Placeware Inc., a Silicon Valley Web-conferencing company, started doing business in Europe a couple of months ago. Yet Placeware Chief Executive Barry James Folsom has never seen his new European headquarters, which is outside London. He knows Nigel Dunn, the general manager who is launching the new operation. But he's not quite sure of Dunn's nationality. Folsom is quite sure of one thing, though: Placeware's new European unit is already doing so well that he expects it to generate 6% of his company's projected $7 million in revenues this year.

Folsom's detachment from the European end of his business isn't as odd as it sounds. His company didn't actually launch the subsidiary itself. Rather, it subcontracted that job to London-based Protégé Software Ltd., a new sort of Internet business that specializes in launching U.S. and Canadian Net companies in Europe. Protégé CEO Larry Levy calls the concept "virtual management" for companies that want to quickly get up and running abroad without dealing with recruitment, unfamiliar labor laws, language differences, and the many other hassles of gearing up European subsidiaries. It also incorporates elements of the old business incubator concept -- housing the fledgling subsidiaries in one facility with common administrative services.

The Internet wave that first hit the U.S. two years ago is washing over the Old World now, and Protégé is riding it. Levy, 35, has already started up the European units of 22 companies, 19 from the U.S. and 3 from Canada. Now Protégé is about to get a big boost. On Nov. 1, the veteran California venture capitalists at Los Angeles-based Global Retail Partners plan to announce a $20 million deal to take a "substantial" stake in privately held Protégé. Levy expects to use the money to expand Protégé rapidly with an eye to taking it public eventually. It's GRP's single biggest investment to date -- though its partners in the past have backed the likes of Starbucks, Beyond.com, and other hot startups.

"NORTH OF 50%." GRP partner Yves Sisteron figures the company could become a smaller European version of the hugely successful CMGI, a publicly traded U.S. venture-capital fund that specializes in Internet companies. "We believe it's the best-positioned company to provide true Internet incubator services in Europe," Sisteron says. "And it's clear that the rewards are great for those who make seed investments in Internet companies."

Four-year-old Protégé already claims one advantage over most of its U.S. Internet ilk. Levy says the London company is hugely profitable: It will turn a profit "north of 50%," he says, on revenues this year of $12 million to $14 million from management fees, systems integration, and other services for its clients. In addition, Protégé typically takes an equity stake of 0.5% to 3% for its services. The "cherry on the top," Levy says, will be the unrealized gains on stakes in its client companies, many of which are growing rapidly but have yet to go public. Sisteron says those shares could one day be worth millions.

Protégé's forte is making its U.S. clients' move into Europe relatively painless. Protégé starts by recruiting a seasoned general manager to launch the client's operations. For the first couple of years, the general managers work for Protégé. They spend a few weeks developing a European expansion plan, which the client has to approve. Then the general manager hires employees and sets up the operations, which belong to the client company.

The general managers all work out of the same London-area office building, using common secretarial, accounting, recruiting, and other services that Protégé provides. Sharing services cuts costs and frees managers from the worry of building back-office operations. And both Protégé and the managers it recruits generally have well-thumbed Rolodexes of high-tech contacts around Europe. After a couple of years, if everything works out, the client company sets up its own European operation. It then has the option of signing on the general manager as its own employee.

MEDIA GIANTS. The experience of Paul Lego, CEO of San Mateo (Calif.) Virage Inc., who signed on with Protégé two years ago, seems fairly typical. In the case of Virage, a private outfit that helps big media companies like CBS and Walt Disney put video content on the Internet, Protégé found Mark Rattley, now 38, who had been a European sales honcho for Sun Microsystems. Rattley has signed on such marquee-name clients as the BBC and Reuters in his first year on the job. Lego expects Europe to contribute $2 million of Virage's projected $7 million to $8 million in revenues this year.

Lego doesn't mind giving up so much control to Protégé. The U.S. startup couldn't have found better managers, he contends. "[Rattley] is a guy I probably couldn't have gotten on my own," Lego says. "Working for Protégé, he got equity. But he also got a safety net. If Virage didn't work out, Larry could always place him with another company."

Having the option of hiring their Protégé general managers helps the companies graduate successfully. ClickNet Software Corp. of San Jose, Calif., for example, plans on Jan. 1 to hire Iain Franklin, a former manager with a British software distributor who has been building up ClickNet's European operation for two years. "He's a gem," says Lou Ryan, CEO of the privately held Internet software company, which expects 22% of its $16 million in sales this year to come from Europe.

It's not hard to understand Protégé's profitability once you examine its deal with Virage. Lego says Virage pays Protégé a fixed annual fee of about $165,000 for its services. On top of that, Protégé gets 15% of Virage's European sales -- or about $300,000 this year. It has the right to take half of that second payment in Virage stock, which would hugely boost profits if Virage launches a successful IPO soon, as it hopes to.

THE BIGGEST WINNER. With the cool $20 million GRP is handing him, Levy hopes to dramatically increase Protégé's profile. The company still is managing the European units of 15 client companies, and Levy wants to more than double that in a hurry to 35 to 40 companies. He has also started up a new Protégé unit to incubate homegrown European Internet companies. There are already two in the hopper. Plus, Levy is expanding a systems-integration arm, which currently accounts for nearly half of Protégé's 82-person staff.

If Protégé does become a juggernaut, the biggest winner will be the South African-born Levy himself. He bootstrapped Protégé into existence with money he earned by founding the European unit of Delrina, a Canadian software company that was eventually bought by Symantec Inc. Delrina founder Dennis Bennie also backed Protégé. But Protégé says Levy retains a 70% stake.

Like most Internet entrepreneurs, Levy is racing to stay ahead of a growing crowd of competitors. Venture capitalist Sisteron counts perhaps 15 new companies that nurture Internet startups in London alone, and there are others in France, Germany, and elsewhere on the Continent. And as competition heats up, it will be ever harder to nab the best clients and general managers.

For now, though, Protégé's early experience as a European company-starter seems to give it an edge. Initially, Chris Hollenbeck, a principal at San Francisco's H&Q Venture Associates, a spin-off from Hambrecht & Quist, was skeptical of the value of Protégé's services. Now, he recommends the company to Internet startups that his $350 million fund is interested in. "I'd say it accelerates their entry into Europe by 6 to 12 months," Hollenbeck says. In Internet time, that's an eternity.

By Thane Peterson
Contributing Editor, Business Week Online