Exporting to Survive

By Lori Ioannou/New York

Robert Dalias was convinced he had a better mousetrap--a new kind of switching device that U.S. telephone companies seemed eager to buy from his start-up company, WaveSmith Networks. But as the telecom crash washed over his customers and prospects, one after another canceled or postponed orders. His venture-capital investors started making nervous noises. So Dalias looked abroad for help. Despite having a meager track record and no multinational distribution channels, the CEO landed his first big sale, to NetOne Systems, a leading tech distributor and systems integrator based in Tokyo, and that success helped Dalias close his first U.S. sale in June.

This is not, of course, how things are supposed to work. Start-up companies normally seek to establish themselves in a local market before expanding abroad. But with U.S. customers on their backs in such industries as telecom, more start-ups like WaveSmith are finding their first foothold abroad, especially in Japan and Korea. Those countries haven't escaped the global tech collapse, but their governments and companies continue to spend, especially on broadband Internet access and third-generation wireless technology. But as always in global business, connections count.

Dalias' first clever move was to enlist a champion with a gold-plated international Rolodex: Michael Feinstein, a senior principal at Atlas Venture in Boston. Before becoming a venture capitalist, Feinstein had been vice president of marketing in charge of global sales at New Oak Communications, a maker of Internet security devices that is now part of Nortel Networks. Through his contacts, Feinstein was able to entice the business-development director of NetOne to visit WaveSmith at its Acton, Mass., headquarters for a demonstration of its new multiservice switch. The product, which transmits data, voice and video in a carrier's central office, piqued the interest of the Japanese because it cost half as much as competing switches and was twice as efficient. After six months of product testing and market analysis, NetOne signed an agreement to distribute WaveSmith's technology in Japan and invested $2 million in exchange for a 3% equity stake.

Vividon, a two-year-old start-up based in Sudbury, Mass., took a similar approach to selling its devices, which transmit streaming audio and video signals over cable-TV systems and the Internet. It made its first big sale last December to Samsung, the Korean electronics giant. Vividon was then able to land sales in the U.S. But it still garners a third of its annual revenues, which are approaching $5 million, from Korea, Japan and China. "The classic way of building a start-up is to cultivate business Stateside first, then expand overseas," says CEO David Ellenberger. "But with the domestic market so depressed, we have no choice but to go where the money is."

This Willie Sutton approach is not easy. The challenges of international business--dealing with linguistic and cultural differences, foreign-exchange volatility and unfamiliar government regulations--can frustrate even a mighty multinational. "Couple all that with the fact we have few resources to draw on for support, and you get the idea of what we have to go through," notes Ellenberger.

So how do they do it? As Dalias' story illustrates, getting an introduction from a well-connected financier, consultant or industry executive helps. Such a champion can entice a potential foreign buyer to visit your lab in the U.S. or accept a visit from you. But then you have to have that better mousetrap. "You need to have a niche-breaking product," stresses Ellenberger. Steven Domenikos, CEO and founder of Telegea, a software firm based in Waltham, Mass., has had success in Japan because his technology automates the service-fulfillment process for telecom companies, cutting their delivery costs more than 30%.

It helps to have a partner in the export market you have targeted--whether a distributor, equipment manufacturer or systems integrator--that knows the vagaries of the market and has relationships with your potential customers. WaveSmith's partner in Japan, NetOne, is part of a telecommunications keiretsu, a network of businesses that own stakes in one another. NetOne used WaveSmith's product in NTT Communications' telephone-equipment offices nationwide. It is now integrating the technology into the Internet and telephony systems of other undisclosed Japanese companies. This has expanded WaveSmith's Japanese customer base almost overnight. About a fourth of WaveSmith's $5 million annual revenues are from Japan. The rest comes from customers in the U.S., including Global NAPS, a local exchange carrier in Boston.

Advent Networks Inc., a two-year-old Austin, Texas, maker of broadband equipment for cable operators, hit pay dirt in May when it signed Mitsubishi to be its distributor in Japan. Already the Asian trading titan has got an order to sell $5 million worth of Advent's equipment to Tokai Group's AIC Cable Network, Japan's fourth largest cable operator, over the next two years.

Wooing a foreign partner often requires time and patience--two commodities in short supply among start-up execs. They typically have to discuss terms with representatives of various departments of a foreign organization. Little can be done without the help of a law firm that understands the local business customs--like meeting etiquette--that can baffle an American. Just ask Domenikos. During his discussions with NTT, it was not uncommon for the firm's high-ranking executives to nap around the boardroom table, leaving underlings to flesh out the deal's specifics, from the budget to the duration of the contract. Cross-border deals are also riskier. "A deal isn't a deal until money changes hands," Domenikos says.

U.S. firms often must adapt their products to local needs. Telegea, for example, developed its technology to support Asian languages. And it's always a good idea to protect your intellectual property from pirates by filing for international patents.

Despite the obstacles, many telecom start-ups are glad they went global early. "We've won wider recognition for our technology, diversified our revenue base and attracted a wider range of investors by venturing abroad," says Domenikos. Even amid the technology slump, Telegea has been able to raise $42 million from investors, including Investor AB, a Swedish industrial holding company, and Nissho Iwai, the Japanese electronics conglomerate. Next year Telegea will begin selling its software through a distribution agreement with Lucinski, a systems integrator in Brazil. "None of our growth would have happened if we took a parochial view of the world," says Domenikos. "We'd probably just be struggling to survive."