The Challenge for Overseas Startups

LOVE AND DOTCOM DREAMS were in the air when Jim Moliski attended his former classmate Richard Chen’s wedding in the summer of 1999. During a break in the reception, Chen, who had gotten his MBA with Moliski at the University of California-Berkeley, brought up the idea of starting an e-mail marketing concern in Japan. Moliski was all ears. He had just made a tidy profit by selling a U.S.-based dotcom he had founded to handle direct e-mail messages to consumers for other companies. Although Japan was still in a nasty recession, Moliski and Chen wanted to provide the same services there and were excited by studies showing the exploding number of Japanese consumers going online. But Moliski, a Florida native, hadn’t counted on Japan’s distinct economic

and cultural landscape. Right from the start, Moliski and Chen had trouble attracting the right people to work at their startup, called OptoMail. Japanese workers are famously loyal to their employers and wary of working at startups. Infrastructure was also an ongoing issue; it took more than six months to get high-speed Internet access in the OptoMail office, and telephone service was exorbitant. Office space is outrageously expensive (rent for OptoMail’s 15-person Tokyo office is more than $10,250 per month). And e-commerce has not yet taken off (Japanese consumers are leery of online fraud, and most don’t use credit cards anyway, preferring cash and wire transfers to pay for purchases). To top it all off, the large Japanese companies Moliski and Chen are targeting for e-mail marketing seem to prefer doing business with companies they already know.

"You have things good in the United States, believe me," says Moliski, 33, who spends half his time in Tokyo and half in Berkeley, Calif., meeting with the U.S. parent companies of potential Japanese clients.

Like Moliski, many online entrepreneurs are learning that the overseas climate can be harsh?or at least one heck of a learning experience. It’s not so much that money is a problem?although funding is always a great challenge. A bigger problem is that other countries have much lower rates of Internet penetration than the United States (see "Level of Internet Penetration," this page). Half of the U.S. population is estimated to have Internet access, compared to only 12 percent in Japan, just over 30 percent in western Europe and not even 5 percent in Latin America. Infrastructure problems are largely to blame. Most foreign countries do not have high-speed Internet access and are plagued by antiquated phone lines. Even pricing systems can be a problem. In Japan, for example, telephone customers are charged for every call; there is no such thing as free local calls, so people tend to curb their Internet usage.

Local traditions also get in the way. In some Latin American and Asian countries, for example, customs snafus make it all but impossible to get a package overnight. Delivery costs are much higher too. And those two-hour lunches, common in Europe and Latin America, can sure cramp a startup’s speed to market.

As in the United States, it’s getting tougher for Web startups to find funding, especially if they sell to consumers. But many countries now have newer, more tech-friendly stock markets, akin to the Nasdaq in the United States, that make going public a possibility. For instance, while Japanese startups have no hope of meeting the stringent requirements for going public on the traditional Tokyo Stock Exchange, they have a better chance of competing on Japan’s two fairly new technology-heavy stock markets, Nasdaq Japan and Mothers Stock Market.

In Latin America, local funding is harder to come by, unless you have an "in" with regionally formed incubators or family-run companies that control much of the financial capital in those countries. There, who you know is more important than what you know. "Fresh ideas and a solid management team will find a venture capital audience with either crowd, but contacts are vital," says Grant Smith, a senior analyst with the Yankee Group in Boston.

For the most part, however, going public?the Holy Grail for all startups?is no more remote for overseas ventures than for their U.S. counterparts, if they can survive the hard knocks of early startup life, such as funding crises, personnel pitfalls and jittery markets. The three overseas startups profiled here are all at different stages of the new-venture life cycle. Whether headed for an IPO, mere profitability or oblivion, these companies’ survival skills have enabled them (by press time at least) to hang on in the face of uncertainty. We follow their twists and turns as they struggle to avoid the global dotcom shakeout.

The $7 million chauffeur

In the spring of 1999, Marcos Galperin was fresh out of the Stanford Graduate School of Business with nothing but an MBA and an idea when he caught a lucky break. Moved by the spectacular success of eBay, Galperin dreamed of creating a person-to-person auction site for Latin America. "Latins are very used to bargaining, and they don’t throw away used stuff. It was a fantastic model for these countries," says Galperin. He reasoned he had better insight into the diverse Latin American cultures than any U.S. company and would be better able to handle intercountry customs and bureaucracy. The then 28-year-old Argentinian had stayed in touch with Stanford Graduate School of Business Dean A. Michael Spence (now retired), and he brought the idea to him. Spence liked it and offered Galperin the chance to take his friend John Muse?who just happened to be founder of the Dallas VC firm Hicks, Muse, Tate & Furst?to the airport. Galperin walked away from that trip with seed money for his venture, called MercadoLibre ("free market" in Spanish). Shortly thereafter, other investors ponied up a total of $7 million for the first official round of funding.

Within a few weeks, Galperin, his cousin Marcelo Galperin and Hernan Kazah (all Stanford MBAs from Argentina) had recruited several of their Stanford classmates to join MercadoLibre, which started business in Buenos Aires in July 1999. (MercadoLibre was the fourth largest recruiter of Stanford grads that year, behind Goldman Sachs, Boston Consulting Group and McKinsey.) But a top education wasn’t the only criterion. These new hires were all natives of the countries in which MercadoLibre operates?initially Argentina, Brazil and Mexico, and then Venezuela, Colombia, Spain, Uruguay and Chile.

Galperin organized MercadoLibre as a U.S. corporation because it inspired confidence in the company’s investors, which are for the most part located in the United States. Having a U.S. headquarters also puts the company in a good position to go public on a U.S. stock exchange, should the chance arise. "The ideal would be to go public in the United States because of the liquidity and relevance of the market to our business," says Ignacio Vidaguren, vice president of business development. "But there is always the chance to go public in local [Latin American] exchanges too. The Brazilian and Mexican exchanges are very important."

Vidaguren, an earnest 29-year-old Argentinian with wavy brown hair and arresting green eyes, opened the company’s U.S. office in Miami, shortly after joining MercadoLibre in November 1999. Miami seemed the right place for the headquarters, since it is the gateway to Latin America and has a large Hispanic population of its own. Vidaguren had friends at a Latin American investment site that headquartered in South Beach, so he made a few calls to real estate agents there.

By December, MercadoLibre had settled in on the ninth floor of a squat 1970s office building in the chichi Lincoln Road section of South Beach. "By February or March, every single dotcom was trying to get space here. The line was going around the corner," recalls Vidaguren. The manager of the building even asked Vidaguren and his colleagues to vouch for the newer startups that were clamoring for space, including ZDNet and But after Internet stocks took a beating on the Nasdaq in April and May, some of the dotcoms that had reserved space never even moved in. Now only a handful of Web startups remain in the building, a constant reminder that existence can be fleeting. (When stressed, MercadoLibre’s Miami staff?almost all natives of Latin America?blow off steam at Finnegan’s, a nearby Irish bar with a palm-ringed patio.)

Much like eBay, MercadoLibre charges a commission of 5 percent to the seller on each successful transaction (for sales over $200, the commission is 2.5 percent). The site also charges special posting fees of between 50 cents and $3 (a plain vanilla posting is free). Another source of revenue: licensing MercadoLibre’s homegrown auction platform for companies that sell to the Latino market. Vidaguren knows of no other auction platform that is written in native Spanish and Portuguese. Translating an English site can be a huge task. Although officials decline to disclose financial details, MercadoLibre has licensed its auction technology to several sites targeting South and Latin American consumers, including UOL (another South American portal), StarMedia (a South American Internet portal) and (a South American travel site).

MercadoLibre’s customized Oracle 8i platform has certain features that make it inherently more desirable to Latin American users, according to Vidaguren. For example, most auction sites (including eBay) won’t allow users to enter a bid lower than the minimum bid. Through a feature called Contra-Oferta (counteroffer), sellers can choose to accept bids lower than the minimum starting bid. So if the auction is about to close without any bid, it might make sense for the seller to entertain a lower offer. This appeals to Latin Americans’ love of haggling, says Vidaguren.

MercadoLibre seems secure for the mo-ment. To date, it has hosted 200,000 transactions with a total value of $55 million. The average price of an item listed on the site is an impressive $300 compared to eBay’s $50. Electronics and signed soccer jerseys are top sellers. In the depressing days after the Nasdaq correction, the company managed to raise an additional $47 million from several U.S. companies including Chase Capital Partners, Flatiron Partners, GE Capital Group, Goldman Sachs and Ventech Inter-national. Galperin says the company should be able to conserve its funding until 2003, in part because it does not have to pay for a delivery and logistics infrastructure (since consumers send the goods to each other). He expects MercadoLibre to break even by December 2002.

The cash infusion gave MercadoLibre the necessary credibility to hire more people, some of whom were nervous about going to a dotcom. Today, the company employs 12 in Miami and 180 worldwide. Speaking Spanish is a job requirement, but company e-mails are in English so that they don’t offend Brazilian workers, who are Portuguese speakers and sometimes resent the predominance of Spanish.

MercadoLibre’s money goes further than many startups, because U.S. dollars buy a lot of labor in Latin America (the company’s technical staff of about 25 is in Argentina). "In Latin America there are very good resources in terms of people. The levels of unemployment are much higher than in the United States, and the degree of development of the Internet is lower. More people are interested in working with Internet startups," says Vidaguren. Salaries are much lower in Latin America than they are in the United States, and the Argentine technical team is able to maintain the site much more cost-effectively than a U.S.-based team could.

Although the Galperins and Vidaguren swear they’re trying to build a sustainable company, not just to get rich quick, going public?whether in the United States or abroad?is never far from their minds. Another possible endgame: acquisition by the big kahuna, eBay. "We could be acquired by eBay?it’s up to them, not up to us. We would like to be the obvious choice," says Vidaguren.

The journey so far has not been without unwelcome surprises. For one thing, the rate of Internet adoption in the Latin American countries is still between only 3 percent and 5 percent of the population, depending on the country. Fear of online fraud has been a significant factor since consumers are not typically shielded from liability for fraud, unlike in the United States where most credit card users are liable for only up to $50 in fraudulent charges. It’s not surprising, then, that Latin Americans are not big credit card users, although Galperin says this is slowly changing. Concerned by the slow acceptance of e-commerce in its target markets, MercadoLibre began a pilot study early last year, targeting the 30 million U.S.-based Hispanics. "The studies at the time were saying that there were 6 million to 9 million Hispanics online in this country," says Vidaguren. That makes for a very attractive segment?a higher number of online consumers than all the Latin American countries combined. Surprisingly, the U.S. pilot did not reveal much interest by U.S. Hispanics. "Many were indifferent to whether the site was in English or Spanish. We found that the people who do prefer Spanish to English in the United States are generally not as comfortable yet doing transactions on the Web. So we’ll have to wait a little bit for that group to blossom," says Vidaguren.

1 2 Page 1
Page 1 of 2
The CIO Fall digital issue is here! Learn how CIO100 award-winning organizations are reimagining products and services for a new era of customer and employee engagement.