apart small pieces of the presentation before you have a chance to present the entire story. A clear statement on what makes your business or product unique. Who is the competition, today and potentially in the future, and how are you different from them? Bullet points and short explanations, as preferable to long descriptions. Hand out more detailed materials as an appendix to your presentation. A starting point that gets their attention. Your audience will see many presentations. It is important to come up with something that will pull them in immediately. Catchy phrases, short stories or clever ideas can work, but beware of trying humor. It is a high risk tactic. As part of their introduction some presenters like to give a simple diagram or picture of their overall offering. Direct comment on known problems with the business plan. After revealing an expected or potential difficulty you should always be prepared to offer a statement on how the problem will be remedied. Enthusiasm and belief in what you are selling. If you are not excited about your business, how can you expect anyone else to be? Finnish audiences tend to sit quietly during a presentation and ask few, if any, questions afterward. In contrast, Americans tend to be active listeners. Someone once asked former U.S. Secretary of State Madeleine Albright what was the most important lesson she taught to her students when she was a professor at Georgetown University. Her simple answer, to interrupt! Do not be surprised if your audience ask questions during your presentation. Do not be put off by this, this means your audience is listening and engaged. If you do not know the answer to a question, do not fake it. Tell 50

the person asking that you will get back to him/her with a reply. Then make sure you do so quickly. Obtaining some coaching at how to field questions and practicing with colleagues can be time well spent. Networking During the early 1980s a local consultant asked me to assist him in a training exercise. He had created a mock cocktail reception for a major Finnish company. The purpose was for the participants to circulate and meet the assembled foreign busi nessmen. The lack of comfort in making small talk at such gatherings has been one of the self -realized weaknesses for many Finnish executives. I still attend many gatherings of international business executives where one sees the Finns tending to be clustered together on the edges of the room for much of the event If you want to meet new business partners or obtain financing it is important to make the best use of occasions when these groups are made available. Developing a natural skill to work a room is not easy. But making the effort is extremely important. There are a few things to keep in mind. Always have your business card easily at hand. Have ready a practiced, short explanation of who you are and what your company does. If the listener is interested the discussion will be taken further. If not, move on to another person and be prepared to give it again. By the way, preparing your brief summary is an excellent way to ensure that you focus your own mind on what is important about your business, particularly from the listeners point of view. Americans tend to speak very casually. They will use your name, and first name at that, quite often during conversation. This, as we know, is unusual in Finland. Learning to do it as well can help to build a small, but important bond with your partner. Americans also tend to use clichs quite often in speech. Many are often based on U.S. sports (e.g. give me the ball and Ill run with it; that idea is a slam dunk; he certainly hit a home run on that one). The casual, friendly manner also leads to statements that should not always be taken too seriously. Lets have lunch sometime, for example. This may be a suggestion that you call sometime, or it could be a polite attempt at ending the conversation. Finns tend to understate their accomplishments. Americans tend to overstate theirs. A sense of humility is often appreciated in the U.S., but not at the expense of getting your message across. Dont be embarrassed about stating your and your companys accomplish ments. Evidence of past success leads potential partners to imagine the opportunities for the continuation of a successful path. If you do any namedropping be sure that you can back it up from actual experience. You can lose credibility quickly if you imply a strong relationship with some one or some company that turns out to have been only a minor social or business interaction. Americans do not mind a little aggressiveness when it comes to business development. You must, however, learn to judge how much pushiness is too much.

Partnerships Business success in the New Economy requires partnering among organizations in ways not seen previous. Today, many companies are outsourcing all but the core competences of their businesses. We even see longstanding rivals such as Ford, General Motors and Daimler Chrysler joining forces to utilize new technologies for managing the supply chain more effectively. Finnish entrepreneurs must actively seek the partnerships that will allow them to develop their operations and provide expertise that will enable them to offer winning solutions. 51

Here are few characteristics of American business practice to keep in mind in this regard: There are many forms of business relationships and partnerships. They can range from alliances where ideas and maybe some resources are shared to more intensive equity investments. Choosing how a partnership should be structured is not easy. Your potential American partners may have different assumptions than you about the scope and duration of the partnership; what you or they are free to do, or not do. Getting advice from a professional is useful so that you do not find yourself locked into an arrangement that does not meet your best business interests, particularly over the medium and long term. Handshake agreements may seem comforting in the U.S. We are quite used to them in Finland. However, be careful in the U.S. since they may not signal the complete agreement that will result. This is because little gets accomplished in business in the U.S. without the involvement of lawyers. U.S. legal agreements can be long and complicated. Make sure you understand what they contain before signing. The best advice is that you have 1) your own U.S. lawyers ready to participate early in the development of a new partnership and 2) a good idea of what legal advice costs so you can budget for it.

To truly understand another culture it is important to have a sense of that cultures spirit. Sometimes it can be summed up in a word or two. For example, many would say sisu best summarizes Finnish spirit. A good description of the American spirit can be found in a book, ironically, written by a Canadian, Guy Vanderhaeghe, entitled The Englishmans Cowboy. And whats the American spirit, Harry? The best I can do is one word. Expansive. Oh, that nails it, Harry. Just expansive? And everything that word implies. Energy, optimism, confidence. Energy, optimism and confidence. That is what U.S. partners can bring to your company along with additional capital and expertise. And as they project their own perceptions on what it takes to be successful, that is what they will oftentimes want to see from you.

********************* About the Author Ken Pasternaks career has covered corporate banking, management c onsulting, and business education. He has lived in the United States, France, United Kingdom, Turkey, Belgium, Channel Islands and Finland. His work experience has included business activities throughout the United States, Western Europe, Central and Eastern Europe, China and the Commonwealth of Independent States. Mr. Pasternak is an American citizen and is married to a Finn. He lives in Helsinki representating Inter Associates Ltd, an international management consulting and training company. His email address is pasternak@kolumbus.fi.

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PART III
PLANNING USA BUSINESS MODEL

(How To Do Your Strategic Planning)

Introduction by Eero Peltola

There is a big difference between The Finnish and American markets. In Finland all the markets are small. Therefore a company must develop quite a large portfolio of products and/or services, if it wants to grow and achieve a significant national market share. Thus R&D plays a visible role in the companys business. This role is furthermore stressed by the fact that in small markets it is not difficult to identify potential customers and other players in the marketplace. As a consequence marketing and sales are not the dominant activities in the business. When the company begins to consider of starting business operations in the USA, the first thing to notice is that the business, however successful in Finland, cant be launched to the USA without adaptation, because of the crucial differences in the market environments of these two countries. It is absolutely important to rethink the business thoroughly and derive a new USA oriented business model. In this process it is vital to answer to questions like: 1. Does the company understand what are the key factors influencing on the success of a business in the USA? 2. What kind of products and/or services are the company now offering and what kind of needs will they fulfill in the US markets? Are they convenient features (vitamins) or useful products (pain killers) or do they form a robust basis for a successful business?

3. How are the products and/or services related with respect to the life cycles of already existing products and services and how are they related to the technologies which they are based on? Are they forerunners in a new paradigm shift or are they possible victims of an emerging paradigm shift? 4. What are the most promising products and/or services in the portfolio of the company for starting the business in the USA or should the company develop new ones? The company must focus on the most promising market segment or on very few top segments.

5. How are marketing and sales to be organized in a big marketplace? The emphasis is on customer requirements and how to attract customers in a marketplace which is huge and full of existing and emerging competitors. Therefore PR, marketing and sales play an extremely central role. It is useful to specify the USA business model in a business plan. Although the business plan is important as an end result and needed for several purposes, the planning process itself is as important and therefore all the key people should actively attend the planning process.

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In the first chapter of this section, Victor Vurpillat and Ken Jacobsen describe the mechanics of success in the USA business. They also list the main reasons for company failures. Charles Fishal gives useful guidelines how to analyze the basis of the companys technology. The result of this analysis is a key building block of the business and therefore also of the business plan. The chapter by Arthur Lipper III gives outstanding objectives for a business plan. These objectives should be clear in ones mind when elaborating the plan. A brief, but practical description of the business plan process is compiled by PricewaterhouseCoopers LLP. In his article, Jack Peregrim focuses on two main traps that a new company may fall in as it engages in market development and gives good advice for avoiding these traps.

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Chapter 7

The Mechanics of Success in the USA

By Victor Vurpillat and Ken Jacobsen
An old joke identifies three life scripts: those who make it happen, those who it happens to, and those who say, what happened? Our goal is to help business management make it happen. The audience for this chapter is those seeking the big winner in the high tech business arena. Most have found success by accident. But it is the premise of this author, that if you understand where the market is going, and the dynamics of its movements, it may be possible to put yourself in the middle of the next wave of success. Eighty-seven percent of all new business fail. As noted in other chapters, high tech companies seem to have a better success rate with only 40-60% failures, none the less, we still keep butting our heads against the walls, starting new ventures. New businesses proliferate every day. Is it possible to initiate a high tech start-up and improve the odds of success? We know why companies fail. Clearly, there are five reasons that a company fails: 1. It was undercapitalized 2. It has an inept team 3. The product doesnt work 4. The market wasnt there. 5. Government/conspiracy/unnatural acts One would think that since it is so simplistic to define the causes of failure, success would result merely by addressing each of these issues. But success is more than the absence of failure. It is multifaceted. It shows many faces. Many companies exist without success or failure. They simply ARE. They live from day to day; they float on the cutting edge of either success or failure, and sometimes both. Sometimes, they are that way by design. Some business people do not want SUCCESS. The principles want to make a living without hassles and be happy, or be fulfilled, or do other things. And they are content with this life/business style. Success is more than the absence of failure. It is multi-directional and has n-dimensional modalities. Any single metric is insufficient to analyze success. Well capitalized companies fail. Undercapitalized companies sometimes succeed. Management teams with long success records some times fail. Success is more of an emergent property than a calculable or predictable outcome. Consider hydrogen and oxygen atoms. Two violent gases, when combined, form harmless water molecules. Physics cannot calculate from the properties of hydrogen and oxygen our perception of wetness in the emergent property we call water. There is nothing in the properties of either hydrogen or oxygen that would allow the prediction that they would produce the feeling of wetness. Success often appears to be, like an emergent property whose attributes cannot clearly be predicted. 55

Observing and analyzing both winners and losers result in some interesting conclusions. First of all, stories about success are filled with myths about how and why success happened. Nonetheless, certain themes and patterns emerge that can be learned and applied to increase the chance of future successes This chapter offers an analysis of these patterns for success in high tech startups. We rely heavily upon the concept of paradigm shifts and disruptive technologies as keys to success. For it is when there is a changing of the guard, that there is an opportunity for new players to emerge. The basic premise of this chapter is that it is imperative that entrepreneurs understand the big picture before they write the business plan and launch a company. Too often a finely detailed idea is the basis of a business plan. A product is not necessarily a business. A company is not necessary to build a product. This book is not about building products. The simple advice to you is that if a product is envisioned, build it, and then licenses license it to a company that has a market for such products. Developing a product is easier than building a company. Selling a product is easier than funding a company. Often, creating and owning a product is a lot more satisfying than trying to manage a company. Many ventures would be more profitable if the entrepreneurs realized that they should peddle their concept to an existing company, rather than attempting to fund both a product development and a business infrastructure. Such an approach greatly reduces the amount of capital required. But may also drastically reduce the reward. If, however, a company is envisioned where a product idea is merely the germ of a complete product line, then the ideas and concepts explored in this book will be helpful. The TEST? Can you identify what a complete product line would look like in five years? How would the company expand with related products and technology? Depending upon these answers, there is justification for a company. Successful companies will emerge out of newness. While someone may create a successful company with an old idea-- lets make a notebook computer! it is more likely that SUCCESS will happen to a company that does something new.

Formatted

The Mechanics of Success Circa 2000-2005

Studying success and failure is futile if clear and distinct metrics are sought. But certain rubrics have evolved that offer a philosophical basis for a successful company. These observations, in conjunction with the principles above, compose a general overview of successful startups in the United States at this time. For every rule, there are exceptions, and anomalies to every pattern. Success often appears as a paradox. Maxim #1 You have Two Customers: One for the Product/One for the Stock: The other customer Most new venture founders do not have a specific plan for the most important product all companies want to sell to the general market. This unique product paradoxically is common to all potentially public companies. That unique yet common product is their stock. The value of each share represents the success, or lack there of, for all entrepreneurs. The underlying value for in a share of stock in for a specific company depends on many factors including earnings, growth, 56

market presence, etc. But it is also obvious to the public and professional investors alike, that stocks with similar statistics, sell at very different price levels for their respective stockindustry. How can that be? Its Its all in the correct positioning and marketing of the other product, product the stock. The marketing plan for the a fledgling companies companys stock requires the same kind of planning as the marketing plan for a product line, with the best professionals and support from the CEO and Board of Directors. The entrepreneur rarely has a the skill set required to even identify the people or parameters necessary to envision, plan, and execute Public Stock offerings. Professional venture capitalists understand the process but they dont fund early stage startups. Safeguard Scientifics understands the process but they also dont do startups. A few organizations such as Green Tree Research specialize in professionally planning and managing the other product for companies that want to maximize shareholder equity. Carol Muratore, president of Green Tree Research, concerns herself with helping CEOs disseminate the correct information about their companies to the proper influence keys and opinion makers in the investment community in a timely manner. According to Carol Muratore, Stock is the entrepreneurs primary product. A successful company would not launch a product without understanding its market or defining the products value to customers. In many ways, your stock is your primary product, as its value supports or hinders all other efforts. Yet companies often fail to apply the same discipline to their stock management that they demand of product management. You may see your company in terms of technology, products, markets and people. Investors see your company as a stock. Stock is the product they purchase: it distills the companys essence to a stream of future earnings. The Battle for Investor Mind share It is difficult to imagine a more competitive product market. Investors are confronted with an enormous number of choices. There are more than 2,500 growth stocks in the public market alone and they are assessed as investments in relation to one another. Company management has a responsibility to position the companys stock in terms relevant to investors; no one else is both willing and able to do so. Once you go public your positioning choices will have an effect on market capitalization. In order to capture investor attention, effective managers articulate their corporate vision in language that investors understand. With clearly stated positioning you directly influence the valuation process. Without clear and concise company positioning, you lose the ability to differentiate your company from your competitors. Corollary: Successful new ventures respect the mothers milk (cash) The exploding PC market was just beginning to find out it was going to need uninterrupted Power Supplies (UPS) to protect their ever more valuable data. PC sales were reaching millions of unit units per year in 1985. The founders of Unisonincluding myself, thought we were going to be rich. The management team was a star studded stable of successful startup successful veterans headed by a young wunderkind who could sell "ice boxes" to Eskimos and maybe walk on water. Or so we thought. 57

The first year at Unison, a promising startup in the Uninterruptible Power Supply (UPS) business, was filled with great expectations. We had developed a hot new technology for the UPS business. Or so we thought. This new high frequency power converter was smaller, lighter and less expensive to manufacture. No one in the market has had anything like it. The first order of business was to bring in the accounting heavy weights from corporate headquarters. We began to build a really top flight purchasing organization. That was followed by growing a huge manufacturing organization in Mexico for low cost production. Or so we thought. Lastly we set up a marketing organization with 500 high quality dealers. Then, we discovered the product didn't work reliably. Does this sound backwards? Not only is it typical of many startups, its understandable in hindsight. We wasted $6,000,000 and 18 months getting to this realization. Each super star on the team was getting ready to do his job, from the head of finance to the head of manufacturing. Our previous success history was in large companies with established infrastructures. So guess what? We built their our own version of the Taj Mahal to support themselvesourselves. What's worse, the first guy we hired to head up purchasing was considered a incompetent and the second one was no better. Instead of concentrating on innovation and marketing they built a factory in Mexico. Two engineering teams later, they completed the original innovation. But it was too late. American Power took over the market and sailed on to dominate while achieving $200,000,000 in sales. Unison finally got their product, but it was too late. The technology was sold to another power company and the dream died. Hopefully, we learned our lessons. The lesson here is that failure to concentrate on the two critical issues, innovation and marketing, allowed the imminent failure in engineering to escape the attention of the champion (wunderkind president). The drive to get the product into manufacturing before it was tested ultimately sunk the project because they had run out of money focusing on other things. These other things included a finance organization, a manufacturing organization and a plush image to enhance the corporate presence. All of which could have been outsourced and none of which had a major impact on innovation or marketing. Corollary: Dollar signs shouldnt be confused with Percent signs: Entrepreneurs by their nature are concerned with control issues that extend beyond product and technology to their percentage ownership of the new company. Some times it seems that they would rather have 100% of an un-funded company rather than 10% of a $100 million company. "Don't be concerned about what appears in front of the percent sign (%), worry about what appears after the dollar sign ($). That is to say when we start a company we expect it someday to be a public company that will be worth millions of dollars in the stock market. During the startup phase the startup team may own 100% of the initial stock issue at maybe a penny or even a tenth of a share. The initial capital provided by the founding management team may only be $4,000. Five million shares issued a $0.01 = $4,000. By adding sweat, blood and tears (plus intellectual property rights, if any), some seed financier (usually family and friends) may invest at $1.00 per share if it can be justified in the business plan. If the seed investor receives 20% of the company (1,000,000 shares) not only is there a million in the bank, but there is a $5,000,000 market valuation on the new company. 58

The entrepreneur and the management team are now worth, on paper, $4,000,000, at a cash cost to the start up team of $4,000. Not Bad for a days work. The team will appear to have lost ground from a percentage point of view. They started out owing owning 100% of the company and now own only 80% of the deal, but it is worth a lot more on a dollar basis. A product idea is worth only a few percent of a company. Maybe the management team is worth 10 or 20 percent, but not much more until success has been achieved. The real heroes in the startup business are the people who risk there their money betting on the management teams dream. They deserve the lions share of the equity (shares) or some guarantee that the venture is going to make it or suffer the lossbecause they are the ones who are going to suffer the loss. Remember "CASH" is the mothers milk of a startup. He who has the gold, makes the rules. Now, If the new venture produces a product that works and some people are willing to buy it, then the next round of financing is necessary. It is time to approach the Venture Capital community. Unfortunately, the successful VCs too often hire young MBAs who have never met a payroll in there their life and have no idea of the Success Paradigm and it's rubrics. While well, educated many of these advisors have no practical business experience or business savvy. Maxim # 2 There are only two legitimate functions in a start-up: Marketing and Innovation. There are only two over-riding newness issues for early stage ventures or companies in transition: Innovation and marketing. We all recognize the critical importance of both but startups that fail often spend most of their time and money on other things. The Most Widely Outsourced Business Functions
59% 60% 50% 40% 30% 20% 10% 0% Finance Manufacuring Info. Sys. Shipping Legal 26% 31% 36% 41%

Source: Arthur Anderson & Co.

15

Innovation implies creativity. Creativity is the process of discovering new information or rearranging old information in a new way. Unfortunately there are a number of inhibitors that prevent the creative process from getting to first base. Here are some of them. Tradition Success Fear "we've never done it that way" "Why should we change?" "Oh my God what if we fail?"

15

The Economist Intelligence Unit: Base 300 North American and European companies with multiple responses. Reprinted in Computer World, March 4, 1996 59

NIH Inertia Blindness Goals Prejudice Culture stifles creativity

Not invented hereInvented Here A body at rest tends to stay that way - Newton Sometimes we can't see our own limitations Rigid short term goals kill creativity New ideas can't always be judged by old values Firing first time failuresPunishing innovators that fail the first time

Once the creative process has begun it will then a substantial effort will be necessary to keep it going. Tthere will be many forces at work to prevent the creative idea from becoming an innovation in the marketplace. Here are just a few of the things that could halt your train. Magic Ideas Overprotection High Risk Peer Pressure No Champion Over Optimism No risk - no investment (surprise) I'm not letting you near my baby If we fail we'll loose our ass If he fails I'll get ahead No passion, no success You promised a billion it's only 500 million "Creativity is the idea-getting process; innovation relates to the commercialization process."
Don Gamache founder of Innotech

Innovation is the process of transforming ideas into new products or services. Transformation for the sake of newness can be a costly error and serendipity does not always lead to a commercial success. A rational approach to the pursuit of creative problem solving is essential. An old Army map reading manual, according to Don Gamache, says the following about finding your way "If the terrain and the map do not agree, follow the terrain." Serendipity and the real world needs may not coincide. The following steps to problem solving/innovation are suggest suggested by Innotech: 1. Problem Recognition -- finding or sensing an unstable situation or disturbance 2. Naive incubation/gestation -- personal immersion, a time of reflection and quiet contemplation allowing subconscious manipulation, restructuring, and new pattern making 3. Information/knowledge search and detailed preparation -- learning everything about the problem via factual information and expert opinion from diverse viewpoints 4. Knowledgeable incubation/gestation -- personal consideration of unusual approaches and ideas, now melding naive notions of step 2 with factual information and expert opinion of step 3 5. Alternative-solution formulation -- group generation of numerous possibilities, using creativeenhancing techniques

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6. Alternative-solution evaluation -- group rigorously test possibilities using tough-minded methodologies 7. Chosen-solution implementation -- putting ideas into action 8. Feedback and reassessment -- judging by results and improving the original idea The success of the innovation process results in the creation of a product or service that solves the customers customers problem. The confirmation of innovation is an a purchase order.

Anomaly: Eighty percent of the investors investors capital is usually spent on infrastructure, ...not innovation. Capital ends up being spent on non-newness issues. There are only two critical newness issues: Marketing and Innovation. It is all about the judicial use of the investors investors capital. Don't build Taj Mahals Mahal-like Manufacturing facilities, Engineering organizations, and Sales and distribution organizations until you have some evidence its going to work. However, once the investment has been made, the vehicle has been created for responding to opportunity. [[By investment do you mean the Taj Mahal-like factilities and that they can be used to respond to opportunity or do you mean the investors capital and it is the investors capital that is used to respond to opportunity? I assume the later but the sentence sounds like dont build this stuff, however, once you have built it you can respond to opportunity]] All the ingredient ingedients have been gathered together than that can facilitate success. By the time you get through the process, the window of opportunity for the initial concept may have closed. Or, enough progress has may have been made to see that the concept was not feasible. So, redefine yourselves to focus on something at which you can be successful (Maxim #1) [[maxim 1 is you have two customers one for the stock and one for the product]]. Walt Disney is reported to have been accosted by his brother, Roy, for sharing his plans too openly. He replied: Roy, I can create new ideas faster than they can steal them! If the right structure has been created, it can follow a new idea. This is a freedom that an established company doesnt have because an established company has too much baggage and history. Dont put new wine in old wineskins, they may burst. Often a failed company, restarted, is more viable at innovation than a successful company. We have often driven to a new ventures headquarters only to find the signs of failure in the parking lot. There seems to be an inverse correlation between the number of expensive cars in the parking lot and the success of the new company. The larger the luxury car count the lower the probability of success for the new venture. Ray Norda's decision to turn down the ex-president's grandiose office for a work place not much larger than a coat closet, said a lot about Novell's new cultural values. Cash is the mothers milk of a new venture. Those who don't respect mother will live to regret it. Maxim #3 Start up companies that thrive are frequently characterized by an ability to change directions rapidly. 61

Corollary: Success often Evolves from Failure The paradox is that many of the successes arise from earlier failures. It is the ability of a company to change direction when they are failing that makes the difference. Novell failed as a hardware manufacture under George Canova. The old failed Novell Data Systems was reborn under Ray Norda where it became a software winner. World class empires are often built from failures. Lotus originally began to create a Visible Programming Language (VPL) which failed. It was too ambitious and not possible to achieve in the computer world at that time. Their dream of a multifunction product with Word Processing (1) Database (2) and Spreadsheet (3) also failed. Integrated software did not resonate with the market at that time. Boeing was originally in the furniture business. Nokia originally made rubber boots. The Price Club couldn't even get started as a company store. QVC started as an idea at Franklin Mint. Throughout industryhistory, it has been established that companies frequently do not succeed at what they start out to do, and often fail at their first charter. Many successful ventures had been failures ... Until until they persevered and discovered all of the necessary ingredients (often by trial and error) that made them a success. It isn't management techniques, tools, structures, great plans, the right people, luck, great markets. -- all of the things management gurus talk about -- its the process. The process of doing until the right thing shows up in the space you have created by just doing, of trial and error, of "serendipitous business evolution." Its not so much what you do but how you do it! It's the process of doing something totally unexpected shows up that creates the seeds for success. Consider the ubiquitous Post-it Pad created at 3M. It was a failed superglue experiment that was salvaged. Its inventor failed to make a stronger glue, but realized its potential as a weak glue. A market was created overnight. Thats not to say that success can be achieve by starting 10 things at once hoping one will succeed. The success paradigm seems to require maniacal dedication to a plan or goal with al l of ones energy and commitment but at the same time being ever vigilant to a serendipitous opportunity. There is actually a logical rational for this. The process of funding a start-up is time consuming. The due diligence required by investors is necessary but often delays a business opportunity. One of two dynamics occur: Either 1) the window of opportunity for the initial business concept is missed because of time constraints or competitive offerings that preempt a launch, or 2) the concept initially conceived was is unreachable. Regardless, the investors have taken the trouble to fund a team and create a new infrastructure. This infrastructure has no baggage. It has a chosen team. It has the enthusiasm of a start-up. It has completed what we call the first round of coursecoarse/course planning. It has the gross targeting completed, and now the fine focusing targets the business opportunity. In a macro economic sense, the failure of whole companies within the free market systems system produces the success of that economic system. This is according to Dwight Lee and Robert McKenzie in their book Failure and Progress, which analyses these dynamics on a global basis. The great tragedy of the socialist system is the lack of freedom to fail by members of the system. The great tragedy of our own governmental system is the unwillingness to let failed government programs die and disappear. As more and more government controls are place placed on society as a whole, the more difficult it will be for our society to produce success. So, too, is it this true within 62

the corporation or the startup company. Having the wisdom to turn failure into success, ashes to empires, is what this book and the great men people who build success from failure are about. How you respond to failure is more important than whether you will fail. A prudent Venture Capitalist considers failure a potential learning experience. A corollary of this is that the person who has never failed before may not handle it well. Handling success is part of the problem; learning from failure is the other. Armed with the knowledge that failure may be a part of the path to success, we can productively redirect the startup at the opportune time. Corollary: Startups can't be successful until the right guy shows up, because he's never there in the beginning! As unlikely as it seems, our conclusion is that the management team will almost always have to change before the company can be successful. And yet most VC's will tell you that the first and most important criteria for funding a company is the management team and the Champion who heads it. They seem to be oblivious to history's record of failed original CEO's. "Those who fail to learn the lesson lessons of history art are doomed to repeat them." It may seem contradictory that management teams must change before success can happen and the notion that A teams with a B plan can succeed. However A teams only get that way after a shuffle or two. Maxim #4 Id rather fund an A Team with a B Plan... The team is more important than the concept. A great team can be re-deployed. A great product is often scuttled. A great team must be led by a great leader. That person, may or may not be the President, but their leadership must be visionary and exhibit wisdom above all else. Successful companies evolve through various phases of fine tuning their marketing and product concepts. A team without baggage is the easiest to focus on a new opportunity. Appropriate cultures, traditions, policies and job descriptions can be created in a start-up that contributes to the success potential of a company. It is, after all, a company that is successful.... not necessarily the product. To have success, For success a product and/or a company needs a champion. Most Almost all human endeavors in business are guided by the drive of the startup Champion (entrepreneur) and his or her Co-Creators to achieve something we all call success. These people are the "paradigm shifters" of the twenty first century. The champion might be compared to the gladiator of old or the currently popular entrepreneur who, through blood, sweat, and tears brings into being a new or reorganized business that provides new goods and services to mankind at a profit (the cost of doing business in the future) for himself or herself and others. We have deliberate deliberately chosen the word champion because it embodies all those qualities about a man or woman struggling to create something new in the face of adversity, against the odds,- blazing a trail where other others have timidly feared to tread The key ingredient in a successful enterprise is the person who assumes the responsibility for the whole organization. That person is the Champion. Even in those very enlightened , non hierarchical, co-creative and participative structures, there will always be some onesomeone who says "lets vote". Anomaly: The Wrong Champion may become the Achilles Heel... Or.... Todays hero may become tomorrows heel. 63

When does a leader outgrow their usefulness? Leaders being chased off of their thrones make great gossip literature. John Scully at Apple, Phillip Kahn at Boland, Larry Michells at SCO, all made headlines as they left their company. It is arguable that they had each outlived their usefulness. It is at the same time sad since in each case, it was those personalities that contributed to the success of the company. Wosniak and Jobs are good examples of the earlier hypothesis that the right guys arent there in the beginning. They, too, had to leave for their company to stay successful. Gates is the contradiction to this theory, or is he?. ...Than a B Team with an A Plan. Safeguard Scientifics launched an automotive jobber inventory management computer system [[is Jobber correct]] called Autologue, . The plan and product were both outstanding. But the management team was not the A team. The same plan however was executed brilliantly by a competitor and became a multi-million dollar enterprise known as Triad. Autologues product was better. Triads team was better. They won. The changes required to compete in a changing market versus the need to stay focused required wisdom beyond the capabilities of the Autologue startup team. Anomaly: Professional Managers who are Perfect often cause failures. We noticed that managers who over concentrate on avoiding failure in order to "look good"; ", end up either doing nothing or making more mistakes. In the managers managers focus on "looking out for number one", they end up paying very little attention to the good of the business. What's worse, companies who let these "games manmen" survive, end up with "be perfect" cultures where nothing new gets done -- In great style -- because no one is willing to risk the unavoidable mistakes that companies make trying new and risky things. An associate, Dr. William Paulin, has offered the following insight: "Failure avoidance leads to a "be perfect" culture that ultimately paralyzes and kills an organization by rendering it unable to change or take effective action." The "be perfect management style" of today's typical MBA graduate would have long since buried Novell, Compucom and probably QVC as well. The forced adherence to a ridged business plan developed even with the best information quickly becomes meaningless in a the fast changing world of today's global economy. The resistance to change by us humans only adds to the no risk policies that ultimate ultimately doom companies to mediocrity or oblivion. Another chronic problem with professional managers is that their success is most frequently in large companies. They develop the large company syndrome expecting nice job perquisites, comfortable travel accommodations, company cars, etc. They too often force the entrepreneurial company into expense commitments that they expect, but are unreasonable for a start-up. Success skills in an established company are not necessarily transferable to a start-up. Maybe the guy WILL have to do his own typing and make his own coffee.... heaven forbid! Maxim # 5 Small Business are More Likely to Find Success in High Tech than big conglomerates.

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John Nasbit, in his book "Global Paradox", asserts that the real power in the new business world will come from the smaller business units not the corporate giant. This is also the premise (responsiveness and maneuverability) of one of Peter Druckers books , Management Challenges for the 21st Century. The reason: ; Hierarchical organizations are not responsive to quickly changing business environments. Our principal [[who is the principal referred to here?]] explains this paradox in terms of the high risk-failure prone process that creates and defines the paradigms of future success. The " Be Perfect Management" 16of Global global corporations is a direct impediment to failure prone activity of the entrepreneur. A large company cannot survive without a bureaucracy. Bureaucracy is a naturally occurring phenomenon, sort of like mold, it cannot be stopped. Like it or not, we cannot live without some of it. Penicillin is also a mold [[is penicillin a mold or created from a mold?]]. But bureaucracy also inhibits creativity and innovation. Smaller businesses have less bureaucracy and fewer inhibitors to innovation. Innovation begets success. Success begets growth. Growth begets bureaucracy. Bureaucracy kills innovation. Anomaly: Success Breeds Conservatism: You only do it once. The concept of Entrepreneuralism is the concept of RISK. The word, entrepreneur, is based upon the French, according to the OED.17 It was originally used in reference to military adventurers. In the eighteen hundreds it referred to a person who organized entertainment events. Some of todays business plans are, indeed, entertaining. Etymologically, it is related to words like prize and surprise. The entrepreneurial model has betrayed all of these connotations. The professional VC community no longer wants any RISK; no surprises, no adventures. After success, they want a sure thing. In fact, its our observation that professional and amateur investors who made all of their money in early stage or even start up companies don't do it again. Its too scary. Anomaly: The Old Judges the New, and is usually wrong. Creativity brings forth new ideas which are judged mainly using the same criteria as old successful and unsuccessful ideas. That's just plain silly. You wouldn't judge the accomplishments of a two year old baby with a performance of a sixteen year old athlete. Organizations often kill their future opportunities by evaluating new ideas as if their product already commanded 70% of the market. AT&T became the largest phone company in the world because the culture at Western Union Telegraph, the then dominate communication company, did not think the telephone technology was useful or important. Albert Einstein was convinced that the current problems or the unexplained anomalies in popular paradigms of physics can could not be solved with the current thinking but required NEW thinking. Corollary: As the market matures, consolidation naturally occurs. Home-run types of success may arise from merger and consolidation. Symantec is a paragon for this model of success. Gordon Eubanks has developed a very successful model that gracefully absorbs yet respects the corporate cultures of the companies they Symantec
16

DR William Paulin, Professor at Pepperdine University was the first person to explain this paradigm. 17 The Oxford English Dictionary 65

acquires. He shares the wealth he creates generously with his partners in trade. Compare his model with the sharkish model of Computer Associates who has a well established record of disassembling its acquisitions, and conforming its prey to its own culture. It is easy to see that all mergers are not the same. Maxim # 6 Its easier to be successful with something new, than with something that everyone else has. Newness sells! Not that mature products dont,. But but mature products and technologies have distributors and infrastructures that support them. New players with new versions of mature products interrupt themthe old players, but do not disrupt them. What we mean is that something totally new can disrupt entire business sectors and. It must be addressed by the old players. Just anotherA new player or a new source for something a product or service that has already been established is only an interruption. Convenience, additional features and pricing advantages are justifications for interruptions, but they are not compelling and dont force the old players to change radically. Disruptive technologies or solutions demand a response. For example, the transistor was disruptive to the vacuum tube industry, but not to the radio industry.

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Chapter 8

Purpose and Construction of Business Plans

By: Arthur Lipper III,
Chairman: British Far East Holdings Ltd. There are several purposes in preparing business plans. For many, the primary purposes is to obtain an audience with a prospective capital provider, who will usually require a prior submission of a business plan before agreeing to a meeting. For others, the reason to do a business plan is to study and justify the allocation and expenditure of resources, perhaps available from within the larger enterprise. I have recently, in a discussion with a corporate consulting client, reached the conclusion that business plans can be developed differently and more constructively than is usually the case on the traditional business plan. Incidentally, almost all plans have the same hockey stick presentation of financial projections. This annual down a lot, down a little, break-even, up a little and up a lot prediction series is more likely to be accurate in the early years than the later years. The first part of the business plan, or business description, can be simply a non-predictive description of the business as it physically exists now. The second part of the business plan can be a three part presentation of possible courses of action. Each course of action would have a different; objective, required investment and risk/reward profile. The first objective might be; maximum possible growth of revenues and/or profits, in the shortest amount of time, using the minimum amount of resources. Certainly, allowing a greater amount of time and employing more funds are options which will also be explored. The second objective might be; maximum assured growth of revenues and/or profits. In this case the time required and level of resource application will be more precisely known than in the maximized case. The third objective might be; a favorable balanced risk/reward result where the level of resource application will be somewhere between the first and second cases. The singular advantage of such a breakdown in a range of corporate objectives is one of the independently investing capital provider, or a board of directors, then being in a position of being able to select how the selected management is going to spend the provided capital. In such a program capital provider could elect to participate in the development of the business as it best suited the investors needs. The reading of a business plan should improve the readers understanding of the current business and the prospects for the business, if operated under one of the described optional programs. The problem posed by conventional business plans is they present the managements (or business plan 67

authors) conclusion without providing those who are expected to pay for the process to exerci se their own judgment as to possible alternatives. I believe it is the board of directors of a company which has the responsibility of establishing the course of action management should follow and not be put in the position of simply authorizing management to proceed as they propose, without a full exploration of the alternatives. It all comes down to a definition of success which is agreed to by all of the significant parties to a transaction. Once the definition of success is accepted then the alternative courses of action can be more effectively analyzed and the defined success more likely to be achieved.
British Far East Holdings Ltd. All rights reserved. January 24, 2001.

About the Author Arthur Lipper III, Chairman of British Far East Holdings Ltd., is; a corporate advisor, investment banker, financier, entrepreneur, author and lecturer. His passion and practice is being involved in the creation and guidance of new and novel enterprise. He has written extensively (5 books and countless articles) on entrepreneurship and the financing of early stage companies. His venture Investing text can be accessed at www.venvest.com. As well as having been the Chairman of Arthur Lipper Corporation and New York & Foreign Securities Corporation, both New York Stock Exchange member firms, he has been the publisher and editor-in-chief of Venture Magazine. Mr. Lipper serves on the Board of Directors of numerous private and publicly traded companies and advises many more. He resides in Del Mar, CA.

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Chapter 9

Business Plan Process

By PricewaterhouseCoopers LLP
Why Is a Business Plan Needed? A quality business plan is an important first step in convincing investors that the management team has the experience to build a successful enterprise. The plan also provides measurable operating and financial objectives for management and potential investors to measure the companys progress.

The Executive Summary

Business plans should be summarized into a short two- to three-page synopsis called the executive summary. The summary is used to capture the essence of the plan and generate interest so the reader further studies the full proposal. It is the most important section of the business plan and should be written last, ensuring that only vital information is included. At many of the largest venture capital firms, fewer than 5 percent of the hundreds of plans received are reviewed beyond the executive summary. While sometimes this is because the business does not fit the type of investment favored by that firm, more often it is because the executive summary is not written convincingly or clearly enough. The summary must stand out and be noticed, and to do this it must be of the highest quality. The summary must be persuasive in conveying the companys growth and profit potential and managements prior relevant experience. The effort taken in researching investor preferences and preparing a quality summary will set the plan apart and assure that it receives further consideration by venture capital firms. Executive Summary Outline 1. Company Overview Generally, the investor wants to knowin a hurrywhat product the company is developing, the market/industry it serves, a brief history, milestones completed (with dates), and a statement on the companys future plans. If the company is an ongoing business seeking expansion capital, the entrepreneur must summarize the companys financial and market performance to date. 2. Management Team List the key members of the management team and technical advisors, including their age, qualifications, and work history. It is important to emphasize the teams relevant, proven track record. Note key open positions and how you intend to fill them. 3. Products and Services Provide a short description of the product or service and highlight why it is unique. Discuss any barriers to entry that prevent further competition (e.g., patents). Mention the products direct or indirect competition. If possible, briefly mention future product development plans such as upgrades or product line extensions in order to show the investor that the venture is not a oneproduct/service company.

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4. Market Analysis Define the target market to be served using recent market data and analysts estimates of current and projected size and growth rates. Also note what percent of the market the company plans to capture. Mention the names of your largest current, well-known customers who have either purchased your product or given you letters of intent. It is important to discuss who will buy the product and why. Briefly note the distribution/ selling strategies used in the industry and explain which one(s) you plan to use to penetrate the market. 5. Funds Requested and Uses State the amount of money required and be specific in the description of the uses of the funds sought. Avoid such general terms as working capital. 6. Summary of Five-Year Financial Projections This section should summarize key financial projections through breakeven. Only projected revenues, net income, assets and liabilities should be listed. It is also useful to note additional expected rounds of financing needed.

The Body of the Plan

1. Company Overview In this section one should fully describe the reason for founding the company and the general nature of the business. The investor must be convinced of the uniqueness of the business and gain a clear idea of the market in which the company will compete. The entrepreneurs vision for the companys future production and operations strategy sho uld also be described. An investor needs to be assured that the company is built around more than a product idea. The entrepreneur needs to demonstrate that a profitable business can be built based on the strategies detailed in the plan. 2. Products and Services The business plan must convey to the reader that the company and product truly fill an unmet need in the marketplace. The characteristics that set the product/ service and company apart from the competition need to be defined. It is also important to describe each of the end-user segments that will be targeted. A full profile of the end-users and the key potential applications of the product will demonstrate to an investor that the entrepreneur has done his/her marketing homework. A description of the status of patents, copyrights and trade secrets is very important. It is equally imperative to describe barriers to entry. Keep in mind that patents are only as good as they are defensible. The plan should list all the major product accomplishments achieved to date as well as remaining milestones. This will give an investor a comfort level, knowing that the entrepreneur has tackled several hurdles and is aware of remaining hurdles and how to surmount them. Specific mention should be made of the results of alpha (internal) and beta (external with potential customers) product testing. If alpha or beta tests are planned, mention how these tests will be conducted. Single product companies can be a concern for investors. It is always beneficial to include ideas and plans for future products/services. If the plan demonstrates the viability of several products, an investor will see an opportunity to grow a successful business. 3. Market Analysis The analysis of market potential separates the inventors from entrepreneurs. Many good products 70

are never successfully commercialized because their inventors dont stop to understand the market or assemble the management team necessary to capitalize on the opportunity. This section of the business plan will be scrutinized carefully; market analysis should therefore be as specific as possible, focusing on believable, verifiable data. Market Research should contain a thorough analysis of the companys industry and potential customers. Industry Data should include growth rates, size of the market, recent technical advances, government regulations and future trends. Customer Research should include the number of potential customers, the purchase rate per customer, and a profile of the decision-maker. This research drives the sales forecast and pricing strategy, which relates to all other strategies in marketing, sales and distribution. Finally, comment on the percentage of the target market the company plans to capture. 4. Management and Ownership Venture capitalists invest in peoplepeople who have run or who are likely to run successful operations. Potential investors will look closely at the members of the companys management team. The team should have experience and talents in the key disciplines: technological development, marketing, sales, manufacturing, and finance. This section of the plan should therefore introduce the members of your management team and what they bring to the business. Detailed resumes should be included in an appendix. The management team in most start-up companies includes only a few founders with varied backgrounds and an idea. If there are gaps in the team it is important to mention them and comment on how the positions will be filled. Glossing over a key unfilled position will raise red flags. Often, because venture capital investors have access to networks of management talent, they can provide a list of proven candidates appropriate for these crucial positions. Include a list of the board of directors or advisors: key outside industry or technology experts who lend guidance and credibility. This is another area where empty positions may be filled from suggestions of a well-net-worked investor. 5. Marketing Plan The primary purpose of the marketing section of a business plan is to convince the venture capitalist that the market can be developed and penetrated. The sales projections made in the marketing section will drive the rest of the business plan by estimating the rate of growth of operations and the financing required. The plan should include an outline of plans for: Pricing, Distribution channels, and Promotion. a) Pricing The strategy used to price a product or service provides an investor with insight for evaluating the strategic plan. Explain the key components of the pricing decision, i.e., image, competitive issues, gross margins, and the discount structure for each distribution channel. Pricing strategy should also involve consideration of future product releases and future products. b) Distribution Channels A manufacturers business plan should clearly identify the distribution channels that will get the product to the end user. For a service provider, the distribution channels are not as important as are the means of promotion. Distribution options for a manufacturer may include: Direct Sales, such as mail order, direct contact through salespeople, and telemarketing; 71

Original Equipment Manufacturers (OEM), integration of the product into other manufacturers products; Distributors or Wholesalers; or Retailers. Each of these methods has its own advantages and disadvantages and financial impact, and these should be clarified in the business plan. For example, assume the company decided to use direct sales because of the expertise required in selling the product. A direct salesforce increases control, but it requires a significant investment. A venture capitalist will look to the entrepreneurs expertise as a salesperson, or to the plans to hire, train and compensate an expert salesforce. If more than one distribution channel is used, they should all be compatible. For example, using both direct sales and wholesalers can create channel conflict if not managed well. Fully explain the reasons for selecting these distribution approaches and the financial benefits they will provide. The explanation should include a schedule of projected prices, with appropriate discounts and commissions as part of the projected sales estimates. These estimates of profit margin and pricing policy will provide support for the decision. c) Promotion The marketing promotion section of the business plan should include plans for product sheets, potential advertising plans, Internet strategy, trade show schedules, and any other promotional materials. The venture capitalist must be convinced that the company has the expertise to move the product to market. A well-thought-out promotional approach will set the business plan apart from the competition. It is important to explain the thought process behind the selected sources of promotion and the reasons for those not selected. 6. Competition A discussion of the competition is an essential part of the business plan. Every product or service has competition; even if the company is first-to-market, the entrepreneur must explain how the markets need is currently being met and how the new product will compete against the existing solution. The venture capitalist will be looking to see how and why the firm will beat the competition. The business plan should analyze the competition, giving strengths and weaknesses relative to the product. Attempt to anticipate competitive response to the product. Include, if possible, a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in the analysis. 7. Operations The operations section of the business plan should discuss the location and size of the facility. If one location is selected over another, be sure to include justification. Factors such as the availability of labor, accessibility of materials, proximity to distribution channels, and tax considerations should be mentioned. Describe the equipment and the facilities. If more equipment is required in response to production demands, include plans for financing. If the company needs international distribution, mention whether the operations facility will provide adequate support. If work will be outsourced to subcontractors, eliminating the need to expand facilities, state that, too. The investor will be looking to see if there are inconsistencies in the business plan.

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If a prototype has not been developed or there is other uncertainty concerning production, include a budget and timetable for product development. The venture capitalist will be looking to see how flexible and efficient the facility plans are. The venture capitalist will also ask such questions as: If sales projections predict a growth rate of 25 percent per year, does the current site allow for expansion? Are there suppliers who can provide the materials required? Is there an educated labor force in the area?

These and any other factors that might be important to the investor should be included. The sales projections will determine the size of the operation and thereby the funds required both now and in the future. Include the sources and uses of financing in the business plan, and be certain the assumptions are realistic. The timing and the amount of funds will be derived from the sales estimates. Business Plan DOs and DONTs Do be brief. Begin with a two- to three-page executive summary. Then, limit the body of the plan to seven- to ten-typewritten pages. Note that internal business plans and budgets are normally more detailed than those presented to external investors. Include everything important to the business and financing decision, but leave secondary issues and information, such as detailed financial information, for discussion at a later meeting. DO let the reader know, early on, what type of business the company is in. While this may seem obvious, many plans tell the reader this information on page 20, for example, and with other plans, the reader is never certain. DO state the companys objectives. DO describe the strategy and tactics that will enable the company to reach those objectives. DO cite clearly how much money the company will need, over what period of time, and how the funds will be used. DO have a clear and logical explanation about the investors exit strategy. DONT use highly technical descriptions of products, processes and operations. Use common terms. Keep it simple and complete. DO be realistic in making estimates and assessing market and other potentials. DO discuss the companys business risks. Credibility can be seriously dama ged if existing risks and problems are discovered by outside parties. DONT make vague or unsubstantiated statements. For example, dont just say that sales will double in the next two years or that new product lines will be added without supporting details. DO be specific. Substantiate statements with underlying data and market information. DO summarize and properly structure internal budgets and plans to facilitate review by outside parties. DO enclose the proposal/ business plan in an attractive but not overdone cover. DO provide extra copies of the plan to speed the review process. About the Author PricewaterhouseCoopers Silicon Valley-based private equity practice has served hundreds of entrepreneurs from the first round of venture financing through the IPO process and beyond. Our professionals are dedicated to helping entrepreneurs establish and grow their businesses, achieve 73

profitability and determine the appropriate exit strategy. Located around the globe, our professionals provide in-depth guidance on the venture capital process and direction on creating a fundable business plan. Visit us at www.pwcerc.com (entrepreneur resource center) to learn more. PricewaterhouseCoopers (www.pwcglobal.com) is the worlds largest professional services organisation. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.

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CHAPTER 10

Processes of Thinking Outside The Box: The Marketers Traps

By Jack Peregrim
Of course, there are any number of traps that a new venture can fall in as it engages in market development. This author will focus on two that are closely related and are also most often overlooked. Taking new products, services, businesses, and technologies into new markets is always more complex and difficult than realized by the initiator. Particularly if the real focus is on the advantages of the offering and how it enters the market is considered as less important, urgent, or interesting. A necessary evil. The focus is on the competitive advantage provided by the innovative or gap filling value premise and then we simply expect that potential markets will be as excited to see your baby as you are to present it. The two biggest traps are: Following the path of least resistance. Failure to exert the same energy, creativity and innovation to the marketing function that was dedicated to the offering. People and organizations follow the path of least resistance with all the best intentions. To expedite time to market by focusing on the bird in the hand. To keep the focus where it should be, on the superior product or technology. Because common sense dictates that we work with those we already know and have established relationships with. Because we arent as comfortable or adept at market development as we are about the other functions of our business . Because we just dont know of any other options, so we pursue those we are aware of. If any of those excuses sound familiar then you may be basing your effort to a greater degree on luck than you realize. Just one case follows to exemplify about a very recent client with a new technology who presented it to one of their existing, major customers who are also the market leaders in their field. On the surface, this sounds like the most practical and obvious market development strategy. But, it basically kept the companys technology out of the market for years! The customer continually expressed high interest, yet over the course of years, they added new requirements to what was already a superior value. It turned out that the improved technology would replace their technology in an area which they had a clear intellectual property position and thus would lose their advantage from a new technology being embraced by the market. They were very shrewd about it by insisting that the clients development s be kept confidential based on their contribution of insights and development strategies.

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The organization above could easily be viewed as doing the right thing because they focused on an established strategic market partner who had a dominant share and thus the largest potential for value creation to the supplier. But, this was just another example of following the path of least resistance. The technology that took years in development was marketed via the first option agreed upon in a 15 minute meeting. What should they have done? The answer is directly related to the second trap! They needed to be as energetic, innovative, and creative in looking at all potential market development plans as they were with the original innovation. This business unit of a larger corporation had about 100 employees with about 70 dedicated to technology and operations. The remainder were in administration and support with 2 people involved in sales and marketing. Of those, the junior employee handled all the small accounts and the senior one focused on the existing major accounts. The senior marketer spends the vast majority of his time maintaining the relationships that keep the Company alive and growing from the existing market/product base. Thus, how likely is it that he will either: Dedicate a large portion of his time and energy to something not affecting the present business or be willing to look at other alternatives to the obvious one stated above. The above case is not is an aberration but is indicative of the majority of market development efforts and it applies in marketing new products or old products into new markets. The specifics will be different (Choosing a distributor that is obvious over an alternative channel; working with someone in the industry that you at least know because you met him over dinner at an association function and he/she was really excited about your offering; or to commit to the leader in the industry because that is surely the only way). But, the real path to success i s really simple, yet, its difficult to execute. It can be costly and time consuming, and it can delay the initial impact in the targeted market. But, it also lowers risk, and increases the level of success over time. Be CreaTIvE!! The keys to creativity in market development are the same as those in other pursuits. Use tools, techniques, and involve people who do not have a bias to only the most obvious approaches. Generate many options. Make lists and then use a creative process to consider every item as viable alternatives rather than quickly eliminating those that seem far out. Focus first on WHAT can be done and only later address HOW. They are separate creative efforts. Recognize that whatever knowledge you have accumulated (even in todays age with access to information), is only a part of what you need to know. You will never have all the information but you need to recognize this and keep digging for more. One of the ways to get started in a new market effort is to generate many answers to questions such as the following: Determine the end-use customers and markets that will most benefit from our offering? Then take that list and break it out in various headings as below and generate many more answers to each new heading. Examples could be: Who has the most immediate need? Who are the early adopters in this market? Who/where is the largest volume going to come from over time? Who will be the most negatively affected by my capturing value? Who would have the most interest in capturing the same value but is not in the market yet? Everyone serves or strives to satisfy someone else so whether you sell business to business or even if you are serving the consumer directly, go beyond the obvious aspects about what they purchase to understand why they do so. 76

Ask the same or similar questions of the potential customers who will be the primary suppliers to the end-use markets. Your new list should consider many things you had not initially such as partnering with someone who wasnt obvious or enacting a step strategy to get into the market in one way but to maximize impact via a separate strategy that can only be executed after credentials are established.

The output of the potential approaches should then be expanded with another list of actions that can be taken to capture value from each option. Thus, a list of dozens of things may be generated and then each needs to be pursued (at least on paper) with the mentality that each one is the only viable choice. Now, to repeat a fact stated above, all of this is based on only what you know and does nothing to uncover issues, drivers, and options that you are not even aware of. So the whole thing is improved immeasurably if repeated with unbiased, outsiders who do not have the same stake that you do. Voice of Customer and Voice of Market approaches have proven extremely valuable tools to those that have embraced them. Admittedly, this is an exhausting effort and it should never end. It may be focusing efforts on issues that arent fun or exciting. But, the end result is an effort that lowers risk, improves the scope of success, and generates confidence based on the number of things looked at and the learning that occurred from the process. Secondary benefits range from securing investment from others based on the thoroughness of your effort to an increased knowledge base that makes following new business initiatives succeed. Again, dont stop pursuing new options because there are always many that you havent considered yet. Dont ever stop asking questions and the best one starts with What if ? or Why not ? And, dont ever stop asking whether you are following the best option or just the easiest one.

About the Author Jack Peregrim is a Vice president with INNOTECH, which was founded in 1969 as a resource to help clients succeed in developing new business. he has been involved in over 300 client engagements which have created billions of dollars in new value. Prior to joining INNOTECH, Jack had several positions in strategic planning and business management with several Fortune 500 companies.

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CHAPTER 11

Is Your New Technology A Feature, Product, Business, or a Totally New Catagory?

By Dr. Charles Fishal
______________________________________________________________________ Inventors invent for a variety of reasons: perhaps personal gratification, perhaps to get talking rights for a U.S. patent. Inventors often aspire to create new products (e.g., portable telephones), or a new company (e.g., Compaq Computer), or a totally new category (e.g., Apple Computer). It is important for an inventor to distinguish between inventions as: features products business new categories

An inventors failure to fully understand the invention may cause wasted time or money. It may pit the inventor in a futile, competitive battle with a dominant industry player. At the other extreme, misclassification by the inventor may result in loss of potential business opportunities. Sometimes, the appropriate classification is obvious. More often, appropriate classification is a complex process involving analysis of the Product, Industry, Market, Financial Requirements and Availability, and the Management Capability. Use the following tables to analyze each of these factors. The first step is to understand the product. You may find a combination of negative and positive factors. Decide which will be most important and use judgment to decide whether on balance the industry will be hospitable or not. PRODUCT ANALYSIS Features Products Business New Category
Major improvement or new product Long product life cycle

Minor improvement to Major improvement to Major improvement existing products existing products or new product Product life cycle is short (e.g., months) Moderate product life cycle (e.g., less than 18 months) Moderate product life cycle (e.g., less than 18 months)

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Single product Not Protectable

Single product Protectable (e.g., patents, copyrights, trademarks, trade secrets) High brand loyalty to existing products User switching costs would be high User learning is minor Slope of experience curve is gradual

Family of follow-on products Protectable (e.g., patents, copyrights, trademarks, trade secrets) in key international markets Low brand loyalty to existing products User switching costs would be moderate to high

Extensive family of follow-on products Protectable (e.g., patents, copyrights, trademarks, trade secrets) in key international markets Low brand loyalty to existing products Not relevant

High brand loyalty to existing products User switching costs would be high Easy for user to change Slope of experience curve is gradual

Not relevant Steep experience curve (first mover advantage) Steep experience curve (first mover advantage)

Generally, inventors should avoid attempting to create a stand-alone business from a minor improvement to an existing product. Even a major improvement to existing products is difficult to commercialize where there is high brand loyalty to existing products and user-switching costs would be high. If the product is not protecting able, there will be problems for an inventor who seeks to negotiate a deal with the dominant producer. An important factor is whether the invention is a stand -alone product or the first product among a family of follow-on products. It is generally not desirable to attempt to create a new company if the invention is a stand alone product. Instead, the stand -alone product would be more suitable for licensing or sale to an existing player. Next, analyze the Industry environment. INDUSTRY ANALYSIS Features
Concentrated (one or two dominant companies) Requires investment in expensive equipment Most competitors can manufacture with existing equipment

Products
Concentrated (one or two dominant companies) Requires investment in expensive equipment Most competitors can manufacture with existing equipment

Business
Highly-fragmented (no company has more than 5% share) Moderate investment in equipment Will obsolete existing industry equipment base

New Category
Highly-fragmented (no company has more than 5% share) Equipment cost moderate in relation to market potential Will obsolete existing industry equipment base

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Dominant players react quickly to new competitors

Dominant players react quickly to new competitors

Dominant players react slowly to new competitors

Dominant players react slowly to new competitors

Concentration in the industry will impact the inventor in several ways. The dominant companies will be able to use their profitability, marketing and financial muscle to crush the new entrant. It is particularly important to examine the past retaliatory behavior of the dominant players. Where the existing companies are slow to react to new competitors or new product introductions, there may be a window of opportunity for a new company to enter the market.

MARKET ANALYSIS Features

Market size is less than $ 1 million Only one customer Narrow market window Price stability High brand loyalty

Products
$10 million market Few customers Moderate market window Price stability High brand loyalty

Business
$100 million market Many customers (none dominant) Moderate market window No price stability Moderate or no brand loyalty

New Category
Market is greater than $1billion Many customers Market window not critical No price stability No brand loyalty

Market size is an important indicator for the inventor. Where the market size is less than $1 Million, the inventor may be unable to raise money to produce the product. Generally, it will be more suitable for licensing or selling to an existing company that has the resources to produce and market the product. As market size begins to approach $10 million, the inventor may be able to outsource manufacturing (often financed by the contract manufacturer) and enter the market. This is particularly true of faddish products. However, this approach is constrained by the protect ability issue. Often, outsourced products may be adapted by the manufacturer and remarketed under a different name or with different features. Brand loyalty is an important factor. Where significant brand loyalty exists and there is a narrow market window with few customers, the inventor should consider the product to be a feature to be licensed or sold to one of the existing players. FINANCIAL ANALYSIS Features
Funding required for a prototype: high

Products
Funding required for a prototype: moderate

Business
Funding required for a prototype: affordable

New Category
Funding required for a prototype: affordable

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Significant funding required for a product launch Limited investor interest

Significant funding required for product launch Interest from private investors only

Not a limiting factor

Not a limiting factor

Venture capital available

Venture capital

The inventor needs to examine both financial requirements and fund ability. Where financial requirements for development of a prototype and launching the product are beyond the means of the inventor, outside financing will be needed. If the inventor has access to adequate private financing, then it may justify launching a new business. Even if the invention is outstanding, if it requires venture capital funding, it may not be fund able unless it meets current investment interests. MANAGEMENT ANALYSIS Features
No management experience

Products
No management experience

Business
Management experience at previous startup or larger company

New Category
Management experience at previous startup or larger company

The inventor should carefully evaluate his or her own management strengths. If limited, the inventor will be able to rely upon outside consultants (e.g., attorneys, accountants, etc.) to successfully license or sell the invention to existing companies. Rarely will the inventor be able to bring together the right combination of outsiders to successfully create a new business.

OVERALL RECOMMENDATIONS Features

License or sell features to existing company

Products

Business

New Category
Create a new company to produce and market family of products

1. License/sell 1. Create a new product to existing company to company, or produce and 2. Outsource market family of production and products, or market 2. Create strategic alliance with existing company

After evaluating the characters of the product, industry, market, fund ability, and management, the inventor must judge whether, on balance, the invention falls into one of the following categories: features products business new categories

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Depending upon the overall factors, determine whether the appropriate classification of the invention. If, on balance, the invention should be classified as a FEATURE, the suggested approach would be to license the product to one of the market leaders, rather than to compete. In fact, depending upon the importance of the feature (and the need perceived by the possible licensee), the inventor may not be able to commercialize the invention. The recommendation is less clear for a PRODUCT. A stand-alone product probably does not justify trying to build a company. Instead, most products should be considered as candidates to be licensed to existing companies with an established presence in the market and with the resources to commercialize the product. In some instances (e.g., fads, etc.), however , the inventor may choose to produce and distribute the product. Where possible, such production of such products should be outsourced so that the inventor can focus on distribution and sales. Where the invention is clearly the basis for a new BUSINESS, the inventor should be encouraged to bring together a qualified management team, assemble skilled consultants and explore the creation of a new enterprise. There is no always correct approach to company-building. Instead, the inventor must assess his/her/their entrepreneurial aptitude and building accordingly. If a NEW CATEGORY, the inventor may have little choice but to create a company to exploit the technology. Often, existing companies may not appreciate the potential value of the new category. In some instances, existing companies may be threatened by the invention because it may obsolete existing product offerings.

About the Author Dr. Fishal is a Principal of Hoffman Row Group, Inc., an investment banking firm based in Monterey, California, with associates in Denver and Salt Lake City. Current consulting involves strategic business planning, corporate finance, acquisitions and merger, international technology transfer, and evaluation of financial opportunities. He is a Distinguished Executive Lecturer at California State University, Monterey Bay and Senior Lecturer, San Jose State University. Until recently, he was Director of the Center for International Business Planning and Senior Lecturer in Global Business Strategy and Industrial Competition at the Monterey Institute of International. His email address is cfishel@redshift.com.

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PART IV
Marketing and Sales in America

Introduction by Juhani Saukkonen

Kenneth Jacobsen in a previous article discusses the paradigm shifts of the software industry. He emphasizes, that while we have moved from mainframe to mini and then to PC computers and now we are moving to PDAs with field automation applications, there is no end in sight. The next wave will be home automation and after that-- automating the person. These paradigm shifts continually create new winners and opportunities. While one winner may stand out in each paradigm, many other companies have become very wealthy and successful in their shadow. There will always be emerging business segments like ERP, educational or gaming software. Every entrepreneur who considers entering the American market should visit a bicycle department in any US shopping mall and notice the vast variety of bicycles models available in each shop. This conveys an idea about the size of the US market and its impact on business processes. The huge number of products available in any product category definitely clarifies the importance of marketing and selling to everyone from that very moment. Hi-tech and software are not exceptions. The above was noted by Mikko Roos, one of the more successful Finnish software entrepreneurs with US experience, when asked the disciplines a Finnish entrepreneur should very seriously pay attention to when planning to enter the US markets. Marketing and innovation are the core competencies in hi-tech industry. A one time innovation is not sustainable: neither is a company that does not excel in marketing. Marketing and selling are so aggressive from a Finnish poi nt of view that one might start to think that excellence in marketing and selling are substitutes for product quality and its ability to fill the perceived customer need. That certainly is not the case. Product excellence and functionality must be in place but they wont survive without superiority in marketing. Nothing succeeds without sales because only sales generates revenue and profit. In small markets (like in Finland) there is no need to specialize PR, marketing and selling into separate functions. The numbers are too small: the number of potential customers, partners, industry magazines, journalists, Everyone must perform many functions. The same person is responsible for marketing and sales. Advertising agencies take responsibility for full service from PR to mass marketing. In the US it is quite different. Everyone has to focus to be successful. A start up company has to have a special focus. The same is true with service providers. A PR company has to focus not only by industry but also concentrate to the companies in certain growth stage: start up, growth, IPO, etc.. Specialists are better in sports. Specialists are also better in business. The articles to follow are all written by US business people who successfully operate in highly competitive US hi-tech markets either as hi-tech entrepreneurs or marketing professionals. All the authors of this Part have met Finnish software entrepreneurs in seminars in US and addressed 83

marketing and sales in numerous lectures. Though those meetings they have developed instincts about the key things Finnish entrepreneurs should learn to facilitate their successful US entry. So, a two-way process has been used when generating these articles. Isnt that what marketing is all about? In this part there are six articles. Owen Greeson introduces two articles in this Part. In the first article he points out the differences of sales, marketing and marketing communication and how they relate to each other. In his second article he concentrates product-market segmentation with valuable and practical advice. Jeff Holmes presents most valuable aspects of marketing in the USA. He goes very deep to the marketing issues and shows many great check lists. He also emphasizes the market examination part with direct connection between customers and their needs and the companys product development. Jay Shotwell describes public relation (PR) activity very deeply and emphasizes PRs vital role while working in big, even huge markets. Ken Jacobsen writes abo ut U.S. sales channels and there huge sizes. He shows, that there are five main avenues to launch software products and describes each in detail. He also gives practical advice, how to arrange an efficient product launch event with PR and marketing functions involved.

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CHAPTER 12

Selling vs. Marketing vs. MARCOM

By Owen Greeson
First a few definitions: Selling concentrates on strategies and tactics in order to motivate prospective consumers to purchase products and services created by an organization.... carried out without the organization necessarily being concerned to determine what the actual needs or preferences of consumers might be. Marketing focuses on developing strategies in order to satisfy the needs of consumers or market segments. In other words, it is a function that seeks to satisfy real needs and seeks to avoid creating artificial ones. Marcom (sometimes spelled "marcomm") is an abbreviation for "marketing communications." Marcom is targeted interaction with customers and prospects using one or more media, such as direct mail, newspapers and magazines, television, radio, billboards, telemarketing, and the Internet. A marketing communications campaign may use a single approach, but more frequently combines several. Before investing time and money into various marketing strategies, it's essential to complete a marketing audit to better understand yourself and your customers. Too many times we make arbitrary decisions without any solid marketing information. The results can be disastrous. To enhance your marketing prowess, answer the following questions: 1. What Business Am I Really In? The first question you must answer is, what client needs does my business meet? 2. Where Can I Diversify? You need to consider additional services you can offer your customers. 3. What Is the Perceived Quality of the Service or Merchandise I Sell? People buy for their reasons, not ours. Although we may feel that we have a high-quality product or service, the customer is the one who really defines quality. 4. What Kind of Image Do I Want to Project? One of the keys to offering a successful product or service is to position it in the mind of the customer. 5. How Do I Compare With the Competition? There are three reasons why you need to know about your competition. The first is to determine where you have the advantages, the second is to know why and how they are better, and the third is to copy success. 6. What Benefits Do I Offer My Customers? In other words, what can your client save, gain, accomplish or avoid by using your product or service? 7. Who are My Customers? There is no issue more important to you than knowing your customers. We need to focus on the 20% of the customers that will give us 80% of our income. 85

8. Can They Afford Our Product or Service? Do you have different services and products available to meet the needs of your various market segments, with prices they can afford? 9. When Do They Buy Your Product or Services? By understanding the key buying times of the year, you'll know the best times to market your product or service. 10. Why Do They Buy From Me? There is one main reason why people buy your product or service. You must be unique or different. This is known as your Unique Selling Position (USP). If you answer all of these questions listed above you will have a very clear understanding of your product, its uniqueness and how it can be marketed. You can then begin the process of creating a marketing strategy that will drive the sales process. Remember our definitions; Marketing focuses on developing strategies in order to satisfy the needs of consumers or market segments. After you have created the Marketing and Sales strategies you can begin to properly attack the Marcom issue. Select the Marketing Communications tools that will allow you to reach your target market and will fit within your budget. This isnt rocket science, its a simple step-by-step process where you begin by clearly defining your product, figuring out what makes it different from your competition, identify the target market and finally decide the best way to reach them at the most reasonable cost. The goal here is to properly position your product or services to emphasize the difference ( Unique Sales Points) in all of your Marcom. If you can do this then the customer is given a very clear message on why they should do business with you and only you. The type of amount of prospects and your marketing budget will determine what medium of Marcom is best. A card deck (direct mail) while often inexpensive produces little results. With a response rate of 1% to 3% it is necessary to mail many 1,000s of pieces. Mainstream PC magazines are outrageously expensive and to be effective a campaign for several months must be implemented. PR combined with ads in industry specific publications offer the most cost effective way of reaching your target audience. About the Author J. Owen Greeson is President of GeoSoft, a Domestic and International sales and marketing firm that represents clients in Europe, Asia, and America. His background in the personal computer industry dates from 1976 when he purchased a computer kit from Processor Technology. He was a member of the original Atlanta Computer Club with Dennis Hayes where his interest in Data Communications first surfaced and an equity partner with Carbon Copy, the original remote control program for PCs. His strengths are in finding products, providing the assistance necessary to productize and bring them to market. His talents include product fulfillment, contract negotiation (international and domestic), trademark and copyright protection (international and domestic), sales and distribution (international and domestic). He can be reached at ogreeson@mindspring.com or by phone at +(404) 255-0691

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CHAPTER 13

Marketing in the US
By Jeff Holmes
The Age of Instant.
In the Industrial age, marketing was all about production for the masses. Create a product that was acceptable by the majority of the population; make it cost effective, then mass produce it. You still needed to create demand, although demand was more from curiosity of new developments and technology, than from product choices. People bought so they could keep up with their neighbors. In the Information age, marketers were able to gather and share resources more easily, and adapt to consumer preferences on a regionalized basis. Thus, they could market to a more diverse set of consumers, while still maintaining economies of scale. Companies enjoyed new ways to lower manufacturing and development costs by reaching new audiences more cost-effectively through television and radio. In the age of Instant, companies will need to understand that the consumer is no longer analog, hes digital. Sure, his technology is different, but more importantly the way in which he receives and views information is greatly different than how his parents viewed information. He no longer needs to watch from beginning to end, listen from the onset of a conversation, or show-up on time to a presentation. The way he receives his information is entirely different, and so is the way he forms opinions or preferences. In the age of Instant, companies selling to the buying population must understand that consumers receive their information selectively, in very fast bursts, and in many differing form factors. Back in the days when we watched a show on tape, we had to fast-forward to new sections, or watch the entire selection from the beginning. In the age of Instant, we can shuttle directly to new chapters, replay a scene in seconds, or cut to the good parts with thumbnail previews of whats ahead. We now get our information digitally vs. analog.

Building a brand in the Age of Instant.

Everything we see is part of our impression of a companys brand. And how that message is delivered is more important than ever before. Now, it is much the norm that events and messages will be taken out of the context for which they were intended. So our methods of delivery need to reinforce the brand in every instance, and allow for adaptation and localization-- especially to a market of one. Everything from the tone and style of a digital signature at the end of an email message, to the music during a multimedia presentation must be adapted for digital minds. This is far from agreeing with marketing rules of the 1980s and 1990s, that everything must be consistent and promote company unity.

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In the age of Instant, brands must be able to adapt to the situation. Yes, we need consistency and we need common messaging. But we need flexibility to adapt to the rapid rate at which consumers digest their information. In the early days of commercial Internet, companies felt that displaying product and corporate information in an electronic brochure format was acceptable. They did not feel the need to adapt information to the individual user. Now, it is imperative that we customize the experience of each user for their individual needs and preferences. Our Brand is reflective of our audience of one. What does he feel about our firm, what does he need from us? Since we can now measure responses instantly, we should be able to adjust our messaging to tailor to his buying habits. He just came from another destination; how can we customize our information to meet his experience expectations? How can we adapt to his patterns for digesting information quickly. He may not have read everything we have shown him. Did we properly cross-sell information, or leverage what we knew about him to create an amended impression of our firm? We cant merely show an electronic brochure.

Why build a Brand vs. solely focus on selling products?

Why do you choose Pepsi over Coke? Why do consumers pay a 20 percent premium for a Sony TV? Why did Absolut Vodka change the shape of their bottle, and raise their prices 400% after being in business since 1897? Why have you read this far? Because there are choices, brands instill preference/value, branding creates loyalties, and you have embraced the idea of change. More Today more than ever, consumers have more choices, more options, and more power than they have ever had. We can buy things from any part of the world, without an intermediary. So why should we buy from you? Product life cycles are now measured in days and weeksnot months or quarters. Being able to market your products by adapting to the consumer needs, rather than telling people what they want, or merely showing them technical innovation, will enable your company to build a longer-lasting brand. Previously, companies had to decide which message to promote to a global audience, or at best on a national scale. Their methods for marketing and development forced them to make decisions based on how they could gather consumer information, and how they could fulfill product sales by means of delivery. Now we can get product testing, consumer trends, and feedback completed instantly. And limited costs allow us to do this daily. Every time someone purchases our products, we can tell where they came from, what else they purchased, in what order, how long it took, when they left, and where they went off too. Based on our instant research, we can make changes to their marketplace experience as they proceed through the process. We can adapt their environment for the next visit; 88

changing messaging, products, and thus increase the value of our brand preference to them. We have an instant advantage in being able to tailor to their needs. Creating preference. People pay more for a Sony television because they believe it is more technologically advanced than other brands. They feel that because it is made in Japan, it must be comprised of superior electronics. Therefore, Sony has helped to create a tremendous value and preference for products from Japanese companies. They have helped to Brand Japan. In doing so, they have also created an opportunity for other companies, by placing themselves at the edge of the market. Chances are, many people own Sony manufactured monitors, without even knowing it. To maintain the manufacturing economies and amortization of R&D that Sony enjoys, they needed to OEM products to other firms. Thus, in essence they are competing with their own successes. And they have counted on the inabilities of other firms to beat them at marketing. Having worked on marketing projects within the Sony family, we can say they have created a tremendous advantage. Sony spends in excess of $1.5B USD on marketing each year promoting their brand. The late Sony Founder and Honorary Chairman Akio Morita, in 1958 changed the company's name to "Sony Corporation" from "Tokyo Telecommunications Engineering Corporation". In the belief that a company's brand is its lifeblood, he worked to gain recognition for Sony around the world, an effort that led to the power of the SONY brand today. By tying promotions to the corporate brand of Sony, the ideals of quality, technology, and credibility are inferred without having to decree these values. Thus, a much greater value is placed on future products as they are developed, and merely association gains a head start in the marketplace. Embracing change an opportunity of a negative? In November 2000, in Helsinki, at a Europe Unlimited forum for entrepreneurs and VCs, Finnish VC Mikko-Jussi Suonenlahti noted, "The problem is that in America, change is seen as an opportunity. In Europe it is seen as a negative." By participating in development programs the Finnish government has created for companies of Finnish origin entering the US, Finns will be able to learn the differences of marketing and how product purchase decisions are made within the US. And eventually, how purchase decisions will be marketed worldwide in the age of Instant. Old world thinking: built in focus group. The old world ideals that change is seen as a negative can also be compared to an analog way of thinking. Someone will always be able to beat you on speed, quality or price. So how do you capitalize on this opportunity? The Finns currently have an edge in the mobile economy. They invented GSM. There is a virtually captive focus group of 10,000,000 people. If exploited properly, this information can be used to determine how marketing in the instant will take place. The infrastructure in Finland is leaps ahead of the US marketplace in terms of mobile communications. The costs are less, the usage is higher, and the need to adapt to outdated underlying technology is virtually non-existent. That combined with the fact that there will be approximately one billion mobile users by 2004, leaves Finland positioned to capitalize on mobile handsets, security software, wireless networks and technology such as SMS. 89

Combine these benefits of an existing foundation for testing, with superior telecommunications technology, and all you need to enter the US marketplace is either A) years of solo brand building with endless sources of marketing capital, B) in-country partnerships with established brands, or C) a combination of partnership brands and an understanding of how to market in the instant to establish new long term value brands.

Marketing partnerships are vital for success.

With market consolidations and survival of the fittest at an all-time high in the technology sector, utilizing the resources of others is of the utmost importance. Whether establishing partnerships with localized brands for their sales channels, marketing relationships, capital or sources of future development, companies can no longer come to market with hopes of billions in market cap valuations without a product roadmap that incorporates a plan B, C & D. And plans for follow-on products/services that include adding more than just features are a must. Instant market feedback empowers accurate product development. True there have been many companies that have gained outrageous valuations on paper, only to have fallen back to earth when the realities of turning a profit set in. It is not hard to obtain funding for a proof of concept stage. The difficulties arise when firms try to convince funding sources they will be reaching their success solely on the virtues of their products. Many past companies within the Silicon Valley area are testimony that engineering products for engineering sake is lacking in one main ingredient what does the customer want today? Tomorrow? And next week? And how are you going to get your product to market without a channel, or the marketing resources to help when faced with challenges that take 2x in time to overcome, and cost 2x more than anticipated? In ensuring the success of your firm, marketing relationships have the ability to give instant credibility to your products/services, while minimizing risk to the end user. It is imperative that marketing partnerships be formed during the planning stages of a company and product development. Thus your proof of concept involves those at the levels of support, field sales, representatives, distribution, and partners, not just management. Too many times, firms develop products and assume that there is a market for them. Building a better product does not guarantee it will be a success. You must understand the customer better than the editors, the analysts, and better than the company that sprouts up tomorrow with 10x the money you have.

A Marketing Toolkit
Over the past 15 years our Silicon Valley advertising and marketing firm has found half the battle seems to be getting players to agree on a single message, goals of a messaging campaign, and how to measure the success of brand development and marketing campaigns. The challenge is to help your team keep focused on the messages you wish to convey as you create brand messaging, corporate identity, advertising campaigns, sales-oriented websites, brochures, direct mail pieces, or product packaging. Whether you're a CEO, Marketing Communications Manager, VP of Sales, or an Engineer who just became THE marketing department, working through these exercises will greatly aid you in improving the message, design, and effectiveness of your campaign. We suggest you distribute the fact-finding sections to follow to all involved in your quest. 90

The Marketing Toolkit is simply a tool to help get you off the ground and pointed in the right direction.

Setting the Rules of Engagement.

Determining the optimal way to measure the effectiveness of a campaign can be very difficult. We prefer to start by having the team talking to your customers. What are their perceptions of your team, your products, and your unique position? By candid interviews, online data gathering, or faceto-face meetings, you can begin to create a baseline to measure your opportunities. Research. Who better to talk candidly with than your customers? Get info that beta testers, past customers, and tech support operators have. People love to talk, and love to talk more about themselves, and their experiences. Measurement. At the onset of a campaign determine goals. Whether direct sales, perception, awareness, or brand related, you must first determine how to gauge the success of the target. Everyone loves feedback. Positive, negative, criticism, bluntness, confrontational, or subtle. Without your honest input, you may miss an opportunity. Turn your feedback into a successful relationship that generates positive results with your marketing. Response. With measurable goals, feedback from customers and insiders, and a determined strategy, you are half way there. Now you can start creative development. But never forget the research. Without it you're guessing, with it you'll be successful. And by conducting post-campaign follow-up, you are able to tweak a message, capitalize on a new opportunity, and create input for your next messaging strategy. Defining "who you are", who others think you are, and who you want to be perceived as and distilling that into a single, comprehensive identity calls for some level of agreement from all audiences in and outside a company. Your company's personality must shine through a finite, onedimensional mark portraying a solid image to many different people. Are you Cutting Edge? Innovative? Global? Most companies today would answer, "yes!" to the above. Yet, how do you make an impact with your Corp. Id/logo, in the space of a square inch or less? Some of the following questions may help narrow down the process: 1) What is the company vision? 2) What are trends affecting us today and in the future? 3) What are the business objectives for growth over the next three years? 4) Who are our competitors? 5) What is our competitive advantage? 6) What are our strengths? 7) What are our weaknesses? 8) How has the competition positioned themselves? 9) Who is the target audience? 10) What is the profile of the decision maker? 11) What is the personality of the company? 12) What brand attributes have been defined? Many questions will need to be addressed before beginning the creative process. However, we've found that by asking and uncovering the answer to the following question, then keeping that answer in focus helps drive a successful marketing strategy. 91

What is the most compelling and persuasive benefit we are offering our potential customers? This should be the strongest, singular quality we can say about this product/service with the broadest and most meaningful appeal to our target audience. The competition cannot or does not offer this.

A quick and effective exercise:

From a single icon to a complete identity overhaul, developing corporate ID is a very subjective process. Defining who we are and distilling that into a single, comprehensive identity calls for some level of agreement from all the principal players in a company. A companys personali ty must shine through a finite, one-dimensional piece of artworkportraying a solid image to many different people. Some of the following simple suggestions may help us narrow down the process: 1) Objective, or desired results: Specifically, what do we want the target audience to think, feel or do after being exposed to your Corporate Identity? 2) Target Audience: Who do we need to talk to and motivate? Be as specific as possible with primary target audience: e.g.: titles, age, gender, income, mindset, attitudes, end-users, MIS, sales/marketing, field reps, etc. 3) Our competition: What company(ies), product(s) and technologies are our primary competition and why? 4) Current product/service perception: How does the target audience feel, think and behave toward our company/product today? State in "our customers" terms. 5) What are the budgetary considerations? Concept and graphic direction: Suggestions you have already considered: 6) List any mandatory elements: If something must be in the piece, here's the time to state it. 7) Things to avoid: Let everyone know up front what NOT to do.

Visualization helps to set the tone.

The best way to start a branding exercise is to get everyone to start thinking in a different frame of reference. Your team has been so involved with building the product, they most likely forgot to concentrate on who they have become, and who is going to be their customers. Following are a few questions to consider when determining Company Attitude:

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1) How edgy is The Company? 2) What edgy sport would The Company do? 3) How sexy is The Company? 4) What does the word "The Company" mean to you? 5) What kind of car would "The Company be/drive? Please take some time thinking through your response to the following questions. Your input is highly regarded in taking the pulse of The Company. You will be able to see how the team feels, and the image you have about what we stand for. 1) What movie would The Company be? 2) If The Company were a celebrity, who would it be? 3) If something bad were to happen to The Company what would it do? 4) In the year 2005, The Company will be? 5) What would The Company say if it got in a fight? 6) What kind of humor is The Company? 7) The Company sees things? 8) What is the best thing about The Company?

Advertising and Positioning.

To design and develop the best possible positioning strategy and advertising campaign for your company and your customers or clients, you will need to communicate together clearly and consistently the requirements and goals of each project. Many factors such as the timing and individual dynamics of your Marketing department and company can and will effect the outcome. The intent is to develop advertising you need, versus advertising you think you want.

The "Power Idea"

This should be the strongest, singular quality we can say about this product/service with the broadest and most meaningful appeal to our target audience. The competition cannot or does not offer this.

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1) What problem must the campaign solve? State the problem that needs solving. This must be an advertising problem, which involves things like raising awareness, creating a predisposition to purchase, changing a perception/opinion, and generating inquiries. 2) Key features and benefits: Primary advantages expressed as customer benefits of our product over the competition. 3) Target Audience: Who do we need to talk to and motivate? Be as specific as possible with primary target audience: e.g.: titles, age, gender, income, mindset, attitudes, end-users, MIS, sales/marketing, field reps, etc. 4) Media considerations: What publications or venues will this ad/s be running in? Any special deadlines or placement timelines your team should be aware of? 5) Objective, or desired results: Specifically, what do we want the target audience to think, feel or do after being exposed to this campaign? E.g.: request information, buy, call, visit web site, etc. 6) Our competition: What company(ies), product(s) and technologies are our primary competition and why? 7) Advertising promise: What is the most important selling point that is both compelling and persuasive in motivating the customer to respond? 8) Current product/service perception: How does the target audience feel, think and behave toward our company/ product today? 9) What does this brand represent? What ought this brand represent? How do we position the product(s)? This should coincide with the Power Idea. 10) Are you open to alternative page sizes if were developing a campaign? 11) What are the budgetary considerations for this project? 12) List any mandatory elements: If something must be in the ad, heres the time to state it: facts, visuals, charts, logos, screen shots, 1-800 number, etc. 13) Things to avoid: Let everyone know up front if theres anything NOT to do. 14) Any samples or references pertaining to this project: Attach any samples you like: competitor ads, packaging, or any other printed material that would be helpful to your team in understanding your product, service, and/or target market. 94

Defining the problem for your Online brand.

To increase sales, customer communication and brand image, you need to communicate the needs and goals from a users perspective:

Define the Problem Define the Target Audience Information Organization User Interface and Execution How will you measure success How will users want the site? What are they trying to do? Why are they coming to the site? What are they looking for? How will they know theyre done? What is the fastest way to get information to/from them? Where are they coming from? How are we tracking them?

Do you want more accessibility to potential customers or clients? Of course!

Online advertising is MUCH MORE than just banners. Its opt-in e-mail programs, newsletters, sponsorships, tiles, affiliate programs, promotional campaigns, one-to-one marketing opportunities, and above all OPTIMIZATION!!! The first step to a successful online campaign is to determine the methods measuring return-oninvestment. How will we know if we won? Sure we need to measure Click-thrus, but more importantly is measuring Conversions. How many people got to the destination, how many completed the registration or desired action, and how many got a confirmation? This is successful online marketing. Now the key is TESTING and OPTIMIZATION. Youll need to run network buys to test creative messaging, and then alter the creative to get the best possible results. Removing words, changing colors, load times; all these factors greatly change our Click-thru Rate. But it is the landing page that is specific to the offer and referring site that increases our Conversion Rate. And to be successful, we need to do all this, and get the best possible negotiated rates, value added bonus media, and quickest reaction time for changes to our plan for OPTIMIZATION. Many traditional marketing minds think online marketing is comprised solely of running banners and hoping they work. As you will see, highly targeted integration of print, online and development experience lends greatly to increased return-on-investment.

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Your message in literature.

Putting together your literature is more about deciding what NOT to include than about telling your reader everything about your company or product(s). Marketing communications is a sustained effort; so dont feel like you need to inundate them with every little detail; save the minutia for a "spec sheet" or white paper if the information is overwhelmingly technical. With distribution through direct mail, at trade shows, sales presentations and increasingly as PDFs for online viewing, your brochure is a critical part to your marketing effort. Sometimes it is the only piece of information a potential client may have on your company, products or services. Make it count! And...Stay Focused! Think of your own limited time resources. Providing just the right amount of information to your target market, with emphasis on the most important features and benefits, is both an art and a discipline. In designing your brochure you need to account for anyone that may scan the piece rather than read it from beginning to end (remember Age of Instant). Using subheads, bullet points, captions, photos, graphs and charts can greatly improve the retention of some of the more important contents of your brochure. Think about how this piece will be used. Is it a "leave-behind" for your Sales Staff? Is it more of a Company Overview? If so, stay away from anything that may date the piece. Some of the most common types of brochures include:

Product Overview Capabilities Brochures Market Specific Brochures Application Stories/Testimonials

1) Project description: What TYPE of brochure will this be? 2) How long do you envision this piece will last? Are you planning on any company or product updates? If so, when and what? 3) Objective, or desired results: Specifically, what do we want the target audience to think, feel or do after being exposed to this brochure? E.g.: request information, buy, call, send in BRC, etc. 4) Target Audience: Who do we need to talk to and motivate? Be as specific as possible with primary target audience: e.g.: titles, age, gender, income, mindset, attitudes, end-users, MIS, sales/marketing, field reps, etc. 5) Our competition: What company(ies), product(s) and technologies are our primary competition and why? 6) Current product/service perception: How does the target audience feel, think and behave toward our company/product today? 96

7) Key features and benefits: Primary advantages expressed as customer benefits of our product over the competition. 8) What is our marketing strategy? E.g.: Attract customers from competitors, bring new customers into the market, upgrade current users, etc. 9) What are the budgetary considerations for this project? This helps present realistic production recommendations like size, number of pages, in-house stock vs. custom photos or illustrations and number of colors, paper stocks, etc. 10) Concept and graphic direction: Suggestions you have already considered. 11) List any mandatory elements: If something must be in the brochure, now is the time to state it: messages, facts, visuals, charts, logos, screen shots, 1-800 number, product/box shots, etc. 12) Things to avoid: Let everyone know up front what NOT to do. 13) Any samples or references pertaining to this project? Attach any samples you like, including competitive brochures, ads, or any other printed material that would be helpful to the team in understanding the current market.

Direct Response Advertising.

Direct Response or Direct Mail can generate inquiries or directly sell a product. Many organizations and companys use direct marketing to help build an image, maintain customer satisfaction, and inform and/or educate customers in an attempt to generate activity. A campaign's results are measurable and can be used to modify subsequent campaigns. Direct Mail can be used to:

Announce the availability of a product and motivate visits to your web site. Encourage attendance at seminars or other events and visits to a trade show booth. Announce new programs or sales incentives to dealers. Generate warm leads for product upgrades or accessory products and services. Support advertising, telemarketing, and other sales activities by making multiple contacts with a prospect. Which markets to target. This will be determined through the use of a well-qualified, updated and clean list, or marketing database. What direct marketing supporting strategies will be employed.

To successfully implement direct-marketing programs, you will need to determine:

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How to evaluate its effectiveness and success. The objective of direct response campaigns is often, though not always, to elicit a response of some kind. For example: test-drives, calls, contributions, sales etc.

To develop a successful campaign, begin by defining the target, and the offer. 1) The Target Whom are we talking to motivating? Be as specific as possible with primary target audience: age, gender, education, income, mindset, attitudes, end users, MIS, sales/marketing, field reps, etc. 2) The Offer The offer needs to be relevant and valuable for your target market. No matter how interesting your product or service may be, people won't respond if theyre not interested in your offer. -Purchase Offer A purchase offer can either be a soft offer ("try before you buy", such as a demo disk or downloading free evaluation software). Or a hard offer, which is an incentive for buying. -Information Offer An information offer includes white papers, brochures, promoting attendance at an event, etc. 3) Create a Sense of Urgency Don't forget to include any terms, guarantees or expiration dates. If you are marketing internationally, you will need to consider the differing regulations on what you can offer and how a purchase offer is stated. The Offer & The Target To develop a successful campaign, begin by defining the target, and the offer. 1) List the mandatory elements: If something must be in the piece, here's the time to state it: facts, visuals, charts, logos, screen shots, 1-800 number, the product and/or box? 2) Key features and benefits: Primary advantages expressed as customer benefits of our product over the competition? 3) What problem must your Direct Mail piece help solve? Simply state the problem that needs solving. This must be an advertising problem. Advertising problems involve things like raising awareness, creating a predisposition to purchase, changing perception/opinion, and generating inquiries. We can address the problem with our offer. 4) Our competition: What company(ies), product(s) and technologies are our primary competition and why? 5) Concept and graphic direction: Suggestions you have already considered. 6) What are the budgetary considerations for this project? Consider the costs to design, print, and use a mail fulfillment house and postage. 7) Do you currently have a list to mail to? 98

If so, approximate number of contacts: 8) How do you currently have the list? On what media? Is this an in-house list, or one through a publication, event management company, etc? 9) Have you made arrangements for mail fulfillment? If so, with whom are you working? Do you have a permit number? What action do we want them to take? Specifically, what do we want the target audience to think, feel or do after being exposed to this project or advertisement? (Request information, buy, send in Business Reply Mail, etc.) 10) Do we know anything about what other products or services your customers are buying, using or doing now? Current product/service perception: How does the target audience feel and behave toward our company/product today? 11) Things to avoid: Let everyone know up front what not to do. 12) Any samples or references pertaining to this project? Attach any samples you like, competitor packaging, ads, or any other printed material that would be helpful in understanding your product or market. Packaging or The Six Sided Promotion The role and function of packaging has changed to accommodate the self-service retail environment, with purchase decisions being made at the point of sale. Large manufacturers such as Proctor & Gamble conduct countless research studies on package design before anything even hits the shelf. Of course you are most likely under different budgets but you can still control the process. Be sure not to waste precious real estate on your package. Logos and important content information shouldnt be listed somewhere that may get buried on the shelf. Dont assume your potential customer has seen your recent magazine promotional campaign and knows everything about your company/product/service. Think of your package as a six-sided ad. Your packaging image should be consistent with your other branded marketing materials or current promotions. Whether youre considering going retail, direct, or through the channel, youll need to design the most effective packaging for your market. Effective Packaging talks to you! Not only must a package be attractive to the target audience, it must also communicate information such as how to use the product plus divulge its composition and content. 1) Project description. Be complete. What exactly will the package hold? If its software, will it hold a disk or CD-ROM, user manuals, etc? 2) Target Audience: Who do we need to talk to and motivate? Be as specific as possible with primary target audience: e.g.: titles, age, gender, income, mindset, attitudes, end-users, MIS, sales/marketing, field reps, etc. 99

3) Our competition: What company(ies), product(s) and technologies are our primary competition and why? 4) Current product/service perception: How does the target audience feel, think and behave toward our company/product today? State in "our customers" terms. 5) What problem must the package or display solve? Simply state the problem that needs solving. This must be an advertising problem. Advertising problems involve things like raising awareness, creating a predisposition to purchase, changing an opinion, and generating inquiries. 6) Key features and benefits: Primary advantages expressed as customer benefits of our product over the Competition. 7) What is our marketing strategy? E.g.: Attract customers from competitors, bring new customers into the market, upgrade current users, etc. 8) What are the budgetary considerations for this project? This helps present realistic production recommendations like size, materials and number of colors. 9) Concept and graphic direction: Suggestions you have already considered: 10) Where will the packaging or display be seen or sold? E.g.: retail, direct, resellers, type of store, club, internationally, etc. 11) List any mandatory elements:If something must be on the packaging, now is the time to state it: messages, facts, visuals, charts, logos, screen shots, 1-800 number, etc. 12) Things to avoid: Let everyone know up front what NOT to do. 13) Any samples or references pertaining to this project? Attach any samples you like, including competitive packaging, ads, or any other printed material that would be helpful in understanding the current market. About the Author Jeff Holmes is CEO/Creative Director of 3 Marketeers Advertising, Inc., a leading Silicon Valley marketing and advertising firm specializing in creating measurable results. Jeff has served as the President of the Silicon Valley Association of Advertising Agencies, and ChannelSeven.com has named his firm to the Top 100 Advertising Agencies for the past three years. In addition, the firm has been named to the Silicon Valley Business Journals Top 100 Fastest Growing Private Companies.

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Chapter 14

What Is Public Relations (PR) and How Does It Relate To Marketing?

By Jay Shotwell
Public Relations. Whats that mean? When you walk into a car showroom and you are considering buying a new car, you usually find two types of documents. The first is a four-color brochure of the car with lavish pictures of the car. Written by the manufacture of the car, it describes that car as the best value money can buy the safest car on four wheels. It may also imply that, when you own one and start driving it, it will change your life. This is advertising. You enjoy reading it and the fantasy that it could change your life but you dont truly believe what it says. You decide how much you want to believe. The other document you are given is a copy of an article, sometimes with no color, a copy of an article written by a automotive publication that makes a living at evaluating the quality and performance of the same car you read about in the brochure. This article is written by someone other than the cars manufacture, a third party, and it describes the cars performance and gives you the facts from another persons point of view. This document has a lot more value to the potential buyer since it will tell you both the cars strengths and weakness. This is public relations. Many think its the element that closes the sales cycle. As with most anything we buy, we tend to depend on an endorsement from someone or a organization other than the source that is trying to sell us something or convince us to do something that will benefit us. Public Relations in North America The most obvious difference between North America and Finland is size. As one can imagine, it would be a lot easier to communicate a message within a country like Finland where you can drive from one side of the country to the other in one day where as it could take up to a week to do the same in the United States. With this in mind, it is easy to understand that the effort to communicate a message to potential buyers of your products or services in a large massive country as the United States takes a considerable amount of time and financial resources. The creditability of a product or service is of the utmost importance to the American buying process. The US market is swayed to choosing and purchasing brands and tend to stay away form unknown companies regardless of the technological advantages or quality of the product. The public relations efforts to promote brands are an critical part of most all marketing programs in the United States. It is nearly impossible for a company to sell anything in the US without a program to promote the brand. Nokia has spent millions of dollars in its public relations programs along with its extensive advertising programs.

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What a to look for in a Public Relations Agency Most of the agencies in the US focus their efforts to achieve and maintain positive public relations and sound corporate image objectives via established personal contacts with reporters, editors and publishers of newspapers, magazines, trade journals and the broadcast media. The overall goals are to: Experience in capturing a definitive share of press coverage for products/services facing stiff competition. Expertise in generating and coordinating interviews with editors and reporters of specifically targeted media at trade shows and agency sponsored press tours.

Billing Most PR programs are tailored to a client's industry, and are adaptable to the client's budget goals. PR program includes a monthly status report of measurable results that are directly accountable in the client's monthly bill. Expect to pay at least $15,000 per month for an effective program. Its best to budget for a twelve month program. Sometimes for a product launch, if it is already a branded product, a company can hire a public relations agency to on a project-by-project basis to meet their most pressing public relations needs, such as press tours and trade-show product introductions. Public relations programs are formulated to promote product and service awareness, corporate image, and marketing program objectives. A partial list of typical services includes: Corporate identity materials - press kits, press releases, corporate profiles, specification sheets and overview brochures. An extensive mailing list of carefully targeted publications that is regularly updated and customized to meet client needs. Full coordination of press relations for press tours and industry trade shows scheduling of interviews, coordination with participating client management, a full pretour or show briefing and itinerary, a complete report of interview results, and thorough follow-up activities. A client-specific editorial calendar for regular (often daily) contact with publication editors who may be planning stories that should include information about the client. Coordination of requests for information from reporters and editors. Coordination of photo and graphic design requirements. Complete tracking of measurable results for PR. 102

Development of client-related article outlines and manuscripts for submission to targeted publications.

Cost-Effectiveness If the public relations program is managed and balanced with a targeted advertising program over a period of time for at least six to 12 months, a company from another small country such as Finland can expect to see its branding take effect and have a positive impact on its sales efforts. Best of all, Public Relations can provide measurable and accountable results that help the companies from Finland reach their customers, meet their business goals and enhance their credibility. About the Author: Jay Shotwell founded Shotwell Public Relations over 16 years ago, and has had such notable clients as Pioneer, Kenwood and Honeywell. His specialty has been small startups where his vast network of editors and reporters enables him to efficiently and effectively present new technologies and companies to the high tech community. Prior to forming his own company, Mr. Shotwell worked in public relations for such companies as Televideo and Memorex. He can be reached at jay@shotwellpr.com or by phone at (408) 530-8081.

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Chapter 15

Alternative USA Entry Strategies & Tactics Product-Market Segmentation

By Owen Greeson
Strategic growth models Prior to entering the USA it would be prudent to choose a growth model for the new company. Should the company be based upon the classic Silicon Valley Startup or a more conservative classic slow and careful entity? Silicon Valley Startups are noted for their condensed time frames. The goal is to flip the company quickly. This is done by launching the company, delivering the product, generating some sales and then either sell, merge or do an IPO all within a short time frame defined as anything within twelve to eighteen months. The above is very intense and demanding for all involved with little margin for error. There are several classic examples of companies that could be used as models but most of these successes occurred in a short time period that may have passed. Everyone remembers the successes but not the failures. In the year 2000 the Silicon Valley Startup model seemed to be diminishing, often noted for a lack of profit, an unfathomable business model, too much cash with not enough ideas and finally the chickens came home to roost. This means that profit became very important, more important than a Silicon Valley Startup model. Much more recommended is the classic traditional model of slow and steady. This is not meant to imply that one should be overly cautious but instead rely on good planning, execution and testing some new markets prior to over committing all of the new companies resources. Unlike the Silicon Valley Startup model the employees are more in control and have the opportunity to correct mistakes before they destroy the company. As one wise old man said, You never go broke making a profit no matter how small it is. Product/Market Focus - from niche to total market, cost to differentiation. At a very early stage of the company a decision must be made to determine what market or position the product will fit into. Defining the prospect initially does this and then a strategy is created that will target him or her. Once the prospect is clearly defined then they must be quantified to determine how many exist, where they are located and a strategy is put together to reach them effectively with the companies marketing budget. 104

Dont try to pursue and capture an entire market, remember, A slice of watermelon is better than a whole grape. Position your product in such a manner that your marketing budget will allow you to reach a substantial number of prospects that buy and permit you to grow and produce a profit. Market Segmentation from applications segmentation to multi channel selection Undifferentiated marketing is a technique that relies on mass advertising when businesses treat the market as a whole and focus on what is common to the needs of the customer and not on what is different regarding the product. This type of marketing is successful when the competition is scarce or the product has mass appeal. To build greater loyalty one should use differentiated marketing by considering the customers needs and wants. This is a very specific targeted marketing that creates more total sales with a concentrated effort in a selected area. Differentiated marketing or target marketing of products and services reduce the cost of production, distribution and promotion. There is a risk of a market going bad or a competitor entering. Opportunities increase when customer groups with needs and wants are recognized. Markets can be segmented or targeted on many different factors including age, gender and location to name a few. These segments or target markets should be accessible and large enough to provide a solid customer base. The company should analyze the needs and wants of different market segments before determining its niche. Market segmentation is dividing a larger market into sub-markets based upon different needs or product preferences. A company should focus on small differences that give a marketing edge and are important to customers. Market segmentation matches consumer differences with potential or actual buying behavior. Corporate Partnering & Strategic Alliances Some products work well together even though different manufacturers may make them. An example would be monitors and video cards. A marketing campaign could be put together to offer a discount on a video card with the purchase of a specific monitor. This type of partnering is beneficial to both companies. Seek out companies that offer opportunities to work with you whenever possible. One of the classic examples of partnering for many years was the placing of a box of Tide (a soap to wash clothes) into a new washing machine. When you had the washing machine installed it was inside and was most likely the first soap used. Examine the market and the companies that participate within it, can you find similar alliances that offer marketing opportunities? Dont confine this partnering or strategic alliance to bundling alone. Often companies have technology that can be shared that will improve the products of each company. Always explore these possibilities at every opportunity. In the early eighties spell checker technology existed as a standalone product, now it is in every word processor. It is not unusual to find two ordinary separate products that when combined make 105

an outstanding offering. By examining every product and attempting to make an alliance or fit it may be possible to enter new markets, create new synergistic products and appeal to new prospects that will result in a successful entry into the USA.

About the Author J. Owen Greeson is President of GeoSoft, a Domestic and International sales and marketing firm that represents clients in Europe, Asia, and America. His background in the personal computer industry dates from 1976 when he purchased a computer kit from Processor Technology. He was a member of the original Atlanta Computer Club with Dennis Hayes where his interest in Data Communications first surfaced and an equity partner with Carbon Copy, the original remote control program for PCs. His strengths are in finding products, providing the assistance necessary to productize and bring them to market. His talents include product fulfillment, contract negotiation (international and domestic), trademark and copyright protection (international and domestic), sales and distribution (international and domestic). He can be reached at ogreeson@mindspring.com or by phone at +(404) 255-0691

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Chapter 16

Sales Channels in the American Market

By Ken Jacobsen
Ive been told that distributing software in Finland is relatively straightforward. The author burns five CD ROMS and sends them to some customers that have been identified, then follows up with a phone call to close the sale. It is not quite that simple in the United States as I am sure it is not in Finland either. But the Finnish market is considerably more homogeneous than the American market resulting in a complex matrix of sales channels. Consider the size of the American market and its IT channels:

End-Users: 200,000,000 HW OEM: 250 (including peripherals and consumer electronics) SW OEM: 25 (significant companies) SI/VARS: 3,000 Retailers: 30,000 WEB consumers: 40,000,000
Simplified, there are five avenues to launch software in America. The larger companies support all five channels, with staff that specializes in each one. They are:

OEM VAR/SI Retail/Distribution Direct Web (newest)

Each of these channels offer unique opportunities and provide unique obstacles. OEM Sales Almost everyone targets this channel. If I can only show this to Compaq or IBM and they bundle it, then I will have it made. EVERYONE tries this. The major OEMs have become quite jaded about this. Their internal staff dedicated to dealing with Independent Software Vendors receive thousands of requests. In response, some of the manufacturers will actually offer to bundle a software package only if the publisher PAYS THEM for the exposure! Unless you have a utility that is specifically needed, the chances of this strategy are very slight. If they do value a utility or application written by a third party, they are likely to offer a very low onetime pricefar from the millions of dollars dreamed of. 107

One sells to OEMs direct. You need an experienced OEM sales manager. Without experience in OEM sales, you can waste an enormous amount of time learning the rules of the game. Who you know is considerably more important than how good the product is. The benefit of making an OEM sale is that, while they may pay very little, your product will be on the upgrade path. Most software companies make their real revenue from upgrades and not initial sales. One strategy is to use light and full versions to get revenue from an otherwise profitless bundling deal. The exposure of an OEM bundle can be worth its weight in gold. The headaches of product support for a product which you will be underpaid can overwhelm you and turn the gold into straw. Please realize that most large US corporations erase all software that comes bundled and loads only officially approved applications. OEM bundling is not a way into corporate America. VAR/System Integrator This is the largest channel (in terms of numbers of outlets) in America. Most of these businesses operate out of an office environment. Most are small businessesthough some are amongst the largest in the World such as Arthur Anderson, or Ernst and Young. Most VARS/SI companies purchase through distribution. Distributors such as Merisel or TechData serve this channel well. The distributors can provide some credit terms and quick inventory turnover allowing a VAR/SI to minimize inventory exposure. Smaller retailers also purchase through these distributors. Obviously, these distributors have a lot of influence over the availability of your product. However, for them, your product is just a lineitem. They do not care how good or bad the product is: they care only about how well you will market it to create market pull. Expect to see them scrutinize your advertising budget. Expect them to require Market Development Funds and Co-op advertising budgets. Expect them to treat you with indifference and demand that you do it their way or else go someplace else. Retail/Distribution As mentioned above, this channel is very callused. Their only asset is floor space. They are profitable only by turning inventory. It is not their job to sell your product. That is your job. It is their job to provide shelf space so your customers can access your product. This channel is more complex due to the proliferation of types of stores that sell high tech equipment and software. Literally we have identified over 80 different types of store fronts that sell software. The Superstores are even more difficult. They demand deep margins and high market development funds. Yet they only take your product on consignment. When you read the fine print, they have the right to return your product that does not sell. Sometimes, to replace a competitors shelf space, you must buy their inventory of your competitors product. Shelf space location is a premium. If you wish to be anyplace other than the top or bottom shelf, you must pay extra. Obviously, a channel expert is critical to your success in this channel. Trade shows are an excellent and cost effective way to identify potential Retailers and VARS.

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Vendors

OEM

VAR/SI

Retail

Govt/ Direct

Computer Superstores

Consumer Electronics

Traditional Computer stores

Software only stores

Specialist stores

Office Superstores

Warehouse Clubs

MediaStores

General Merchandizers

Camera stores Education stores Nature stores Sporting goods Movie theaters Toy stores Vending machines Airport newsstands

Bookstores Media Superstores Music stores Video stores

Department Stores Drugstores Home Improvement Mass Merchants Supermarkets Home Furnishing Military PX Rent-to-Own Closeout Stores Catalog showrooms TV-Direct

Selling Direct Many companies think that they will sell direct to end users. While this is possible, and in fact, necessary for some products, it is fraught with hidden costs and complexities. The cost of sale can easily get out of hand if there is any travel involved. Customers do not purchase products in any significant quantity without a somewhat long and arduous sales cycle. Corporate budget cycles dictate when commitments can be made. Signature authority is often limited for large purchases. Decision making is too often controlled by bureaucratic processes that are not rational. The most common technique for selling direct is mass mailing. While a science to some extent, this is an expensive but effective technique for merchandising your products direct to the end-user.

109

The Internet/Web Sales The newest channel to avail itself for software distribution is the Internet. This channel is too new to be a science. The vast number of failed Internet eCommerce companies footnotes the dangers inherent in this nascent channel. The successful companies seem successful almost by luck than design. None the less, this channel promises to be the most lucrative in years to come as it cuts out a considerable number of middlemen and allows a larger profit margin for the publisher. Print media seems to remain the best advertising mechanism to drive people to your web site. The Myth of Bootstrapping It is rare to meet a new software venture than does not believe it can bootstrap its sales organization. The scenario proposes that all you have to do is take out a few ads, hire a salesman, and slowly grow the company by plowing the profits back into marketing. While there are a few exceptions, this does not work. It is not that a small company cannot survive in this manner. It is that growth

OEM Bootstrap Launch Web

Probability of Success Low

Med High

Cost of Success Med

Low High

ROI
High Low Low

High

will never be financed by sales. A sales organization and infrastructure must be in place before sales and advertising start. The companies that exhibit at a trade show, collect leads (called Bingo cards in the American industry) then expect a salesperson to close these leads, are wasting their money. It does not work that way. The way it works is as follows: hire a support staff and train them in parallel , hire a sales/marketing staff and bring them up to speed 60 days prior to the event retain a PR firm, and launch a PR campaign retain a marketing firm and design a pull though advertising campaign 110

 design appropriate collateral materials and have them produced After the event, Respond to each lead within 2 weeks by email, Follow up with phone call within 4 weeks. Without such a complex campaign, the money spent on the trade show is wasted, and the leads will sit meaningless in someones desk drawer as a reminder of what might have been. The costs associated with such a launch will not be met by the sales generated from this event alone. But it is a good start. If the PR campaign is effective, the advertising good, and you do three of these shows, you might expect to see a return on your investment. Each channel has its own peculiarities that must be accounted for in a lunch. Overall, our experience suggests that the best possibility for success comes from doing it right and thoroughly as described above. Short cuts do not work in our experience. Still each company must choose for itself the way that suits them best. About the Author: The bulk of Mr. Jacobsens career has been focused on the software industry. His direct experience is mostly in OEM sales. He has negotiated many OEM bundling deals, and licensed numerous programs to various manufacturers. As a consultant, he has focused on strategic planning and strategic alliances, believing that the right customer is more important than just any customer.

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PART V

FINANCING THE PROCESS

Introduction by Juhani Saukkonen
One of the big differences between the US and Finland is how hi-tech ventures are funded. This does not mean that every start up company in the US is funded by venture capital or even that every US venture will look for venture capital, far from that. Still when the US entrepreneurs target emerging markets that have large growth potential they rarely leave venture capital out of consideration. Serial entrepreneurs may ignore the professi onal investors with the resources and the networks inherited from their previous ventures, but serial entrepreneurs are a minority even in the US. When the crucial elements, money and networks, are in place a venture capitalist may still be approached -- either to increase the success rate by leveraging the network or to share the risk that always exists. If there are strategic holes in founders network, venture capitalists are the first option to seek when an entrepreneur has a vision for a large and fast growing emerging market. The key issue with venture capital is that it only interested in large market opportunities. This consideration is embedded into the business model of the professional investment community whether an angel investor, a corporate investor or a venture capitalist. At the end of the day the success in IT business is defined by market share. If a company is the market leader or number two in a market place it may expect to be very profitable. If it ends up third or fourth it may achieve profitability, but is of little interest to investors. Scores under four rarely make anyone happy. To gain market share a company has to grow faster than the market. To be able to do so a company needs money and qualified resources. Money should be the least interesting asset when evaluating potential venture capitalists. Money is a commodity. It is the amount of industry knowledge and experience that distinguishes a good investor candidate. Better or at least equal access to potential customers and partners, pr agencies, consultants, attorneys and qualified employees, when compared to a companys competitors, is essential for success. This part will introduce the different players of investor community. Because of the limited space it will not tell you who are the prominent investors for a specific software category. That would be the next step when looking for venture funding. This part will describe how the valuation-pie that describes the ownership of a company will grow. It will show how it is not important what is in front of the percentage sign but what is after the dollar sign. It is interesting, but statistics show that the more the founders share the ownership before the IPO the bigger the value of their ownership. After an IPO this formula changes. In this part there are eight articles. William Cardwell, an American lived in Finland for years, writes about the challenges of financing industry after the Old New Economy stages. Mario Rosati discusses the idea that the Expanding the Pie is the best basis for the development of a high 112

technology growth company. He introduces in an extremely practical way how the Pie is divided into pieces while targeting to an IPO. Victor Vurpillat gives specific formulas to explain how the investment community evaluates your company. Wally Eater shows that the Corporate Venture Capital can be an excellent alternative to finance your U.S. entry. He also points out, that this kind of financing is increasing steadily. Price Waterhouse Coopers has written two articles. The first one introduces three key elements to obtain Venture Capital. Their article offers extremely practical aspects to be considered in order to attract a good deal. The second article introduces the process of going to Public. Even though a company isnt ready to target an IPO, this article is beneficial to help understand the process. Jarkko Viherivaara writes about IPOs and general reasons for pursuing that route. He also gives his opinion whether your IPO should be in Finland or in the USA. Larry Lopez introduces the very wide and important area of banking. The banking practices differ a lot between America and Finland. He gives an extremely practical advice about how you finance your growth in America. In addition to venture capital there are so many choices for financing. In many cases you will have to qualify with your personal credit and even give the equity kickers. And as Mr. Lopez says one key factor to running a successful business in the U.S. is smart fina ncial management.

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Chapter 17

Conquering the Chicken and Egg Problem Of Financing For International Expansion
By William Cardwell
Managing Director / Eqvitec Advisors Limited Many Finnish entrepreneurs have faced the chicken-and-egg situation in becoming international. In order to gain international customers and partners, a significant increase in the amount of financing is required. However, in order to achieve an increase in financial resources on satisfactory terms, the company must demonstrate it has successfully penetrated international markets. Expect these conditions to persist and even become more difficult, given the major decreases in price most technology sectors have experienced in the public markets. On the positive side, companies like Solid Information Technology, Digia, Finansium, Springtoys and LPG Solutions have shown that the interest in Finnish technology companies is growing, and that it is possible to complete large financing rounds on very favorable terms. Global investors are now looking for very strong signals that a startup will be able to reach profitability within a reasonable time; they are quite skeptical about the hockey stick models that were a familiar part of the Old New Economy business plans. They are not willing to price a companys shares based on a top-down model (sometimes referred to as the Chinese Bicycle approach) which shows the company getting a small, reasonable-looking share of a massive market. Yet both entrepreneur and investor understand that, especially in Internet- and telecommunicationsrelated industries, the future is a virtual crap-shoot. We must all admit that we dont know which sectors will survive with any degree of certainty, let alone know how quickly individual sectors will grow! While everyone has educated guesses about the future, this lack of historical precedent and thus lack of certainty going forward creates a very difficult pricing problem, one that must be approached carefully from both sides of the table. One way to deal with this Catch 22 is to design a staged financing solution based on a series of milestones that can be reasonably expected to happen in the near future. A willingness on the part of the entrepreneur to agree to this approach sends the strongest possible signal to the investor that the entrepreneur really is committed and believes in the product or services to such an extent that he is willing to share more of his company with the investor in the event that he misses the targets. In return for providing downside protection to an investor, the entrepreneur receives the cash necessary today to meet those milestones, and the potential upside associated with meeting and exceeding his own targets. This article will describe how the typical structure works, and offers some tips on how to negotiate the best possible deal. Background The Near Collapse of Publicly-traded New Economy Companies The downfall of high-flying New Economy companies has by now been well documented. The bellwether of the New Economy, the NASDAQ, has now fallen back to its level in Spring 1999, more than 50% off the high set in early 2000. Recently floated companies with challenging business models have suffered significant share price declines, and in particular high profile 114

incubators such as Internet Capital Group and CMGI (which proxied for the technology sector as whole), have demonstrated the difficulties of firms without clear roadmaps to profitability. Barrons, one of the most respected financial papers in the U.S., has even gone so far as to predict that one in three publicly trade Internet companies in the U.S. will run out of cash in 2001. Meanwhile, in Europe the IPO and follow-on financing market has virtually dried up for all but the strongest and most well established companies. The leading technology exchange, Germanys Neuer Markt, is struggling to demonstrate it can provide liquidity to investors in a down market and rise above the high profile failures of several Internet companies. Companies in the wireless software and services sector are also suffering. Drivers of the mobile Internet like Aether Systems, 724 Solutions, and Infospace are off of their highs by 50% or more. Relating Problems in the Public Markets to Entrepreneurs During the upswell in the technology markets, the fundamental question a venture capitalist facing an investment decision was How much is this investment opportunity worth?. There was a feeling that as long as there was an IPO market, most of the companies that did not make it to the stock market would at least be attractive acquisition targets for companies that managed to go public, since the growth figures expected of recently IPOd companies required voracious acquisition paths. In other words, venture capitalists perceived there was a continuum of prices for companies, and consummation of a deal was more or less a question of price. Given the current volatile market, the same venture capitalist asks himself a different and even more fundamental question: Is this investment worth something or nothing?. A vibrant IPO market, one supported by listings of companies with a demonstrated concept, is necessary to achieve huge upside: in the absence of this exit route, the VC believes that he must hold the company until it is profitable rather than simply until it proves its concept. This is a very different mentality. If the company never reaches profitability, then the chances are that the investment will be a total writeoff, not merely a trade sale at a less than optimal price. Given the longer holding periods, the VC is looking for very strong signals from the entrepreneur that his company is committed to doggedly moving toward profitability in a difficult environment. The Milestone Approach In order to achieve the best possible deal under these circumstances, the entrepreneur must signal more strongly than ever that he has a valuable company, one that will over time generate significant cash flow at fair degree of certainty. There is no stronger way for an entrepreneur to signal this belief than to agree to divide a financing round into several stages, with valuations of each stage increasing based on the companys performance. If goals are met, valuations increase in such a way that the entrepreneur is left with an attractive percentage of the company at the end of the financing period. The financing will usually have two or three dates where performance is evaluated and additional cash is contributed by the VC investors. In the current market environment progress must be made quickly, with the final milestone often being less than a year into the future. Choosing both appropriate milestones and the levels to be reached is critical to ensuring that the entrepreneur continues to receive funding on reasonable terms. In addition, building in some flexibility perhaps setting three challenging goals with only two needing to be met is advisable since market conditions can change quickly and there should be no motivation to continue meeting outdated metrics that do not contribute to the value of the company simply because they were in the original contract which was made in a different environment. The bottom line for selecting milestones is 115

that they should be both achievable and to a certain extent controllable by the entrepreneur while the entrepreneur cannot control the growth rate of a particular sector, he can regulate the effort and efficiency of his own team in approaching that market. The types of milestones vary depending on the sector and the development stage of the company. Taking the expansion-stage company as an example, a VC may require one milestone related to creating recurring revenue, one milestone related to market penetration, and one milestone related to establishing value-added partnerships. In particular, international VCs will stress a companys ability to generate customers and partners outside of Finland. To regulate the valuations where future contributions are made, a ratchet agreement can be added to the revenue component (or potentially other types of milestones, though they are often more difficult to measure quantitatively). If the budget milestone revenue is exceeded by, say, 20%, the valuation of that tranche of financing can be increased by a corresponding percentage. Conversely, if the revenue falls 20% short, the valuation is decreased by 20%. The Two-Way Street The key to this approach is that the distribution of ownership between entrepreneur and VC is controlled by negotiated, measurable factors, and that minimal dilution occurs when the entrepreneur is undertaking business in a way that creates the most value for all shareholders. Of course, the VC must contribute to this as well. The best VCs will be able to demonstrate a track record of generating a number of value-added activities, such as introducing customers and partners, and leveraging relationships to raise secondary private financings, and eventually IPOs or strong acquirers. It is a good idea, from the entrepreneurs perspective, to push the potential VC investors very hard on their ability to add value, and ask them for their own milestones to meet, ie number of introductions per quarter. In summary, the increased volatility in public markets requires more and more cooperation between entrepreneur and venture capitalist. Both sides must concentrate on long-term value creation, and not on short term valuation issues it is much better in the end to own a small slice of a big pie, than a large portion of a company with no growth prospects. In order to reach aligned goals that drive the growth of a very valuable company that enriches both the entrepreneur and his investors agreeing on concrete and measurable milestones is a way to resolve the impasse of structuring a win-win deal. About the Author: In January 2001, William Cardwell became a partner in Eqvitec Partners, and manages a crossfunctional team dedicated to organizing the firms value -added programme and financing needs of the portfolio companies. William first joined Eqvitec Partners in January 1999 as Director of Global Finance, and in this role established a relationship with Robertson Stephens International, which he ran as Managing Director of Eqvitec Advisors Oy, a private equity advisory firm, until December 2000. Will has been involved in many of the landmark deals in the Finnish financial community, which include the Data Fellows IPO (the company is now known as F-secure), one of the most successful in 1999; Solid Informations private placement of 55 million; the trade sale of Iobox to Terra Mobile for 230 million; and the second round of financing for Digia.

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Chapter 18

Funding the USA Entry

With Corporate Venture Capital By Wally Eater
This Chapter focuses exclusively on securing of equity funding from a corporation. A corporate investment may supplement your self-financed, angel and venture capital rounds. BACKGROUND The majority of corporate funding for start-ups and new technologies is internal. Corporate funding of external start-ups and emerging and growing companies is a fairly recent strategy of US technology, life science and a few industrial companies within the past 7 years. Total US technology funding including venture capital, corporate funding and angel funding for the first 9 months of 2000 is up from $10.0 billion to $18.1 billion, or +80%, from 1999 (Venture Economics / National Venture Capital Association, Dec 2000). Total corporate venture funding for the first 9 months of the year went from $935 million in 1999 to $3030 million in 2000a 224% increase over 1999 (Venture Economics / National Venture Capital Association, Dec 2000). The $3030 million was invested in 344 companies with an average of $5.5 million per company in the first round. Corporate funding has increased from about 9% to over 17% of total venture funding in just one year and this trend is expected to continue
NUM NUM NUM Company OF OF OF Disbursement ROUND Quarter COMP FUND -------------------------------------------------------------2000-1 207 202 2000-2 184 184 2000-3 163 163 TOTAL 554 549 NUM OF FIRM ----138 129 126 393 122 107 115 344 SUM AVG AVG AVG AVG INV PER PER PER PER $MIL ROUND COMP FUND FIRM ------------------------------------1033.92 4.99 5.12 7.49 972.90 5.29 5.29 7.54 1023.19 6.28 6.28 8.12 3030.01 5.47 5.52 7.71

Disbur

8.47 9.09 8.90 8.81

Request Hits Request Description 0 - DATABASE: Portfolio Company Disbursements (VCD) 1 - Round Date: 2000 to 09/30/2000: 1/1/2000 to 09/30/2000 (Custom) 2 22589 Standard Venture Capital Disbursements: Select All Standard Venture Capital Disbursements 3 18940 Company Nation : US 4 3285 Fund Investor Type: in corpvc 5 770 Company Stage Level 1 at Round Date: 10 6 Standard Report: Disbursement Quarter

117

NUM NUM NUM Company OF OF OF Disbursement ROUND Quarter COMP FUND -------------------------------------------------------------1999-1 60 60 1999-2 85 85 1999-3 128 125 TOTAL 273 270

NUM OF FIRM ----40 78 109 227 37 68 93 198

SUM AVG AVG AVG AVG INV PER PER PER PER $MIL ROUND COMP FUND FIRM ------------------------------------167.61 2.79 2.79 4.19 238.92 2.81 2.81 3.06 528.39 4.13 4.23 4.85 934.92 3.42 3.46 4.12

4.53 3.51 5.68 4.72

Request Hits Request Description 0 - DATABASE: Portfolio Company Disbursements (VCD) 1 - Round Date: 1999 to 09/30/1999: 1/1/1999 to 09/30/1999 (Custom) 2 12406 Standard Venture Capital Disbursements: Select All Standard Venture Capital Disbursements 3 10997 Company Nation : US 4 1522 Fund Investor Type: in corpvc 5 383 Company Stage Level 1 at Round Date: 10 6 Standard Report: Disbursement Quarter

Source: Venture Economics / National Venture Capital Association, Dec 2000 Corporate venture funding may bring benefits beyond equity funding: distribution, R&D support, possible licensing, contacts with suppliers, contacts with venture capitalists and institutional investors, and more. QUESTIONS TO ASK WHY does your company want corporate venture equity, instead of angel or venture capital funding, for your next financing round? Do you require equity funding in 6-12 months? Could a major US company assist in reaching your strategic objectives in 1-2 years? Do you want a major company to assist in licensing or distributing your software? Would it be more prudent to seek additional rounds of angel or venture financing instead of corporate funding? Do you have the time to invest to prepare, identify, approach, engage and close a major US company as well as the associated expenses of travel, due diligence, legal and accounting fees? HOW does your company identify a potential large corporate investor(s)? First, review your strategy, current funding and update your business plan. This necessary step gives you a reality check as to whether or not you want to pursue a corporate investor. Second, identified potential corporate investors. Perform due diligence on your potential investors to see if their strategy and investments are in alignment with your strategic objectives and if they are investing in early stage companies such as yours. Due diligence resources includes your service providers (venture capitalist, accountants, attorneys, consultants), the internet, , Securities and Exchange Commission (SEC) filings, independent research firms such as Venture Economics, who provided data for this chapter, your potential corporate investor(s) competitors, suppliers and others.. Your due diligence, most importantly, will identify companies in which your potential corporate investors have invested, the results, what did and didnt work.. Do n ot overlook traditional industrial companies who are making investments in smaller technology companies. Some 118

examples of major industries where companies are investing are utilities (major utilities are investing in software companies to improve efficiency), chemicals (Dow, Eastman, and others are investing in materials, pure play e commerce, internet and other strategic early stage ventures), autos (Ford, for example) and many other companies in industries not thought of as potential equity investors. WHO should you approach as a potential corporate investor? Many large and medium-size companies, such as Intel, IBM, Lucent, Hewlett-Packard and others have a Business or Corporate Development function. The Vice President or Director of Business Development is the first contact for a strategic investment. If there is no Business Development function your due diligence will identify whom to approach. Business Development may or may not also be responsible for investments outside the companys primary business area and managing an outside venture capital fund handling the companys investments. There may also be a separate venture group within the company. Due diligence will identify your target investor companies, their successes and failures, and how they work with management in companies in whom they have invested. HOW do you approach a potential corporate investor? Start with your existing professional relationships: venture capitalist, Big 5 CPA firms, transactional attorney, angel investor in your company, consultant or other professional. A personal referral is preferred over a cold call. A handful of conferences are held each year where many Business Development professionals attend: The February (Southern California) and May (Texas) Corporate Investment & Strategic Alliance Conferences where there are 40 Business Development professionals on panels (www.CISAconference.org). These conferences are designed for CEOs to meet Business Developments professionals to put deals together with the panelists from Fortune 1000 and other large companies. The September and February Corporate Venturing Conferences ( www.ibf.com). These two conferences target Business Development professionals as attendees and the format is specifically for their requirements. Conferences by the Institute of International Research (www.iir -ny.com). Conferences by Strategic Research Institute ( www.sriinstitute.com). Conferences by the Association for Corporate Growth ( www.acg.org). ACG is an organization of Business Development professionals, mergers and acquisition specialists and other service providers. Conferences by the Association of Strategic Alliance Professionals ( www.asap.com). ASAP is an organization of Business Development professionals and service providers. Conferences by the National Venture Capital Association ( www.nvca.org). Most US venture funds are members although several of the largest are not. A handful of venture capital funds are funded by corporations and these corporations could be potential investors. Consider becoming a member of ACG and ASAP (see web sites above).

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HOW LONG will it take to obtain corporate funding? Plan on at least three months, and as long as nine months, from the time you make initial contact with a potential investor until you have funding. WHAT TERMS should I expect? There are no generic guidelines. Each company has a specific policy. Some possibilities: Acquisition. Some companies will only acquire companies and not make minority investments (this used to be Hewlett-Packards policy, for example). Investment with option to buy. Medtronic, for example, has historicall y made such investments. Investment with no option to buy. This is a more common corporate investment. Investment with no intent of increasing equity or acquiring. Intel has made investments in companies that enhance the use of Intel chips with no intention of acquisition or increasing ownership. Investment with no equity or warrants. This usually results in a right of first refusal to license technology or right to review technology. The US Internal Revenue Code has specific accounting requirements for investments of more than 20% in a company Companies have, over the past several years, secured better deals from corporate investors. This appears to be changing with companies that are purely financial investors and do not invest for strategic reasons. Selecting a corporate investor is similar to selecting your angel and venture capital investors; with one major exception: your corporate investor may also be your exit strategy instead of an initial public offering (IPO) or sale to a third party. Corporate equity can supplement your financing and, in certain cases, be your only financing. About the Author: Wally Eater is Managing Director, Eater Alliances Group and Managing Member, the 2010 Fundan investment fund dedicated to investments in technology emerging from US Universities. He has been involved in high tech investments and strategic alliance formation for over 10 years. He can be reached at: 24351 Spartan St, Ste 120 Mission Viejo CA 92691-3920 949 583 1992,

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Chapter 19

Business Plan Process

By PricewaterhouseCoopers LLP
Why Is a Business Plan Needed? A quality business plan is an important first step in convincing investors that the management team has the experience to build a successful enterprise. The plan also provides measurable operating and financial objectives for management and potential investors to measure the companys progress.

The Executive Summary

Business plans should be summarized into a short two- to three-page synopsis called the executive summary. The summary is used to capture the essence of the plan and generate interest so the reader further studies the full proposal. It is the most important section of the business plan and should be written last, ensuring that only vital information is included. At many of the largest venture capital firms, fewer than 5 percent of the hundreds of plans received are reviewed beyond the executive summary. While sometimes this is because the business does not fit the type of investment favored by that firm, more often it is because the executive summary is not written convincingly or clearly enough. The summary must stand out and be noticed, and to do this it must be of the highest quality. The summary must be persuasive in conveying the companys growth and profit potential and managements prior relevant experience. The effort taken in researching investor preferences and preparing a quality summary will set the plan apart and assure that it receives further consideration by venture capital firms. Executive Summary Outline 1. Company Overview Generally, the investor wants to knowin a hurrywhat product the company is developing, the market/industry it serves, a brief history, milestones completed (with dates), and a statement on the companys future plans. If the company is an ongoing business seeking expansion capital, the entrepreneur must summarize the companys financial and market performance to date. 2. Management Team List the key members of the management team and technical advisors, including their age, qualifications, and work history. It is important to emphasize the teams relevant, proven track record. Note key open positions and how you intend to fill them. 3. Products and Services Provide a short description of the product or service and highlight why it is unique. Discuss any barriers to entry that prevent further competition (e.g., patents). Mention the products direct or indirect competition. If possible, briefly mention future product development plans such as upgrades or product line extensions in order to show the investor that the venture is not a oneproduct/service company. 4. Market Analysis Define the target market to be served using recent market data and analysts estimates of current 121

and projected size and growth rates. Also note what percent of the market the company plans to capture. Mention the names of your largest current, well-known customers who have either purchased your product or given you letters of intent. It is important to discuss who will buy the product and why. Briefly note the distribution/ selling strategies used in the industry and explain which one(s) you plan to use to penetrate the market. 5.Funds Requested and Uses State the amount of money required and be specific in the description of the uses of the funds sought. Avoid such general terms as working capital. 6.Summary of Five-Year Financial Projections This section should summarize key financial projections through breakeven. Only projected revenues, net income, assets and liabilities should be listed. It is also useful to note additional expected rounds of financing needed.

The Body of the Plan

1. Company Overview In this section one should fully describe the reason for founding the company and the general nature of the business. The investor must be convinced of the uniqueness of the business and gain a clear idea of the market in which the company will compete. The entrepreneurs vision for the companys future production and operations strategy should also be described. An investor needs to be assured that the company is built around more than a product idea. The entrepreneur needs to demonstrate that a profitable business can be built based on the strategies detailed in the plan. 2. Products and Services The business plan must convey to the reader that the company and product truly fill an unmet need in the marketplace. The characteristics that set the product/ service and company apart from the competition need to be defined. It is also important to describe each of the end-user segments that will be targeted. A full profile of the end-users and the key potential applications of the product will demonstrate to an investor that the entrepreneur has done his/her marketing homework. A description of the status of patents, copyrights and trade secrets is very important. It is equally imperative to describe barriers to entry. Keep in mind that patents are only as good as they are defensible. The plan should list all the major product accomplishments achieved to date as well as remaining milestones. This will give an investor a comfort level, knowing that the entrepreneur has tackled several hurdles and is aware of remaining hurdles and how to surmount them. Specific mention should be made of the results of alpha (internal) and beta (external with potential customers) product testing. If alpha or beta tests are planned, mention how these tests will be conducted. Single product companies can be a concern for investors. It is always beneficial to include ideas and plans for future products/services. If the plan demonstrates the viability of several products, an investor will see an opportunity to grow a successful business. 3. Market Analysis The analysis of market potential separates the inventors from entrepreneurs. Many good products are never successfully commercialized because their inventors dont stop to understand the market or assemble the management team necessary to capitalize on the opportunity. 122

This section of the business plan will be scrutinized carefully; market analysis should therefore be as specific as possible, focusing on believable, verifiable data. Market Research should contain a thorough analysis of the companys industry and potential customers. Industry Data should include growth rates, size of the market, recent technical advances, government regulations and future trends. Customer Research should include the number of potential customers, the purchase rate per customer, and a profile of the decision-maker. This research drives the sales forecast and pricing strategy, which relates to all other strategies in marketing, sales and distribution. Finally, comment on the percentage of the target market the company plans to capture. 4. Management and Ownership Venture capitalists invest in peoplepeople who have run or who are likely to run successful operations. Potential investors will look closely at the members of the companys management team. The team should have experience and talents in the key disciplines: technological development, marketing, sales, manufacturing, and finance. This section of the plan should therefore introduce the members of your management team and what they bring to the business. Detailed resumes should be included in an appendix. The management team in most start-up companies includes only a few founders with varied backgrounds and an idea. If there are gaps in the team it is important to mention them and comment on how the positions will be filled. Glossing over a key unfilled position will raise red flags. Often, because venture capital investors have access to networks of management talent, they can provide a list of proven candidates appropriate for these crucial positions. Include a list of the board of directors or advisors: key outside industry or technology experts who lend guidance and credibility. This is another area where empty positions may be filled from suggestions of a well-net-worked investor. 5. Marketing Plan The primary purpose of the marketing section of a business plan is to convince the venture capitalist that the market can be developed and penetrated. The sales projections made in the marketing section will drive the rest of the business plan by estimating the rate of growth of operations and the financing required. The plan should include an outline of plans for: Pricing, Distribution channels, and Promotion. Pricing The strategy used to price a product or service provides an investor with insight for evaluating the strategic plan. Explain the key components of the pricing decision, i.e., image, competitive issues, gross margins, and the discount structure for each distribution channel. Pricing strategy should also involve consideration of future product releases and future products. Distribution Channels A manufacturers business plan should clearly identify the distribution channels that will get the product to the end user. For a service provider, the distribution channels are not as important as are the means of promotion. Distribution options for a manufacturer may include: Direct Sales, such as mail order, direct contact through salespeople, and telemarketing; Original Equipment Manufacturers (OEM), integration of the product into other manufacturers products; Distributors or Wholesalers; or 123

 Retailers. Each of these methods has its own advantages and disadvantages and financial impact, and these should be clarified in the business plan. For example, assume the company decided to use direct sales because of the expertise required in selling the product. A direct sales force increases control, but it requires a significant investment. A venture capitalist will look to the entrepreneurs expertise as a salesperson, or to the plans to hire, train and compensate an expert sales force. If more than one distribution channel is used, they should all be compatible. For example, using both direct sales and wholesalers can create channel conflict if not managed well. Fully explain the reasons for selecting these distribution approaches and the financial benefits they will provide. The explanation should include a schedule of projected prices, with appropriate discounts and commissions as part of the projected sales estimates. These estimates of profit margin and pricing policy will provide support for the decision. Promotion The marketing promotion section of the business plan should include plans for product sheets, potential advertising plans, Internet strategy, trade show schedules, and any other promotional materials. The venture capitalist must be convinced that the company has the expertise to move the product to market. A well-thought-out promotional approach will set the business plan apart from the competition. It is important to explain the thought process behind the selected sources of promotion and the reasons for those not selected. 6. Competition A discussion of the competition is an essential part of the business plan. Every product or service has competition; even if the company is first-to-market, the entrepreneur must explain how the markets need is currently being met and how the new product will comp ete against the existing solution. The venture capitalist will be looking to see how and why the firm will beat the competition. The business plan should analyze the competition, giving strengths and weaknesses relative to the product. Attempt to anticipate competitive response to the product. Include, if possible, a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in the analysis. 7. Operations The operations section of the business plan should discuss the location and size of the facility. If one location is selected over another, be sure to include justification. Factors such as the availability of labor, accessibility of materials, proximity to distribution channels, and tax considerations should be mentioned. Describe the equipment and the facilities. If more equipment is required in response to production demands, include plans for financing. If the company needs international distribution, mention whether the operations facility will provide adequate support. If work will be outsourced to subcontractors, eliminating the need to expand facilities, state that, too. The investor will be looking to see if there are inconsistencies in the business plan. If a prototype has not been developed or there is other uncertainty concerning production, include a budget and timetable for product development. The venture capitalist will be looking to see how flexible and efficient the facility plans are. The venture capitalist will also ask such questions as: 124

If sales projections predict a growth rate of 25 percent per year, does the current site allow for expansion? Are there suppliers who can provide the materials required? Is there an educated labor force in the area?

These and any other factors that might be important to the investor should be included. The sales projections will determine the size of the operation and thereby the funds required both now and in the future. Include the sources and uses of financing in the business plan, and be certain the assumptions are realistic. The timing and the amount of funds will be derived from the sales estimates.

Business Plan DOs and DONTs

Do be brief. Begin with a two- to three-page executive summary. Then, limit the body of the plan to seven- to ten-typewritten pages. Note that internal business plans and budgets are normally more detailed than those presented to external investors. Include everything important to the business and financing decision, but leave secondary issues and information, such as detailed financial information, for discussion at a later meeting. DO let the reader know, early on, what type of business the company is in. While this may seem obvious, many plans tell the reader this information on page 20, for example, and with other plans, the reader is never certain. DO state the companys objectives. DO describe the strategy and tactics that will enable the company to reach those objectives. DO cite clearly how much money the company will need, over what period of time, and how the funds will be used. DO have a clear and logical explanation about the investors exit strategy. DONT use highly technical descriptions of products, processes and operations. Use common terms. Keep it simple and complete. DO be realistic in making estimates and assessing market and other potentials. DO discuss the companys business risks. Credibility can be seriously damaged if existing risks and problems are discovered by outside parties. DONT make vague or unsubstantiated statements. For example, dont just say that sales will double in the next two years or that new product lines will be added without supporting details. DO be specific. Substantiate statements with underlying data and market information. DO summarize and properly structure internal budgets and plans to facilitate review by outside parties. DO enclose the proposal/ business plan in an attractive but not overdone cover. DO provide extra copies of the plan to speed the review process.

About the Author PricewaterhouseCoopers Silicon Valley-based private equity practice has served hundreds of entrepreneurs from the first round of venture financing through the IPO process and beyond. Our professionals are dedicated to helping entrepreneurs establish and grow their businesses, achieve profitability and determine the appropriate exit strategy. Located around the globe, our 125

professionals provide in-depth guidance on the venture capital process and direction on creating a fundable business plan. Visit us at www.pwcerc.com (entrepreneur resource center) to learn more. PricewaterhouseCoopers (www.pwcglobal.com) is the worlds largest professional services organization. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.

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Chapter 20

IPO in Finland VS. IPO in The USA

By Jarkko Viherivaara
Evli Corporate Finance Structural changes in the Stock exchanges during the last years have enabled IPOs for younger and younger companies. On the other hand, growth in the Venture Capital markets have enforced companies relying on venture capital as the primary source for growth funding to actively consider different options for exits. The positive development in most stock exchanges until early spring of 2000 was also a driving force behind many IP Os, especially to New Markets -lists. Reasons for listing Common reasons for listing the Companys shares can be divided under 5 headlines: 1) To increase shareholder value after listing the Company is valued by the investors every day liquidity of the shares improves dramatically after listing the Companys shares can be used as currency e.g. in takeovers listed shares enable better and more effective incentive programs for employees recruitment is easier because of gained publicity and incentive programs

2) Source of capital stock exchange is a alternative source for financing the Companys growth the Company is able to raise capital on market terms stock exchange listing strengthens the Companys capital structure 3) Diversification of the ownership base diversification shares the ownership risk old owners can easily reduce their ownership in the future the Company gets new neutral owners at market valuation 4) Increased credibility as a business partner greater financial resources reduce uncertainty about the Companys future publicity of the Company is increased --> better and bigger projects listing thus enables faster growth 5) Increased business profile listing adds the Companys media coverage interest group awareness increases

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What investors look for in an IPO? Regardless of the industry, or the stock exchange, investors tend to look for similar features in their investment targets. Those are described in the picture below (and need no further comments).

Strong market positions

Coherent business strategy

Strong management

Favourable Industry Outlook

Investment Investment decision decision

Favourable growth prospects

Technology edge Financial performance Specialist Know-how Reasonable valuation

Listing into a stock exchange requires great efforts from the company. To minimize the effects of those efforts on the everyday operations, the listing process should be planned and prepared thoroughly. Most important questions related to listing are: 1) When to do it? 2) Where to do it? 3) Who should lead the process? Traditionally, Finnish companies have considered an IPO in a foreign exchange because of the following reasons: easier access to capital due to the fact that the amount of available capital is hundredfold for example in the U.S. companies hope to gain a better valuation, as the valuations are relatively higher in some larger exchanges than Helsinki companies look for operational benefits in international markets via better publicity as the amount of investors is higher in larger exchanges, companies hope to reach a broader shareholder base and thereby better liquidity for their shares Easier access to capital? 128

It is naturally true, that compared to Helsinki amounts of capital are dramatically larger in the capital centers of the world. However, it must also be stated, that even in Finland the capital supply is tenfold to market demand. And, the same rule applies in all stock exchanges; the better the company the more available capital. Even if the company looking for an IPO in a foreign exchange, such as Nasdaq, is an exceptionally good one, foreign investors tend to be extremely critical towards unknown and small foreign companies. A question will arise: if the domestic investors dont believe in the future prospects of this small company, then why should I as I dont even know the company? Naturally, exceptions do exist, but not too many. The average annual amount of IPOs in Nasdaq in the 1990s was between 300 and 500, so the competition is very hard (in HEX the most active year so far has been 1999, when the amount of IPOs was 20!). Only the best companies sustain. Better valuation? The relative valuation levels of stock exchanges vary considerably because of Index structures (e.g the weight of Nokia in HEX, the medical industry in Switzerland), because of the size and liquidity of markets and because of the familiarity of the companies abroad. In the end of the day, it is the investors who define the market price in an IPO, not the location of the exchange. As well as in the long run; the valuation of the company is defined by the companys own facts and figures, not the index. Figure. Index development in HEX, Frankfurt Neue Markt and Nasdaq.
350

300

HEX HEX portfolio

250

Nasdaq Neue Markt

200

150

100

50

0 1.1.1999

24.3.1999 14.6.1999

2.9.1999 23.11.1999 11.2.2000

3.5.2000

24.7.2000 12.10.2000

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So it is clear that from the beginning of 1999 to the end of 2000, HEX has performed clearly better than Nasdaq and NM. Even when comparing the HEX portfolio, where the weight of Nokia is limited, neither NASDAQ nor NM has performed better. Operational benefits? It is quite clear, that due to increased publicity, it is easier for a company listed in Nasdaq to penetrate to U.S. markets, than for another company listed in an European exchange. However, the problem is that it is very hard to achieve trust among U.S. investors when the U.S. operations are just beginning. Therefore, one alternative is to list the stocks in Helsinki and thereby secure the funding for U.S. operations, and after the company has already gained a position in the U.S. markets, list the stocks in NASDAQ as well. Reaching a broader shareholder base? IPOs of high-tech growth companies are usually quite small. Therefore it is hard to tempt big U.S. institutional investors to participate in the listing. Probably the Company is getting lots of private persons as owners, which does not necessarily offer the kind of liquidity desired by the company. Listing location is not an investment criteria for an institutional investor, but the quality of the companys operations is. A domestic IPO can always be offered and sold to foreign investors. One good example of the liquidity in a foreign exchange is Sonera, which is listed both in Helsinki and NASDAQ. On the average 80% of Sonera trading happened in Helsinki in 2000. For smaller companies, the liquidity in NASDAQ could be even smaller. Conclusions for a growth company in Finland the availability of domestic capital is many fold compared to demand for a good company funding is available no matter where the company is listed the companys profit making capability determines its value, not a s pecific index or the location of the stock exchange a foreign listing might have operational benefits, but there are always problems associated to that it is difficult for a small company to obtain a broad shareholder base domestic listing does not exclude the participation of foreign investors

About the Author Jarkko Viherivaara is Director of Evli Corporate Finance, a leading Finnish Investment Bank. Evli's market share in IPO market in Finland was almost 50% in year 2000. Before joining Evli Jarkko worked for several years in media industry.

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Chapter 21

How the Investment Community Evaluates Your Company

By Victor Vurpillat
When Finnish companies come to America, they often, and wisely pursue investment from American sources to finance this move. The experience of negotiating with the American investment community is daunting at best but always intimidating. Partially this is because the process of establishing a valuation is an arcane science that is rarely understood by the Finnish corporate officers. In truth the evaluation process may be based upon emotion and subjective criteria as much as fact. There are two basic categories of evaluation: 1) Hopes and dreams of the future (perception) 2) Historical analysis (reality) Perception and reality combine to form the final valuation of the company. In the case of perception, it is dramatically enhanced by the current fashionability in the investment community. In other wordswhats hot is hot and whats not is NOT. You can have the best technology in the world but if it is not fashionable, your valuation will be lower. In 1999 EVERYONE wanted to be in the DOT.COM market. In 2001, optics and biotech are hot. Energy is likely to become a hot commodity in the near future. Wireless technologies continue to grow at a rapid pace, and thus are welcomed by the investment community at higher valuations. Those not so hot technologies must rely upon reality for the establishment of their valuations. The basic form of reality is earnings per shareeither current or projected. To the extent that the investor is confident in the projected future earnings, you will achieve a higher valuation. As an example: If you have a measurable growth rate in earnings that is significantly better than 25% per annum and a confident 3-5 projection of the same, the investment community will impute a future valuation of at least 25X those projected earnings. Thus, if you earn $1 per share today and grow at 25% per share over the next five years, which would result in earnings of $2.44 per share and the market would assign a value of 25X those earnings or $61 per share. If this product/technology is in fashion like Cisco circa 2000, the market may project a price of 100X earnings or $244 per share. In the case of commodity or boring products, you may only be able to negotiate for 10X earnings. The Dow Jones Industrial Average sells at about 15X earnings. Your corporate valuation will fall between these extremes.

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What this means in numbers, is that the investor would have to wait 100 years to get back there investment IF the earnings do not keep growing. The motivation for making such a silly investment is the hopes and dreams of the future. In order to compute total market capitalization, the formula is simple. Multiply the number of shares by the earnings per share times the anticipated multiple. In the hypothetical example above, if there were 15 million shares outstanding, the company would have a total market cap of $900 million. Now the question becomes, how much equity does the investment community demand for any the investment you require? Let us assume you need $20 million to launch this company. The VC community expects at least 10X their investment in 3-5 years. In other words, in our model, they would expect $200 million in return for their investment or roughly 20% of the companys shares at the liquidation event (fully diluted). To have 20% of the stock in five years, the assumption is that the business plan has accurately forecast the total funding requirements for the project. The initial equity position may be higher as the plan predicts dilution of earlier investors. This hypothetical example is only a mechanism for explaining the process of company valuations and may vary wildly in the real world. The greatest impediment in the negotiations is the sincere belief of the entrepreneur that their program/technology/product is the best thing since sliced bread. And they often confuse what is ahead of the percentage sign as being more important than what is after the dollar sign. About the Author Dr. Vurpillat has held executive positions in numerous high tech ventures. As Vice President of Business Development for Safeguard Scientifics, he initiated the Novell-Safeguard relationship[ which led to the Novell IPO and the recruitment of Ray Norda. He currently serves on numerous boards including companies in both computers and bio-technology. He has been active with the Global Software program since its beginning.

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Chapter 22

Startup Company Valuation Model The Expanding Pie

By Mario Rosati
Formation of Company
Founders A, B and C each purchase 1,000,000 shares of Common Stock at a purchase price of $.001 per share. Person Founder A Founder B Founder C Total Post-Financing Valuation No. of Shares 1,000,000 1,000,000 1,000,000 3,000,000 Percent of Shares 33.33% 33.33% 33.33% 100.0% Value $ 1,000 $ 1,000 $ 1,000 $ 3,000

Founder A 33% $1.000 Founder B 33% $1.000

Founder C 33% $1.000

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Hiring of Chief Executive Officer and Establishment of Option Plan The Company hires a chief executive officer who purchases 1,000,000 shares of Common Stock at a purchase price of $.01 per share. Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan and reserves 1,000,000 shares of Common Stock for issuance under this plan. The pre-financing valuation is $30,000 and the post-financing ownership structure and valuation are depicted in table and pie chart below: Person Founder A Founder B Founder C President Stock Option Plan Total Post-Financing Valuation No. of Shares 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000 Percent of Shares 20.0% 20.0% 20.0% 20.0% 20.0% 100.0% Value $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 50,000

Founder B 20% $10.000

Founder A 20% $10.000

Founder C 20% $10.000

Stock Opt. Plan 20% $10.000 President 20% $10.000

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Initial Venture Financing Round The Company needs capital to complete product development. Accordingly, the Company completes a $5,000,000 venture capital financing at a purchase price of $1.00 per share, representing a pre-financing valuation of $5,000,000 (5,000,000 shares with a value of $1.00 per share). The shares sold in the financing are typical, venture capital Series A Preferred Stock with each share of Series A Preferred Stock being convertible into one share of Common Stock. This financing results in the following ownership structure and post-financing valuation. Person Founder A No. of Shares 1,000,000 Percent of Shares 10.0% 00 Founder B Founder C President Stock Option Plan Series A Inv. Total Post-Financing Valuation 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000 10,000,000 10.0% 10.0% 10.0% 10.0% 50.0% 100.0% $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 5,000,000 $ 10,000,000 Value $ 1,000,0

President 10% $1.000.000 Stock Opt. Plan 10% $1.000.000

Founder C 10% $1.000.000 Founder B 10% $1.000.000

Founder A 10% $1.000.000

Series A Inv. 50% $5.000.000

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Series B Preferred Stock Financing The Companys product development is progressing favorably, but an additional $10,000,0 00 will be required to complete development. Accordingly, the Company undertakes a $10,000,000 Series B Preferred Stock Financing at a purchase price of $2.00 per share, representing a pre-financing valuation of $20,000,000 (10,000,000 shares with a value of $2.00 per share). Like the Series A Preferred Stock, each share of Series B Preferred Stock is convertible into one share of Common Stock. This financing results in the following ownership structure and post-financing valuation. Person Founder A No. of Shares 1,000,000 Percent of Shares 6.66% 00 Founder B Founder C President Stock Option Plan Series A Inv. Series B Inv. Total Post-Financing Valuation 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000 5,000,000 15,000,000 6.66% 6.66% 6.66% 6.66% 33.33% 33.33% 100.0% $ 2,000,000 $ 2,000,000 $ 2,000,000 $ 2,000,000 $ 10,000,000 $10,000,000 $ 30,000,000 Value $ 2,000,0

President Stock 6.66% Opt. Plan $2.000 6.66% $2.000.

Founder C 6.66% $2.000 Founder B 6.66% $2.000 Founder A 6.66% $2.000

Series A Inv. 33.33% $10.000.000 Series B Inv. 33.33% $10.000.000

Initial Public Offering The Company needs substantial additional capital to expand the scope of its manufacturing and sales and marketing operations. The Companys investors, who must provide a return to their limited partners and investors, are also interested in obtaining liquidity. Accordingly, the Company decides to undertake an initial public offering. As a result of the offering, the Shares of Series A and Series B Preferred Stock held by the venture capital investors will be automatically converted 136

into Common Stock at the conversion rate of 1 share of Common Stock for each share of Preferred Stock, and all shares sold in the offering will be Common Stock. A total of 5,000,000 are to be sold in the offering, including 3,000,000 shares being sold by the Company and 1,000,000 shares being sold by each of the Series A and Series B investors. The shares will be sold at a price of $10.00 per share, representing a pre-financing valuation of $150,000,000 (15,000,000 shares with a value of $10.00 per share). This public offering will result in the following ownership structure and postfinancing valuation. Person Founder A Founder B Founder C President Stock Option Plan Series A Inv. Series B Inv. Public Investors Total No. of Shares 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 4,000,000 5,000,000 18,000,000 Percent of Shares 5.55% 5.55% 5.55% 5.55% 5.55% 22.22% 22.22% 27.78% 100.0% Value 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 40,000,000 40,000,000 50,000,000 180,000,000

$ $ $ $ $ $ $ $ $

You should note that the interest of each founder has decreased from 33.33% at the formation of the
Stock Opt. Plan 5.55% $10.000

President 5.55% $10.000 Founder C 5.55% $10.000 Founder B 5.55% $10.000 Founder A 5.55% $10.000

Series A Inv. 22.22% $40.000.000

Series B Inv. 22.22% $40.000.000

Public Investors 27%

Company to 5.55% following the initial public offering. However, the value of the interest of each founder has increased from $1,000 to $10,000,000. About the Author Mario Rosati, 54, has been with the Palo Alto, California law firm of Wilson Sonsini Goodrich & Rosati since 1971, first as an associate and as a member since January 1975. Mr. Rosati specializes in Corporate Law, especially as it relates to high-technology companies. In 1981 Mario Rosati participated in the Innovation and Entrepreneurship Task Force to the office of the President Elect, Ronald Reagan and in 1982-83 served as a Special Consultant to the Secretary, Drew Lewis, and Deputy Secretary of Transportation, Darrel Trent, and in this connection was a member of the Airport Access Task Force. 137

CHAPTER 23

Three Keys to Obtaining Venture Capital

By PricewaterhouseCoopers LLP

The First Key: Understanding the Process

Target a Venture Capital Partner Choosing the right venture capital firms is an important part of the fundraising process. An entrepreneur that has not researched and targeted venture firms runs the risk of lengthening the search and over shopping the plan. Venture capitalists readily exchange information, so rejection from one firm may influence others. The criteria for selecting the right venture capitalists to approach include their geographic, industry specialization, stage of development, and size of investment preferences. Also important are whether the fund will act as a lead investor and whether there are complementary or competing investee ventures within the funds portfolio. The research of a funds preferences can be done by obtaining literature from the funds directly, talking to venture-backed entrepreneurs, visiting the PricewaterhouseCoopers MoneyTree web site at www.pwcmoneytree.com, obtaining the quarterly Money Tree Report from your local PricewaterhouseCoopers professional (see pages 20-21), or by calling 888-609-7117. PricewaterhouseCoopers professionals are active in the venture community and welcome the opportunity to talk with you. 1. Profile of a Typical Venture Capital Fund Professionally managed venture capital funds provide seed, startup and expansion financing as well as management/leveraged buyout financing. In addition to these distinctions, funds may also specialize in technology sectors such as life sciences, while others invest in a wide array of technology and non-technology arenas. Venture capital firms are typically established as partnerships that invest the money of their limited partners. The limiteds are usually corporate pension funds, governments, private individuals, foreign investors, corporations, insurance companies, endowment funds, and even other venture capital funds. When venture capital firms raise money from these sources, they group the money committed into a fund. A typical fund might close at $50-$150 million and actively invest for three to five years. Since investors in venture capital funds have specific return-on-investment requirements, a venture capitalist must evaluate potential investments with a similar return-oninvestment consideration. Since the return on investment is critical, venture capitalists invest with certain criteria in mind. Many funds invest between $4-$8 million in any one venture over a three- to five-year period and look for companies with market potential of $75-$200 million. Since a venture fund typically 138

invests in only 20-30 companies, each investment must be screened carefully. Venture capitalists will be looking for a 30 percent to 40 percent, or more, annual return on investment and for total return of 5 to 20 times their investment. Venture capitalists are not passive investors and become involved as advisors to management, usually as members of the companys board of directors. By actively participating in investments, venture capitalists seek to maximize their return. Just as venture capitalists perform due diligence, an entrepreneur must evaluate the benefits that a particular venture firm can provide the company. Do the venture capitalists have experience with similar types of investments? Do they take a highly active or passive management role? Are there competing companies in their portfolio? Are the personalities on both sides of the table compatible? Does the firm have strong syndication ties with other venture firms for additional rounds of financing? Can they help provide contacts for distribution channels and executive search?

2. The Valuation Process It is critical for an entrepreneur seeking venture capital to assess the value of the company from the perspective of the venture capitalist and to appreciate the dynamics of the entrepreneur/ venture capitalist relationship. This relationship revolves around a trade-off. Funds for growth are exchanged for a share of ownership. The entrepreneur will be asked to give up a large share of ownership of the company, possibly a majority stake. The venture capitalist seeks to value the venture to provide a return on investment commensurate with the risk taken. Entrepreneurs seek to raise as much money as they can while giving up as little ownership as possible. Venture capitalists strive to maximize their return on investment by putting in as little money as possible for the largest share of ownership. Through the negotiation process, the two parties come to agreement. Entrepreneurs understand that excess funding costs them equity. Venture capitalists must leave company founders with enough ownership to provide incentive to make the business succeed. To balance their individual goals, both parties should agree on one mutual goalto grow a successful enterprise. The first step in the negotiation process is to determine the current value of the company. The most important factor in determining this premoney valuation, or the value of the venture prior to funding, is the stage of development of the company. A business with no product revenues, little expense history, and an incomplete management team will usually receive a lower valuation than a company with revenue that is operating at a loss. This is because the absence of one or more of these elements increases the risk of the ventures not succeeding. Each successive stage commands higher valuations as the business achieves milestones, confirms the ability of the management team, and progresses in reducing fundamental risks. Stage I Ventures have no product revenues to date and little or no expense history, usually indicating an incomplete team with an idea, plan, and possibly some initial product development. 139

Stage II Ventures still have no product revenues, but some expense history suggesting product development is underway. Stage III Ventures show product revenues, but they are still operating at a loss. Stage IV Companies have product revenues and are operating profitably. The best way to build value in a company is to achieve the goals and milestones within the timeframes designated in the business plan. As milestones are achieved, risk is reduced and subsequent rounds of financing can usually be raised at more attractive valuations. Pricing and Control: The Investors Perspective Pricing venture capital deals involves the estimated future values of the entity being financed and is highly subjective. Theoretical approaches can be used to estimate the companys future value and the corresponding percentage ownership that the investor requiresin other words, estimated future value based on the ventures expected profitability and estimated earnings multiples. The estimated percentage ownership the investor must receive can then be calculated to derive the desired return on investment. As noted, venture capital investors expect an annual rate of return of 30 percent to 40 percent or more. The table below shows the percentage investment a venture capitalist would need to realize to support a 30 percent return on investment at various estimated market values. As shown, to realize a 30 percent return on an investment of $4 million, a venture capitalist would need to own 32 percent of a company with an estimated future market value of $60 million after six years. If the estimated future market value is higher, $100 million for example, a smaller percentage ownership (19 percent) will provide the required rate of return. The Second Key: Writing the Business Plan Write the Business Plan Often the first step in dealing with venture capitalists is to forward them a copy of the business plan. And, because venture capitalists have to deal with so many business plans, the plan must immediately grab the readers attention. The executive summary will either entice venture capitalists to read the entire proposal or convince them not to invest further time. A good plan is crucial for two reasons: first, as a management tool, and second, as a means to obtain financing. While the plan is an essential element in securing financing, it should also be an operating guide to the business, with the goals, objectives, milestones and strategies clearly defined and well-written. This is the best way to demonstrate the viability and growth potential of the business and to showcase the entrepreneurs knowledge and understanding of what is needed to meet the companys objectives. The first reading of a plan is the venture capitalists initial opportunity to evaluate the individuals who will manage the business and to measure the potential for return on this investment. The plan should also address the following business issues from the perspective of the venture capitalist: 140

Is the management team capable of growing the business rapidly and successfully? Have they done it before? Is the technology fully developed? Is the product unique, and what value does it create so that buyers will want to purchase the product or service? Is the market potential large enough? Does the team understand how to penetrate the market? Do significant barriers to entry exist? How much money is required and how will it be utilized? What exit strategies are possible?

If the plan is of interest, the entrepreneur will be contacted for the first of what will generally be several meetings, and the venture capitalist may begin the due diligence process. Since venture firms are in the business of making risk investments, one can be certain a thorough analysis of the companys business prospects, management team, industry, and financial forecasts will precede any investment. Prepare for the Negotiation Process Following due diligence, the successful venture will then enter into the negotiation process, where the structure and terms of financing will be determined. The entrepreneur must carefully prepare for this next step by becoming familiar with the various structures of venture capital financing and preparing a bargaining position after consulting with an attorney who has extensive venture capital experience. Attorneys will give guidance on the issues worth fighting for. Issues to consider are: vesting, salary, stock restrictions, commitment to the venture, debt conversion, dilution protection, downstream liquidity and directors. The negotiation will involve most or all of these issues in addition to price per share. However, price-per-share concerns should not be the overriding interest; the end result of this process must be a win/win situation in order for the relationship to progress successfully. The last step is to document and close the transaction, resulting in a term sheet, investment agreement(s) and, finally, the closing. The Third Key: Preparing the Financials Prepare the Financials Realistic financial forecasts within the business plan are important to attract investors and retain their interest to participate in future rounds of financing. The financials must accurately reflect the various product development, marketing and manufacturing strategies described in each section of the plan. 1. The Purpose of Financial Forecasts Developing a detailed set of financial forecasts demonstrates to the investor that the entrepreneur has thought out the financial implications of the companys growth plans. Good financial forecasts integrate the performance goals outlined in the plan into financial goals so that return on investment, profitability and cash-flow milestones can be clearly stated. Investors use these forecasts to determine if (a) the company offers enough growth potential to deliver the type of return on investment that the investor is seeking, and (b) the projections are realistic enough to give the company a reasonable chance of attaining them.

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2. Content of Financial Forecasts Investors expect to see a full set of cohesive financial statements, including a balance sheet, income statement and cash-flows statement, for a period of three to five years. It is customary to show monthly statements until the breakeven point or profitability is reached. Thereafter, quarterly statements should be prepared for two years, followed by yearly data for the remaining timeframe. It is also imperative that the forecasts include a footnote section that explains the major assumptions used to develop revenue and expense items. It is not advisable to ramp up sales and expenses in sequential fashionthis gives the impression that the financial implications of the plan have not been fully thought out. Prepare the financial projections as the final step in putting together the plan. The following section contains some helpful hints on how to develop sound assumptions from which to base projections. 3. Assumptions to Use in Forecasts Sales Preparing the sales forecasts can be a difficult process, especially in a developing or niche market. Typically, the plan should state an average selling price per unit along with the projected number of units to be sold each reporting period. Sales prices should be competitive with similar offerings in the market and should take into consideration the cost to produce and distribute the product. Cost of Sales Investors will expect accurate unit cost data, taking into consideration the labor, material, and overhead costs to produce each unit. Have a good grasp on initial product costing so it is protected against price pressure from competitors. This data will also be important for strategic make versus buy decisions. Product Development Product development expenses should be closely tied to product introduction timetables elsewhere in the plan. These expenses are typically higher in the early years and taper off because product line extensions are less costly to develop. Investors will focus on these assumptions because further rounds of financing may be needed if major products are not introduced on time. Other Expenses A detailed set of expense assumptions should take into consideration headcount, selling and administrative costs, space, and major promotions. It is useful to compare final expense projections with industry norms. All expense categories should be considered. Balance Sheet The balance sheet should agree with the income and cash flows statement. Consideration should be given to the level of inventory and capital expenditures required to support the projected sales level. It is important to limit capital expenditures at the outset to current requirements because cash will be harder to come by if fiscal restraint is not demonstrated to investors. It is generally better to rent or lease capital equipment in the first few years in order to conserve cash for marketing and selling expenses that will generate sales. Cash Flows The cash-flows statement must correlate to the balance sheet and income statement and should mirror the timing of the funding requirements stated in the plan. Investors will study the cash-flows statement to determine when cash-flow breakeven is expected and when periodic needs are anticipated. Venture capital firms set aside a certain percentage of their funds for follow-on financing to address these periods of need by their portfolio companies, but the cost in lower valuations for unanticipated financings can be high. This is why it is important to set realistic 142

forecasts so that the initial request covers the capital needs until the business can complete milestones leading to higher valuations in future rounds.

Summary of Forecast Assumptions

This footnote section will summarize the assumptions developed in Section 3. It should highlight key points of the plan that relate to cash flows and requirements for funds, as well as assumptions used to develop the forecasts. Sales: The sales forecast for product reflects the following unit and pricing assumptions: Year Units Unit Product Service Total Price Revenues* Revenues Revenues 1 42 $28,500 $1,197 $81 $1,278 2 137 27,000 3,699 572 4,271 3 300 25,000 7,500 1,509 9,009 4 710 23,500 16,685 2,499 19,184 5 1,690 22,100 37,349 3,934 41,283 (000s omitted: small rounding adjustments included ) Product revenue is recognized at time of shipment Declining unit prices reflect savings from economies of scale as well as a more competitive environment beginning in year two Total revenue reflects the companys target of owning 10 percent of the market by year five Service revenue increases are due to growing product-installed base Expenses: Salaries are based on competitive compensation Operating expenses include estimates for supplies, travel and telephone Balance Sheet: Accounts receivable are collected 72 days from sales (turnover rate of five times a year) The reserve for warranty is 2 percent of product sales Organizational costs are amortized over three years Inventory is assumed to turn on average three times a year Fixed assets include both purchased equipment and leasehold improvements Depreciation is based on three- to five-year lives Accounts payable reflect a 60-day payment cycle Accrued expense includes overhead cost, service cost and operating costs for one month Salaries are paid bi-monthly Taxes are paid in the month following each fiscal quarter and are assumed to be at a combined rate of 40 percent Income tax expense assumes that losses will carry forward until income is earned. Years three and four tax expenses are reduced by the net loss carryforwards of prior years Preferred and common stock are issued as shown Cash-Flows Statement: The cash-flows statement is based on the spending and payment decisions of the income and balance sheets Equity investment includes founders and initial investors common stock of $500,000, plus the venture capitalists investment of $1,500,000

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Tips for the Plan Preparer Financial Calculations Sales Accounts Receivable, Net= Accounts Payable (for Year 1)= For Following Years: 360 days Cost of Goods Sold Inventory Turns= Average Inventory Overhead + Service Cost + Total Operating Expense Accrued Expenses= 12 months Beginning Accounts Receivable + Ending Accounts Receivable 2 About the Author PricewaterhouseCoopers Silicon Valley-based private equity practice has served hundreds of entrepreneurs from the first round of venture financing through the IPO process and beyond. Our professionals are dedicated to helping entrepreneurs establish and grow their businesses, achieve profitability and determine the appropriate exit strategy. Located around the globe, our professionals provide in-depth guidance on the venture capital process and direction on creating a fundable business plan. Visit us at www.pwcerc.com (entrepreneur resource center) to learn more. PricewaterhouseCoopers (www.pwcglobal.com) is the worlds largest professional services organisation. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world. Average Accounts Receivable* Purchases + Ending Inventory x Payment Cycle 360 days Purchases + Average Inventory x Payment Cycle

*Average Accounts=

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Chapter 24

Banking on America
By Larry Lopez
Managing Director Silicon Valley Bank Over the last few years there has been an increasing number of venture-backed European technology companies choosing to open operations in U.S. markets. Prior to arriving in the U.S., there are several factors for a company to consider. How should I form my company? How do I finance my new operations? Where should I locate the office? Who should I contact for legal and accounting assistance? Unlike many countries in Europe, the U.S. government does not provide significant assistance to support your company with these services. Instead, private institutions, such as Silicon Valley Bank offer services to assist companies with establishing a presence in the U.S. One key to a successful company is properly structuring the company both in operations and in financing. This can be accomplished through establishing relationships with the right law firm, accountant, and banker. In todays business climate, it can be difficult to find the best service providers and so having the right connections will be of great value. Prior to establishing the banking relation in the U.S., a company should consider the needs to incorporate itself as a U.S. entity (typically either in Delaware or California). Consult your attorney to determine if this is the appropriate and which state to incorporate in. If the company plans to operate and generate revenue in the US, tThe next step is to obtain an employer identification number or federal tax identification number. This can also be handled through the attorney. Once these two tasks are accomplished, it is as easy as signing a couple of documents at the bank and the account is opened. If the company does not plan on incorporating in the U.S., it can still open U.S. bank accounts. For a number of reasons, this will be a more cumbersome process but it can be done with help from your Banker. Typically, an early stage company requires a checking account and an interest bearing account, if cash will be idle for a given period. One big difference between the U.S. and other markets is that companies legally may not mainatinmaintain interest bearing demand accounts The interest bearing account can either be a simple money market account, a cash reserve account, or a time deposit. Depending on the time that funds will be idle and the level of risk the company can accept, Silicon Valley Bank offers several options to earn interest on the funds. In most cases, company policy requires excess liquid assets to be invested in low-risk, high-quality vehicles. Treasury services such as commercial paper, Treasury Bills, and a cash reserve account are available and provide moderately low risk with varying ranges of liquidity. For more conservative needs or shorter idle times, a company can place the funds in either a money market account for instant liquidity or time deposits that offer a slightly higher return but less liquidity. The first two are liquid, while the time deposit is locked for a set period of time, ranging from 90 days up to two years. Commercial paper is an unsecured promissory note from a large, solid company and is used by U.S. banks as a short-term investment tool. A major rating company, such as Moodys or Standard and 145

Poors typically rate the paper. Treasury bills are short-term debt offerings from the federal government. Since the U.S. Treasury backs them, the bills are considered lower risk than corporate debt facilities or municipal bonds. While the U.S. Treasury also offers bonds, which are long-term loans to the government with a fixed interest payment, the Treasury bills are short term (less than one year) and the yield fluctuates with the weekly auction of the bills, usually within a range of .51%. While there are several other types of low-risk, short-term investment vehicles, banks offer special managed accounts that blend all of the investment vehicles to maximize returns and minimize risk. The Cash Reserve Account, for instance, blends money market accounts and treasury bills, while the Treasury Reserve Account mixes different Treasury bill maturities. The benefit of these accounts is that the investor does not need to worry about the maturities of the Treasury bills or moving funds around as yields change. This is all managed and offers liquidity similar to standard mutual fund accounts. Besides an account to deposit funds into, a company may require cash management services to handle both receiving payments and paying employees. The Bank can set up services to relieve some of the time consuming administrative tasks necessary to grow the business. Payroll accounts are available to manage the employee payroll process through an account that maintains only the balance necessary to make payroll. Funds are usually transferred the following evening from a specified account and payroll checks are drawn on the account. Lock box service is a service in which a clients remittances are mailed directly to a specified post office box. The Bank processes the remittances, deposits them into the clients account and passes payment information on to the client. This service benefits companies that need quick availability of funds from receivables. Since the Bank providing this service takes the risk of float time between payment to client and collection from the issuer of the payment, collateral is often required from the client. For businesses that accept credit card payments, whether in person or through the Internet, a company needs the appropriate tools. Silicon Valley Bank works with partners to provide credit card payment services both for the Internet and traditional payment methods. While it is difficult to establish credit in a new country, certain credit products are available with cash collateral. Usually, one or two key employees will need credit cards for company expenses. If leasing office space, the landlord will usually require a letter of credit from the Bank. A letter of credit usually requires a company to pledge an interest bearing deposit with a Bank for a specified amount by the landlord. In return, the Bank issues a letter to the landlord that basically guarantees the contractual payment agreement between the landlord and tenant. As an international company, revenues may be received in several different currencies. If that is the case, a company needs services to manage the foreign currency exchange and hedge currency risk. Spot currency is currency that is issued at the current market price and subject to fluctuation. It is typically used when a company does not anticipate the need for foreign currency or requires an insignificant amount. Forward exchange contracts allow a company to lock into a specified price for a specified amount of currency. The benefit to the company is that it limits the risk against possible currency fluctuations. The company pays a small premium and is sometimes required to put down a deposit to secure the transaction. All of these services should be offered by your bank and your relationship manager should consult the company on which services are appropriate at the each stage of the companys life cycle. We need to talk more about non-credit services. Foreign trade, more about cash management, treasury services, e-Source etc. We should also talk aboutcorproate finance and vc referral. 146

Now that the company has a bank account, credit cards and a payroll account, the next question is where does the next round of financing come to grow the company in the United States. While venture capital firms are raising funds in record numbers in the U.S., access to those funds are not easily obtainable. Many VCs are turning to their current portfolio companies for follow -up investments or to the serial entrepreneur that brought them success in the past. In most cases it takes a network to attract the right investors. At Silicon Valley Bank, we have developed a referral program to assist early stage technology companies meet the appropriate VC. After a successful screening process and meeting with the company, the Bank introduces the plan to targeted VCs and attempt to set up a meeting for the entrepreneur. Through a large global network of venture capitalists, angel investors, and corporate investors, the Bank can also facilitate a private placement. Although sometimes more expensive and timely, a private placement offers exposure to a broader array of investors and professional assistance in putting together the investment package, pricing, and sourcing. It is beneficial to a company that does not have the resources or the experience assembling an investment offering. The Banks Corporate Finance Group can also provide advisory work for mergers and acquisitions. Done on a fee-based program, the Bank will conduct due diligence and assist with the filings for a merger or acquisition. As many early stage venture backed companies maybe losing money and have limited track records, the use of debt is often overlooked. Debt financing, when available, may be a very efficient way to augment a companys capital and support revenue growth. If a company can qualify for debt, the cost of the new money provided will be much less then the cost of capital associated with equity. By borrowing money, companies can leverage existing capital, avoid dilution and create considerable shareholder wealth. It should be pointed out that in most cases debt should only be used to support the working capital and fixed asset requirements of venture backed companies. The bad loan departments of banks are full of those sorry companies that used debt as a substitute for equity! Understanding the type of debt products available to emerging technology companies and the process lenders use to evaluate risk can help investors and management create the maximum value out of the limited capital resources inherent to most emerging venture backed companies. Some basic concepts are important to understand. Debt financing is significantly less expensive than equity and therefore, it has much less risk tolerance. In the majority of cases, to qualify for debt financing, a company needs to have either adequate capital to support its business plan or established cash flow from operations, available collateral (trading assets or capital equipment) and proven access to equity capital. Not all companies will qualify for debt. Over the years we have seen a number of highly successful companies with great management, strong investors and superior technology that were unable to qualify for debt because they lacked the proper attributes. For the purposes of illustration, imagine this overly simplified scenario. An emerging technology company has recently completed a six million dollar series A round and has a monthly burn rate of two hundred and fifty thousand dollars. In other words, the company has cash for twenty-four months and expects to seek additional funding within two years. After eighteen months, the company is exceeding plan and shipping at a much higher rate than initially projected. The company has determined that in order to establish market share, initial margins will be quite thin. Once the company ramps up, it will be able to maintain price and increase margins through economies of scale. As a result of the strong revenue, accounts receivable have grown considerably and are now one million dollars higher than the original plan. For all the right reasons, the company now faces a cash flow shortage and will run out of cash in two months. Many managers would 147

describe this as a nice problem to have. One consideration may be to immediately raise more money through a series B round to support working capital. Given the short time table, the company may not be in a position to negotiate a favorable valuation. In addition, the company forgoes six months of value creation and may be subject to more dilution than would otherwise be the case. On the other hand, if the company were able to secure debt to support the increase in sales, it would not only be able to restore cash flow to previous plan, but the use of debt may extend cash reserves beyond initial expectations. The company would have the opportunity to delay the originally scheduled series B round and obtain a higher valuation based on the elimination of a cash flow crisis and the additional time to increase revenue run rate. This is just one example of how the use of debt can be an effective tool in the creation of wealth in early stage enterprises. Typically, debt financing is used to finance sales growth and equipment. There are four common types of borrowing available to early stage technology companies: venture leasing, formula based lines of credit, asset based lending, and factoring. These products are best used at different stages in a companys development depending on the companys financial condition and performance. For later stage companies, debt may also be available for project financing and acquisitions. Venture leasing is used by many early stage capital intensive companies to obtain equipment. With rare exceptions, to qualify for venture leasing a company must have raised at least one round of venture capital. As collateral, the lender will take a specific security interest in the equipment financed. The cost is moderate with the all-in pricing, excluding warrants, between thirteen and eighteen percent on an annual basis. Equity kickers (options to buy shares in the company at a predetermined price) are typically given to the lender in venture leasing. It is important to note that these transactions have many of the attributes of classic leases. As the company may not own the equipment, the transaction may be off balance sheet. There is a buyout option at a pre-determined price. Venture leases usually last from 24 to 48 months and require monthly payments. The average size of a venture leasing deal is between five hundred thousand and three million dollars. Formula based lines of credit are often available to companies shipping products or delivering services. This type of credit may be available even if the company has negative cash flow and/or ongoing losses. To receive a formula line, an early stage company must have proven access to equity financing, strong business fundamentals, adequate capital to support projected marketing and R & D expenditures, and experienced management. Typically, banks advance between sixty and eighty percent of the companies eligible accounts receivable on a revolving basis. In most cases these are one-year commitments. The financial performance of a company is usually monitored with balance sheet and income statement covenants. As collateral, the bank will take a blanket lien (floating charge) over all assets and specific perfected liens on intellectual property when required. Formula lines are usually monitored monthly, are charged interest based on a floating spread over the Prime Rate(the Prime Rate is the prevailing interest index in the market. While many people assume it is fixed by the govermenetgovernment, it is in fact a market rate and each bank sets their own... Imn most cases the prime rate is the same), carry an annual loan fee of at least 50 basis points and have a light equity kicker. Legal and audit fees related to the close of the transaction are reimbursed to the bank by the borrower. In most cases formula lines of credit mature within twelve months. Asset based financing is used to support accounts receivable and inventory. To qualify for this financing a company needs to show favorable operating trends and a strong collateral base. Asset based financing is often used by companies which demonstrate a particular weakness. This may be in the lack of access to adequate capital, temporary operating losses or a weak balance sheet. Asset 148

based deals are usually structured as two year revolving lines of credit. There are extensive daily revenue reporting and cash control procedures, but it provides high borrowing availability with minimal financial covenants. In todays environment asset based financing costs are reasonable with all-in costs typically between eleven and eighteen percent. In many cases, the lender is given an equity kicker by the borrower. The most readily available debt financing vehicle is factoring. Factoring is used to finance specific accounts receivable and is typically utilized when other financing vehicles are not available. The only requirement to qualify for factoring services is strong account receivables. If a company has strong, collectable receivables, the structure of the financing is highly flexible. There are no financial covenants and no requirements for equity financing. Because of the flexibility of this financial service, the cost is high. The all in cost can be anywhere between twenty-five and fortyfive percent. In the event factoring is done on a non-recourse basis, the debt will not be reflected on the borrowers balance sheet. For this reason some very healthy companies will factor their
receivables to shorten their cash cycle and improve their financial condition. Equity kickers are typically not part of a factoring relationship.

Use of any of the four types of debt described here can be a lucrative component in the planning and completion of an emerging technology companys overall capitalization. Other financing options are available through a bank like Silicon Valley Bank if the above mentioned debt facilities are not appropriate or available to the company. If the company has already leveraged much of its assets through traditional loans and is experiencing rapid sales growth, they can look at mezzanine debt, otherwise know as subordinated debt. This type of corporate or merchant financing is a hybrid of debt and equity and resides on the balance sheet under traditional debt, but just over equity. It usually requires a company to have rapid growth and cash flow and includes some form of an equity conversion feature. In order to maximize the benefit of the debt, one should invest time in creating a trust-based relationship with the lender. It is important to choose a lender that understands your business and is committed to your industry. This should be done very early on in the life cycle of the company. Once everything is in place, it is critical to be honest and open when disclosing information in a banking relationship. At this point, we should note that bankers do not like surprises. When a company misses plan, the bank will probably be more flexible in working with the company if management has been honest and pro-active in disclosing bad news. Treat you lender much like you would treat one of your key investors. Over the long run, this strategy will allow the company to reap many benefits. One key factor to running a successful business in the U.S. is smart financial management. From depositing excess cash to funding the expansion of the business, a company needs to manage the day to day operations. In the U.S., there are several options for a company to take advantage of to earn interest off of their excess cash. As a company begins to grow and take in revenues, they need to decide how to accept payments, pay employees, and acquire new office space. Expanding the business overseas may also require international financial management, such as foreign exchange forward contracts or letters of credit. Growth is usually managed by new capital. Whether it be through raising another round of venture capital or financed through a debt facility, a company needs to look at the overall cost of capital, availability, and the value of the partners providing the capital. Working with a bank such as Silicon Valley Bank, these services can all be provided through one partner that understands your business.

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About the Author Larry Lopez is the Managing Director of the Silicon Valley bankone of the premier commercial banking institutions in the area. SVB is focused on emerging high growth technology companies and offers a unique understanding of the industries financial requirements. SVB is one of the nations leading lenders to electronic and life science start-up companies. He can be reached at LLopez@svbank.com.Please do a summary

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PART VI

Building and Managing a US Company

Introduction by Jussi Nukari
In this part there are eight articles, of which Arthur Lipper III emhasizes the importance of home works before making the decision to go to America. He also gives extremely valuable advice for the whole business development and especially for the need and methods of hiring the best people to run your American enterprise. Sharon C. Ballard points out, that while starting your business it is important to fill the knowledge holes in the founding team. Her ideas will have the perfect fit also to later phases of the growth company. She also has a clever way to form the real win-win situations for all the different players. She writes about the the important role of the advisory boards. Further she emphasizes, that you have to make also the hard decisions early enough, or else it might be very expensive to correct the oversight later in the process. Henri Grundsten, the head of Tekes office in San Jose, gives valuably aspects to consider; where to locate your office in the USA. He introduces the C2CR criteria customers / competition, cost and recruiting and presents important backround information for decision making. James N. Mei (Esq.) introduces the U.S. Immigration laws, which you have to take seriously account, when planning your presence in the USA. These are vitally important for transfering your key personnel, hiring qualified foreign workes or even taking your spouse or unmarried children with you to the USA. You have to reserve some months calender time for these issues. Pat Zilliacus, born in Finland and moved to the USA in 1940, is working in as a search professional in a recruiting firm. He writes about these issues in a general level and also gives two search examples done lately with Finnish high technology companies. William D. Evers (Esq.) introduces what one has to take accounct while selecting his/her business entity in the USA. His approach is very thorough, allthough the article is meant for non-lawyers. William L. Paulin (Ph.D.) has examined typical U.S. equity compensation practices through a survey in May-June 2000 and introduces as a result 3 party (investors, management and employees and founders) * 1/3 ownership principle for us with insights. Nina E. Anderson, originally a Finnish corporate lawyer who jointed the internationally operating law firm in January 2000, gives us very practical tips for doing business in the USA. She points out very valuable issues concerning the business development as a whole. It is wise first to secure some customers from the USA before you decide to have your own presence in America. This approach provides excellent market research of the business opportunity and the competition. This requires of regular flying overseas, and cannot be delegated to someone else.

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After your home work you have made the decision to have a U.S precence, dont accept anything but the best. The most crucial item is that you find great people to execute your vision. In America the use of the advisory boards is very common. This practice is not common in Finland. Fill the holes of your management team and board of directors with experienced advisors. Build the best team and equip it with the best tools to accomplish that vision of yours. As Arthur Lipper III says The Finnish owners of the business cannot afford not to afford the right person to create and run their American enterprise. In the USA, networking enables you to focus to your own core competence and outsource the supporting activities to advanced service providers. These consultancies offers you services like accounting, PR, recruiting and many kinds of legal counsel. But remember select only high quality providers. So if you have a killer application product with huge market opportunity in the USA, build first a superior management team and a great network. You have to understand that at different stages of business, you have to have different skill sets in the management. You will maximize your odds of success, if the management has the experience to move the business to the next level, for example making the IPO. You will probably require a different team to manage the company AFTER an IPO.

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Chapter 25

Management of Finnish-Owned American Businesses

By: Arthur Lipper III,
Chairman, British far East Holdings Ltd. Perhaps the most important determinative of success of a U.S. venture is the selection of its first manager. The natural temptation of the Finnish owners of a business to be created or re-created in the United States to be attracted to a Finn or someone having an association with Finland is understandable. In writing this chapter, I believe it more useful for the reader if I ignore that which may be unique Finnish characteristics and possibly even tax and other structural capitalization issues and address the problem generically. How to identify, recruit, monitor and motivate a good manager for a foreign owned or controlled enterprise is an issue facing investors, entrepreneurs and corporate executives worldwide. America is a logical place to establish a business as the markets are large and the available resources, including capital and intellectual property, so available. America is also a place where good managers are constantly in high demand and under supply. Managing a business in America is easier than in many jurisdictions which have fewer resources and greater government interference, restrictions and restraints. This fact does not indicate that it is easier to find the right manager in America than elsewhere. Although the creation, development and marketing of; computer software, communication technology and electronic consumer products are only a few of the possible areas of activity focus, I am going to assume these rapidly growing businesses as being that which are generally of interest to Finnish readers. There are also significant differences between the executive needs of a Finnish company, investor group or entrepreneur already established in Finland and one which intends to start de novo in the United States. Success cannot be predictably achieved if it is not defined. The development of a business plan for the U.S. operation is essential. Ideally, the individual having the responsibility of meeting the goals of the plan should participate in the creation of the business plan. Success can be achieved in stages and these stages should be clearly delineated and defined. A previous chapter was a recent paper of mine regarding business plans which may be appropriate for Finnish entrepreneurs and managers to consider as there must be a determination of the level of

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funding available to the selected manager and realistic definitions of success will be, in part, clearly dependent on the resources available to the manager. The identification of the prospective manager must start with a fair, honest and realistic job description and the validity of the description is dependent on the quality of the business plan. Seldom are the best people for the job found by starting with; someone who wants to move to America or a friend or relative or friend of a relative or relative of a friend who happens to live in America. Managing a business requires expertise and it is too expensive a tuition to pay for those not having had the experience. What would I do were I to be a Finn and wanted to start a business in America? First I would attempt to make an objective evaluation of the unique benefits of the product or service I either had to offer or wished to make. America is and will continue to be a competitive market and planning a business, the success of which is dependent on lower cost or selling price, is not nearly as realistic as one which provides user benefits other than simply lower price. Next I would access and study, using the web or otherwise, the relevant trade publications. I might either or both write to the editor of the publications and/or run a few ads, extracting the highlights of the job description. I would initiate contact with the executive search firms specializing in my area of specific interest, but would not retain them until later in the process, if at all. By reading the trade press I would learn of the companies which are growing and which are downsizing. Each of them will have a number two executive who wants to be a number one and typically who believes he or she could do a better job than their present superior if only given the chance. Incidentally, in America today senior women executives are still subject to discrimination and frequently represent a valuable and available resource, though they may be less willing to relocate physically. I would learn about (and probably join) the trade associations and attend some of the larger conferences relative to the business I wanted to establish in the U.S. The Internet makes it easy to gather information, especially that which can lead to meeting CEO candidates. Each business segment has a center of activity. I would spend some time in that area, but not necessarily decide to open my new business there. Id give greater consideration to establishing a business near a concentration of customers than competitors. Nevertheless, there is a lot to be learned as to the business and availability of people by talking to the editor of the local newspaper, bank new business development officer, local venture capitalists and other professional investors and even the companies already in the business which I was interested in starting. I would certainly learn a lot by exploring a joint venture with prospective competitors. Those considering coming to America to be in business should also consider buying or buying into existing business. Again, the exploration will bring you into contact with those who may have some or all of the qualities being sought for a CEO. I find that communications and the creation of reporting protocols are key to the creation and maintenance of good relations. Once a business plan is adapted and budgets approved there are or should be only a few key numbers which tell the story of progress or the lack thereof. Variance reporting and analysis is really the key to being able to understand what is really going on in multiple and remote operations. What do you need to know on a daily, weekly and monthly basis? How are you and the CEO going to communicate? Is there going to be a daily scheduled phone call

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or a form supplied by fax or e-mail which gives you the number(s) so critical to being apprized in a timely basis of progress? Who met with the CEO and what was the expectation and outcome of the meeting? What are the goals for the week, month or quarter and what variance from these expectations are occurring? What is the cash in the companys checking or liquid funds accounts? What are the bills to be paid? What is the aging of the accounts payable and receivable? Between the CEO and the Finns controlling the company there will have to be an agreement as to the amount of information flowing and the schedule of the flow. Integrity is an absolute. Perhaps more so in the U.S. than in many countries, there is a wealth of background information available regarding individuals. For as little as $2,000, one can have an investigative report drawn on anyone. Such a report will indicate many of their past problems, if any - and a surprising number of people have been engaged in litigation and have, during periods of their lives, difficulty in paying their bills on time. There are also a number of professional assessment firms and programs and psychological testing services available. As the person chosen to lead the American enterprise is so critical to the ultimate success of the venture and can be so destructive to the vision, it makes sense to use more than your own instinct in making the selection. Thanks to the Internet you can readily learn of the investigation agencies as well as assessment and testing services available. I have found Decision Dynamics Groups program <www.decdynamics.com> for assessing decision making styles particularly useful in predicting how well or poorly people are likely to collaborate. Now we come to the issue of compensation and reward. Good people are expensive and great people too expensive not to try to attract. At the end of the day, you only have one currency to use to attract great people and that currency is equity. Sure, you can create an intelligently structured and generous bonus pool, based upon achievements, but that requires the payment of cash and growing businesses eat cash. How much equity and when does the issuance really become beyond the control of the issuing company? How much equity will have to be awarded on signing and how much will be granted in the form of options, over what period of time and under what conditions? The structuring of a chief executive officers compensation plan is an art form, not a science, as there are so many conditions and variables. The primary issue is how much of the company will the CEO own if he accomplishes all of the business plan objectives? As long as the compensation package is keyed to the business plan the overall effect is ascertainable and the values should be found acceptable as wealth, largely predictable, will have been created. Some factors which might be included in a sophisticated and competitive compensation plan are; profit margins versus either specified competitive companies or an index of such companies, revenue growth compared to the competition, patent filings and issuances, absolute profits, revenues and/or profits per employee (both absolute and possibly relative to the competition) and, should the company become publicly traded, price appreciation and price/earning ratios. Consideration might also be given to selling the prospective CEO shares in the enterprise so there was additional incentive for the individual to think as an owner and not only as an employed senior 155

executive. The shares could be subject to a recapture arrangement in the event the CEO was terminated under agreed conditions. Depending on the state of incorporation and company by laws, the shares may be paid for with a personal note as well as with cash. The CEO of an enterprise is effectively a partner of the other owners of the business. Finding the right partner is never easy and recognizing that mistakes are frequently made a prenuptial-like separation agreement should be in place to be used sooner rather than later in the event a mistake has to be recognized. On a more positive note, there has to be sufficient upside to attract a truly great executive to run a business and if the scope of the business is sufficient and a reasonable amount of resources available, there shouldnt be a situation where the right person cannot be afforded. Indeed, recognizing the compensation package will be mostly non-wage focused, the Finnish owners of the business cannot afford not to be able to afford the right person to create and run their American enterprise. The right CEO can make the investment really right for the owners of the company and the need for this essential part of any success story should never be under estimated.
British Far East Holdings Ltd. All rights reserved.

About the Author Arthur Lipper III, Chairman of British Far East Holdings Ltd., is; a corporate advisor, investment banker, financier, entrepreneur, author and lecturer. His passion and practice is being involved in the creation and guidance of new and novel enterprise. He has written extensively (5 books and countless articles) on entrepreneurship and the financing of early stage companies. His venture Investing text can be accessed at www.venvest.com. As well as having been the Chairman of Arthur Lipper Corporation and New York & Foreign Securities Corporation, both New York Stock Exchange member firms, he has been the publisher and editor-in-chief of Venture Magazine. Mr. Lipper serves on the Board of Directors of numerous private and publicly traded companies and advises many more. He resides in Del Mar, CA.

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CHAPTER 26

Choosing Your Start-Up Team

By Sharon C. Ballard
Founding President/CEO, Reticular Systems, Inc.

Introduction In this chapter, the author shares her start-up experience coupled with lessons learned from mentoring over 100 technology start-ups in the United States and around the world. The chapter was written from a lecture of the same title, which has been the most popular of the lectures given by the author. Choosing Your Start-Up Team is the most important task for the entrepreneur.
There is something rarer than ability. It is the ability to recognize ability.
Elbert Hubbard

The Entrepreneurial Team My motivation in preparing the original lecture and this subsequent chapter, was to share lessons learned from my own start-up experience and from over 100 start-ups that I have mentored. What did we do well and what did we do poorly? I wanted to be as candid as possible so that future entrepreneurs would not make the same mistakes; their start-ups would be even more successful. The responsibility of selecting Reticulars start -up team is one for which I am most proud, though there were a few big mistakes. I personally recruited everyone during Reticulars start-up phase. Further, recruiting our initial technical staff was one of my top priorities. During our first few years, I attended every career fair selected, and personally held on-site interviews, after meeting candidates in our booth. The table below provides a context for my comments. Entrepreneurs must consider all these positions, their responsibilities and general level of involvement in the start-up company. The shaded boxes mark those positions that are most likely to serve on the Board of Directors and/or Board of Advisors, our first area of consideration in this chapter.

Table 1. The Entrepreneurial Team Team Leaders Chairman of the Board CEO President Achievement Oriented Managers COO CFO VP Marketing VP Sales VP Manufacturing Technology Team Leaders CTO VP Engineering Director of Technology Chief Scientist Advisory Board (part time) Entrepreneurial team members Service providers Providers of capital Industry experts & consultants University professors

Engineering your start-up, Michael Baird

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Board of Directors Board and Advisor members should fill in the experience and/or knowledge holes in the founding team. With regard to the board, you are hiring your bosses. Directors report to the shareholders, not to the CEO! They are chartered with running the company for the shareholders and they have hired you to be their chief executive to do that work on their behalf. Be sure to select directors willing to work for your startup, attending meetings regularly and following through on their commitments. The Board should be comprised of individuals who add credibility to the company and the founders, especially if the founders have little business or professional experience. What skill set do you need? Reticular's founders developed a top-level design of our Board at founding. I generated short position description statements and wrote them on the back of my business card. As I networked at various events and conferences, I handed out my card and pointed to the Board needs that we were seeking. Several board and advisor positions were filled via this method. We set out to fill our Board with world-class experience and knowledge, with people that would impress customers, investors, employees and service providers. We sought Board members and Advisors that would make the founding team look more credible and impressive by association. Reticulars original Board members included: VP, Engineering, IBM; Investment Banker (Northwestern MBA, Bank of London, Wells Fargo Bank); Sr. VP and Founder, QUALCOMM (inventor of CDMA with 50+ patents awarded); venture-backed software CEO. They are all with Reticular at this writing, as a director or advisor, and all have invested in one or more financings. Reticulars three founders each had 20+ years of technical, sales and marketing, finance and management experience with Fortune 50 USA companies. Two of Reticular founders had worked for the third founder in a previous New York Stock Exchange traded company. A key lesson: There can only be one boss in a startup. If the founding team cannot decide who will be the boss and be supportive and loyal, the startup will not be successful. Period. This principle is fundamental to the success of any startup and is the single biggest failure of start-up teams. How do you identify & retain directors? I looked around our industry and our targeted customers. I looked for industry leaders, successful CEOs, and for those who had specific skills and knowledge that our startup needed and that our founders did not bring to the company. I called all the best people who fit our needs. I learned not to be afraid to ask. Most desired directors said yes and only a few said no. Do I need Inside and Outside Directors? I felt Reticular needed a mix of inside and outside directors. And, all companies for whom I have mentored also needed a mix of inside and outside directors. It is not necessary or even the best practice for all founders to serve on the board. Reticular's board usually contained two inside directors and 3 or more outside directors. This worked quite well.
The best-utilized boards will provide objectivity and sound judgment. Directors will question your assumptions, contribute to the resolution of specific problems, and bring new ideas to the table. Expect the board to review financial performance, marketing plans, key hiring decisions, and any other major development affecting the business.
Engineering Your Start-Up, Michael L. Baird

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How can I mitigate the legal liability for Directors? To attract the best candidates for directors, you must provide some form of liability protection for them. This can be done using competent legal counsel who will establish indemnification protection for the directors as part of the companys start-up paperwork. As soon as possible, purchase Directors and Officers (D&O) Insurance, an expensive but essential part of doing business and attracting the best people. What are some of the typical deals? Reticular holds quarterly meetings and no director is paid for these meetings. Most would not permit the company to reimburse them for their travel expenses to attend the meetings. The founders planned for stock options for directors and advisors, and these options were typically granted every year for directors, in the amount of 1,000 to 2,000 shares of common stock. Reticulars directors have invested in one or more rounds of private placement funding rounds.
The American Electronics Associations 1991 Executive Com pensation in the Electronics Industry survey publication reports that of its 423 reporting private companies, 379 (90%) provided no compensation for inside directors. Fifty-two percent provided no compensation for outside directors, the average annual retainer was only $5,430. Twenty-seven percent provided stock benefits.
Engineering Your Start-Up, Michael L. Baird

Advisory Boards Advisors bring credibility to your organization and fill in holes in your knowledge or expertise. We originally designed Reticulars Advisory Board to include primarily technical experts. We quickly realized that an Advisory Board is an excellent overall business extension to the Board, with essentially no liability compared to that of company directors. Advisory Boards are an inexpensive way to get expert advice at little or no cost in any needed business area. Since Advisory Boards have no formal liability with regard to their duties compared to a formal directorship position, really impressive and important people are much more willing to serve startups. I have discovered, to my delight and surprise, that most successful business people want to serve on boards and advisory boards. I now encourage my clients to think big and select carefully since they may find more excellent candidates will want to serve on their Advisory Board than they need. I also counsel clients to be very open with candidate Advisors as to what is expected from them (generate a position description for them to review, including number of mee tings per year and locations, as well as the kinds of issues you expect them to assist with). Get their commitment to support this effort consistently; otherwise, they may be 'collecting' titles for their own benefit. What needs can they fill? We used Reticular's Advisors, along with our Board, for annual strategic planning meetings. Further, we sought Advisors who had: specific industry knowledge and experience; technical expertise that complemented and extended our own; legal and financial expertise, such as due diligence in preparation for funding; contract negotiations and security programs with government agencies; and human resources issues.

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How to identify and retain Advisors? I suggest that entrepreneurs ask themselves the question Who is T HE dream advisor (or director, for that matter) for our company, who will most impress our investors, bankers and customers? If they cannot think of a candidate name, I suggest that one can characterize THE dream advisors background, experience, and/or positions in a pro forma description and share the description with ones network of friends, peers, professionals and service providers. Ask for introductions to those dream advisors and directors. Once an entrepreneur can characterize their needs, they can start networking. Ask directors, banker, investors, service providers, customers, college professors and other CEOs to introduce any who might fit the requirements. Read trade journals then call the cited analysts or editors, asking them for recommendations and introductions. Although these folks are extremely busy and difficult to reach, once I have their attention, I have found them to be extremely helpful and happy to do so. They very much enjoy getting insight into what might be coming down the line. Reticulars Advisory Board consisted of: VP/ Engineering and business attorney (government and commercial businesses); VP/Sales and Marketing (Sun and Perkin-Elmer); VP/Finance and Administration (SAIC and Titan Corporation); VP/Product Sector (Cubic, Titan Corporation); Ad/PR agency owner and principal (The Sterling Group). In some capacity as Advisors and/or Directors, they are all still with Reticular at this writing. Flexible use of Advisors Reticular typically held annual strategic planning sessions, which included our advisors with our board members (important people like to network too!). Most often, we used them individually on a tactical basis, seeking their help and advice in their particular area of expertise. Many have given lunch-time seminars to our employees, for the cost of their meal. It is a great way for the employees to rub elbows with important people and allowed our important people to see what great employees we had (important people like to brag too!). Key Executives We have identified and recruited key executives without the use of professional search firms. This has been done primarily through networking in a systematic way, as described for Directors and Advisors. Hiring decisions for key executives were made with complete consensus by Reticulars decision-makers. If any early uneasiness is ignored, there will be, almost always, serious consequences later. We recruited Reticular's second President/CEO from our Board of Directors. He first served the company on the Advisory Board; later, he was moved into a Directorship. Five years later, he took over as the chief executive of Reticular. He was a proven contributor, understood our business, and had earned the trust and respect of the team. Service Providers Legal: Based on my experience, I believe all attorneys cost the same, regardless of their billing rates. The expensive ones will not usually make costly mistakes for the entrepreneur; but if they should, they have the size and financial wherewithal to fix the mistakes. Inexpensive attorneys are, well, inexpensive. But sometimes, they cannot fix their mistakes. Simple mistakes during various fund-raising offerings resulted in very expensive corporate issues for Reticular Systems and for the major shareholders. My advice to clients now is to find and retain the best legal firm. Most 160

top law firms will work with start-up companies in negotiating affordable payment plans and limitation of expenses. If they will not, you are certain to find other excellent firms who will work with you. It is very competitive for law firms now, particularly in high technology areas. My approach in working with any service provider, and especially attorneys, is as follows, to paraphrase Guy Kawasaki of Garage.com, this is the business deal I want to do, now keep me out of jail. In the early days, I negotiated legal costs on a fixed -price, project basis. I also negotiated, during the interview and selection phase, monthly minimum payment schedules and caps for services, to limit mutual exposure of unpaid balances. Reticular Systems needed several different kinds of legal services: corporate and securities, taxes and finance, real estate and lease transactions, government contracts, human resources, and intellectual property. Our approach was to have several different firms, with the corporate and securities law firm being the lead counsel, as necessary. Regardless of their advertising, most law firms cannot cover all legal areas well, so we chose to go to specialist law firms for those infrequent but important needs; for instance, government contract specialists. In the case of intellectual property (IP) counsel, several reputable firms were interviewed based on networking results and reference checks (reference checks are important for service providers and essential for all other positions, such as employees, directors and advisors). Retainer details were negotiated; then, the Chief Technical Officer made the final decision, as they must be able to communicate and get along well with the IP counsel. Many of my clients have used this approach in selecting IP counsel with great satisfaction. It is the most economical approach for a small business. If the technical staff and IP counsel communicate well, that saves lots of money. Accounting: Reticulars accounting firms were selected in a similar way to legal services, through networking, several interviews and reference checks. Once we settled on a relationship with a large accounting firm, we realized that most of their services were not needed in the early stages of our development. To keep the costs down, we asked the large firm to recommend a boutique small firm that they were very comfortable working with. We sought a small accounting firm that specialized in government cost accounting and reporting. This was critical during Reticulars early years as our technologies were developed partially using government research and development funding. With such funding, we did not have to seek large sums of investment, thus keeping our ownership dilution down. We tasked the large accounting firm for annual reports and more formal accounting reporting, and tasked the small firm for more routine assignments. This turned out to be one of the best decisions we made in our early development. We received great service, kept our costs low, and had the prestige and credibility that a relationship with a large firm brings. Later, we used the same approach for routine legal matters by asking our legal service providers to recommend small law firms they were comfortable working with in order to outsource routine work and keep our costs down. One should not be afraid to ask. Marketing/Advertising/PR: We sought to establish a professional corporate image by professionals right away. We used the same technique in locating and selecting a firm in this area as we used for legal and accounting services. This selection turned out to be a critical decision for later fund-raising efforts. We appeared serious and professional to potential investors. And, the firm we selected, having done a splendid job working on our corporate image while keeping the costs down, also raised more money for Reticular Systems than anyone other than the author.

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Other (Bankers, Benefits Agents): A relationship with a banker is much like a marriage. One must work at it all the time but the benefits are worth it. Reticular Systems has followed its banker through several bank changes. He is worth following, given the relationship and service. Candor is the most important feature in this relationship. He knows we keep him informed and he can trust us. He has been a real asset in fundraising since investors know that he has banked us the entire life of the company. Our Benefits Agent has also invested in Reticular Systems in several rounds of funding. He has worked with many successful technology start-ups; thus, he brought great experience to the benefits planning process. Investors The marriage analogy is an excellent way to characterize how one should 'select' investors. This is a long-term relationship; so one must select an investor carefully. Do not take money from just anyone!! This discussion is obviously the subject of many books. However, the kind of investor one seeks is primarily driven by the targeted market size, market pace (adoption cycle), and company stage of development. These will dictate what kind of money and investors one seeks. Reticular Systems raised funds from individuals, angel investors and small investment partnerships. These funds were coupled with significant government research and development contracts in the first years of product development. This resulted in low dilution while company value increased. We also received development contracts with large corporations, negotiating rights to intellectual property and/or market segments. There are many kinds of investors, depending upon ones business model. However, one does CHOOSE ones investors, so the process remains the same. Formally identify what one's requirements are, network to select candidates, and check references! Friends and Family, and Angels: There are legal requirements to qualify (check references) of potential investors for private placements. While I was responsible for fundraising at Reticular, I made it my mission to look into their eyes and ask them the qualifying questions personally. I wanted to be sure they understood the nature of a start-up investment: long term and high risk. One must take the 'high moral ground in dealing with other peoples money and be able to look them in the eye even if you lose their money. Friends and Family invested in Reticular because they believed in the people. Angel investors, on the other hand, appreciated the business vision and, in many cases, felt they could add value beyond pure investments through their experiences and contacts. We chose Angel investors based on those contributions as well as their money. Institutions (venture capitalists): One must realize that there is a selection involved for both parties. The entrepreneur selects a professional investor as much as they select the start-up opportunity. Institutional investors bring so much more value than just money, but at considerable time, energy and dilution cost to the entrepreneur. One must go into this marriage with ones eyes wide open. References are essential before making a decision to add institutional investor(s) to ones team. Corporations: In the course of serving as a judge during the San Diego State Entrepreneurial Management Centers Annual Student Business Plan Competition, I discussed entrepreneurial interests with several of the programs sponsors, in particular, Motorola Ventures. They are serious about seeking early-stage investments and desire to be chosen by entrepreneurs 162

as a potential investor partner. Their sponsorship of such events gives them the opportunity to kick the tires of many start-ups. Their tires should be kicked as well, once one decides t hat the business plan would benefit from such an investor partner. Surprise!! Service providers!! Reticulars choice of service providers who closely matched our needs brought another benefit; most invested in one or more rounds of funding. Our selection process, performed in an open and business-like manner, inspired confidence in us; they invested corporate and personal funds in Reticular Systems. How do I attract the best employees? Reticular made a conscious decision to be competitive with regard to salary and benefits for all employees. We wanted to hire the best candidates. To compete for them, we had to offer traditional and innovative, creative and even funny new attractions: Salary: we stay competitive by calling key universities caree r services departments and solicit recent graduate salary offerings. This costs only phone time. Benefits: o Health and well being: competitive. We wanted employees to concentrate all their work-time energies on Reticulars business and not be concerned a bout their family's well being and health care. o Wealth building: qualified stock options, 401(k) retirement plans with Reticular match for employee savings. o Fringes (computers, space, child care, other): cheap with furniture, generous with computers, nice facilities, tailored benefits against family needs, other accommodations as required. Emotional, Social: cash and gift spot awards, holiday and birthday parties, recognitions in newsletters, fishing trips, picnics, rubber-band gunfights, etc. o Career Building: tuition reimbursement, conference participation and publishing, professional associations (not publications), public speaking and lecturing. o Moving, Teleconferencing, No Moves: flexible office hours, flexible telecommuting approaches, moving costs covered for long distances. o Transportation: car-pool arrangements, telecommuting and flexible hours in hightraffic routes, other needs as required. How to identify, interview, and select the best candidates? For our initial start-up team, the founders established position requirements, then networked in our peer groups for potential candidates. This proved to be quite successful because the founders were all experienced in industry. We established early on a formal interview process that included a writing assignment, a technical assignment and group interviews by peer teams. A 'chalk talk' was also required of the candidate where they had to explain a complex subject to the person on the street. The ability to communicate was essential to receiving an offer of employment from Reticular. While recruiting at career and university job fairs, a verbal and a written assignment was given as part of the application and pre-interview process. After successful interviews, candidate selection was done by consensus if all references were verified and checked. Offers were made and negotiated hard, since we did not go through such a rigorous process unless we were certain we wanted the candidate. 163

A candidate is identified, interviewed and selected. Then, there is a problem. Make the hard decision early otherwise you will be sorry! At the first sign of a mismatch, do everyone a favor: cover your heart with a steel cage and ask them to move on, in a generous and kind way. This was a very difficult lesson for Reticular Systems. We knew of a problem with a new employee but continued to delay facing the fact that the team was not working well, designs were not coming together well, and the program was behind schedule. In the end, the problem person left and we were unable to complete a project without significant further investments. We were patient with the problem person and hurt all other stakeholders: employees, investors and customers. Long-term strategy: grow your own! Although our founding team and initial technical staff were drawn from the ranks of peers we whom we had work experience, we also took a long-term approach to obtaining top talent. We established immediately upon founding a program of formal internships through local universities and colleges. Reticulars internship program has been so successful, it was formally recognized by the University of California System. The award cites our considerable successes in giving a large number of their graduates fabulous work experience resulting in great career opportunities for them, either with Reticular or other employers. An example of our early successes included our ability to retain 4 full-time #1 engineering, computer engineering and physics graduates from UCSD while we were still less than 20 employees in size. During my presidency, Reticular had about 60 interns. We were able to have our pick of the litter from this great talent pool. We were able to test their skills during their internship and part-time employment and bond with them. When they graduated, we encouraged them to interview elsewhere, asking that we be allowed to compete for their favor as well. When they joined Reticular full time, they were confident they had chosen the right career position. We also recruited mature graduates and advanced degree talent from a half a dozen key universities. It was amazing to learn that most little companies did not recruit at universities or participate in campus job fairs. We were extremely successful at campus career fairs; the students really liked Reticular; we were cutting edge and cool. We have routinely been very successfully recruiting at these schools (trade secret!) against the likes of Hewlett-Packard, Qualcomm, Microsoft, Texas Instruments, Intel, Oracle, Sun, etc. Academic fellowships and Sabbaticals Professors love to come to technologically innovative small companies during their breaks. They are always looking for some kind of sponsorship during their Summer breaks or sabbaticals. In addition to their technical or design projects, we would task them with lunch-time seminars and lectures in which all employees could attend. Through these programs, they brought freshness, excitement, and new ideas to the technical staff as well as our other employees. Directors and Advisors, shareholders and service providers were invited and often attended these seminars too. This kind of program for a little company is not that expensive. Reticular wrote several proposals for each chosen professor so that their expenses might be covered. Many actually helped write proposals for their fellowships and sabbaticals. We discovered another advantage of this program. Professors sent us their best students during our on-campus recruiting efforts. Training Incentives Similar to the United States military and many countries government policies, training incentives have been a great long-term strategy for growing top talent. The idea is to trade 164

advanced degree time for time served at the company. Many clients use this approach to recruit and grow their technical staff. They sponsor an exciting or new employee in pursuit of an advanced degree, with the agreement that a certain amount of time was obligated back to the company upon completion. During breaks and Summers, the employee works for the company on short-term projects or long-term research. What happens when a key employee leaves? I made it a policy to stay in touch with them. I kept them on our mailing lists for press releases and newsletters, and invited them to annual holiday parties and other social events. Those former employees have been great recruiters for Reticular. When new positions became available at Reticular, we often targeted former employees and ask them to recommend us to any they know who might fill our needs. Many have expressed a desire to return to Reticular. How Important is the Start-Up Team? This area of my start-up work is one for which I am most proud. Reticular's founders recognized that we could not do all the work needed to be successful. We needed to choose great people to execute our vision. We needed to establish the business structure and give the best team the best possible tools to accomplish that vision. Building a great team is worth the effort. I have mentored and counseled over 100 technology entrepreneurs and teams. I have seen extremely talented individuals who could not work together as a team. Some of these individuals were Nobel Prize recipients. Ive seen fabulous products with great market potential with all the right people and yet, they have failed. What happened? For the most part, they could not work as a team. The teams and/or key individuals could not be led or the leaders could not lead. People were greedy, prideful, dishonest, unrealistic, lazy, unprofessional, nave, stubborn, unfocused, undisciplined, mismanaged and/or insecure. They could not communicate or they could not listen or they had both faults. How does this happen? Most consistently, I see founding teams trying to work as a group of friends, as if playing a game. All successful start-ups are run professionally with some form of hierarchical structure. There must be an organization with leaders and led. The style of leadership can be different amongst businesses but there cannot be a democracy. There must be a place where differences of opinion are resolved and then respected and honored by the rest of the team. There must be great leadership, respected by those led, combined with hard work, great communication and mutual cooperation. If you want a great team, be a great leader. To be a great leader, lead by designing your start-up team, lead them by setting an example, lead by rewarding performance, lead by listening, lead by providing all that is necessary for their success, lead by making the tough decisions after gathering to inputs. A leader doesn't have all the answers or makes decisions that please everyone. But a great start-up team leader does have everyone's respect.

In the world today, theres plenty of technology, plenty of entrepreneurs, plenty of venture capital. Whats in short supply is great teams. Your biggest challenge will be building a great team.
John Doerr, Partner, Kleiner Perkins, Caulfield & Byers Fast Company, Feb-March, 1997.

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About the author Mrs. Ballard, a native San Diegan, is Vice President of Business Development, former President and Chief Executive, and one of three founders of Reticular Systems, Inc., a privately held California corporation (1989). Reticular Systems develops intelligent agent-based computer hardware and software products that aid its customers in solving complex, time-critical problems. Prior to founding Reticular, Mrs. Ballard was Director of Business Development for Titan Corporation. Previous to Titan, she served as Business Development Manager with Motorola Inc. in Scottsdale, Arizona. There, she was responsible for both technology and systems sales for the satellite communications business unit. Mrs. Ballard served as an Engineering Manager then Sales Manager with the LINKABIT Corporation, where she was the 18th full-time employee. The founders of LINKABIT later founded QUALCOMM Inc. When she left to join Motorola eight years later, LINKABIT had grown to over 600 employees. While on sabbatical leave from Reticular, Mrs. Ballard held the position of UCSD CONNECT Management Fellow, serving as an entrepreneurial mentor to over 60 early-stage high technology companies. Under retainer by the San Diego Technology Incubator, she served as an entrepreneurial management consultant to their high-technology residents. She has mentored entrepreneurs in preparation for the annual investment conference of the San Diego Software and Internet Council (SDSIC). Mrs. Ballard has often served as a judge for the annual Student Business Plan competition organized by San Diego State University Entrepreneurial Management Center. Mrs. Ballard served a 2-month fellowship with the Hunter Centre for Entrepreneurship at the University of Strathclyde, Glasgow, Scotland, and assisted with the launch of the University of Dundee's Centre for Enterprise Management. She had lectured and mentored entrepreneurs as part of the Global Software Program in Finland. She is a frequent speaker and lecturer on all aspects of entrepreneurship and maintains a small consulting practice. As part of her sabbatical leave, she is completing a theoretical physics degree at Point Loma Nazarene University (in process of transfer to Arizona). She can be reached via email at sballard@reticular.com.

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CHAPTER 27

Legal Considerations
By William D. Evers, Esq.

PRIMER SERIES for Startups and Emerging Companies SELECTION OF A BUSINESS ENTITY A PRIMER FOR NON-LAWYERS

prepared by William D. Evers, Esq. FOLEY & LARDNER 415/ 434-4484 wevers@foleylaw.com

NOTE: This is a brief summary and is not to be relied upon for legal advice. The subject of securities law is arcane and decisions on how to proceed are factually based. The author assumes no responsibility for action undertaken pursuant to this Primer.

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Forward: This Primer, when read together with the other Primers in the series, is intended to assist our clients in thinking through what route to follow when embarking on a start-up business and/or financing of their business. It is not a complete guide and should not be considered legal advice. Should the reader desire more precise advice, please contact the author at the address indicated on the front cover of each Primer. Other Foley & Lardner Primers Depending on ones needs, the firm of Foley & Lardner has several volumes that should prove useful to non-lawyers. These are designed primarily for start-ups and emerging companies, executives and interested angel financiers. They are: 1. Selection of a Business Entity 2. 3. 4. 5. 6. 7. How To for Early Stage Financing Primer on Intellectual Property for Non-Lawyers Legal How to Offer and Sell Securities Use of the Internet to Sell Securities California Corporation Code Section 25102(n) and the MAIE

The Primers were originally written for use in California. They have been slightly rewritten in order to assist clients in other states; however, the emphasis is still on California.

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Selection of a Business Entity

SCOPE
In General. This Primer focuses on the factors to be considered when selecting a form of organization for a business. The form of organization adopted will depend upon the particular objectives and situation of each business, and this Primer suggests matters for you to review in making the determination of the best form to choose under the circumstances. The specific attributes of alternative forms of business organization are discussed. The Primer considers the most common forms of business organization -- sole proprietorships, general partnerships, limited partnerships, limited liability companies and corporations, including S, C and Closed. Other, specialized forms of business organization such as business trusts, cooperatives, and professional corporations are beyond the scope of this work. SPECIAL NOTE: The Business Plan and the Real Agenda. When you contemplate a new venture think through what you really want and how you are going to achieve your goal. Usually a Business Plan is the tool used to force a think-through. What are the goals? An IPO in five years? A single store with two owners and no expansion? A Cash Cow that licenses an invention? The answers to these questions will have a substantial influence on what form of organization suits your needs. If an outside investor is involved, it is doubly important that you have a clear understanding, and full disclosure, of the real agenda of the founder/management team in order to avoid later charges of your having mislead the investors. This first step: the choice of entity, is an area where the lawyer can be critically useful. A wrong choice can be fatal. Your lawyer should take the time necessary to thoroughly understand your real agenda, to measure your resources and to understand the structural and tax advantages and disadvantages involved in the various structures you are considering. Note: The Securities and Exchange Commission has instituted a reform known as plain English in order to simplify legal documents. This Primer is an attempt to use just that: plain English. It varies from the traditional legal writing in the use of personal pronouns, active verbs and enforced simplicity. Hope you like it. Bill Evers

ALTERNATIVE FORMS OF BUSINESS ORGANIZATION Sole Proprietorship. A sole proprietorship is a business owned by a single person. As sole owner of the assets, the sole proprietor is entitled to all of the profits of the business and must bear all of the losses. There is no shield from liability other tha n insurance coverage (which usually does not cover debts and financial obligations). As a sole proprietor you will be responsible for all of the liabilities and obligations of the business. No legal formalities are required to 169

bring this form of business organization into being, and there are no particular formalities necessary for its operation. You will wish to avoid the liabilities associated with a sole proprietorship. As a business you will be required to obtain a local business license and, frequently, to file for a fictitious name certificate. Recommendation: Do not use. You are naked regarding liability. If you do use this form, have a good insurance broker and avoid debt. General Partnership. A partnership is an association of two or more persons to carry on a business as co-owners for profit. This form of business organization is ordinarily created by formal agreement, but a partnership may be created by oral agreement or may be implied by the conduct and acts of the parties. Matters not covered by a written partnership agreement may be controlled by state laws, in California by the Uniform Partnership Act of 1994 (Corporations Code Sections 16100 16962), which provides certain limited rules for the operation of a partnership and its termination. The laws of the various states are detailed in their treatment and must be reviewed by anyone contemplating the formation of a partnership. The Uniform Partnership Act is the usual state law. As a partner in a general partnership you are liable for all obligations and liabilities of the partnership, even those incurred by another partner. Because of this exposure you will probably wish to avoid this form of entity. Recommendation: Same as sole proprietorship, only worse as you must contend with the acts of your partners. Limited Partnership. A limited partnership is a partnership formed under the acts of the various states. In California it is the California Revised Limited Partnership Act (governing limited partnerships formed after July 1, 1984; California corporations Code Section 15611-15723). A limited partnership must have at least two partners, and must have at least one general partner and one limited partner. The general partner is liable for the partnership obligations beyond the funds invested. Consequently, most general partners are corporations. A limited partnership may be formed only by filing a Certificate of Limited Partnership, Form LP-1, with the Secretary of State, with a filing fee. A limited partnership may record a certified copy of the Certificate of Limited Partnership in any county recorders office. Recordation creates certain conclusive presumptions in favor of bona fide purchasers. Foreign limited partnerships in California are governed by California Corporations Code 15691-15699. The feature which distinguishes a limited partnership from a general partnership is that the limited partners liability is restricted to their contribution of capital. You, as a limited partner, are not responsible for the debts and liabilities of the partnership, beyond your investment, unless you take part in the control of the business. Management of a limited partnership is vested exclusively in the general partner or partners. The general partner is liable for the obligations of the partnership. Consequently, most general partners are corporations. Limited partnerships, very popular in the 80s for syndication purposes (real estate and oil and gas) are being eclipsed by the Limited Liability Company form of organization.

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Recommendation: O.K., but general partner must be corporation if one is to avoid liability. Why not use LLC? Most businesses are opting for the LLC form over that of a limited partnership. Limited Liability Company. In 1994 California joined 43 other states in enacting a Limited Liability Company Act (California Corporations Code Sections 17000-17705). The result is a flexible new business entity combining the advantage of corporate limited liability with the one-level taxation of a partnership. The LLC form of doing business is the most flexible form available (allows different sharing of profits, losses, as compared to ownership) that also provides protection from liability. It does not suffer the limitations placed on an S Corporation or a Closed Corporation. In addition, there is no need of a corporate entity to shield the general partner as in a Limited Partnership. All members of the LLC are shielded from liability beyond their investment. Because of the perceived advantages of (1) pass-through tax treatment; (2) the operational flexibility of a partnership; and (3) limited liability, the limited liability company (LLC) has taken its place as one of the most used forms for doing business. It is interesting to note that the historical roots of the LLC lie in Germany (1892), England and the civil law countries of Europe and Latin America. In all these areas it is an established and popular form of business association. Prior to 1997, to comply with the California Limited Liability Company act and the Internal Revenue Service rulings, you could have no more than two of the following attributes, which are those of a corporation: Continuity of life; Centralization of management; Limited liability; Free transferability of interests.

In a 1997 most innovative watershed ruling, the Internal Revenue Service changed the rules, and California has accommodated the change, by simply allowing one to check-the-box as to whether you wished to be taxed as a corporation or a partnership. (Reg. 5301.7701-3). Under these rules most entities that are not corporations may choose how they are to be taxed without specially qualifying as one form of entity or another under local law. This meant that the four attributes were no longer needed and has made the LLC an even more useful form for doing business. Recommendation: Excellent form for cash cow type of business without IPO plans. Best suited for small group, licensing company, etc. Very flexible. Corporation. A corporation is an artificial, intangible being which is created under state or federal law. A corporation may be owned by one or more persons. It is a separate entity that can acquire, hold, and convey property, be sued and generally act in its own name. It derives its rights from statute and its articles of incorporation. A detailed statutory framework is provided for the creation, operation, and termination of corporations. In California, matters dealing with the formation, capitalization and operation of corporations are found in the Corporations 171

Code and the Corporate Securities Law of 1968 (Corporations Code 1-24007). All states have laws governing the creation and operation of corporations. If adequately capitalized and corporate procedures are followed, the corporation alone is responsible for its debts and liabilities. The owners are not personally liable for these obligations. If you want to go public some day and have a vision (plus a Business Plan) of a large, listed Company, the best form is the corporate form a C corporation, not a sub S corporation. Recommendation: Only way to go if IPO is your aim. Best suited for public vehicle. SPECIAL NOTE: If your company is located, owned and operates in California, there is little advantage and some disadvantage to incorporating in Nevada, Utah or even Delaware in order to avoid the California taxes. By incorporating out of state, you do not avoid having to qualify in California and you will simply have to report to two states and, usually, to pay taxes in two states. Delaware has certain advantages relative to minority shareholder rights and the use of Chancery Courts; however, unless you see these as critical, the better program is to incorporate in California or the state in which the corporations headquarters are loc ated and in which the majority of its shareholders reside. Delaware is favored by those in the Midwest and East and by the investment community, including most venture capitalists (even those in Silicon Valley, California). Please note that it is easy to re-incorporate in Delaware at a later date, if desired. In addition, in using Nevada or Utah, you create a certain negative image in the minds of many in the investment Community. They think youre not playing by the rules. Subchapter S Corporation. A Subchapter S Corporation is a regular corporation which has elected to be taxed as a partnership and has adhered to certain requirements in order to obtain that treatment. Generally, an S corporation may not have more than 75 shareholders, all of whom must be individuals, estates or certain defined trusts. A corporation can not be a shareholder. An S corporation may not have more than one class of stock, although certain differences in voting rights are permitted. Distributions must be in concert with ownership interests. The election to be an S corporation must be filed, with the unanimous consent of all shareholders, on or before the fifteenth day of the third month of its taxable year in order for the election to be effective beginning with the year when made. There are rather strict rules that, if violated, cause the S status to be loss. Thus, the principal advantage of the S corporation is avoidance of double taxation. If there are losses this can be an advantage for the shareholders for the near term, but a disadvantage for the corporation in that the loss shelter is not available to the corporation once it becomes profitable. With the advent of the Limited Liability Company, S Corporations are rarely used. Recommendation: Forget it. Too inflexible. Use LLC instead.

Close Corporation. California offers the choice of forming a Statutory Close Corporation. Although this form of doing business affords a degree of flexibility not available in a non-close corporation situation, there are many pitfalls and the close corporation format is rarely used. Particularly now that California has the Limited Liability Company law the close corporation will be used even less frequently.

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Nevertheless, the elements, the advantages and the disadvantages must be examined. (See 1:16 below). The following is intended to be a brief outline of the salient features of the close corporation. In addition to the normal requirements for incorporation, the following are essential to attain close corporation status: An unanimous, written Shareholders Agreement. This covers what matters the shareholders will control and any phase of the affairs of a close corporation. There may be no more than 35 shareholders of record of all classes of shares outstanding. The Articles of Incorporation must contain: (a) a provision that all of the corporations issued shares of all classes shall be held of record by not more than a specified number of persons, not exceeding 35; and (b) a statement This corporation is a close corporation, (c) the share certificates issued by the corporation must contain a conspicuous legend as follows: This corporation is a close corporation. The number of holders of record of its shares of all classes cannot exceed 35. Any attempted voluntary inter vivos transfer which would violate this requirement is void. Refer to the articles, bylaws and any agreements on file with the secretary of the corporation for further restrictions. Recommendation: Forget it: less flexible than Subchapter S. Use LLC instead. CONSIDERATIONS RELATING TO FORM SELECTION In General. Various factors bear on the selection of a form of business organization. Some of these considerations, the advantages and disadvantages of the alternative forms of business organization, and the specific attributes of these various forms are reviewed later in this Primer. Generally, choosing the form of business organization is a matter of weighing the various considerations and evaluating their relative importance. In some cases, the form of organization for a business will be heavily influenced, or even dictated, by a single factor. For example, if you are entering into a relatively risky business you may be willing to consider only a form of business organization such as a corporation, limited partnership or limited liability company which offers limited liability. In many states, banks and insurance companies must be organized as corporations, so this would be the only choice for this type of business. In most cases, however, the selection of the form of entity will depend upon your consideration of a number of factors. The selection of a form of business entity is not necessarily an all or nothing proposition. It is possible to utilize more than one form of business organization for a business. For example, a corporation might be organized to operate a business, and some of the assets used in the business might be owned by a partnership which leases them to the corporation. Of paramount importance is to ascertain what you wish as to your position, say, five years in the future. How much available cash flow is expected? How will it be distributed? What is the exit strategy? How much financing is needed and when? The answer to this financing questions bears heavily on who will control the company. The answers to these and similar questions will determine what form of entity makes sense. And, of course, tax considerations are of great importance. CHECKLISTS OF ADVANTAGES AND DISADVANTAGES In General. The following checklists summarize the advantages and disadvantages of the various alternative forms of business organization. 173

Sole Proprietorship. Advantages Few formalities are required for organization and hence organizational costs are minimal. This minimizes legal fees. Actually, it is rare for lawyers to be involved in the formation of a sole proprietorship perhaps its most important advantage! Absence of statutory or other formalities required for decision making and action. Freedom to do business anywhere without elaborate formalities to qualify. Minimal reporting requirements to government entities. Control is centered in one person, thus avoiding the inconvenience of collective decision making and the risks arising when broad powers to manage or to obligate the business are granted to several persons. Income is taxed only once at individual federal income tax rates, which can be lower than federal corporate rates for high income. Of course, state taxes are also payable. In a corporation, income is taxed twice, once when earned and once when distributed. Losses are available on the owners personal income tax return and can offset other income. Disadvantages The owner is subject to unlimited liability for obligations and liabilities of the business. The business is subject to termination upon the death or disability of the owner. Transfer of the business through sale or otherwise requires transfer of the individual assets of the business. Risk or equity capital is limited to resources of the individual owner, and borrowing capacity may be limited as well. Business profits are taxed as income to the owner at individual income tax rates which can be higher than those of a corporation for lower incomes. General Partnership. Advantages Minimal formalities are required for organization, and hence organizational costs are limited. Since a partnership involves more than one person, it permits a combination of individual resources and talents, and authority to act is not limited to one person. Few formalities are required by law for decision making and action. The business may operate where it wishes without elaborate formalities to qualify. Minimal reporting to governmental entities is required. If the partnership agreement so provides, a partnership may continue in existence after the death or withdrawal of a partner. Business profits are taxed to the partners, and if they are individuals, will be taxed at individual income tax rates which are lower than corporate rates for high incomes. Business losses are available on partners personal income tax returns and can offset other income. Disadvantages Each partner has unlimited personal liability for all debts and liabilities of the business. The general power of every partner to act on behalf of the business requires caution in the selection of partners. A partnership is dissolved upon the death of any one partner, if not otherwise provided by agreement. 174

Partnership profits are taxed as income to the individual partners, which is disadvantageous at low income levels. As more than one person is involved, lawyers fees can be substantial due to the need to customize and protect the participants as much as possible.

Limited Partnership. Advantages If you are a general partner, or control the corporation that is, there is an advantage in that financing, or other support, is available from limited partners, without the need for the general partners to surrender control. There can be great flexibility in the share of available cash flow to be paid to the limited partners; e.g. 75% until they get their money back, then 50% until they get double their money, then 25% thereafter. For limited partners, a limited partnership affords an opportunity to invest and participate in the profits of a partnership without risk of liability or loss beyond the amount invested. The business continues in existence without interruption upon the death of a limited partner or upon transfer of a limited partners interest. Relatively free transferability is available for limited partnership interests. The tax advantages are the same as those for a general partnership, including the ability to take partnership losses on partners personal income tax returns and to report partnership income on individual partners returns. Allocation of profits and losses is also possibl e. Disadvantages Organization requires greater formality, which increases organizational costs. The preparation of a Limited Partnership Agreement usually demands a great deal of customizing and is therefore quite costly. Legal fees can vary from $2,50 0 up to $15,000. Operating in states other than the state of organization will require qualifying to do business in the other state. Greater reporting requirements to governmental entities. Limited partners are required to make a financial or property investment without the right to participate in the operation of the partnership. At least one general partner is required to assume responsibility of unlimited exposure for debts and liabilities of the business. This usually involves the formation of a corporation to act as the General Partner. This, of course, has attendant costs and reporting requirements. Sale or transfer of interests may be subject to securities law regulation. The limited partnership is dissolved upon the death or insanity of a general partner - subject to the terms of the Agreement. The same tax advantages or disadvantages, depending on the owners position, apply as for general partnerships, including income being taxed to the individual partners. Corporation C Type. Advantages. If corporate procedures are followed and the initial capital is adequate, there is no liability of the shareholders for debts and liabilities of the corporation. Free and ready transferability of ownership by sale and transfer of stock, without affecting the continuing existence of the business or title to its assets. Perpetual existence of the corporation unaffected by the death of shareholders or transfer of shares. The ability to transact business without each shareholder participating in each decision. 175

The use of a business format which, if used correctly, provides for structured accountability and governance. The corporation provides an institutional being separate and apart from the owners sometimes a distinct advantage. Flexibility of financing through the sale of various types of securities to many investors. Normally the founders get common stock and the investors get preferred stock. This is to minimize the possible tax problems of the founders being held by the IRS to have received stock for services, taxable at ordinary income rates. The availability of tax-favored fringe benefits unavailable to other forms of business entity. For simple corporations, relatively inexpensive formation costs. Figure filing fees and franchise tax in California at $915. Legal fees should be small as the time involved to form the corporation is minimal. A long established body of law which serves to provide a degree of predictability as to corporate actions. Disadvantages If you are going to be a minority shareholder, you will have very little power to control any aspect of the corporations operation or policy. Burdensome requirements for reporting to governmental entities. Statutory formalities must be adhered to for decision making and action. Control is vested in a board of directors, not the individual owners (however, the majority owners control the Board of Directors). Stock issuance and transfers are subject to securities law regulation. Limited liability of the corporation causes the assets to be the only source for credit. You may be called upon to guaranty corporate indebtedness, which somewhat defeats the value of limited liability. Must qualify to do business in states other than the state of incorporation. Double taxation for federal income tax purposes of business income which is taxable initially to the corporation and again upon distribution to the shareholders, unless the corporation qualifies and elects to be taxed as a S Corporation. Losses of corporations may not be deducted by individual shareholders, unless the corporation qualifies and elects to be taxed as an S corporation. The distribution of property by a corporation to its shareholders is generally a taxable event for income tax purposes as to both the corporation and the shareholders. Thus, withdrawing property from a corporation can be extremely expensive from a tax standpoint. In determining who gets what share of the equity, there is little flexibility to have the amount of equity for the founders to be greater than their actual cash contribution. This tends to make it difficult to handle the outside cash contributors unless they loan part of the funds rather than take a full equity position. It is of the utmost importance for the founders to purchase their holdings (which should be Common Stock) at the earliest date possible if the price they pay is considerably less than that to be paid by outside investors (who should purchase Preferred Stock). Otherwise the founders will run the risk of being held by the IRS for having received for services the difference between what they paid and what the investors paid. This income would be taxed at ordinary income rates. As hinted above, another technique used to lessen the tax risk is to issue Preferred Stock to the investors and Common Stock to the founders.

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Corporation S Type Advantages No double taxation. Income taxed to owners. Limited liability. Disadvantages Can lose status inadvertently; e.g. transfers of ownership by a shareholder to no-permitted trust or corporation. Robs corporation of the use of net operating loss, incurred in early years, for a tax shelter when the corporation becomes profitable and usually needs cash for expansion. This is a very important consideration, one usually overlooked by the founders. Limited to 75 shareholders. Being replaced by more attractive (flexible) limited liability companies. Close Corporation Advantages Flexibility in arrangements amongst the shareholders as to distribution of profits, voting and any affairs of the corporations including meetings of the Board and shareholders. In short, shareholders have more power than in a non-close corporation. They can approach being partners. Corporate attributes of a shield against personal liability, centralized management, and continuity of life. Lack of corporate formalities does not provide basis for alter ego liability. Shareholders may bypass Board of Directors by use of unanimous written agreement. Disadvantages Limited to 35 shareholders. If you as a founder elect Subchapter S formation and the corporation allocates profits, voting rights, or other privileges on an unequal basis, the corporation could be subject to double taxation; i.e., at the corporate level and the owners level as these distinctions could be held to create two classes of stock and therefore Subchapter S status would be denied. Formal requirements are strict and the status can be lost without so intending. Issuance of new shares by the corporation can be complicated as the new shareholder must agree to be bound by the Shareholders Agreement or the corporation loses its close corporation status automatically. If shareholders act as managers, as they can, they are personally liable as managers. Limited marketability for the shares as the transferee is bound by the terms of the Shareholders Agreement (if the required legend is on the share certificates) and may not wish to abide with those terms. Also, the holders specifically waive the right to register their shares for sale to the public. On liquidation the shareholders could be taxed at ordinary income rates on the portion of a distribution which is greater than that received by other shareholders with the same number of shares. There are Securities Law problems: 25102(h) of the California Corporate Securities Law can be used only if there is a single class of common stock (the Shareholders Agreement may create more than one class by granting different rights); changes in rights, preferences and privileges effected by the Shareholders Agreement will be considered a sale of securities demanding a permit (unless an exception exists - - 25102(f) of the Corporations code may still be available) and, indeed, the Corporations Commissioner may even require a permit for the Shareholders Agreement itself prior 177

to its adoption. The lawyers fee and costs for drafting the Shareholders Agreement, because it takes much time and effort, are usually high. From the above it is obvious why the Close Corporation is not used very often. With the advent of the Limited Liability Company, it is hard to imagine when the Close Corporation form will be used. Limited Liability Company. Advantages Allows great flexibility in the relationship amongst the member-owners as to the distribution of profits, voting and management through the terms of the Operating Agreement. The members may be active in the management of the entity without being subjected to liability as in a Limited Partnership. An LLC is particularly handy when the founders wish to end-up with a sizeable amount of equity by providing the investors with a large share of the available cash flow until they get their investment back (say 75%), then a lesser percentage (say 50%) until they receive double their funds and then they drop to, say 25% on a permanent basis. Thus, you, as a founder, can end up with 75% of the cash flow while the investors are happy as they have received double their investment back and ride at 25%. A wonderful vehicle for a cash cow business. Allows for pass-through tax treatment; i.e., the entity is not taxed, other than the minimum California franchise tax, (plus a nominal graduation fee up to maximum of $4,500 per year) with the members being taxed as a partnership. Provides limited liability with exposure for debts and obligations limited to the original capital investment of the members. There is no need for a Managing Member to be a corporation as in the Limited Partnership form where the General Partner is liable. As compared to the S corporation, allows any number of members and for cor porations, trusts, and any other form of organization to be members. It appears that even nonresident alien individuals may be members. Cannot have piercing of liability protection due to lack of formalities if the Operating Agreement does not require them. An LLC can also own more than 80 percent of the stock of a corporation. One can change to a corporate form without tax consequences. The reverse is not true. Disadvantages The death, retirement, resignation, expulsion, bankruptcy or dissolution of a member generally terminates the LLC unless the LLCs business is continued pursuant to a vote of all the remaining members within 90 days of the happening of that event. Limited participation by members in fringe benefits. On sale of a members interest, the capital gain is subject to IRC 751 ordinary income categorization. California imposes a minimum franchise tax ($800) on LLCs plus graduated fee based on total income with a maximum of $4,500 for gross income of $5 million or more. Professional groups governed by the Business and Professional Code are not permitted to use the LLC form in California, however, attorneys and accountants have the use of a limited liability partnership form. As the California Limited Liability Company Act used the Revised California Limited Partnership Act as a foundation, the members fiduciary duties would appear to be that of partners, not shareholders. Cost of formation is higher than for a corporation as the Operating Agreement can be highly customized. The initial filing fee with the Secretary of State (California) is only $70. However, the minimum tax soon follows. Figure $2,500 to $7,500 for legal fees. 178

If you wish to have an initial public offering and become a listed company (on the Bulletin Board or NASDAQ Small Cap), you should start with a C corporation and not complicate the business growth by starting with an LLC, despite its apparent appeal.

Tax Considerations A. Pass-Through Use of Losses These comments apply to partnerships and LLCs any pass-through entity wherein the owners are taxed and the entity is not. It is often thought to be clever to start a business with an LLC so the owners can take advantage of the usual start-up losses. The plan, then, is to change to a corporation when there are profits. Thought should be given to the fact that the early losses are really an asset of the business in that they can be used to shelter income when the business becomes profitable. However, if this asset is taken by the owners by use of an LLC or partnership, it is not available to the business at a time when cash is usually needed to finance the receivables and the growing business. In such circumstances, the cash is used to pay taxes on the profits as there is no net operations loss carryover. This scenario can result in the need for working capital which may have to be obtained by an equity offering that may cost in dilution to the founders considerably more than the perceived benefit of owning the early losses. Food for thought. B. Sale of the Business You also have to consider, from the start, what tax liability may be incurred in the sale of an LLC or a partnership. In the event assets are sold, the sale is taxable to the owners on the difference between the tax basis of the assets and the sales price. In the event a member of an LLC or partner wishes to sell his/her interest for stock, it is a taxable sale. In the event a member or partner whishes to exchange his/her interest, it is taxable unless the selling group ends up holding 80% or more of the buyer after the sale. In the exchange of corporation stock, the exchange is, generally, tax free without the 80% rule limitation. Further food for thought.

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COMPARISON OF BUSINESS FORMS: TABLE

(D) Limited Liability Companies Articles of Organization must be filed with, and on form prescribed by the Secretary of State. Annual Statement of Information must be filed within 90 days. 2:07

(A) General Partnerships

(B) Limited Partnerships

(C) Corporations

1. Ease of Formation

No writing legally required, but agreement should be in writing. No government approval needed. Fictitious business name statement, statement of partnership, and special licenses or permits may be needed by the particular business. 2:03

Certificate of Limited Partnership signed by all general partners must be filed with the Secretary of State. Partners must enter into limited partnership agreement. See Column (A) General Partnerships for other possible requirements 2:04 Drafting the agreement is more time consuming and costly than drafting simple articles and bylaws for a corporation. Secretary of States filing fees are around $70. Same minimum franchise tax as corporations ($800) 2:40.

Articles of Incorporation must be filed with and approved by the Secretary of State. Statement of Domestic Corporation must be filed within 90 days. Licenses or permits may be required. 2:05

2. Cost of Formation

Cost of drafting the agreement subject to much variation. Fictitious business name statement, if needed, must be filed and published; filing costs are approximately $25 to $75. 2:39.

Filing fee $100; Special Handling is $15; Corporate kit $50 to $115. BiAnnual Statement fee is $20. Legal drafting fees can be reduced if standardized forms are used. 2:41

Filing fee is $70. Filing fee for BiAnnual Statement is $20. Legal costs of writing the Operating Agreement are comparable to writing a Limited Partnership Agreement. 2:36

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(A) General Partnerships Partners capital contributions and loans to partnership from partners and outsiders are main sources. General partnership interests are not usually deemed securities.

(B) Limited Partnerships

(C) Corporations

(D) Limited Liability Companies The Corporations Code states that interests are presumptively securities. Great flexibility aids in raising capital. Excellent vehicle for a cash cow business.

3. Raising Capital

Same as general partnerships, except that limited partnership interests are usually deemed securities.

Sale of shares (equity) in various forms, including common, preferred, and convertible debt can be in various forms, including bonds, debentures, notes and other evidences of indebtedness. Structure can be highly centralized. Many control devices available to separate management from ownership, such as nonvoting stock, voting trusts, shareholder agreements, and super majority vote requirements for certain matters. 2:27 Risks are born by corporation, and shareholders risk only their investment, not their personal estates, unless courts pierce the corporate veil. But lenders may require personal guaranties of principal shareholders of closely held corporations. 2:21

4. Control and Management

Control can be shared or centralized; great variety of control and management structures available by agreement. Absent an agreement, control is by a numerical majority of all partners. 2:25

Management and control are by the general partners. Limited partners must be excluded from control to retain limited liability (but they are less restricted under new Act than under old Act.) 2:26

Structure can be highly centralized and does not need to be exercised by a member. Can have a Managing Member or Members, a management Committee or be Member Managed. Absent an agreement, control is by all its members. 2:29 Liability is limited to the original capital investment of the members. 2:22

5. Liability of Owners

Partners ordinarily share risks according to partnership agreement. Partners have joint or joint and several liability without limitation for partnership obligations to outsiders. 2:19

General partners have unlimited liability to outsiders; limited partners risk only the loss of their agreed capital contribution. 2:20

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(A) General Partnerships

(B) Limited Partnerships

(C) Corporations

(D) Limited Liability Companies No perpetual existence. Link to one event (e.g. death of partner).

6. Continuity of Business

No perpetual existence. Partnerships may be dissolved by specified events or (unless otherwise agreed in advance) by the death or withdrawal of a partner. Inadvertent dissolution should be guarded against in the partnership agreement. Difficult. Partners right to receive distributions is assignable, but transferee cannot be substituted as a partner except by consent of the remaining partners. 2:32

No perpetual existence (see Column (A) General Partnerships). Dissolution may result from loss of limited partners. Inadvertent dissolution should be guarded against in the limited partnership agreement.

Corporations have perpetual existence. However, the corporation may be dissolved, or its powers may be suspended for failure to comply with corporate formalities, or the business may fail or be sold.

7. Transfer of Interests

Same as general partnership with respect to general partners interest. Limited partners interest is assignable but the assignee cannot be substituted as a limited partner without the other partners consent, unless the partnership agreement provides otherwise. 2:33

Shares are more readily transferable than interests in partnership (if there is a market for them). However, restrictions on sale to outsiders may be imposed by the articles or bylaws or by a shareholders agreement. 2:34

Membership and economic interests are assignable. Membership interests must be approved unanimously by the members unless the Operating Agreement or Articles provide otherwise.

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(A) General Partnerships

(B) Limited Partnerships

(C) Corporations

(D) Limited Liability Companies Limited as in partnerships.

8. Fringe Benefits

Some of the fringe benefits that corporations can offer employees (see Column (C)) are available to partnerships as well.

Same as General Partnerships.

Many tax-favored fringe benefits are available for corporate employees, such as profit-sharing and pension plans, group insurance, and accident, health, and sickpay plans (some of these benefits, or comparable alternatives, are also available for use by partnerships). Double taxation (corporations are taxed on predividend profits and shareholders are taxed on dividends) is a major disadvantage; where applicable, use of S corporation status may reduce the burden. California imposes a minimum annual franchise tax. 2:46

9. Taxation, Generally

Partnerships do not pay income tax but merely file information returns. Partners are taxed on their share of the profits, whether distributed or not; double taxation of corporation is avoided. Lower taxes generally, even without considering double taxation. 2:45

Same as general partnerships, except that limited partnerships doing business in California are subject to a franchise tax of $300 beginning in 1988 (more in later years). 2:45

Federal flow through tax treatment, i.e., entitys not taxed and the members are taxed as a partnership. Under California tax law, the LLC is subject to a minimum franchise tax ($800) plus a graduated fee based on income. 2:47

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(A) General Partnerships

(B) Limited Partnerships Limited partners names need not be disclosed to public under Californias new limited partnership act.

(C) Corporations

(D) Limited Liability Companies Cannot pierce liability protection due to lack of formalities if operating agreement does not require them.

10. Other Advantages

Simpler structure, fewer statutory requirements. Doing business in other states may be easier for general partnerships than for corporations. For some businesses (e.g., law firms) partnership is the traditional form. Lack of prefabricated structure and rules is a drawback.

Shareholders identity (unless they are directors or officers) is not disclosed on public records.

11. Other Disadvantages

If interstate business is contemplated, laws of other states regarding limited liability, foreign limited partnerships, etc., should be investigated.

Required to follow corporate formalities (annual shareholder meetings, minutes of boards actions, annual statement, reports to shareholders, etc.). Corporations doing business in another state may have to register as foreign corporation and pay taxes in that state.

Relatively new form of business subject to rules and rulings of the Treasury. If more than a few Members, may be same confusion of management responsibility as in partnership.

About the Author: William D. Evers is a partner in the San Francisco office of Foley & Lardner. Mr. Evers has extensive experience in representing start-up and emerging companies for whom he has specialized in private placements, Section 251002(n) offerings, Small Corporate Offering Registration (SCOR), Reg. A exemptions, and Small Business Registrations. He has also handled numerous mergers and acquisitions. Mr. Evers is the Chair of the California Capital Access Forum, a non-profit corporation dedicated to changing the overly restrictive nature of the securities laws in order to assist small and emerging companies in obtaining capital. He can be reached at wevers@foleylaw.com.

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Chapter 28

Where to locate?
By Henri Grundsten Tekes
When thinking of setting up business activities in USA, location is probably one of the most thrilling issues. The country is full of famous and fascinating places that are familiar to us all, thanks to television and movies. Think of New York, Los Angeles, San Francisco and others wouldnt it be nice to live and work in one these places? Everyday life and hard work, however, is often far from the scenery that you see on the screen. In the following a business-minded and professional approach will be set forth to help Finnish hightech companies in figuring out the best and most appropriate location for their US operations. Whereas this is a challenging task to overcome at least some basic principles are presented accompanied by a few pieces of information concerning different factors affecting the decision. C2CR Criteria Like every other aspect of business development this one also needs to derive from the firms ultimate business strategy and goals. What kind of business is the firm after and what services and products does it offer for its clientele? These are fundamental questions to consider. Competitors are also relevant when thinking of the location. If competitors are clustered at some location it might be worthwhile to consider the same location. Why? Because most likely they have done their homework and found out something that makes the location attractive. And most importantly, being able to watch competitors closely is always beneficial. Operating and living costs are naturally very important factors when considering different choices for the location. In the U.S. there are many different places also in this respect. Silicon Valley, with all its fascination and prestige is perhaps the worst of all. Housing is extremely expensive and hard to find. Office space is equally expensive and scarce. Venture capital funds awash with money have biased economic structures in a way which have set off high cost in every walk of life. Some other places may offer significantly lower costs and many other benefits, but the downside may be disabilities eg. in corporate image and networking opportunities. Availability of skilled and trained personnel is a critical issue for a high tech firm. When youre coming from a different continent with a cultural background its necessary to hire local personnel, sooner or later. For Finnish high tech companies operating in the U.S. it is a must to hire native marketing and sales people. Avalability (as well as cost) of these type human resources varies significantly between different areas. Recruiting in a foreign country is challenging enough to begin with and when high salaries and poor availability are added into the mix, it can get next to impossible.

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The above mentioned matters are the most critical main issues. There are certainly many more to think about, but in most cases at least these should be considered. They could be called C2CR criteria Customers & Competitors, Cost and Recruiting. Industrial Clusters Industrial clusters are formed when a group of firms in the same industry have chosen to locate in the same region. These type of clusters can be found all over the industrialised world. A recent study of U.S. industrial clusters by Tekes offices in the U.S. tried to capture an overview of all clusters in the country. The results of that study are shown in picture 1 .

Washington Aviation Software MI/IL/OH/WI Automotive Food Industry Materials Manufacturing Colorado Logistics Machinery New Mexico Electronics Nuclear R&D Space R&D Texas Electronics Oil&Gas Software Telecom

New England Biotechnology Financial Services Innovation Services Multimedia Software PA Energy Metals

Northern California Biotechnology Computers/Electronics Software Telecom Southern California Automotive Aviation/Space Biotechnology Media Telecom

DC/Maryland/Virginia Biotechnology Defence Technology Software Telecom Georgia Forestry Semiconductors

NJ/NY Chemistry Financing Media Pharmaceut. North Carolina Life Sciences Furniture Software South Carolina Manufacturing Materials Florida Agriculture Forestry Tourism

Picture 1. Industrial clusters in the U.S.

How do industrial clusters affect the firms decision as to where to locate? It is usually worthwhile to check at least all the known industrial clusters in the target area. First, it enhances your understanding of the target area and secondly, it is more likely that these regions have some advantages to offer. Just to mention a few: the infrastructure may be especially favourable for your type of operations and most likely there are professional services easily available that are already familiar with your industry. Industrial clusters also mean that there are people around who are knowledgeable and skilled in those areas which are of interest to you. You can benefit from this in many ways. People always tend to get together and this offers an excellent opportunity to gather first-hand information concerning industry affairs. Again, if you need to hire skilled personnel, it will be much easier. It may, however, cost you some money, but it can be done.

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Service providers When setting up new business activities in a new territory various kinds of professional services are needed: legal counseling, accounting, auditing, tax consulting, housing etc. Many times these trivial issues may cause a lot of overhead in a foreign environment. Being able to locate right kind of service providers for these needs may save an incredible amount of time and money. Business incubators started to emerge in the late 80s and today can be found almost everywhere. Some incubators have specialized in assisting foreign start-ups, like the International Business Incubator (www.ibi-sv.org) in San Jose, California. These organisations often have those very services available that a newly started foreign high-tech company needs. They also offer office space which can be obtained as needed, and what is also important, without commitment to a threeyear or even five-year lease. Incubators typically also have a wide network of all types of service providers that a foreign business might need. Other type of service providers can also be of importance when considering location issues. E.g. telecommunication services such as high-speed Internet access can be important to your business, but not necessarily available in every location. Furthermore, things like web hosting services, subcontracting opportunities or sometimes logistical services may be crucial to the business. Even universities and research institutes may play a role when deciding where to locate. Snapshots of a some areas When thinking of software business and the U.S. as a target territory there are a few regions worth considering. First of all there is of course Silicon Valley. It is still the most known and the most prestigious turf for software related businesses and activities. There you can easily get hold of the major players in the field and get to know people who may be of benefit to you. It is also the place where you can expect to hear all the relevant news and rumours within the industry first hand. If Japan has any role in the business involved Silicon Valley is definitely one of the best places to reach out to Japan. But Silicon Valley sure has its downside as well. It is crowded and exceedingly expensive. Abundance of people is not a problem per se, but the growth rate is. A constant flow of Silicon Valley immigrants drives rents straight up and infrastructure like phone lines, power supply, schools etc. lag behind all the time. Skilled workers in Silicon Valley change jobs a lot more often than elsewhere in average. And the salaries are sky-high with all possible bonuses, stock options and other incentives. But Silicon Valley is the place, particularly if your business deals with core information technology like e.g. data security or database engines. Meanwhile, if you are more in the application kind of business you may want to consider other places, perhaps ones which are close to your customers. Other regions in USA which are relevant in regards with software business or information technology more broadly, include Boston - New England Atlanta Georgia Research Triangle (Washington DC, Maryland, Virginia) Houston and Austin Texas San Diego California

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Seattle is also worth mentioning, though its justification relies mostly on Microsoft. San Diego is known for its telecommunications related activities Qualcomm and UCSD (University of California, San Diego) being the key players there. Atlanta and Georgia are more focused on hardware, but that industry of course generates usually a lot of software activities around it. The Research Triangle area is rapidly growing in this respect and has some major companies there like AOL (America Online). In some cases it might be worthwhile to consider also Canada when thinking of location in North America. There are some benefits that can be significant: the same time zones, the same language, a more European lifestyle and society and most importantly, lower costs. In fact, Canada has been quite active in recruiting high-tech companies to locate there and there may even be some incentives, which the country will offer for new high-tech companies that will come to Canada. Here are a few examples of cost indexes in some areas:
Location All Items (100%)* 102.0 132.5 Grocery (16%)* 102.2 116.6 Housing (28%)* 103.8 171.2 Util. (8%)* Trans. (10%)* 108.3 111.6 Health (5%)* 104.0 130.0 Misc. Avg (33%)* Rent 101.0 113.8 Avg Home

Atlanta

Boston

90.4 134.0

$ 705 $212,795 $1,326 $326,725 $484,478 $920,000 $281,809 $238,472

Los Angeles 147.7 111.4 241.5 114.7 109.1 120.8 109.4 $1,459 New York 241.0 143.9 485.3 199.3 121.2 176.3 137.0 $3,720 San Diego 120.8 119.9 142.6 122.0 117.5 123.6 103.0 $1,149 Washington 114.7 112.6 129.0 97.1 109.3 114.7 109.4 $1,133 DC (Source: ACCRA Cost of Living Index sample data. The above data is provided as an example.)

Off-sites An interesting approach to the question about location in the USA can be that based on the so-called off-sites. Off-sites are locations that are within a close proximity to the primary locations. As an example, we may think about Silicon Valley which has its pitfalls like mentioned earlier of which the cost factor is the most meaningful. Some benefits of being located in Silicon Valley can still be reached even if you are not located in the very heart of it. You could consider places like Walnut Creek, Livermore, Dublin, Danville etc. that are all roughly within an hours drive from Silicon Valley. Housing, schools, quality of life in general would probably be on a whole different level there compared with the Valley itself. In fact, one of the major software companies, Peoplesoft, has its corporate headquarters in Pleasanton, which is kind of an off-Silicon Valley site. A similar approach might also be used when thinking of New England: Boston vs. off-Boston. In the New York metropolitan area it might also work: New Jersey or even Connecticut could be good choices. Summary The most important criteria in choosing location in North-American territory are customers / competitors cost recruiting 188

Customers and their locations should be on top of the list, but it may be worthwhile to watch competitors and their moves as well. Cost and recruiting are equally important and should kept in mind when making decisions. Other factors and dimensions that are important are various industrial clusters and their locations service providers, which can make life easier off-sites which can offer some of the benefits without some of the downsides time zones, East Coast vs. West Coast

Sometimes it may also be worthwhile to give the whole idea a second thought. The U.S. is definitely the hardest and toughest software market in the world where all the big players put up their best. But again, if you are successful there, you will surely be successful anywhere else. About the Author

Henri Grundstn, Technology Councelor

Henri Grundstn, M.Sc., is head of Tekes (National Technology Agency of Finland) office in San Jose. His areas of expertise are software and Internet industries as well as technology-based businesses and start-ups. His present responsibilities include representing Finnish technology, universities and hi-tech companies in Silicon Valley as well as observing technology and technology policy issues in the region. Promoting international R&D cooperation involving both universities and private companies is the primary goal for his work. His previous responsibility within Tekes was financing of Finnish software companies and software-related research projects of Finnish universities as research manager and head of department. Before joining Tekes Mr. Grundstn has been employed in different positions of engineering, marketing and sales in software industry. Tekes, the National Technology Agency is the main financing organization for applied and industrial R&D in Finland. The funds for financing are awarded from state budget. Tekes primary objective is to promote the competitiveness of Finnish industry and the service sector by technological means. Activities should lead diversify production structures, increase production and exports, and create a foundation for employment and social well-being. Tekes main functions are Framing and preparation of national technology policy. Preparing, financing and coordination of national technology programmes. Financing applied technical research and risk-intensive industrial R&D projects. Financing and coordination of international technological cooperation. SME advisory services in technology transfer and exploitation. Mr Grundstn has a degree in industrial management from Helsinki University of Technology in 1984. At the moment he is also working on his post graduate studies and research concerning how to promote new, technology-based companies and entrepreneurship.

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Chapter 29

What a Finnish Entrepreneur Should Know About

US Immigration Law18
By James M. Mei, Esq. of Davis Wright Tremaine LLP
All foreigners who seek employment in the U.S. are subject to a complex set of immigration laws and regulations implemented by the U.S. federal government. There are two categories of visas for the foreigners: nonimmigrant visas and immigrant visas. Nonimmigrant visas will be available to those foreigners who qualify for one of several nonimmigrant categories established for temporary workers and other visitors. Immigrant visas (aka green card) are available to the foreigners who seek to enter the U.S. in order to remain permanently. A. Relevant Nonimmigrant Visas

When a foreign company decides to establish a U.S. subsidiary, one of the threshold issues they face will be what kind of U.S. visa they should obtain to transfer key personnel from overseas affiliates to the U.S. or to hire qualified foreign workers in the U.S. on a temporary basis. The following nonimmigrant visa categories are most often used by U.S. employers to hire foreign workers. 1. E-1/E-2 Visas - Treaty Traders and Treaty Investors

E visas are available for executives, managers, and persons with essential skills who are citizens of certain countries with which the United States has treaties to promote international trade and commerce. To qualify for E visa status, the U.S. company must be 50% or more owned by citizens of the treaty country. Since Finland has entered a Treaty of Friendship, Commerce, and Consular Rights with the U.S., Finish nationals are entitled to E visas if they meet certain statutory requirements. E visas are commonly used by foreign firms (such as banks, technology companies, and trading companies) to send managers and executives or key employees to staff their U.S. subsidiaries and branch offices. E visas must be obtained by a foreign worker at the U.S. Embassy or Consulate abroad. E visas are issued for five years and can be renewed indefinitely. E-1 visas are for U.S. employers that are engaged primarily in trade between the United States and the treaty country, whereas E-2 visas are for U.S. employers that involve a substantial investment in the U.S. by nationals of the treaty country.

18

NOTE: Immigration Law is a specific practice of a dynamic body of law. This article has been prepared by a specialist in this field, but it is not intended to serve as legal counsel or advice. It does not warrant that it is accurate by the time this article is published. Please seek counsel from a professional before acting upon any of the guidance provided herein. 190

Spouses and unmarried minor children of E-1 and E-2 holders will be issued a respective E1 or E-2 visa to accompany the principal alien in the U.S. However, dependents E -1/E-2 visas are not authorized to engage in employment in the U.S. 3. H-1B Visas Temporary Workers

H-1B visas are available for foreign workers employed in a specialty occupation, which is defined to mean an occupation which requires (a) theoretical and practical application of a body of highly specialized knowledge, and (b) attainment of a bachelors or higher degree in the specific specialty as a minimum for entry into the occupation in the U.S. H-1B visas are issued for an initial period of three years and can be extended for an additional three years. The maximum period of stay is six years, after which the foreign worker must leave the U.S. for one full year before re-applying for H-1B status. Many H1B workers apply for green cards prior to the expiration of the six-year period. It normally takes at least two to three months for the INS to review and approve the petition and an additional seven to ten days to obtain an H-1B visa at the U.S. Embassy abroad. The availability of U.S. workers is irrelevant to the issuance of an H-1B visa. However, there is a limitation on the number of H-1B visas that can be issued by the INS each year (195,000 until 2003). Although the H-1B visa quota has been increased substantially by the U.S. Congress in the American Competitiveness in the 21st Century Act, it is important to file H-1B petitions as early in the year as possible. It should also be noted that H-1B visas are employer-specific and geographic-specific. If the foreign worker changes employers or changes employment sites, the new employer must obtain approval from the INS before the foreign worker can begin work. Also, if the U.S. employer terminates the foreign worker prior to the end of the validity period of the H-1B petition, the employer is liable for the foreign workers return transportation to his or her home country (the employer is not liable if the foreign worker quits). 4. L Visas - Intra-company Transferees

L-1 visas are available to executives, managers and persons with specialized knowledge who have worked overseas for at least one year out of the past three years in an executive, managerial or specialized knowledge position with a qualified overseas affiliate of the U.S. employer. A qualified foreign affiliate must have at least 50% common ownership with the U.S. employer (i.e., parent, subsidiary, joint venture, branch office, affiliate company, etc.). L-1 visas are initially issued for three years (or one year in the case of a new U.S. office of a foreign company). The maximum period of stay is seven years for L-1A managers and executives and five years for L-1B workers with specialized knowledge. Foreign workers who qualify for L-1A visa status as managers or executives can obtain green cards very easily as multinational executives, without having to prove that there are no U.S. workers available for the position (the labor certification requirement is waived for multinational executives).

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L-2 visas are for the spouses and unmarried minor children of L-1 foreigners. It normally takes at least two to three months for the INS to review and approve an L petition and an additional seven to ten days to obtain an L-1 visa at the U.S. Embassy abroad. 5. O Visas Aliens of Extraordinary Ability or Achievement

O-1 visas are available for individuals with extraordinary ability in the sciences, arts, education, business, and athletics which has been demonstrated by significant national or international acclaim who are coming to the U.S. to work in the area of their extraordinary ability and whose admission will substantially benefit the U.S. The petition for an O-1 and O-2 visa must be accompanied by a written advisory opinion obtained through consultation with an appropriate peer group, union or management organization with expertise in the field/area regarding the nature of the work and the foreigners qualifications. O-2 visas are available for foreigners accompanying an O-1 foreigner to assist in the artistic or athletic performance for a specific event or events. O-3 visas are for the spouses and unmarried minor children of O-1 and O-2 foreigners. Period of authorized stay for O category is for the duration of the event or activity for which the O1 foreigner obtained entry, up to three years. The U.S. petitioner and employer are jointly and severally liable for reasonable transportation costs of foreigners return home if he/she is terminated. B. Immigrant Visas Immigrant visas (or green cards) are issued based on a quota system, with a certain number of visas reserved each year for each country and for each preference category of visa applicant. There are basically two types of immigrant visa petitions those based on relationships with U.S. relatives and those based on employment with U.S. employers. The following are employment based immigrant preference classifications. 1. First Preference Priority Workers The priority workers classification consists of three sub-classifications: a. Persons of Extraordinary Ability This employment-based category is for persons who have extraordinary ability in the sciences, arts, education, business or athletics. Extraordinary ability is defined as that small percentage who have risen to the very top of the field of endeavor, and it must be demonstrated by sustained national or international acclaim. Unlike other employment-based categories, no specific job offer is required from a U.S. employer and no labor certification is required to prove the unavailability of U.S. workers. Eligibility as a person of extraordinary ability must be established by receipt of a major internationally recognized award, or by a combination of at least three of ten factors listed in the INS regulations, for example, receipt of lesser awards, membership in associations which demand outstanding achievements, published material about the person, high salary, authorship of scholarly articles, displays at 192

b.

artistic exhibitions, evidence of commercial success in the performing arts, or comparable evidence. Outstanding Professors and Researchers This category is for professors and researchers who are internationally recognized in a specific academic field, have at least three years experience teaching or researching in that field, and have been offered tenure or tenure track teaching or comparable research positions at a university or other institution of higher education. Applicants must submit evidence in at least two of six categories, such as receipt of prizes and awards, membership in associations which require outstanding achievement, published material in professional journals about the person, participation as a judge of the work of others, original scientific or scholarly research contributions to the field, and authorship of scholarly books or articles in journals with international circulation in the field. Like persons of extraordinary ability, no labor certification is required for outstanding professors and researchers, so the availability of U.S. workers is not an issue.

c.

Multinational Managers or Executives This category is for managers and executives of international companies who are being transferred to the U.S. after having worked overseas for an affiliate of the U.S. employer for at least one year. The requirements are quite similar to those for L-1A nonimmigrant visa status, except that the U.S. company must have been doing business for at least one year and green cards are only available to managers and executives (not workers with specialized knowledge as is permitted for the L-1B visa). Like persons of extraordinary ability and outstanding professors and researchers, multinational executives are exempt from the labor certification requirement.

2.

Second Preference - Professionals with Advanced Degrees or Exceptional Ability Aliens

This preference comprises two sub-classifications: a. Professionals with Advanced Degrees or Their Equivalent This category is for persons who have job offers that require a Masters Degree or above or a Bachelors Degree plus five years progressive experience in the field. Generally speaking, before the foreign worker can apply for a green card, the U.S. employer must obtain a labor certification from the Department of Labor confirming that there are no qualified U.S. workers available for the job in question. The labor certification process can be time consuming and expensive, as it requires advertising the job and interviewing any qualified U.S. applicants. There is an exemption from the labor certification requirement, however, for applicants whose occupations are considered to be in the national interest (National Interest Waiver). b. Persons of Exceptional Ability This category is for persons whose expertise in the sciences, arts or business is significantly above the ordinary. Evidence must be submitted in at least three of six 193

categories, including a college degree, ten years full-time experience in the occupation, a license to practice the profession, a high salary, membership in professional associations, recognition for achievements and significant contributions to the industry or the field by peers or professional or business organizations, or other comparable evidence. Like professionals with advanced degrees, persons of exceptional ability require a labor certification or a National Interest Waiver before they can apply for a green card. 3. Third Preference - Professional Workers, Skilled Workers, and Others

Professional workers are persons with job offers that require a college degree. Skilled workers are persons with job offers that require at least two years experience. Other workers is the lowest priority of employment-based applicants and there are very few visas allocated to this category (applicants in this category are subject to a long waiting period). Professional workers and skilled workers require a labor certification, and there is no National Interest Waiver for these categories. Due to budget cutbacks and backlogs, labor certifications are taking up to two years unless the U.S. employer can qualify for Reduction in Recruitment, as explained below. In late 1996 and early 1997, the Department of Labor instituted a new fast-track procedure to expedite labor certifications for occupations which have a clear shortage of U.S. workers. To qualify, the U.S. employer must have attempted to recruit U.S. workers for the position within the past six months in a manner that is normal to the industry. Also, the position must not include any special or restrictive requirements that would eliminate qualified U.S. workers. It helps if there are multiple job openings for the same or similar positions and if the U.S. employer has made a continuous effort to recruit qualified U.S. candidates. It also helps if the U.S. employer can prove that the job preexisted the foreign worker, rather than being tailored to meet the foreign workers speci fic qualifications. If the U.S. employer can meet all of the requirements for Reduction in Recruitment, the labor certification can be obtained within three to four months rather than six to nine months as it took in the past. 3. Alien Entrepreneurs Million Dollar Investment Visas Although this category is not used very often, immigrant visas also are available for alien entrepreneurs who invest $1 million in a new U.S. commercial enterprise and thereby create 10 or more jobs for U.S. workers. The amount is reduced to $500,000 in certain high unemployment areas, and the job creation requirement also is reduced in certain export promotion areas. 4. Annual Green Card Lottery Each year, the INS and State Department conduct a visa lottery to promote diversity in the immigrant population. A certain number of visas are set aside for immigrants from countries that have had a low rate of immigration to this country. Nationals of Finland are eligible for this type of immigrant visa.

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C.

Choosing the Right Visa

Given all the different immigrant and nonimmigrant visa categories that are available, how do you choose the right visa? This requires a careful review of the foreign workers qualifications, the nature of the job offered to him or her, and certain background information on the U.S. employer. Based on all these factors, one can choose the immigrant or nonimmigrant visa that is the quickest and easiest to obtain and offers the most flexibility for the U.S. employer and the foreign worker.

About the Author James M. Mei, a partner in Davis Wright Tremaine LLP Portland office, concentrates his practice in the areas of business-related immigration law and internal business transactions. DWT is a national law firm with more than 400 lawyers in 10 US cities. Mr. Mei can be reached by email at jimmei@dwt.com or by telephone at 503-778-5315 or 503-780-4784.

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CHAPTER 30

Building a Team in America

By Pat Zilliacus
It is easier to find money, for an enterprise, than the right people. This might be a clich but it is true. Whats even worse is that the wrong team will blow the money without producing real results. How then, do we know who is right for the key jobs? Not easy, but there are ways of predicting performance in a given setting. Foremost is the critical examination of the candidates true, not apparent, record of accomplishment in a somewhat similar situation, be it startup, turnaround, or simply making a good company better. The last one can be the toughest, but it, like the others, can be predicted, given the right information. Getting that information is the essence of sourcing and referencing when recruiting someone for a key position. Asking for a recommendation of someone who fits the job requires the ability to define, quickly and accurately, the duties involved and good listening skills are needed to determine whether or not the person questioned really understands what qualities are needed. The time and effort spent on locating, interviewing and referencing a candidate for executive office yields enormous benefits. Conversely, the price of failure in hiring the wrong person is very high, and can in fact, damage a company beyond repair. In the case of an overseas company, establishing itself in America, this matter is even more critical. Top executives in the parent are far away, cultural and language differences exist, transmittal of key operating data may be slow and incomplete and corrective action, when needed, is more likely to be delayed. Any foreign company seeking to do business in America could do well to remember that, historically, most such efforts have failed and the reason, more often than not, can be traced to the wrong people in key jobs. Recruiting Services At the General Management level, at least, it is almost axiomatic that a well- regarded Retained Executive Search Firm must be used to achieve the desired results when recruiting an important executive. The search firm should have demonstrated successful results in conducting assignments for overseas clients starting operations in America. Definition of the skill sets, career experience and personal attributes that make up a successful candidate must be undertaken in close collaboration between client and search firm. To some extent this is an educational process, each, learning from the other about cultural and legal differences, job titles, compensation, benefits and housing costs to name a few. The goals to be met and timeline for achieving them must be realistic and clearly delineated. Special requirements, such as language skills and willingness to live abroad for extended periods must be identified and dealt with.

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Fast Response and Good Communications The client must also be prepared to respond promptly to questions from the search firm when candidates are discovered and to schedule interviews in a timely manner when a panel of finalists has been developed. Moreover frequent and thoughtful discussions between search firm and client, as the search progresses, ensures that there is agreement on the path of the search and less likelihood that time is wasted pursuing prospects who do not, for some reason, fit the position. This is after all, a joint effort where both parties have a role to play. Detailed Written Reports Written Presentations on the candidates, once in-depth interviews by the search firm are completed, guide the client organization in their interview process and suggest areas to be probed in interviews as well as during reference checking. Referencing requires special skills to elicit the needed information without placing the reference giver in a compromising situation and the search firm has to find ways to talk with truly independent references. Verification of educational and professional credentials is also essential in this age of exaggeration and outright distortion. Unfortunately a very significant percentage of people make false statements on their resumes, particularly pertaining to the MBA Degree. Obviously the most important single aspect of a candidates makeup is that of integrity. Without character and integrity all else is relatively unimportant. During the interview process the search professional also tries to determine the likely chemistry between the candidate and the key people in the client organization. Obviously, discovering the lack of such chemistry only in an interview abroad is an expensive and time-wasting proposition. Compensation Arrangements In many cases the client relies on the advice of the search firm on matters pertaining to compensation. This includes, not only base salary but also extent and criteria for paying cash bonus and awarding stock options and grants. Relocation packages are also often a key element in attracting a qualified candidate. At the clients option, the search partner can play a role in negotiating these matters with the selected candidate. Since discussions with the search professional are not official they can establish the parties negotiating stance without boxing in the client, allowing flexibility in the final discussions, leading to agreement. Follow Up An often-omitted item in the Search Firm/Client relationship is the follow-up interview a good search professional has with the successful candidate a month or so after the individual has started on the new job. This sometimes reveals problems before they become acute and allows timely corrective action. A good search professional retains contact with the people placed. Since the rules of ethics forbid the later recruitment of anybody placed by a reputable firm, such contacts are generally helpful to both parties and often result in new business referrals or suggestions of candidates in other companies for subsequent searches. All ethical search firms follow out-ofbounds hands- off policies regarding anybody working in a client company. Guarantee Another important consideration in the retained search process is the guarantee made by any good search firm, that if the successful candidate leaves for any reason, except for certain specified ones, within one year, the search is re-done for no additional search fee. The exceptions to this would include sale of the company, elimination of the job and such other exigencies unrelated to job performance and the employees willingness to remain with the company.

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Fees for the Search In the matter of search fees, most retained firms charge one third of the total first years cash compensation although, in the age of the e-business startups, some firms also expect warrants or stock options. This practice is by no means universal and seems to be diminishing with the ebbing fortunes of many of these companies. The search fee is usually billed out, in equal monthly increments, over the three- month period it generally takes for a search to complete. Some firms charge a flat rate rather than a percentage and some of them do not bill the final payment until the search is successfully completed. In virtually all cases out-of-pocket expenses on items pertaining to the search are also billed on a monthly basis. These include, travel, communications, refreshments and meals, as well as postage and other incidentals. There are firms who also factor in secretarial fees and other overhead items. Something called a Startup Fee, typically amounting to $150 also has, on occasion, appeared in the billing to the client. Generalist vs. Specialist Firms An important item to consider in retaining a search firm is the matter of out of bounds companies. These are client companies where the firm cannot recruit anybody. In the case of a specialist search firm doing work only in a given field, this can be a serious problem since many of the target companies where good candidates might be found cannot be touched. Another shortcoming for specialists is that of already having recruited and placed many of the good people in a given job specialty, and therefore being unable to recruit them again. Specialty recruiting also often leads to a certain narrowness of focus and the inability or unwillingness to look outside the box for candidates. Generalist firms, on the other hand, have to become students of the search divining its unique characteristics and. to some extent, re -invent the wheel for each search. This entails more research and more effort by the search professional than just reaching into files for past candidates. The results are usually worth it. Other Ways to Recruit For the sake of completeness let me point out that there are, of course, other ways than retained search for finding and recruiting executives. Advertising in Industry Publications and The Wall Street Journal will attract those people who are contemplating a job change, but generally not those who are happy with what they are doing. Contingent Search, wherein no fee is paid until someone is actually hired, is generally confined to middle management or below. While those in this practice claim to make a large number of sourcing calls, the economics are against this and most of their candidates come from resumes the firm has received from people seeking a change i.e. largely the same group who respond to advertisements. To seek out the very best candidates who might have an interest in the job being filled but are not looking requires excellent research through multiple databases by an ingenious and well experienced Research Director followed by aggressive sourcing and prospecting calls to a large number of people, leading to a good sized and well- focused group to be interviewed face-to-face by the search professional. Only a retained firm can do this. Follow Up Once the new executive is hired, it is very important that frequent contacts be maintained with the cognizant authority person at the home office and that proper introductions are made to all key people there, with sufficient time allowed for one-on-one discussions with these people .Few things are worse than casting a new executive adrift in the new company, without preparing all concerned for his/her arrival.

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Example: A Finnish Startup To illustrate all of this it might be helpful to consider the example of a recent search for a Finnish client. This was a near-startup company that had developed a cutting edge technology for broadband applications. The technology had been fully tested and proven with a cooperative major client company in this field. Both hardware and software had been produced in limited quantities using outside contract manufacturing for the hardware. Recognizing the US as the logical place to start sales and marketing activities on a broad scale and, with sufficient venture capital in-hand, or committed by the VC, it was decided by the client to recruit a highly experienced President .in this exact field who could hit the ground running. It was further decided that the new North American headquarters could be in one of several communities where key telecom organizations were based. To a considerable extent, but not fully, this decision would be influenced by the desires of the new President. It was also expected that the new President would be able to identify and attract qualified people to his team. After looking at several search organizations recommended by the Board of Directors, our firm was picked largely because of our experience working with Finnish, and other overseas clients and also due to our background with high technology clients. The fact that the Search Professional had been the CEO of a high tech company, had a Masters degree in Electrical Engineering, still remembered a smattering of Finnish (and was totally fluent in Swedish) also didnt hurt . Job Specification and Location of U.S. Office A series of meetings were held and the job specification was spelled out in detail. This included defining the contract terms for employment and even a rough pass at a budget, anticipating additional hires for key functional managers within a very short time after the Presidents starting date. This turned out to be two weeks for the whole group of 4 more people. Location was also further defined and Silicon Valley was eliminated due to extremely high costs and rampant pirating of employees. Outlying areas in the San Francisco Bay Area, such as Petaluma would still be considered but created a potential commuting problem. Research Armed with this information, the Research Director set about uncovering potential sources and prospects for the search. In addition to internal data on such people, which was fairly extensive, outside sources, many on the Internet, were searched. The result was approximately two hundred names of people who might either have a personal interest or could recommend someone who did. The fact that this was a Finnish company and this would require fairly frequent travel to that Northern Land mitigated in favor of a younger, more adventurous type, who would see this as an advantage rather than the opposite. It also meant that the spouse would have to buy into the concept and accept heavy travel as part of the job. Concentration was on people in those metropolitan centers that had been picked as potential locations for the company but some candidates who surfaced, would have required relocation, adding further complexity and expense in their case. Search Process A week after the start of the search, extensive telephone contacts began, producing about thirty potential candidates possessing the required background, at least on paper. They were interviewed extensively by telephone and the resumes of the survivors were sent by e-mail to the client in Finland for their review. One person there served as primary contact and everything went to him. A couple of candidates were eliminated by the client, sight unseen, and the rest, after additional telephone interviews, were scheduled for face-to-face meetings with the Search Professional. This

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took place two weeks after the beginning of the search. The interview trip began immediately afterwards and consumed another two weeks, including interviews with local people. Interviews of Final Panel Those who were deemed most desirable and had a healthy degree of interest were re-interviewed by telephone to fill in blanks and ascertain continuing interest. Written reports were then prepared on the final panel of some ten people. These reports discussed the pros and cons of that particular candidate in relation to the job. It examined personal attributes as well as professional experience and tried to evaluate the candidates likely performance in the various areas required. These reports were transmitted to the client and a meeting to present and discuss the candidates was arranged in the conference room of the search firm. In this meeting the candidates were examined further in light of the reports, topics to be investigated were highlighted and interviews between client and candidate were set up. Client Meetings with Finalists In this case the client traveled to three locations in the US and the candidates met him there. This series of meetings took place during the fifth week of the search. After the client had completed his interviews, two clear favorites stood out with the decision between them quite difficult. A third person was barely behind these, and was considered a good candidate, should the first two not work out. This was, pretty much, an ideal set of circumstances, since the client could now initiate negotiations with two candidates who, each knew, they had competition. Both finalists approved preliminary referencing by the Search Professional presumably knowing that such referencing would help in defining the favorite. At the same time, informal discussions took place between the Search Professional and both candidates aimed at establishing parameters for cash compensation, stock options, employment contract provisions and related matters. Based on these discussions and references the search Professional was empowered to extend a preliminary offer, subject to final referencing and verification of all educational and professional credentials, to the candidate selected as the front runner (by a very small margin). In this case some additional, last minute demands, by this candidate caused the emphasis to be shifted to the other one, with the third one kept warm, just in case. After a couple of days of consideration brought acceptance, the offer was reduced to writing, accompanied by an employment contract, written by the search firm for the clients approval and signature. In the meantime final references were obtained and credentials verified. Since substantial agreement had been reached, the Search Professional was able to talk with people at the candidates current employer and far more searching and detailed questions were asked of all references. Upon the clients review of a the final written report on references and credentials the contingency for references was removed and the offer of employment then became formal and legally binding. Acceptance took place soon afterwards and the search was completed, in eight weeks. Sign Off and Follow Up Two weeks thereafter the new President started work and all the other candidates as well as all references were thanked, in behalf of the client company and notified of the successful conclusion of the search. Since some of these people might very well turn out to be customers or marketing partners, great care was taken to create a positive attitude toward the client company on their part. As a Post Script, it should be added that the President quickly recruited a team of people he knew (this was adjudged one of his strengths) and the only role played in these transactions by the search firm was the referencing and verification of credentials. Incidentally, one person failed this test and was eliminated from consideration. While this search proceeded in an exceedingly smooth manner 200

and the recruited President is off to a very auspicious start, others can be more troublesome before being brought to a successful end. Another Finnish Example An example from another recruitment for a Finnish client, a few years ago, tells a slightly different story. This was a well-established company, primarily in consumer products, which had diversified into electronics, generally for Commercial/Industrial customers. This product line had been sold to customers, almost wholly in Europe, for a number of years, and was well accepted as top of the line rather expensive products. An attempt had been made to enter the US market thr ough the acquisition of a California based company making somewhat related products. The management of this company had remained but proved to be incompatible with key members of the clients management. Moreover it was found that entirely different markets were served by the acquired company, thus eliminating the possibility that they could bring the Finnish- made products to market here quickly and economically. Use of Management Consultant Against this backdrop, the client in Finland decided to engage the services of one of the top management consultants to study the problem and recommend curative steps. Among the recommendations made was the recruitment of a President for the US Company to be headquartered away from the acquired company. His charter was to establish parallel lines for marketing the Finnish- made items, look for further acquisitions with truly compatible products and take steps to run the company they already owned, on a profitable basis. Meetings with Clients from Finland When our firm was awarded the search several people came from Finland and let their sometimes conflicting views be known in a series of meetings, culminating in a pseudo-business plan combined with a very detailed position description which was, after many amendments, approved by the authorities in Finland. First Successful Candidate Gets Out Has to be Replaced Following much the same procedures as on the previous search, a competent and well-regarded candidate was identified and recruited. He, however required a hiatus of several weeks before he could take on his new duties and, just before the agreed-upon date, he indicated that he had opted for another opportunity and would not be joining the client company. By this time the trail was a bit cold, everyone had been signed off and the one potential backup had received a substantial promotion where he was and no longer had any interest. True to our task we restarted the search and, fortunately, found someone at least as good, who was subsequently recruited. The story had a happy ending since this person performed well on all counts and, eventually, made a very successful acquisition. Summary The lessons from this are basically that great care must be taken by an overseas firm recruiting a key executive here, half a world away. Effort and expense spent on this will be returned countless times. About the Author The Search Professional in these cases and the author of this Chapter is Patrick Zilliacus, one of three founders of Larsen, Whitney, Blecksmith and Zilliacus in May of 1981. Zilliacus was born 201

and grew up in Finland. He came to the U.S. in 1940 and received his university education as an Engineer. Until entering search, he worked in engineering, sales management, plant management and, finally, as Chief Executive of two high technology companies. He entered the search field with the leading and largest international search firm before leaving with two others from that organization to form Larsen, Whitney, Blecksmith and Zilliacus then operating under a different name. The driving force behind the decision was the desire to serve clients better as a smaller less structured firm with not so many out of bounds companies as a large firm. Mr. Zilliacus can be reached at pwzilli@aol.com or reached by telephone at 213-243-0033.

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Chapter 31

Sharing The Wealth

USA Equity Compensation Practices
By William

L. Paulin

One area that causes significant problems for Finn USA business ventures is financial and equity compensation. Virtually all Finn firms we have worked with have been surprised and sometimes confused when they learned how much good folks are paid in the USA, especially in terms of equity. Apparently, traditional Finn equity compensation practices are much more conservative than what is common - and necessary practice in the USA high-tech community today. GOOD PEOPLE ARE WELL PAID Good people, in the USA today are well paid. And in the high-tech arena, equity is almost always a significant part of this compensation. With unemployment in the USA today at about 3% to 4%, it should be clear that if you are going to hire good folks in the USA, you will have to have a competitive compensation package including equity. Unfortunately, the responses of some Finn companies coming to the USA for the first time have not recognized this fact. Sometimes our frugal Finn friends, surprised by the compensation practices in the USA and primed by Finn-Myths distrust of the USA, have initially responded with a negative what do they think? I just got off the turnip truck? Im not going to pay that! They arent going to screw me! But to get good people, Finns just like Americans - do have to offer competitive compensation. Finding someone to work at much less than market rates for USA employees and/or consultants should make Finns as suspicious as it does Americans. What might be wrong with these folks? Why are they so much cheaper? Are they just telling me what I want to hear? Are they really incompetent? Some not very competent Americans are quite adept at telling people what they want to hear and fooling them for a while. Unfortunately, we have seen several Finn Firms make deals with bad folks here that eventually proved too good to be true. Dealing with the wrong people in the USA has, in the past, been one of the sources of the unfortunate Finn-Myths about the USA. Deals that seem too good to be true in the USA, usually are, as all Americans have learned the hard way. FOR BEST RESULTS, DEAL WITH THE RIGHT FOLKS AND PAY THEM FAIRLY Dealing with the right people in the USA will cost you a bit more, but you will be assured of getting capable, high integrity folk giving you their best efforts and you will avoid mistakenly working with folks whose main intent is to separate you from your money as easily as possible. But how do you know what is a reasonable level of equity compensation in the USA? Especially since common practice over here is so different than practice in Finland. To try to help Finns get 203

better calibrated, we performed an investigation into the USA compensation practices in general, and the USA equity incentive practices in particular, of early stage, high tech, Silicon Valley type companies. The investigation took place in May-June, 2000. Following is a summary of this study. Following the summary is a list of sources for the report. EQUITY COMPENSATION STUDY OBJECTIVES & SOURCES The purpose of this report is to give Finn companies the information necessary to craft an initial USA compensation and equity incentive policy that will be: a) effective in attracting top quality talent, b) fair to the three key constituent groups (i.e., founders, funders and director/managers/employees) and c) prudent governance. The equity compensation guidelines derived from this survey should be thought of as an average of USA practices. In practice there is quite a bit of variability in individual company policies and behaviors (from no equity for the majority of employees and constituents to equity for every one). Never the less, in the USA today, employees have definitely become one of the scarcer of resources even scarcer than money in some high-tech circles. Therefore the price of employee resources has risen most firms are finding it hard to attract good employees without significant equity incentives. OVERALL FINDINGS The study found a clear consensus that while equity compensation policies considerably, significant equity must be paid to attract the best people to modern, high-tech companies: 1. Equity Compensation Systems Do Vary Quite A Bit . . . and are generally formed over time by a combination of planning, negotiation, evolution and accident. As companies approach later rounds of funding and even IPOs, it is not at all unusual for significant attention to have to be paid to cleaning up the ownership structure. To quote two of our sources: The details of what companies do vary all over the map . . . so we can only speak in terms of averages or tendencies . . . but all must give significant equity incentives. We often have to adjust companies ownership and capital structure before its sale or even IPO . . . so it is better to start with a logical plan and policy. In addition USA practices appear to be quite different than typical Finn practices. So starting early with a reasonably well-researched and thought-out policy should put Finn companies ahead of the game. 2. High-Tech Companies Must Use A Significant Portion Of Their Equity As Incentive Compensation For Directors/Advisors, Managers And Employees. This puts management on the same side of the table with the other two major constituent groups necessary to success founders and funders. Two more quotes are illustrative: Enlightened companies (especially during periods of full employment) need to attract key employees and governors and to help keep them motivated, loyal . . . and working together to 204

maximize the valuation of the company. Equity for managers and employees used to be a matter of policy . . . companies who gave it were thought to be progressive. But today it is necessary - it is assumed in the early stage companys competitive battle for employees. Otherwise you wont get the quality of employee you need . . . youll be penny wise but pound foolish. CORE RULES: THE KEY CONSTITUENTS SPLITS FOR THE THREE STAGES While companies equity compensation policies do vary all over the map in the details of how they provide equity incentives, there was a clear central tendency or average in how they distributed it between to their key constituencies: founders, funders and employees (the latter includes directors and managers): 1. The 50/50 Rule For Early Stage Through Seed Round Companies: The most conservative policy identified by the most investor biased of our sources (see attachment 3 & 4), was also the most common early stage policy one typically used at the friends, family and angel stage. This policy groups the founders and directors/managers/employees into one group and uses a 50/50 Rule 50% for funders and 50% for founders/employees. This policy provides a reduction in shares for founders who do not remain in an active role in the company and increase for early incoming managers and employees. 2. The One-Third Rule For Professional Funding Stage Companies: The consensus average equity policy for the professional funding stage was that the basic equity split should conform roughly to the One-Third-Rule - one-third for funders, one-third for directors, managers and employees and one-third for founders and early angels. Note that some folks may be in two categories making calculations more difficult. 3. Pre-IPO Stage 20% Rule: The aggressive firm consensus was that, at the IPO stage, the directors, management and employees group should have about 20% reserved with a maximum of 15% issued after all pre-IPO dilution but before IPO. IPO investors want significant incentives existent to retain key employees after the IPO. These rules allow for progressive dilution of the earlier shareholders as the firm advances and additional funds are brought in to help the company grow. In this IPO or trade sale exit focused approach to business, it is not uncommon for the earliest founders to be diluted by later funders and managers down to 10% or less of total company equity. ) Obviously, for this to be worth it to the original founders, the added dilution must pay-off in per-share valuation increases worth more than the loss in percent of shares. Thus these equity rules embody the essential model of USA high-tech business: It is not whats in front of the % sign, but whats behind the $ sign that counts. DIVISION WITHIN 4 CONSTITUENT GROUPS In the more specific details of policies and programs, there was much, much more variety of schemes, but still some usable guidelines emerged for Finns to use in developing their own equity compensation policies that have a chance of satisfying both USA and Finn participants in FinnUSA ventures:

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1. Management and employees need a minimum of 20% at the professional funding stage. But more is better. This number could rise to 40% + when including active founders in this group and allowing for several rounds of future funding and dilution. One-third is the most common advice we received. 2. Boards (Directors and Advisors) can have up to a maximum of 10%. Boards of Directors seem to behave somewhat differently in the USA and Finland. USA Boards tend more to inside management championing/governance than to arms length management/audit and oversight. And informal Boards of Advisors made up of both helpers to management and industry/customer experts are extremely (and increasingly) common in USA high techs. 3. CEO. A major, heavy hitter CEO in the USA can ask for as much as 8% to 10% alone . . . although less qualified CEOs would take correspondingly less . . .as would senior Business Development VPs or General Managers wanting to become CEO take less again (4% to 6% was commonly mentioned for these very key folks). 4. Management Team: Common management team totals came to 18% to 31%. The higher percentages would be closer to early stage and the lower percentages would be in the professional stage. The equity distribution ranges by position were: a. CEO - 6% to 10%, b. VP Engineering/CTO 6% to 10%, c. VP Marketing 2% to 4%, d. VP Sales 1% to 2% plus sales commissions, e. CFO 2% to 3% and f. VP Operations 1% to 2%. 5. Bonuses: For key employees (CEO, etc.) have been suggested by some. While there wasnt a clear consensus, many folks in the survey felt, however, that for early stage companies that provide significant equity incentives, bonuses are not always necessary. OTHER SIGNIFICANT EQUITY COMPENSATION TERMS Two sets of contractual terms were considered quite important: a) those that tie the longer term contributions of equity recipients closely to the firm and b) those that allow the firm to control the spread of its equity among people not closely allied to the firm (e.g., buy-back provisions, resale restrictions, first right of refusal on sales, etc.): 1. Founders Stock (early stage) is normally given at the outset (until the first professional funding rounds) to those who do very early stage, founders-type work and/or early angel investing at very low valuations (e.g., $.0001). Usually, founders were assumed to remain working in the company in critical roles and buy-back at departure terms are common. 2. Intermediate Stock is sometimes given for first CEOs, key advisors, etc. before the company develops a stock option plan. Sometimes it is given outright, but more typically it vests over a two, three or four year period (at, say, 1/24 th per month, 1/36th per month, or 1/48th per month, respectively). Because of taxes, it is normally purchased by the recipient. But the company often loans money for the purchase to the recipient. Buy-back at departure terms are common.

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3. Stock Options are the most typical way for the company to provide equity to its constituents after the first professional rounds of funding have established a higher market value for the company. Most high tech companies will create an authorized but not issued stock option pool for active employees - as annual options as well as performance-based options in areas where individuals, such as the CEO, have control. Stock options also tend to vest over several years. Again, buy-back at departure terms are common. CONCLUSIONS & FINAL THOUGHTS The sentiment in the USA seems pretty clear. Compared to our impression of traditional Finnish practice, in the USA great deal of equity should be reserved for the contributors who will make the business happen managers, directors and employees. And this does makes sense when one considers the relative contributions of each group: 1) the founders get the idea and form a company (worth 1/3, though inventors often think this is worth much more), 2) the money gets 1/3 for making the company resources and execution possible (though VCs often want more because of course its money - but money is plentiful these days) and 3) management and employees are who really make it happen . . . surely deserve 1/3. Quoting another contact: these days, it is not hard to make a case for more than one-third to operating people . . . because the working team (active directors/advisors, managers and employees) are the ones who produce future success execution is everything - the founders and money simply enable them. Clearly, while the path is clear a lot of equity should be reserved for managers and employees in the USA the details of any companys equity compensation policy will have to be developed by the companys board using the proper legal advisory in both countries. Finally, it is common for firms to evolve their equity policy over time, so a perfect policy is not necessary at this time. However, we do suggest that Finn companies put in place a their adaptation of a USA style equity policy before they launch significant operations in the USA. This way they may: a) not turn away the best folks that they meet in their initial USA activities and b) avoid false starts and learning based slow-downs in their USA expansion. About the Author: Dr. William Paulin has been working in Finland for over nine years. He has been a visiting professor at Oulu University. Dr. William L. Paulin is the founding principle of Paulin, Vurpillat, Early Associates - an internationally based firm of virtual executives who work with client/partners in the areas of business development, new product/marketing, strategic partnering, venture funding and general management. In the years immediately preceding the founding of PVE Associates, Dr. Paulin held senior, Fortune 500 executive sales and marketing positions at Emerson Electric and Square D Company where he also served as manager of strategic planning. Earlier, Dr. Paulin participated in two successful start-ups and led two successful small business turn-arounds. Since founding PVE Associates, he has also served as an advisor or on the board of directors of 17 firms. Prior to entering the business world, Dr. Paulin was Professor of Business Administration at the University of Southern California

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Attachment 1

List Of Sources For The Report

Contact
Victor Vurpillat Jack Savidge John Neal Pat Zilliacus

Description
Private Silicon Valley based board member, consultant & VC Private San Diego based senior executive, Entrepreneur & board member CEO ACE Group - San Diego based information system, employment & interim executive agency Partner, Larsen, Whitney, Blecksmith & Zilliacus Los Angeles based management recruitment firm

Contact Info
408 923 1600 858 454 9192 760 634 2900 213 243 0033

Peter von Scheven VentureOne Corp. - San Francisco based, venture 415 538 2608 networking & business development company www.ventureone.com Byron James Sally Gault Matt Ward Brett Pollak Sandra Paulin Merchant Group, San Francisco based investment Banking & VC firm Director, Corporate Directors Forum, San Diego based Forum for improving Corporate Governance 415 391 3344 858 455 7930

Westward Pay Strategies, San Francisco based 415 217 8202 Organization for compensation studies www.westwardpay.com Foundation for Enterprise Development, San Diego based foundation for equity compensation Personnel Director, Kaiser Electro Optics, Carlsbad, CA based aero space firm Provided Eppler Company (wage consultants) salary & bonus reports Partner Wilson, Sonsini, Goodrich & Rosati, premier Silicon Valley Start-ups law firm. Vice President, San Jose based Silicon Valley Bank, premier Venture Bank in the Valley 858 459 4662 www.fed.org 760 438 9255

Mario Rosati Adam Kaufman & Larry Lopez Erick Schonfeld Jim Clark AdvancedHR Len Eisenstein

415 494 9100 408 496 2567 www.svb.com

Author, Fortune Magazine, Web of Loose Ethics March 20, 2000 www.fortune.com Founder Silicon Graphics The Equity Equation article in Business2.0, March 1, 2000 www.business2.com Web based cooperative data base for analysis of equity structure strategies www.advanced-hr.com Worldwide Sales Director of Los Angeles based Trillium Digital Systems 310 442 9222

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Chapter 32

Ten Tips for Doing Business in the United States

By: Nina E. Andersson
a Finnish lawyer of Brown Rudnick Freed & Gesmer a premier international law firm with offices in Boston, Hartford, Providence and London.

The Finnish economy has undergone a quiet revolution during the past decades with high tech companies emerging and growing parallel to the traditional industries. Due to the limited size of the Finnish market and the increased globalization of most industries, high tech companies encounter a need to expand their business outside the borders of Finland at an earlier stage than before. Despite this fact, Finnish high tech companies tend to expand their business to the U.S. to a lesser degree and at a later stage than high tech companies from certain other nations such as Israel and Ireland. True, the coordination of a move across the Atlantic may be like moving through an intricate maze, but it may also be a journey full of opportunities and sometimes even a necessity. To help companies make an informed decision on whether to expand to the U.S. or not, and to help them navigate safely around obstacles in a new environment, Brown Rudnick Freed & Gesmer provides the following ten basic tips for doing business in the United States. NOTE: The Author has taken care in preparation of this article but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of the information contained in the Text. The Text is provided with the understanding that the Author is not engaged in rendering legal, accounting, or other professional services. Changes occur regularly in legal matters and interpretation of the law. Some legal matters are subject to opinion and judgment rather than fixed rules. Therefore no written material on the law can render a warranty of the completeness or accuracy of its contents. If a reader requires legal, accounting, or other expert assistance, reader is advised to consult a suitable professional advisor." Tip # 1: Recognize Your Market The U.S. market is still the worlds largest largely integrated single market, and it is on the forefront in many fields of technology. In addition, the U.S. capital markets are the largest, deepest and most transparent capital markets in the world. This combination makes the pull to the U.S. market hard to resist. When a Finnish company makes a commitment to expand to the United States, there are a number of issues that need to be addressed. Since many aspects of American cultural life have been exported around the world and to Finland, it is easy to assume that the business practices are equally familiar. But this simply is not true. In many ways the U.S. market is a dramatically different environment, with its own rules and regulations. Doing business in the U.S. calls for fresh scrutiny of basic assumptions about corporate practice, about commercial activity, even about human behavior. The first step to building a successful business in the U.S. is to abandon the notion that 209

business strategies which have been successful in Finland automatically will bring success in the U.S. as well. The differences in technology, infrastructure, business environment and the legal system all must be recognized. In some areas, the U.S. technology may be years ahead of Finnish technology; in other areas it is years behind. This may impose limitations on the ability to market some products in the U.S., even though they have been successfully marketed in Finland or elsewhere in the world. Careful thought and planning is required to decide what kind of products, services and solutions the company intends to offer beyond its borders. Tip # 2: Localize Your Company Finns often prefer to do business with Finns. Americans similarly often prefer to do business with Americans. This in itself is a good enough reason to localize the company and build an image of being a U.S. company or at least an international company. Some of the steps that can be taken to make your company be thought of as a U.S. or an international company include (i) forming a U.S. legal entity, (ii) making the name English, or at least easily pronounceable in English and (iii) hiring local management. Working out of a U.S. entity will also make the access to the U.S. capital markets easier, since some U.S. investors may be reluctant to make investments in a legal entity that is not American. What type of entity should be established to do the U.S. business? As a part of the localization process, one of the first decisions a company must take is to choose the legal form of the new business. There are many alternatives to choose between. The company may start its business as a separate entity a corporation, a general or limited partnership, or a limited liability company. Other alternatives are to simply establish a branch office of the Finnish company or to set up a joint venture with a U.S. company. In order to answer the question, you need to consider: what is the purpose of the entity? will management, marketing and finance shift to the U.S., or will the U.S. operation only be a sales office? what are the tax exposure and filing requirements of the different entities? how important is limited liability? how important is the degree of control of the Finnish company over the entity? The form most commonly chosen is the corporation. Generally, the profits of corporations are taxed twice in the U.S., once at the corporate level and a second time when distributed as dividends to stockholders. (There is an exception for so called S Corporations, but a U.S. su bsidiary of a foreign company is not eligible to be a S Corporation.) However, there are major advantages of setting up an American subsidiary corporation for a foreign company. If the foreign parent company is not otherwise subject to taxation in the U.S., the formation of a subsidiary will not subject the parent to U.S. taxation, as may be the result if the business is operated through a branch office, a limited liability company or a partnership. And, by treaty, the dividends paid by American subsidiaries of Finnish companies are subject to a maximum tax in the U.S. of five per cent. Another benefit of operating the business through a corporation is that the liabilities of the U.S. operations are limited to the U.S. entity, and not passed on to the parent company and its shareholders. The liability for U.S. operations is also limited if the business is operated as a limited liability company (also known as a LLC). If the business is operated as a branch office or a partnership there are generally not the same advantages of limited liability as if the business is conducted as a 210

subsidiary corporation or a LLC. The parent company has unlimited liability for the activities of the U.S. operations conducted as a branch office and a general partner (but not a limited partner) similarly has unlimited liability for the activities of the partnership. And, using any of these structures may cause the foreign investor to be considered doing business in the United States and subject to U.S. tax, although analyses of this issue is very complex. Partnerships and LLCs are generally taxed only at the partner and member level. Each year, each partner or member must include its proportionate share of the partnerships or LLCs losses or profits in its own income. Losses, if any, may in some circumstances offset income from other sources, if any. While partnerships, LLCs and branch offices generally are subject only to a single level of taxation in the U.S., the American tax code imposes a second level of taxation on the profits of the U.S. branch of a foreign corporation and on partnerships or LLCs in which foreign corporations are partners or members. Branch offices of Finnish corporations which are qualified residents of Finland may become exempt from the branch profits tax. It may, however, not be easy for a privately held company to demonstrate that it is a qualified resident. Finally, if the company intends to go public at a later stage, partnerships and LLCs may give rise to troublesome securities issues. As a result, in order to avoid becoming subject to the branch profits tax, which is complex to compute and because of the five per cent maximum tax on dividends, because the potential securities issues, foreign companies often opt to incorporate in the U.S. rather than conduct operations through a branch, partnership or LLC. Where to establish the business? You must also decide where in the United States to establish the business. The U.S. is a geographically large country, with significant climatic, cultural and legal differences between different regions and different states. Practical issues naturally influence this decision, such as where the center of gravity of a particular industry is located or how many hours time difference there is from the home office. Proximity to strategic allies, customers or education and research centers and existing ties all may be significant factors. Differences in legal requirements, local taxes and securities regulations should also be noted. Some states may require that shareholders and directors hold meetings in person, which may be particularly difficult for foreign stockholders. Other states may require corporations to satisfy certain valuation tests. There are also differences in the degree of development of the corporation laws from state or state which make certain state laws (e.g., Delaware) more commonly accepted as a jurisdiction of incorporation than others. If a company intends to be incorporated in Delaware but locates its office in another state, it must file to qualify to do business in the state where the offices are located. This also means that the corporation usually is liable to pay taxes in two states. Tip # 3: Stay Finnish Despite what has been said above about localizing your company, it is also worthwhile to take care to maintain your Finnish identity in some contexts. Keep you R&D at home. First of all, the degree of technological development in Finland in a number of industries is in the forefront in the world. Finland can offer highly skilled research teams, and companies can benefit from industrial partners of the highest standard. Many foreign companies have chosen to locate their key resources and laboratories for technological development in Finland. Keeping the R&D in Finland may give your company a competitive edge.

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Exploit your home market early. Thanks to the technological development in Finland, there are many opportunities to be established on home ground, including opportunities for strategic partnerships. These should not be forgotten in the pursuit of the international markets, but rather exploited at an early stage. They can prove to be valuable assets in the internationalization process, adding credibility to the business and opening doors to other allies. Preserve the Finnish identity Finns have a reputation of being precise, punctual and hard workers. Do not give up these values. Get Finnish investment early Most foreign venture capital firms require that a local venture capital firm make an investment in the company before or at the same time that they make any investment. By having Finnish or European investment, you increase the companys credibility and open doors to foreign investors. Tip #4: Protect Your Intellectual Property The most valuable assets of a high tech company often are its intellectual property. Intellectual property can advance a companys strategic position and secure its competitive edge in a swiftly changing global environment. Patents, trademarks, copyrights and trade secrets are among the forms of protection available to companies wanting to safeguard their intellectual property. Establishing protection for intellectual property in Finland and Europe does not mean that the company can feel secure in the U.S. The U.S. rules on intellectual property differ from the rest of the world in certain important respects. Patents can be obtained for a broad range of innovations such as product design, business methods, software, electrical or electronic apparatus, chemicals and chemical processes and medical devices. Patents allow inventors to prevent anyone else from making, using, selling or importing the patented invention within the U.S. for the life time of the patent. Trademarks identify the origin of a particular product or service. Protection can be sought for a name, slogan, design or even color as long as it is identifiable with a specific producer. Copyrights grant the copyright owner the exclusive right to reproduce, distribute, perform, display and license original works of authorship. Copyrights can be used to protect both traditional forms of expression, such as literature, music drama and works of arts, as well as more contemporary modes such as computer software, multimedia and internet content. In the U.S., no registration is required to create copyrights, they are created automatically when the author first records the work. It is, however, advisable to register, since the ability to enforce the right and to obtain damages for infringement are limited prior to registration. In order to fully enforce the copyright, a copyright notice should also appear or be attached to the product itself. A company must also take steps to protect its trade secrets. Trade secrets can include virtually any kind of information which is kept confidential and gives the owner a competitive advantage. Trade secrets do not require any formal registration in order to be enforced. A company must, however, ensure that the trade secrets are kept confidential by entering into confidentiality agreements, marking information as confidential, and limiting access to the information. Before a company starts making use of its intellectual property in the U.S. or decides to apply for protection in the U.S., several issues should be considered. Certain intellectual property rights, especially patent rights, can be lost, if the company does not take proactive steps before bringing products into the marketplace. Also, companies should determine whether there is a risk that the marketing, sale, production or use of the product or service would infringe upon existing intellectual 212

property rights of others. If infringement is found, the company could be subject to an injunction and liable for monetary damages. Tip # 5: Be Prepared to Spend Money Entering the U.S. markets is expensive. There are a number of things that have to be in place in order for the venture across the Atlantic to be successful. Sales and marketing efforts in the U.S. will take considerably more resources than in Finland because the market is bigger and there are likely to be more competitors. Services from support firms such as head hunters, consultants and advisors are needed. Local management most likely will have to be hired. Real estate in hot spots, such as Silicon Valley, New York, Northern Virginia and the Boston area, is anything but cheap. Even though local investors may be able to assist with some of the issues, such as finding qualified management and strategic allies, the costs will be significant. If you are not prepared to spend money, do not go. Half-hearted efforts will not add any value for the company, they will only fail. Tip # 6: Get U.S. Investment Early In many cases financing the costs of entry into the U.S. market will require obtaining funding from U.S. investors. U.S. investment also brings other benefits. Having backing from a U.S. venture capital firm increases credibility of the company to the U.S. markets. Venture capital firms can open doors to other contacts such as strategic allies and can help find qualified management. When negotiating with venture capital firms on investment, it is important to understand that many of the most critical terms may be determined at the term sheet stage. Even though it may be tempting for a company to attempt to handle those without advisors, it is unwise to do so. Tip # 7: Get Local Management Companies entering the U.S. market find themselves confronted by intricate and complex issues in an unfamiliar market. Even executives and managers who have traveled extensively and done business in the U.S. can suddenly feel that they are working in a confusing environment. Recruiting local management to help navigate in the new business environment is often a must. Local management also will bring credibility and help build the image of being American or international. The help of a head hunter or investors is needed when looking for management. The background of the management should be thoroughly checked. Choosing wrong can be devastating. In the U.S. it is very common to compensate management, employees and consultants by granting them stock options. There are two types of stock options about which you may hear, nonqualified stock options and incentive stock options. Companies establishing a stock option plan must consider all of the advantages and disadvantages of each type, including the tax and accounting consequences for both the company and the employee. Tip # 8: Adopt U.S. GAAP or IAS now. If your company is foreseeing an expansion to the U.S. market you should seriously consider adopting U.S. generally accepted accounting principles (GAAP) or International Accounting Standards (IAS) now, not later. Venture capital firms, the public markets for securities, and potential acquirers will require it. Most major accounting firms have the capability to run U.S. GAAP or IAS concurrently with local GAAP, and it is far less expensive and difficult to do so from the beginning than to have to go back and recreate history later.

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Tip # 9: Recognize that the U.S. Market is Big. This may sound simplistic, but it is easily forgotten, especially coming from a small market such as Finland. While the U.S. is much more fully integrated than the EU, it is not fully a single market; it is a number of regional markets, with different business environments and cultures. Your sales and marketing efforts must take these differences into account. The size of the market also means that there is competition everywhere. While your company may be the only one of its kind in Finland, there may be a dozen or more companies competing for the same market in the U.S. Tip # 10: Get Good Advisors The business and legal atmosphere in Finland is very different from the one in the U.S. People in Finland tend to do business based on personal relationships and do not necessarily involve lawyers before there is a dispute. This does not work in the U.S. The U.S. business culture is much larger (therefore it is more difficult to establish personal relationships with everyone you need to work with), more used to extensively negotiated written agreements, more used to involving lawyers aggressively prior to disputes, and more litigious. Issues may be much more complex than they seem at the surface and there are many traps for the unwary. Protect yourself by getting good advisors and getting everything in writing. In this complex legal environment competent legal counsel is needed to provide sound advice to help companies avoid the pitfalls and reap the unique benefits of doing business in America. About the Author: Brown, Rudnick, Freed & Gesmer is a premier international law firm. We have over 180 attorneys located in offices in Boston, Hartford, Providence and London, England. We provide full legal services to a range of clients, with a specialty in new economy and high technology companies. We have lawyers expert in intellectual property, mergers and acquisitions, corporate finance, employment, real estate, litigation, governmental relations, banking, and health care. We provide practical solutions to meet our clients entrepreneurial objectives and guide our clients through complex and sophisticated legal and business situations nationally and internationally. In the recent years we have included Finland as one of our focus points and we regularly travel to Finland to meet up with Finnish companies. In February we hosted a seminar on Doing Business and Raising Venture Capital in the United States for a delegation from the Finance Committee of the Finnish Parliament. In March we organized a workshop on Doing Business in the United States for Finnish software companies visiting Boston as part of the Global Software Program organized through the University of Oulu together with Jyvskyl Science Park Ltd., Tampere Technology Centre Ltd. and Spinno / Innopoli Ltd. A similar workshop was arranged in Espoo, Finland in September 2000. Nina Andersson is a Finnish corporate lawyer working as an international legal intern with Brown, Rudnick, Freed & Gesmer in Boston specializing in corporate law for multinational companies. She joined the firm in January 2000 after several years of experience in practicing corporate law in Finland. Nina E. Andersson Brown, Rudnick Freed & Gesmer (nandersson@brfg.com +1-617-856-8200 www.brownrudnick.com) 214

PART VII

Lessons Learned
Introduction by Eero Peltola
In the previous parts respectful experts and business practitioners have given their advice, guidelines and opinions about how to launch and run a successful business in the USA. In this part the foregoing arsenal is amended by lessons told by those who have actual experiences on launching business in the USA. It is beneficial to apply methods and solutions that are found to work and to avoid those that dont. Be, however, sure that there are always plentiful new mistakes to be done, but hopefully not to be repeated many times. The aim of this book is to help in avoiding as many mistakes as possible. In the first two chapters of this part two Americans, who have helped Finnish companies to start or enhance their businesses in the USA, present their experiences. John D. Saunders has worked for years with Finns in different circumstances and knows well the similarities and differences between both people and businesses in these two countries. Therefore his advice are invaluable. William L. Paulin has in recent years worked with several Finnish start-up companies and helped them both to explore the USA markets and to launch their first businesses in the USA. Therefore his thoughts are useful reading for new companies planning an entry to the American markets. The last chapters present the perspective of some representative Finnish companies. Chris Vargas, Jussi Harvela and Mikael Roos tell about their experiences on running their companies businesses in the USA. These stories are both useful and exciting.

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Chapter 33

Lessons Learned: How to Avoid Common Mistakes

By: John D. Saunders
Smith, Gambrell & Russell, LLP
Over the past 20 years of representing Finnish companies in the U.S., we have noticed a dramatic improvement in the sophistication of these companies not only in U.S. dealings but globally as well. Although our Finnish clients, which include a broad spectrum of entities from manufacturers to service providers, have been for the most part successful, all too often these companies have made choices or taken actions that have been counterproductive for the desired timetable and objectives. Significant reworking and undoing of various steps in the process has led to disappointment particularly with respect to the performance of the U.S. party in the deal. In commenting upon common mistakes, which we have noticed, we do not purport to be business experts but have been positioned to observe numerous Finnish companies approach the U.S. market through such activities as forming U.S. subsidiaries to handle U.S. sales to the acquisition of U.S. operations of third parties. In order to avoid the major missteps weve noticed, we suggest Finnish companie s keep the following in mind: 1. Choice of Partners: Dont Believe the Hype! One of the great attributes of Finns is their trusting nature. Finns only make statements that are totally true and supportable, and for that reason I have thoroughly enjoyed conducting business with the Finns. While Americans are generally trustworthy, they are more likely to make misleading statements or implications. The Finns trust in contrast with the American propensity to exaggerate particularly with respect to their own accomplishments has led many Finnish companies to a disappointing selection of U.S. partners or key employees. Americans are by far the greatest experts in the world in one matter self-promotion. When a Finnish company solicits joint venture partners, distributors or key employees, it is often surprised with the high quality of responses. This reaction is often based solely upon the hyperbolic resume of the prospective U.S. partner. We advise the Finns to look skeptically at resumes of individuals and capability statements of potential partners. We do not suggest that you assume Americans are untrustworthy, but we recommend a thorough review and examination including reference checks of the capabilities of those involved. We have all too often received word from our Finnish clients that they have found the perfect person to fit their needs based simply upon what was told to them by the potential applicant. A closer analysis of the applicant with our help has most often led our Finnish clients to realize the significant background checking and thorough analysis that this selection requires.

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2.

Focus On Due Diligence. Finns seem to value engineering and production know-how as more respectable and necessary toward the task at hand than those services offered by accountants, attorneys, consultants, public relations firms and marketing experts. Americans in dealing with potential Finnish partners more often focus on the promotional aspects of their proposed operations and engage consultants in this regard. The Finns often minimize, and in many cases ignore entirely, potential benefits that could be gained by engaging experts to conduct preliminary market studies, tax analysis, legal review and related matters. When I discuss these issues with Finns, they often feel such services are unnecessary. Instead, they choose to rely on their own business experience and assume that the U.S. business climate resembles that of Finland. The Finns I have encountered also believe that since their products are superior to those of their U.S. competitors, and since these products sell well in home markets, these products will therefore sell themselves in the U.S. We constantly receive such a reaction upon the suggestion that the Finnish client engage experts to help to promote a product, conduct market studies or evaluate business ideas targeted at the U.S. market. As a result, Finnish companies often move boldly without adequate preparation and end up losing money or refocusing business plans following an initial entrance into the U.S. market. Localize the Target Market. The U.S. population is around 280,000,000, or more than 50 times that of Finland. Coupled with Canada, the population of the North American market exceeds 300,000,000. Despite the sheer mass of this market, many Finns target the entire U.S. and in turn dilute their penetration by spreading resources much too thin. If the Southeast U.S. was a target market through a localized approach it would encompass some 40,000,000 people, or a size comparable to large areas of Europe. Documentation: Brevity is the Root of Liability . The Finnish legal system, as with most legal systems in continental Europe, is based upon legal codes (such as the Napoleonic Code) rather than the common law system. These codes include statutory safeguards and other provisions that allow abbreviated documents. In common law jurisdictions such as the U.S., certain protections provided by code-based legal systems are not present. As a result of this difference, legal documentation in the U.S., whether it be of a contract or joint venture agreement, tends to be extremely long compared to those for similar transactions in Finland. The Finns, conditioned by the business atmosphere in Finland, insist that U.S. documentation be abbreviated. Although the Finns do not intend to overlook any substantial or major business issue, they clearly prefer that agreements merely document what is agreed as briefly as possible. By not focusing on appropriate legal provisions to treat matters such as indemnification, termination, exit strategy, limitation of liability and other issues, many Finnish companies have been exposed to often-significant liability. A good example of this relates to provisions limiting liability. It is very common for lawyers in the U.S. to minimize statutory warranties and remedies in transaction documents. We generally provide that our clients, if selling manufacturers, have no exposure for lost profits or consequential damages due to defective products. Without such a limitation, the client would have unlimited exposure for all consequential damages resulting from a breach of warranty or other manufacturing defect. The result can be a serious liability. Often the Finns request to prepare a short agreement simply cannot be fulfilled if the agreement is to provide adequate safeguards. Finnish clients choose not to present a lengthy document out of an unfounded concern for the reaction from the American counterpart.

3.

4.

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Again due to their trusting nature, the Finns often feel it is unnecessary to document every understanding as they are comfortable that the American side understands the deal. When difficulties arise, this often leaves the American counterpart in a position to take advantage of the loose or brief documents and ignore any sort of understanding that may have been reached on an oral basis. Further, the Finns reluctantly approach difficult issues such as exit strategies. For example, agreements should generally provide the circumstances for termination and detail respective liabilities and remedies in such event. Finns often request that we do not raise those issues in negotiations as in their view it may discourage or upset the American counterpart. To the contrary, American businessmen are used to dealing with these types of issues and have no negative response in that regard. They understand the role of lawyers in the U.S. common law system. Accordingly, we strongly recommend that Finns adopt the American business attitude and thoroughly document the parties understanding to prevent future misunderstandings. If Americans understand, for example, that their remedies have been limited, they are more likely to work on the relationship intended by the document rather than seek legal recourse as a result of a poorly drafted agreement. 5. Dont Avoid the Courts. The huge and often highly publicized verdicts of the U.S. litigation system horrify Finnish business. American businesses share this concern. Liabilities can be managed through contractual provisions as mentioned above, through insurance and by doing business through subsidiaries to insulate current company liabilities and other techniques. The Finns carry into the U.S. their Finnish view of litigation as a process of last resort in which the courts intervene only when parties involved are acting unreasonably or in bad faith. In Finland the commencement of a lawsuit sends a signal to society in general and to other businesses that the entity bringing the lawsuit somehow has not acted in a fair and reasonable manner to resolve a dispute. In the U.S., the courts are viewed as the resolver of disputes; it is no stigma or concern if an entity is involved in a lawsuit. One of our Finnish clients, when named as a defendant in a groundless lawsuit by a former partner, asked whether the officials of the State of Georgia would view the Finnish company harshly since it was being sued. Recently a client was reviewing the credentials of a potential key executive and noted that involvement in a lawsuit made the candidate possibly unsuitable. The lawsuit turned out to be a legitimate claim in which the potential partner was trying to preserve agreed-upon rights. If Americans feel their Finnish joint venture partner will settle any lawsuit at all costs, they will be much more aggressive in attacking such Finnish partner with the hope of reaching an inflated settlement. Finns should realize that the U.S. courts should be used to proceed against persons who have violated contracts or other agreements. Lawsuits often are a legitimate undertaking and should be pursued. Finnish companies should be prepared to litigate so that those doing business with the Finnish company will realize that the Finnish company will pursue claims in court if there is a default or breach of agreement.

Conclusion When we provide the foregoing advice on an informal basis, our clients are often skeptical that as lawyers we are simply trying to inflate the need for associated professionals and front-end legal work. We are quite confident, however, that an investment with associated professionals in the pre-start up stage can help avoid serious liability and costly mistakes.

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About the Author John D. Saunders is a partner in the Corporate and International Section of Smith, Gambrell & Russell, LLP. He has over 20 years of experience in representing Finnish firms in connection with their U.S. activities. He is the Honorary Consul of Finland for the State of Georgia. Founded in 1893, Smith, Gambrell & Russell, LLP is an Atlanta-based law firm with offices in Jacksonville, Florida and Washington, D.C. One of the Southeasts oldest and most respected law firms, today its home to over 190 innovative attorneys. With a growing national and international reputation, the firm represents clients in the areas of corporate law, real estate, construction and environmental law, corporate immigration matters, employment law, health care, trial and appellate litigation, international, public and private financing, tax law, bankruptcy, franchising, intellectual property, technology law and other specialty areas. Mr. Saunders can be reached by email at jsaunders@sgrlaw.com, by telephone at (404) 815-3682, by fax at (404) 685-6982, or by mail addressed to him at the following address: John D. Saunders Smith, Gambrell & Russell, LLP 1230 Peachtree Street, N.E. Suite 3100, Promenade II Atlanta, Georgia 30309

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Chapter 34

Action Research: The Method For Success

Processes For Successful FinnUSA Market Entries

By William L. Paulin, Ph.D.

DO FINN SMES HAVE A SATISFACTORY FINNUSA ENTRY SUCCESS RATE? No, we dont think so. While things seem to be improving, it appears to us that too many Finn firms are still under performing and/or failing in their USA entries. About 70% to 80% of them still fail to meet expectations.19 often returning unhappily home to Finland. And a 20% to 30% FinnUSA success rate still compares quite unfavorably with the 50% to 80% success rates of homegrown USA start-ups20 Does this seem as unnecessary to you as it does to us? Wouldnt you expect that successful Finn companies, expanding to the USA with products and business models proven at home, should do significantly better than raw USA start-ups. Well, we think they should. So, how did this unacceptable situation come to pass? And more importantly, how can it be fixed? CAN FINNUSA SUCCESS RATES BE DRAMATICALLY IMPROVED? Yes, we think so. For many reasons, including the fact that we have done it with several Finn firms, we know that the FinnUSA success rate can be dramatically improved. There is no easy way, however. Each Finn firm entering the USA marketplace will have to explore and adapt to the USA, building, adapting and evolving its new Finn/USA business model as it goes. The good news is that Finns do not have to act alone when entering the USA. Savvy Americans and experienced FinnUSA Finns will be glad to help. Contrary to the not uncommon Finn Myth about the USA, most American business folks would like to have you come here and be successful. We know that each business success here grows the pie here so that there is more for everyone else here. This positive growing pie belief is part of the USAs entrepreneurial cultura l heritage.

19 20

Finnish Ministry of Trade Figures ca 1994-1998. Entrepreneurship Economics by Bruce A. Kirchhoff, ch 14 in The Portable MBA in Entrepreneurship, William D. Bygrave, ed., John Wiley & Sons, 1994. 220

Specifically, we believe that more than half of the Finn failures in the USA can be either avoided or corrected. How? By applying the hard-won lessons of experience from those Americans and those Finns who have gone before to the USA. Because those with real experience can easily foresee many of the reasons for FinnUSA entry failures before they occur, we strongly recommend that you avail yourselves of these folks help early in the game of your USA entry. Now lets turn to the most promine nt reasons for FinnUSA failures and the process approaches that can be used to cure these.

PART I FATAL BUT AVOIDABLE MISTAKES MANY FINN SMES MAKE WHEN ENTERING USA MARKETS
WHY DONT MOST FINN TRANSPLANTS WORK WELL IN THE USA? Why is the Finn track record in so poor the USA? There are many reasons, of course, but in our long experience helping Finn companies enter USA markets, there is one reason in particular one avoidable and/or manageable reason that figures in most FinlandUSA business failures: Cultural & Business Practice Differences Literally thousands of culturally derived business practice and personal behavior differences, big and small, constantly bedevil and often trip-up Finn firms entering the USA. Simply put, many Finn business instincts dont often work well in the USA (the opposite is also true of course; Americans often dont go easily to Europe). Using instincts developed in their home countries and refined in nearby markets, most Finns are blind-sided daily in the USA - sometimes without even recognizing it. Some eventually go home without ever knowing what hit them, sometimes blaming the wrong reasons for their failure. We think that this may be where some Finn-Myths about the USA arise (e.g., Americans always su e you to keep you out). The USA is quite different than Finland and the rest of Europe. In Europe, most countries markets are quite homogeneous internally, and the differences between countries are familiar and predictable. Marketing there is relatively simple and organized. Not so in the USA. We remember being astonished when we learned that competitive paper companies in Finland actually shared the same sales organizations around Europe. This is certainly very different than in the USA where competitive selling is king. The USA is so unpredictable, so seemingly random, so dynamic and diverse that even Americans have trouble understanding their markets from one day to the next. Coming from an area with a history of controlled markets to an area of relatively uncontrolled markets, many unescorted Finns dont have a chance over here . . . unless they have persistent enough deep pockets to survive their first two or three years of mistakes. For most Finns, entering the USA marketplace is a radical innovation doing something quite different at which you have a strong need to succeed but to which much of your prior experience does not apply as opposed to an incremental innovation doing something only slightly 221

different than what you have done before. And radical innovation requires quite different approaches than do engineering-type, incremental innovations. HOW CAN FINNS OVERCOME THESE BUSINESS INSTINCT CHALLENGES? When you are attempting a radical innovation by entering the USA marketplace; when your instincts are culturally programmed the wrong way for this market; and when Finn -standard business practices often dont work well, there is only one thing that the USA -bound FinnExecutive can do: Explore & Learn First Makes sense, doesnt it? If you dont understand a situation or environment, you must first explore it and learn about it before you can reasonably expect to be able to work successfully in it. No amount of careful, prior planning can prepare you for a completely unknown and unforcastible situation. The whole idea of exploring in the USA is to first gather new information about the relative unknown business environment and then develop new ideas and plans and responses to it so that the firm has a greater chance of success when and if it commits to market entry here. But processes suitable for exploration and radical innovation are quite different than the more familiar scientific-type processes that are suitable for incremental innovation. Exploration -type processes are less orderly, linear and systematic, while being more intuitive and evolutionary in nature. For example and contrary to many Finns instincts, it is most important not to draw conclusions too soon - to remain open until sufficient information is gathered:21 All this is to say that ideas evolve, and they don't evolve in predictable ways. Psychologists call the activities associated with idea development loose associative thinking processes. Associative logic is not sequential. It's jumpy. For a time, the maintenance of uncertainty is important. Closure is a killer; it strangles associative thinking in favor of arriving at an answer. Early in the process, leveraging uncertainty, riding it, and valuing it are critical to developing robust ideas. So Finn business executives must expect a significant period of learning in the USA; must be ready to questioning all of their business assumptions; must plan on a period of exploration before they can hope to become successful here. And they must be prepared to use new and less familiar exploration-type processes to do this efficiently and effectively. If they dont - if they cant learn-to-learn and dont seek how to adapt their business to the USA quickly their chances of eventual failure in the USA increase dramatically, sad to say. THE TWIN FAILURES NO STEP 3 & A WEAK STEP 4 In our experience, an open minded, questioning market exploration is what Finns often neglect to do before, or even while, they first go to the USA. We suppose that some Finns may inadvertently use more familiar incremental innovation processes when performing the radical innovation of USA
21

Leifer, McDermott, OConner, Peters, Rice & Veryzer, Radical Innovation, Harvard Business School Press, 2000, p 32. 222

market entry simply through force of habit. After all, exploration is not such an obviously important activity at home. So our Finn-friends often may not think of spending enough time and money on the most critical of all USA-bound activities: STEP 3: Action Research - An Early, Open Business & Market Development Exploration For Finn SMEs, with limited budgets, market and business development processes must become a pragmatic combination of market exploration, customer research and early sales/marketing activities of practicing doing business that we call action research. Performed before market entry, market research and business development is the all-important third step (see attached graphic) of a solid USA entry process. Unfortunately, we find many small, high tech Finn companies tend to skip this vital step, usually to their ultimate regret. Finn SMEs often take too much time on Step 1 (getting the product ready for the USA while still at home) before they explore the market here. And most also tend to overemphasize Step 2 (planning for the USA entry from home) again, before they explore the market here. It is definitely a much better practice for any Finn firm that plans to eventually to enter the USA marketplace to go early even before the products are completed and explore. Then their product and business development activities can be adjusted to fit the realities of that market place not uninformed and probably incorrect speculations. Unfortunately this pattern of misunderstanding the USA marketplace by skipping Step 3 (market exploration and business development) is often compounded many fold by a rush to initiate a weak, unfocused Step 4 - sales and marketing efforts. It is simply not natural for most Finns (as well as most Europeans) to understand the absolute importance of the sales and marketing function in the USA. Along with management, it is the most important factor in your ultimate success more important even than technology: STEP 4: The Sales & Marketing Intensive Business Culture - Launch A Killer Program Thus the main FinnUSA failure mode that we observe is: a) a significant misunderstanding of USA markets caused by failure to explore early-on before entry forgetting Step 3 - compounded by b) an extreme lack of appreciation of the USA sales and marketing function during USA launch an inappropriate Step 4 resulting in c) an all too common, failure prone business model that d) forms an extremely weak foundation for success in Step 5 successful business growth and/or exit.

PART II BETTER PROCESSES FOR ENTERING USA MARKETS: ACTION RESEARCH & USA STYLE SELLING
SO LETS USE BETTER FINNUSA BUSINESS MODEL & ENTRY PROCESSES Finns, in our experience, tend to be quite linear, systematic and methodical folks. Unfortunately these usually positive attributes tend to get them in trouble when coming to the USA. The familiar and comfortable engineering development-type processes (i.e., detailed planning before execution) that Finns tend to naturally use, just dont work very well simply because the USA is so different and so unknown at the outset. Coming To America is a radical innovation for most 223

Finns not a simpler incremental innovation, as going to Sweden might be. As such, it does require the use of less familiar and less systematic seeming exploratory discovery-type processes. But contrary to many Finns first impression, these processes are far from random or unmanageable:22 The exploration process has commonly been described as inherently uncertain, dynamic, and seemingly random. . . . On closer examination, though, [experts] find that it is not a random process, but rather a chaotic one. . . . Chaos is a nonlinear, dynamic system, which is neither orderly and predictable nor stochastic and random. Learning in chaotic conditions [radical innovation] calls for an expanding and diverging process of discovery, . . . [while] learning under more stable conditions (incremental innovation) requires a narrowing and converging process of testing. The point the researchers make is that chaos is not randomness, and a chaotic environment is a manageable one, albeit in a very different way from an orderly environment. Now Finns are justifiably well known and respected for their systematic and careful planning. Consequently, the chaotic an unplanned seeming processes of exploratory networking and action research are often uncomfortable for them to contemplate before they have done it essentially because plan-as-you-execute is so different than plan-before-you execute. As one of our Finnish colleagues23 so perceptively wrote to us: I see a paradigm shift in process: The old paradigm tells that you will not execute successfully if you hadn't planned carefully. The new paradigm says that you can't plan successfully if you don't execute concurrently. If this paradigm shift is true, I have to change my behavior a lot. I have to accept my mistakes and recover immediately. No, actually I have to stop getting anxious as a consequence of a mistake. Then, no need for recovering exists anymore. And I can use all my energy for execution. We think that Mr. Saukkonen is absolutely right. But this mental shift of gears is very difficult to do. Most Finns will need some experienced folks to help them with this transition, we have found. But the good news is that we have also found Finns to be universally happy with the results of a good action research exploration program once they have done it. By spending a little time and money in up-front exploration, most Finn SMEs coming to the USA save much more time, money and grief down-stream. So, once again, our best advice is: Dont Forget Step 3 Explore First, Enter Second Do A Great Step 4 Sell & Market Like Hell Now lets look more closely at these twin Finn-Killer problems of: a) no early action market research and b) an inappropriate, weak sales and marketing effort.

22

Leifer, McDermott, OConner, Peters, Rice & Veryzer, Radical Innovation, Harvard Business School Press, 2000, p. 219. 23 Juhani Saukkonen, Director Oulu Region Software Center of Expertise. 224

STOP THE PLANNING IN A ROOM GO THERE & DO ACTION RESEARCH No experienced American entrepreneur would dream of starting business operations in a market segment with which they were not intimately familiar and for which they did not have good contacts and a good feel. Neither should any Finn. And no one can develop this feel from a distance, from outside the market itself, no matter how smart he or she is, or how good the statistics, reports or other, commonly available market intelligence. After all, by the time market data is well known and gets into commonly available reports, it is often too old to be of much competitive value. We call the Finn tendency to plan at home in Finland without first hand experience in the USA planning in a room by thinking real hard as Dilbert24 so clearly explains.

Silly, isnt it? After all, planning, no-matter how carefully done, can only be as good as the quality of the information that goes into it. How could anyone develop a product (Step 1) that is just right for a market segment in a far away country where they have little experience? How could anyone plan well for organization building and product/market launch (Step 2) in a market for which they have no knowledge of business practices and no feel? Isnt this just as foolish as Dilberts management team? Yes it is . . . and lots of Finn failures in the USA can be blamed on just this sort of inappropriate planning in a room, sad to say. But getting out of the room, getting to the USA early on is not so easy for young Finn SME firms. Many Finn firms we have known, who plan to go to the USA as soon as the product is ready, still seem to us too often put off exploring the USA until it really is too late. The reasons we have heard for late exploration of the USA both indicating a lack of understanding of the roles of sales and marketing in the USA - tend to fall into two categories: We are still engaged in Step 1 - product completion. To this we say that, since it is most likely that any Finn product will have to be localized for the USA market, it would better for the product designer to learn about this earlier rather than later. Come early and adjust product development as required by the market.

24

Used by permission. Thanks to Scott Adams for Dilberts management wisdom. 225

We still are engaged in Step 2 - planning the launch, or we must carefully consider how to go to the USA before we visit. Is systematic planning such a highly esteemed virtue in Finland that the very thought of simple exploratory trips to the USA without specific, forecast outcomes seems too wasteful to contemplate? Yet the real waist comes from faulty plans based upon inadequate information. Come early, explore and learn, then plan.

And this is the critical aspect of Step 3 it is an experimental exploration into the unknown USA market without commitment to long-term entry. This is the most efficient way to consider and then decide whether to enter the USA market or not. If the learning is positive, then the commitment to enter the USA market can intelligently be made. In addition to making an intelligent entry decision, the information gained from the Action Research exploration can be used for effective planning of a strong Step 4 USA market launch. Clearly, Finn companies planning to enter the USA marketplace must budget both time and money for Step 3 - market exploration - before completing their product localization (Step 1), before completing their entry planning (Step 2) and before their formal USA market launch (Step 4). AND DO IT SOONER RATHER THAN LATER We recommend that any Finn SME that even thinks it may want to enter the USA marketplace sometime soon, should come over and take a few first exploratory looks much sooner than most Finns would expect. Why come early and often? There are several good reasons: It is not cast in stone that you must go first to Sweden, then to Europe and then to the USA. Europe is not necessarily good practice for the USA . . . the USA is different. Time spent planning for the USA will be mostly wasted without at least some first hand, incountry experience to insure that the planning assumptions bear a resemblance to reality. It is better to be early than late, since no one can know for sure when your window of maximum opportunity will open especially from a distance. Sudden business success occurs when careful, persistent preparation meets with the right moment of opportunity. You cant know when that window will arrive (or even if it is past) for you in the USA, unless you look now and at least make friends who will watch for you over time. There are plenty of strategies solo, partner, OEM, license or acquisition - that, if acceptable to you, can work in the USA for even the smallest company to act upon. The USA is a great place for high tech SMEs. We probably can make a lot of money together which is what good USA business folks love to do.

But the most important reason for coming earlier and more often than most Finns do (remember, most Finns fail over here) has to do with the nature of the exploratory learning process itself. It must be given sufficient time to work. The necessary learning must take place the only way it can through repeated exposure of the team to the environment that it needs to absorb and feel. And 226

this, in-turn, must be given time to feed back into the companys Finland -based operations, business culture and global strategies. AND STOP THE SOFT SALES & MARKETING EFFORTS When Step 3 is skipped by Finn SMEs, what most often seems to replace it is a soft, weak launch based upon getting a booth at a couple of trade shows. As this often generates an initial bubble of interest (Step 4b) and some product awards, Finns frequently get misled about market potential. How many Finn failures in the USA have been preceded by trade show awards? Several we think. Remember, in the USA trade show awards wont make payroll sales will. Whether or not the initial interest at trade shows represents real, sustainable demand, Finn SMEs frequently tend to follow soft trade show launches with late and equally weak sales campaigns. So it is a double misfortune that any company recognition and customer leads generated at the trade shows are followed by one of two inadequate sales strategies (Step 4a): Seeking USA partners who, it is thought, will save us money and take care of our interests without the need for the learning and familiarization efforts implied in Step 3. But this approach is an unrealistic Silver Bullet25 that usually leads Finn SMEs to great disappointment. Countless times we have been told: we gave them half of our price as discount, they promised great things, but nothing happened. All USA sales managers are used to this and know how to handle it. This is truly an avoidable mistake. Launching a USA office and hiring a couple of salesmen, both at great expense. Even if the demand is real enough, just hiring a couple of salesmen often indicates a continuing lack of understanding of USA business practices and behaviors putting marketing ahead of the usually more important sales function. Sales is frequently the most critical function in B-to-B business in the USA, with marketing playing an important support role depending upon the sales channels chosen.

More often than not, these approaches by USA-novice Finns prove to be inadequate - leading to the high failure rates cited above. The only way to do market development effectively is from inside the market, with the constant, long-term and high-intensity daily contact with the market itself necessary to generate adequate, real-time, gut-level information and business behavior. Clearly, Finn companies must also learn to both truly appreciate and effectively execute the hyper-intensive, hard driving USA-style sales (Step 4A) and marketing (Step 4B) business practices if they are to maximize their chances of USA success. If, in your heart, you really believe that USA style sales and marketing shouldnt really be necessary because of the quality of your technology (an excellent value system which we truly admire), we respectfully suggest that you get strategic level, USA style sales and marketing help. Here, believe it or not, powerful sales and marketing is as essential and noble a business practice as is strong technology in Finland.

25

The Lone Ranger is a fictional American cowboy good guy who fights evil in the old west. He wore a mask to hide his identity, rode a white horse, wore a white hat and shot silver bullets out of his gun. In his hands, these silver bullets performed impossible miracles (like shooting the guns out of the bad guys hand without hurting him). Thus the term silver bullet today means unrealistic, naive or impossible. 227

ONE MORE TIME, REMEMBER THAT TECHNOLOGY IS THE EASY PART This bears repeating. Sales and marketing seems to be the area that requires the greatest change and adjustment on the part of Finns coming into the USA. Sales and marketing are a much greater part of the success equation in the USA than in Finland. But some Finns, in our experience, dont seem to get this, in their gut where it counts - no matter how many times they hear it without sobering, direct and often unpleasant experience. Many seem to agree when we say, technology is the easy part here. Some even seem to agree when we say, marketing is at least 40%, if not 60% or even 80% of the success equation in the USA. But when we look at their subsequent behavior, we often see that old F inn habits persist. Finns typically wont spend 40%, 60% or even 80% of their USA entry budget on market development. Rather, they often continue to spend on the familiar - product readiness or partner alliances - thus doing relatively little market development or even worse; giving this most vital core task selling and marketing and owning customers - away to others. Sometimes it seems as if many Finns have core values that say, sales and marketing shouldnt have that much importance relative to technology - technology is good, marketing is bad . . . or at least unethical. While many Americans share similar views, the business folks dont. These incorrect views are based on a clear misunderstanding of the USAs economy. The USA is such a big a nd intensely competitive market where there are a huge number of companies, products and services vying for our attention. While this has the welcome effect of pushing prices down and selection and quality up, it also has the effect of greatly increasing the importance of the sales and marketing function. It is very hard to get noticed over here! You do have to sell and market like hell to get your good technologies into the hands of those who can use and appreciate them. Sadly, when a Finns lack of respect for the sales and marketing function in the USA leads to inevitable entry failures, sometimes the blame is placed on the wrong reasons such as unfair USA business practices. This, in turn, tends to perpetuate unfortunate cross-cultural misunderstandings and misleading Finn-Myths about the USA. So, not learning how to do business well in the USA can contribute to other Finns unreasoning fear of doing business here. Too bad for all of us since worrying about inaccurate Finn-Myths wont improve Finn SMEs performance over here. Only solving real problems like improving Finns sales and marketing performance will. Is there something basically wrong with the Finns who make these mistakes? No, not at all. Some of the finest business people we have met are Finns. Rather, we think that learning to do business in a radically different business culture is a very difficult thing. The act of questioning ones fundamental assumptions is tough for any action-oriented person. And believing that sales and marketing is more important that technology is a huge change in values for many. It is often easier to assume that business is business that we are all the same. It is more comfortable to continue to think and behave as we always have. And, it often feels better to focus on organizing efficiency and not wasting money instead of learning effectiveness. After all, exploration with no idea of the possible outcome does feel uncertain and wasteful. Ironically enough, the seemingly wasteful process of exploration and the seemingly unnatural process of intense sales and marketing are what is necessary to avoid totally wasted time and money in the long run for most FinnUSA efforts to be successful.

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Now lets look close at how to practically implement action research and intensive sales and marketing early on in the USA.

PART III PRACTICAL GUIDELINES FOR ACTION RESEARCH AND SELLING & MARKETING IN THE USA
USE STEP 3: A PRACTICAL CONCURRENT PLANNING PROCESS Once again, the best advice we can offer to most Finn companies who are contemplating going into the USA in the future is: Get Out Of That Room And Visit The USA As Soon And Often As Possible. And this is what Step 3 is all about an optimum concurrent planning and action research process for Finns to gain the necessary market touch and feel as fast, inexpensively and pain -free as possible. Lets look at the process of Step 3 more closely. Remember, action research and concurrent planning are plan-during-execution processes rather than the more traditional planthen-execute process. Here are some guidelines for what we know to be a fast, cost effective and risk reducing process of exploring the USA market. Following these, you will rapidly learn the lessons needed to greatly improve your chances to win and put yourself in the path of those lucky accidents that always seem to contribute to business success: Go to the USA a lot. Explore. Have faith in your ability to navigate and learn. The market will tell you what to do. Do extensive action research networking to find customers and partners. They will tell you when and how to formally enter the USA. Use those who have gone before. Finns who have been successful in the USA and USA based, Finn-experienced virtual executives will gladly mentor you. They will accelerate the process, reduce your risk and deepen your learning via their navigation and translation assistance. Beware of Planning in a Room. Go learn instead. Beware of completely believing most Finn-Myths about the USA. The truth is bound to be different. So test your assumptions. Beware of doing only the familiar - doing the easy parts first or doing last things first (i.e., putting MARCOM ahead of sales). Focus on the core and do the tough, key things including selling like hell.

AND GET HELP IT WILL SAVE YOU TIME & MONEY IN THE LONG RUN

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Entrepreneurship is no longer considered a solo-hero game in the USA. It is considered a team game simply because the environment is so complex and fast moving with such high stakes that no one person can do it all. Everyone needs help . . . the smart one get help.26 Because non-engineering-like exploration processes are new to many Finns, and because the USA marketplace is so different than Europe, most USA-bound Finns find it very useful to get help in their initial exploration and business launch. In fact, after the advice to go to the USA in an action research mode as early and as often as possible, our second most critical piece of advic e to USA bound, Finn SMEs is: Get Some Friendly, Reliable & Finn-Knowledgeable Indigenous Help We call this facilitated concurrent planning. In these days of rapid, global change, where time to market is so important, facilitated concurrent planning has become almost necessary for success. The specific, practical benefits of this approach are many and important: Two sets of eyes, ears and minds, each with their very different backgrounds and experiences, digest and evaluate the raw information acquired and turn it into something more than the sum of its parts real synergy is possible. It is a faster to market and faster to money process with lower time and money risk. Learning is maximized, if the participants are open and capable of learning (some arent; are you?). It is possible (not guaranteed) that initial USA-launch customers will be found, guiding the company to the right market segments, product modifications and physical locations. Specification of the right product & service localizations for the USA will result. Business models for the USA will evolve in a positive way. Finance & performance models will evolve and scale-up for the USA. Multi-channel, segment USA-specific sales models will be identified. Segment-specific, USA-type marketing support models will be developed. Revised organization methods & processes for USA can be designed. USA style Board of Directors &/or Advisory Council can be designed and/or staffed.

26

Most often in the form of informal advisory councils in addition to more traditional business methods. See Jeff Timmons, PriceBabson@Berlkeley, 2001. 230

What is even more important than these rational outcomes of this facilitated concurrent business development process, are the existential outcomes the learnings and understandings and changes that takes place inside Finn business folks. The most important of these are: Feel and gut level understanding of USA markets, business practices & individual behavior. Dispelling of the Finn-Myths about the USA and learning of the things you should worry about (there are plenty!). New and/or adapted paradigms of business building The beginnings of the business wisdom that will prove to be the essential ingredient in your firms success especially how to sell and market like hell in the USA.

AFTER-ALL, IT IS A PROCESS OF SERENDIPITOUS EVOLUTION These facilitated concurrent planning process recommendations that we make are not just a random set of ideas. They are actually based upon years (more than wed like to admit) of our combined experience in observing, funding, starting and running entrepreneurial, high-tech businesses. They are an attempt to systematize what we have observed about the actual, natural process of evolutionary learning that virtually all start -ups go through on their way to eventual success. Companies rarely go straight from inception to success. Most follow torturous and somewhat accidental path of change and adaptation to unanticipated events and circumstances. We call this process Serendipitous Evolution. The term Serendipitous Evolution is an oxymoron in English (two words that dont belong together that are, never-the-less, put together like military intelligence or jumbo shrimp): Evolution means to become ever more complex, sophisticated and successful over time through adaptation. Serendipity means the ability to have lucky accidents. And this is the oxymoron. Accidents should be 50/50, good and bad. Then how can one have the ability to have only lucky accidents? By using the right processes.

But this describes exactly the facilitated concurrent planning and development processes we observe the most successful entrepreneurs and start-ups employ - and that we recommend to you. Finally, dont be seduced away from appropriate serendipitous evolution processes by the siren song of overly systematic scientific management type approaches. As Jerry Kaplan (of Lotus, GO and Egghead.com) says:27 In the real world, management is an art, not a science. The formal techniques for decision analysis that business schools teach are fool's gold, a vain and misguided attempt to systematize the chaotic. The mere existence of these methods betrays a darker truth: we harbor a desperate desire to believe that the world is ultimately predictable. But anyone who has managed a startup knows that predictability is an illusion. In this
27

Jerry Kaplan, Start-Up, Penguin Books, 1994, P 101 231

environment, you are faced with an endless stream of arbitrary challenges that bear down on you with the relentlessness of an automatic pitching machine. There's no time to think. The trick is to know when to swing and when to duck. But I suspect that each arbitrary decision is like smoking a pack of cigarettes - somehow, somewhere, it shortens your life. So, . . . it is important for those who wish to globalize their business to accept, understand, use and enjoy the processes of serendipitous evolution on the way to their successful FinnUSA adventure. ABOUT THE AUTHOR: HOW DID WE LEARN THESE THINGS? First, the ideas for this article came from actual, practical experience in the trenches with Finn SMEs Coming To America - experiences both good and bad, successful and unsuccessful over the past 9 years. With associates in 4 countries (USA, Finland, Switzerland and the UK) and 8 USA cities (San Diego, San Jose, Austin, Atlanta, Boston, Seattle, Minneapolis and Washington DC), we have focused upon Finn SMEs since 1993. Weve made over 100 trips to Finland for weeks at a time literally living with our clients/friends and helping over 34 Finn SMEs Come to America. Weve escorted, navigated, translated and action researched intensely in the USA during 17, long term and extensive Step 3 programs for Finn SMEs with greater than a 75% success rate. Weve served as a visiting professor at the University of Oulu and have conducted over 200 seminars/courses in Finland and the USA for both Finn and American SME executives. Weve guided a sequence of in-depth, University based research projects into both successful and unsuccessful FinlandUSA SME efforts. And we have 5 publications in Finland as our ideas and experiences have evolved. Secondly, these ideas have risen out of our combined 150+ years of senior business management and start-up experience . . . and through our own interactions together with Finn SMEs. And finally, we have observed how countless other USA business executives interact with Finn SMEs. In addition to the most often repeated mistakes that we have catalogued elsewhere, we have noted the 3 most-asked questions of Finn SMEs by these American business experts: What is your market, how is it segmented and how close to it are you/can you get? Why the over emphasis on technology vs. sales and marketing and management? Why dont Americans help you develop alternative strategies, tactics and contacts?

The more we refine the ideas presented here, the more our Finn friends, colleagues, associates and clients confirm that we seem to be on the right track. For this we say to all our Finn and American Coming To America friends: Thank you for the great business building experiences.

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Chapter 35

The Finnish Entrepreneurs of Silicon Valley

F-SECURE / CHRIS VARGAS
F-Secure, a security software company, provides security solutions for traditional devices, such as the desktop, the laptop, the firewall, as well as for next generation devices, like the palm pilot, the PDA and the communicator. The company first established their U.S. office in Boston in the midnineties. That time taught F-Secure some valuable lessons. First of all, the company sent a Finnish person to start up the operations. While this was valuable in the sense of bringing the Finnish culture and connection to the headquarters, there were a number of challenges. Without an established network of colleagues and business associates, hiring was more difficult. Without substantial experience in doing business in North America, building a partnership ecosystem took more time. One of the lessons we learned was the importance of including experienced North Americans as an early part of the team, says Vargas. , . Soon the management realized that the people, partners and infrastructure that would be most instrumental to their success - was on the other side of the country, After a short stay on the East Coast, the company moved its corporate headquarters in Silicon Valley. Once there, , the firm focused on hiring local executives who bring the distinct advantages of a good rolodex, , business relationships, and who knew the subtle nuances of doing business the North American way. . President Chris Vargas is very familiar with Finnish people and business practices, having lived in Finland for a number of years. He and his Finnish wife Marita have a daughter together in Silicon Valley, where they currently reside. According to Chris, the first step in coming to Silicon Valley is to first decide what your strategic objectives are! Vargas states that Each time I speak to young entrepreneurs that come from Finland the first thing I ask is: Why are you here? You really need to ask yourself that question. Am I here because I want to sell more product directly to my customers, to establish strategic partnerships, to get marketing and to get close to a PR-firm, to get my name known, to meet venture capitalists to raise capital or why? That is the most important question. I discourage people from saying: We have to be here because everybody else is here. That is the wrong reason to come here. North America is an ocean of opportunities, but you need to first decide what you want to accomplish in this wonderful ocean. It is also worth exploring other U.S. high tech centers to first see if they are better suit ed to ones business objectives. Boston is known for its Telco and workstation infrastructure businesses, as well as some new software technologies. Dallas and the Research Park Triangle in North Carolina are known as good research and development centers. Denver and Virginia are known as homes for optical internetworking. Los Angeles and New York city are known as the multimedia and content capitals. Even if in the end you decide that Silicon Valley is best suited for you, does not of course mean that all the companys functions should be in the valley. 234

I always believe that sales should be as close to the customers as possible. So, one of the first things I did when joining F-Secure was to stop hiring sales people in San Jose and start putting them out in the field and be within 30-60 minute drive of our customers and see them face to face. Second, decide which key competencies are going to be developed organically and which are going to be outsourced. In todays Internet driven economy there is a lot of sense in having a number of core competencies in your company. Those competencies might be your sales, marketing and business development. It is important to decide what you will be very good at., Vargas advises to decide what that is and then hire the very best people to lead that function. Dont be afraid of the price tag of an excellent person, it is going to be high. Consider yourself extremely fortunate if you can find an outstanding person who comes with a high price. This means good things will follow! Non-core functions can and should be outsourced, especially in the case of a new and small startup. These include legal support services, pr-firm, financial processes and various consultants. Many of the outsourcing companies now offer their services on line, which was unheard of only 5 years ago. Most are are located in Silicon Valley. For example, there are many ASPs application service providers that will take care of your HR (human resources), payroll, benefits, compensation, vacation time and all the forms on line. Some companies will outsource your IT (information technologies) for you to keep the whole office network connected to the Internet.. You can go to companies that will do sales forecasting and sales force management tools for automating your sales systems and processes. There are PR-firms and marketing firms that outsource your marketing activities too. The Internet has allowed this to happen. The easiest way to find out about the existing outsourcing companies is to go to your computer and type: outsourced IT on the search. But what if money is an issue? There is more venture capital than you can dream of in Silicon Valley. There is a real value in bringing in venture capitalists. I look at a VC firm not as a supplier of money or capital but as a critical business partner, Vargas points out. An old clich is that a venture capitalist is a vulture that wants to take control of your company. Vargas says that it need not be so. A good VC gets involved with the business, sits in your board, helps in recruiting, with the business plan and provides access and introductions to other Silicon Valley power players. To get the right VC requires some skill. The best thing is to hook up with someone who knows Silicon Valley. Today there are already many Finns there who are involved in venture capitalism. For example the Nexit fund has an office in the valley. Because of the number of VCs, it is impractical to visit every one of them. Vargas urges the newcomer to find 3-5 who fit your profile and then do a thorough due diligence process to determine which one of those is best suited for you. Chris Vargas assists small companies, particularly Finnish ones, in this area as an angel investor. . 235

Silicon Valley, as the name says, was founded on microchip making technologies. Much of the data infrastructure providers are there, as well as hardware and software companies. The only major software company located outside Silicon Valley is Microsoft, which is headquartered in Seattle, Washington. -If you are software, chip, or a data infrastructure company, I think Silicon Valley is the place to be, Chris Vargas opines. His experience is, that many Finnish companies fall into the category of an OEM (Other Engineering and Manufacturing), company. OEM business model normally require strong, technology-based partnerships Many of the strongest OEM partners are found in Silicon Valley. Another critical practice is being customer driven. I always believe that a company must create its business plan based on their customers, not their own internal beliefs. The customer-driven businesses have the highest probability of succeeding. Part of this business practice includes being as close to the customers as possible. So, one of the first things I did when joining F-Secure was to stop hiring sales people in San Jose and start putting them out in the field and be within 30-60 minute drive of our customers and see them face to face. F-Secure has also dispersed its other personnel not essentially needed in the valley. Gotchas about Silicon Valley: Its expensive as heck here!. You dont wan t your whole team based here. A good model is to have the core people here. We can put our technical support team and engineers in a lower cost area. For example once could place R&D in the middle of Nebraska to take advantage of the very well educated work force that is more stable. They dont hop from job to job so easily because there arent as many competitive offers out there. For example only half of F-Secures 100 employees live in Silicon Valley. Nowadays the company hires sales people in other cities such as Chicago, Boston and New York, where their customers are. There are a few common mistakes that Finnish companies commit coming to America. Number one is not clarifying why you want to be in North America.. The second common mistake is under compensating the local work force. I think we tried to bring a little bit of a Finnish compensation mentality here and I dont think it went over very well. The fact is: Salaries and expectations of equity are much higher here than anywhere else in the world. Chris Vargas has also run into the question of fairness, which is one of the corner stones of Finnish business practices. One of the things I used to hear is fairness. It is not fair that a European makes 60% of what someone in Silicon Valley makes. We know that the cost of living here is 10 times what I have seen anywhere in Europe. The market sets the price, not the company, not the people. You have to be competitive to that market. Dont look at it as a fairness issue. Life isnt fair and you cant help that. It is also good to remember in the case of compensation, that there is no safety net in America, so Americans are driven to make their money earlier in their careers. While Chris Vargas gives high 236

praise to the Finnish integrity, honesty and reliability, their ability to understand the U.S. business culture is an important part of their success. A funny example comes to Chris mind: A Finnish person had sent out an e-mail asking for input on an idea he had. One of our U.S. employees responded and sent a very lengthy series of recommendations and e-mailed it to the Finnish fellow. And he didnt hear back for a day, 2, 3 days. A week went by, 2 weeks. Of course by now the American was feeling a bit irritated. I took so much time to write a long response to this Finn and he didnt do a thing about it. The American was sure that the Finnish guy had read the response and thrown it away. Of course, on the other side of the Atlantic, the Finn had read the e-mail, thought it was wonderful and made all the changes as suggested by the American. Only he didnt write anything back. The Finn though: What a nice American! The American thought: What a rude Finn! Then later on they both found out what had happened and were a little surprised. Communication is very important to our style. That can sometimes lead to misunderstandings that may appear funny on the surface but they can be detrimental to a companys success if they continue. Chris also points out that we are in a customer driven marketplace. There is a tendency to be somewhat inward focused. To be in a lab, developing what you think is a wonderful thing, then to go out to the world and say: Here, what do you think! The surprise is that nobody comes to your doorstep to buy your thing. I think one area everyone should improve on is: You first go to your customer and you listen. What is it that you need, what can I do for you? Then you go back and you develop your thing based on what the customer needs, not on what you think they need or what you think is a wonderful thing. Also, in Finland, the working life and private life are customarily strongly separated, On the other hand, an American likes to mix business and pleasure and thinks nothing of taking business calls at 3.30 in the morning, or talking business on his or her vacation. Whereas a Finn typically limits the conversation with his client to the business at hand, an American wants to know also personal things of the person he is dealing with. A Finn may view questions about his family and hobbies as trivial small talk but to an American it means building trust and getting to know the person. Other pointers: Dont try to hide your weakness. Do not avoid confrontation. * Americans communicate with logic and emotion. Learning how to connect with this style will greatly assist your ability to build a sense of rapport, trust and good business! If you are not good at marketing, go and find a good marketing firm. Dont be afraid to say I cannot do it. Once here, use the resources. They are there to help you. Consider starting with the VCs because they will give you the money and professional business support which can be very vital to your ability to get into the network of Silicon Valley and North America. Aim high! Dont be shy. Dont be afraid to be demanding. If you have got a great product or an idea, get the best VC possible. Hire the best sales people possible. Be a little bold. Step out and say: Damn, Im good! Finns have a hard time saying that. Note: Chris lives in Los Altos Hills with his wife, Marita Seulamo-Vargas and their two children. He considers himself part-Finnish and enjoys meeting and connecting with Finnish entrepreneurs. Prior to F-Secure he spent 8 years with Cisco Systems He can be reached at chris@vargas.cc. 237

Solid Information Technology: JUSSI HARVELA

Solid Information Technology was founded in Finland in 1992. Solid pioneered Solid FlowEngine, the software that puts the smart in smart networ ks, and enables system data to be distributed, managed and synchronized throughout all elements of a network, from wireless devices to optical routers. Today Solid is headquartered in Mountain View, California with additional offices in Helsinki, Finland; Sophia Antipolis, France; Burlington, Massachusetts, USA and Tokyo, Japan during the first half of 2001. In addition to two main offices in North America, the Solid local sales presence in the main networking technology centers include: Seattle, WA; Denver, CO; Dallas, TX; Chicago, IL; Reston, VA and Ottawa in Canada. The additional hubs in New Jersey and North Carolina are still in the planning stages . The Solid business model is considered royalty based OEM, where Solid software is embedded in network hardware and software. The sales model is achieved through direct sales by using 2-3 person sales teams, which address either one global strategic account such as Nortel Networks, or a territory defined by geography. The sales team consists of an account manager, a sales engineer and inside sales support staff working as a team and sharing a common quota. Solid customers in North America include technology leaders and networking visionaries such as Avaya, Agilent, AT&T Wireless, Check Point, EMC, F5, Hewlett Packard, and Nortel which use Solid as the foundation for their next-generation wireline and wireless infrastructure products. The Solid patented technology is a required component when building a smart networking infrastructure that will enable the smart world of tomorrow. In the smart world, vehicles, roads, buildings, devices and appliances will all be able to exchange and process information. This requires dynamic flow of data and ultra scalability by distributing processing power balanced within the network. From day one, the goal was to build Solid into a global company that is the only option if youre aiming for the position of becoming the de facto standard. Solid chose Silicon Valley as the location of its corporate headquarters so that it could be close to other companies building and marketing base technology such as operating systems and data management, most of which are located in Silicon Valley. Not everyone should seek to establish his or her businesses in Silicon Valley, but for Solid that was a natural place. Breaking into North America was planned to happen in stages. The first three years Jussi Harvela and Janne Karjalainen (co-founder and Sr.VP, future technology) circled the U.S., selling the company and its products, leading marketing efforts and conducting market research. They spent about a week each month in the U.S., where they met 3 to 5 customers a day. The duo made a number of significant deals with Compuware, Encanto Networks, Infoseek and Microlog. Finally, a major deal with Hewlett Packard caused Solid to establish its functions in the United States. Our aim was to first understand how the U.S. markets worked, to gather references on customers and then to make the move here, said Jussi Harvela, president and chief operating officer of Solid. He earned his engineering degree from Helsinki University of Technology in Otaniemi and started at Solid a year after the company was founded. He is the head of all business operations. For those who fear the high cost of globe trotting, Harvela has an excellent hint:

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-By purchasing the air tickets in a certain way you can hop from one city in the U.S. to the next and it doesnt cost more than a direct flight between two turning points. Currently such a ticket costs approximately 3000 - 4000 dollars when purchased in Finland. The trip is done in business class, so that one can change locations each day and stay in hotels for $80 $150 USD per night. With the Solid business model it was easy to generate revenues selling to keep the costs en par, He advices to take advantage of each layover, and for example this interview was done during a stop at Los Angeles International Airport, while Jussi Harvela and his business partner Ari Valtanen were on a business trip that took them around the world. Harvelas bottom line is the price per contact in other words what it costs to meet each potential customer during the journey. He wants to also point out in this context, the importance of face-to-face meetings because seeing is believing -When you are a foreigner and come to a business meeting, you are a VIP and it is relatively easy to schedule time, typically a day or two prior to the meeting. Harvela said, The day I moved here and sent all my acquaintances, partners and customers my new contact info, was the day that I also dropped into the same category with the rest of the other Americans doing business in the US. The perpetual traveling is made financially possible through ongoing sales. The Finnish Trade Center TEKES was instrumental in helping Solid at its early stages in product development. In the fall of 1997 the company received the equivalent of $5 million US dollars in venture capital funding from Finnish source, Conventum. In October of 2000 Solid finished its second round of financing, led by Apax Partners and BancBoston Capital, receiving a total of $50 million US dollars. Jussi Harvela emphasizes, Our motto is that while we are traveling, we are always doing business and meeting people. One cannot come back home empty handed, without either having closed a deal or at least obtained a stack of contacts leading to larger deals. Harvelas advice is to try to hire the best possible experts among all experts in the various fields, when starting up operations in Silicon Valley. The peers you work with will bring their pedigree and work history to the overall positioning of the company. It is not easy to get into those first tier service providers, typically you need audition with these experts just as one would do w hen requesting funding from the VCs. The right pedigree includes the right lawyer, bank, PR -agency, investment bank, etc. The logical place to start from is the lawyer. Solid works with Fenwick & West that is one of the top high tech law firms worldwide. It was easier to get attention from a top law firm, when we walked in asking for help closing a multi-million dollar contract with a top-tier customer, said Jussi Harvela. Once we were a client of Fenwick and West, they began recommending Solid to their network service providers. which has been beneficial for us. Based much on those recommendations today Solid is using Fragomen, Del Rey, Bernsen & Loewy, P.C. for Immigration work; Banking with the Silicon Valley Bank; working closely with Robertson Stephens investment bank, doing branding work with Lexicon and Method &c. &c. According to Harvela, securing a PR agency is another story in itself. Solid looked for a year for a suitable top tier public relations-agency and decided to go with Blanc & Otus in August 2000 due to their excellent reputation and track record of work in the infrastructure space. We worked several months to get an audition with them and then waited three more months until B&O had the resources to start working with Solid.

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The Blanc & Otus PR agency was in such great demand at the time that it was forced to pick and choose only 2 new clients a month out of about 100 applicants. Jussi Harvela also recommends the use of various outsourcing companies in the beginning stages. Solid itself outsourced many of its functions until the time the company had grown to about 30 employees in North America. Outsourcing requires strict control and close management, though. It is also a wise idea to delegate different functions to different outsourcing companies so that one cannot dominate its client. The U.S. laws, recruiting strategies, and different Human Relations issues are so complicated and different from that of Finland and Europe in general, that it is best for a small start-up to outsource them. But even after settling in Silicon Valley the constant traveling of its executive officers has not ceased. Solid has decided to disperse its different functions across the world because of the driving principle, be close to your customer. Today its customers are in all 5 continents. Doing business this way is incredibly demanding on human resources and time Ari Valtanen, co-founder, vice president and chief technology officer of Solid has lived in Silicon Valley and worked with Jussi Harvela there for over a year and a half now. According to Valtanen, his wife has also met many challenges in staying at home and taking care of their children, studying at a local college and teaching at the Finnish school in San Jose. On top of that, she also finds time to pursue her own hobbies. According to Valtanen, the worst part of this business is being separated from family. But if you are able to bear the responsibility and if you succeed in your work, at least partially, this work is rewarding. In order to help in taking care of his family, Harvela has hired an au pair to look after his children and assist his wife with duties around the house. Jussi has an original work rhythm: Harvela claims, Way back when, I was working for three weeks s traight, around the clock. Then the following two weeks I would take it easier without doing as much work non-stop. However after moving to US the trend seems to be a five-week non-stop period and a weekend of slower work pace. My work is my way of life. If it is not in your blood and your family doesnt have an entrepreneurial spirit, then you should not be in this business here in Silicon Valley. It is the observation of this writer that behind the globe trotting high-tech people there is a spouse who is at home taking care of the family. One must weigh whether ones own family is up to the long separations, when oftentimes the wife has to do all the household chores in a new environment and without friends. The dispersed business model demands a lot from the employees as well. Many people in the company have to be prepared for the same kind of mobile lifestyle in the early stages of the operations. When the manpower grows and competence gets distributed more evenly in different regions the relative amount of travel will go down to some degree. The importance of intercompany communication is key to being able to operate effectively in this manner. The employee must be a self-starter, who can assume full responsibility of his or her sector.

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-Harvela explains, We empower our employees to take full charge of their duties and run their jobs as if they would run their private businesses you can decide how to do you job, enjoy the full reward but also get all the punishment if it does not fly and always can have another possibility to try. At Solid, communication is essential in the mobile working environment. E-mail and cell phones must be in working order at all times, in different parts of the globe, including during business trips. No one knows when there is a meeting going on in some part of the world where deals are being closed. If the customer cannot reach you at a time like that they may make a deal with your competitor, who has an inferior product but who can be reached immediately. Especially in North America, employers demand quick solutions from their employees and therefore they are pressured to make fast business decisions. For example, during my interview with Harvela and Valtanen, there are 3 mobile phones resting on the table between us. The men also have additional hardware, such as laptops, palm pilots and communicators in their bags. Solid is encouraging all the employees who are active with customers, peers and community to be candid marketers for the company. The management, middle-management, even researchers, when in contact with the community are urged to socialize with their peers and spread the good word about Solid. When it comes to market research, Jussi Harvela is skeptical to polls in the case of specialized OEM-products like Solid products. He stresses the importance of knowing the customers needs. You dont generate sales by traditional marketing research, says Harvela. He adds, If you dont get sales people out into the market taking heed of what the consumers want, it comes down to trusting a bunch of market survey statistics and not truly knowing what the customer wants firsthand. The only way to understand what the customer wants is to make the rounds yourselves and talk to them and take that information back to the marketing and R&D teams. He thinks it is essential to hire an American work force immediately upon opening for business in Silicon Valley. Harvela also believes that a Finn should not take care of the local matters having to do with the business infrastructure. He has assumed a habit of acquiring the basic knowledge of any subject matter and then hiring the best possible person based on that knowledge. One can see the results of those hires by walking down the corridors of Solid. Just about every ethnicity is represented among the employees at Solid. Out of Solids 80 employees in North America, today only 8 are Finnish nationals. The sales situation itself differs from the Finnish one: Ari Valtanen explains, I had a shattering experience on a rec ent sales trip to Finland. I went to a visit one of Solids largest Finnish customers. There were 13 people seated at a table. The experience was totally different from what I had become accustomed to in America. In the United States, I see many nationalities whose English language skills differ. They all ask difficult questions and want to delve deep into the technology subject matter. After that, they want to make decisions on the spot and proceed in closing the deal right away. The Finns on the other hand were sitting quietly around the table, as if in a church, and wanted to ponder the deal in private. It may be the basic difference in the peoples mentality, but I believe its the startup -spirit that makes the difference in the American business setting. Time is money!, 241

In Finland the decision making process can take up to a week, whereas in America you are in trouble if nothing happens in 2 hours, says Jussi Harvela. He remembers an incident where he had attended a customer meeting the previous afternoon. The next day when he delayed checking his email until early afternoon, because it was Christmas Eve, he discovered a bunch of angry e-mails asking arent you interested in doing business with us? Harvela believes that the inner harmony of a company is also important: The management must have a clear vision of where the business is going. In the business culture of Solid the mutual control of power is a key role. After the management has communicated their vision to the employees, the employees are naturally expected to adapt to that vision and model. Employees who violate the business culture are subject to reprimand. -A salesman who comes up with $15,000 dollars in monthly expenses stemming from flying first class, taking limousine rides, buying expensive cigars and spending a lot on entertainment, is asked to explain himself. Harvela says, We have an open office, so other employees always get a whiff of what is going on, at least from the body language and hearsay of others around them. The publicity is punishment for anyone who cant live up to the set rules and expectations. We will warn the individual in question that this is not the way we do things at Solid, therefore giving them an opportunity to correct their mistakes. However, if they dont, they are asked to leave. Jobs are plentiful in Silicon Valley, which is a real challenge in filling vacant positions. Solid handled its first round of recruiting by hiring people we knew from the past somehow. The second round was done using headhunters. A headhunters fee is 30% of the first years salary of the employee hired through their assistance. Recruiters take 20%. Solid is also using internal headhunting to scout the talent. It promises 3000 5000 dollars for its employees for each new employee that they manage to bring in, and who works at least 3 months in the company. However one cannot hire ones own subordinates that way and the management is also not eligible to receive the reward. When calculating expenses in Silicon Valley, the rule of thumb is to equal the same amount of dollars that you would lay down in Finnish Marks when doing business in Finland. This applies to both employees salaries, as well as to other expenses. Luckily this also applies to closing deals too. For example in order to set up a 2-3-employee operational office you should be prepared to invest about a million dollars the first year to get the business moving. Yet just about every self-respecting software house wants to come to the expensive valley. C ouldnt business be handled using the modern technology e-mail, video conferencing and cell phones? Harvela asks, Then, why did you want to meet us face -to-face? People have a tradition that dates back thousands of years we want to actually meet the people we are dealing with. One cannot change that tradition overnight. At the end of our meeting, Jussi Harvela shares a new idea for a business gift instead of the age-old ballpoint pens and calendars: Harvela simply says, Childrens T -shirts! They became an instant hit among our customers. 242

MIKAEL ROOS: SCANDINAVIAN SOFTLINE TECHNOLOGY

Motto: Every product intended for the American mass market must be smooth and refined. This quality flavoring raises costs 50 times more than it does in Finland and delays operations 50 times more. In Los Angeles I was called Carlos and received faxes and other messages addressed to Miguel Roos or Michael Rats. How did I suddenly become a rat? Well, it all had to do with my poor English language skills. Roos sounded like rats to the other person at the end of the line. Although my English language skills later improved as I interacted with more Americans, there is no doubt that they affected the quality of our operations. Language is only one of the many things I experienced during my business experience in America. Having been the beneficiary of Finnish government assistance through organizations like KERA, TEKES and KTM, I feel it my duty with companies, which are in the same position as Scandinavian Softline Technology Oy was then. Background Scandinavian Softline Technology was formed in 1987, and seven years later it had a turnover of 7,5 million marks. Roughly three quarters of this came from the domestic and the rest from the European market. Bolstered by these results, we reasoned that our products would do well on the North American market, which was 50 times bigger than our current area of operation. Market research showed that there was going to be a big market for our fax products in North America during 1993-96. We had to invest there. We did a one- week business reconnaissance trip to the United States. We were confident that our "Keep it simple" motto, which had worked well in Europe, would also apply to the North American market. Canon on the West Coast indicated that it was more than ready for our products. Their Canadian partner, a software outfit called AMA, were not delivering on schedule. So we were really convinced that there was a real demand for our products in North America. The competitors were inefficient, product demand was there and the distribution channels were available. West Coast Canon got in contact with their head office in New York and they, in turn contacted us. In April 1993 a Softline representatives flew to New York. Antti krs, one of our executives, flew to Canada and also had the opportunity to visit our competitor AMA. From there we learnt that the company was actually based in Hong Kong and the Canadian office was just a marketing unit manned by four people. After negotiations, we signed an agreement with Canon USA and became one of their business partners or dealers. They invited us to participate in office automation fairs, and from there we gathered that Canon USA had 400 dealers like us: Fifty of them were the size of Canon Finland! We established our Office in Los Angeles. I was the managing director but I also assumed the marketing operations because I wanted to experience the international scene. We had, after all, been involved in exports for six years. Our office network operations were based on our products. Our marketing materials were produced on our PCs. The key tools for our office functions were Windows, Powerpoint, Word, Softline 243

Canon Fax for Windows (CFW) software. Our CFW software was used for the Canon L770 printer, scanner and fax modem. The system did, not of course, function without technical glitches. For example, we had to reprogram Windows because I had mistakenly thought that the VMS system was the same as Windows. It wasnt the case. Why wasn't this problem found in Finland because everybody uses VMS servers? There were other technical hiccups and the result was that our marketing operations experienced difficulties. Operating costs went up as we had to phone, fax and explain what had gone wrong to our customers. In one area, Ventura, Softline lost its credibility and reputation and customers avoided our products. Clueless in Seattle There were other technical spoofs. During one of the office automation fairs we met some dealers and decided to make a follow up on them. One, Mr. Chris Keski, the marketing manager of a company called Dierickx, which was based in Seattle, had ordered 50 Single users. This order promised to be the beginning of a profitable relationship because Dierickx sold two and half times more Canon equipment than the whole of Canon Finland. I flew to Seattle, settled in my hotel, and slept well. I woke up early and headed for the Dierickx office and prepared for the demo. There were 25 sales reps, and despite my nervousness everything went well until one of them asked me to scan something. Our software blacked out. That was it. To the customer if software doesn't work then it doesn't. Aided by two female members from Dierickx, we labored for hours to find out what had gone wrong. The problem, we finally discovered originated from the PC's c: drive. We tried to install the net version of our software program. It didn't work. "Why arent we selling cars?" one of my two Dierickx staff, Bonnie Heinrichs, quipped. I thought the same way. In the end Mr Keski bought 15 Single users and magnanimously spared us from the law courts. He refused to buy the Web version of the program until it could be proven to work. I flew back to LA and after some weeks returned. To Seattle to once more ascertain why the Web version wasnt working. The fault was, however, only diagnosed in Montreal one month later. The Dierickx network contained software from our Canadian competitor AMA and it blocked all signals from our own program. The result: Dierickx did not buy our software for the next 8 months. The second fiasco occurred in St Louis. We flew there to demonstrate our ware to a dealership called Datamax. Once again our software failed to work on the Novell network system because the server program's name had a writing error and the client could not find the server. We had not prepared ourselves for this mistake. Another minor mix up concerned Beverley Hills Health Center, which had bought our software. Bill our partner in the deal phoned to inform us that he was unable to scan with our program. We realized that the problem stemmed from the fact that there was one instruction missing from our five-point list: Hit the view button. One memorable marketing encounter was with the Navy HQ. John Conrad had bought our CFW, and one morning he phoned to inform us that the program was not working. After a 42- minute step- by- step analysis between him and Mika Hnninen, the problem was finally diagnosed - in writing phone numbers to his address book, John had used brackets around his area codes. This practice is quite common in the United States and our CFW software was not equipped for it. The worst part of this problem was that this was in November and we had delivered over 100 programs to dealers. There were hundred problems waiting for us out there. We got another order from the Navy HQ as a result of promotion by a satisfied customer. We sent our software. The deal did not go through. Our potential buyer phoned back, "My principle is that if 244

a program cannot be installed I return it. I'm returning your program." That was it and it shows the buyer's attitude to a flood of products in the mass market. The problem resulted from planning error. We had decided to produce similar versions of the demo and the final (production) software, and the Navy technician, or whoever it was, had installed all of them. The result: a demo version that did not send anything. It took us a long time to convince the Navy buyer that we had corrected the mistakes on our software, and it undoubtedly inflated our costs. What went wrong? So, what were the reasons why we got into these technical, sales and marketing fiascos? My diagnosis is that we had management problems such as a risky strategy, faulty organization and a poor understanding of distribution channels and the nature of the mass market. Furthermore, our marketing materials were inadequate, and we had misread the European market signals, which gave us the impression that we could succeed in North America. Technically our mistakes stemmed from the fact that testing had not been done properly, customer documentation was shoddy and there was poor planning. The structure and nature of the new market was not understood. There was hardly any room for customer feedback. After the Dierickx debacle I realized that we had several problems in our North American operations. I informed our offices in Finland, but was dismayed and surprised when I learnt that the message was not getting through. "We have the final version of the software, and we have sold thousands in Europe. Just sell it," was the standard response. I was not the only one facing this problem. Heikki Ketola who was working for a Finnish software house told me that he was telling his employers to speed up Product development but the message was not getting through. Being inexperienced there was nothing that I could do except to tow the home line: "Just sell it." Study the signals In retrospect we failed to properly analyze the signals we were receiving from the European market. Our turnover from that segment was over 2mmk, and armed with this statistic we thought that we could do well in the huge North American market. It never occurred to us that although our products were being sold in 14 countries there were no second orders. I notified the company owners and directors about this, but we all soon forgot the problem. It was stupid. I noted that in countries where we received second orders customers were satisfied with our products and our turnover, depending on the country, grew by 50-200%. One major difference between the European and American distribution channels is that the socalled dealers in the United States are PC illiterate. They rely on the sale of equipment and trust the customer because it is through him/her that they survive. Many years experience with the European market had created trust and confidence. The American market, on the other hand, was dominated by "bad will." Competition is tough and as result sellers sale tried and tested problem free products. He who has the dollar is the king We knew that the American market was vast, but not on the scale that confronted us. Through 75 dealers Softline had 2000 sellers. We were not prepared for this. But the American business scene is dominated by the market gospel. There is marketing for the area manager (faxes every week), 245

marketing for the best dealers, marketing for all the dealers, marketing for the best sellers (You have to know their names), marketing for al the sellers and marketing for the end user... In the end we decided to operate with 10 dealers. It was a wise decision. We learnt that the market structure differed from the European one in that woman formed 40-60 % of the sales force. Only 10% of the sales force used or had used a PC. I estimated that 50% of them dreaded using a computer. Turnover was high. Sales were a come and go temporary occupation. Most of the sales force worked on commission. The more you sold the more you earned. The frequent question was: "What is in this for me?" Americans are competitive. A bicycle that cost 500mk in the States will be 2000mk in Finland. In 1994 an NMT phone cost 800mk in the States. In Finland the price was 8000mk. After 14 months in the United States I can confidently say that from childhood Americans are taught to be tough competitors. There the dollar has value and he who has it is king. The dollar is enticed in many creative ways: poor quality sells cheap, mediocre is middle priced and luxury is expensive. Brand name has more resonance than here. The result is that marketing and sales consume a huge chunk of any company's resources. There are many things I learnt from my brief business experience in the United States. What I have related are some of the things, which have remained in my mind. Some practical suggestions American is an English speaking country. There is no way that one can operate there without knowing the language. If you want to avoid being called "Rats" or some other such names, you must as well consider attending an English language course before you go there. Before gong to the United States, we thought that it would be easy for European businessmen to get visa. It wasn't that easy. I realized that I was going to be in the United States for at least one year, so I took my family with me. It was a good idea. I got a lot of emotional support from my wife and children. We, and all the Softline staff, rented one house. We lived downstairs and the offices were upstairs. It was a good arrangement. People were there when they were needed and we saved on rents. To young IT entrepreneurs my message is: America is indeed a land of opportunity, but if you want to succeed DO your homework first.

Mikko Roos 2001.

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