A British Incubator Turns Net Startups into Multinationals
Protégé builds its clients' European subsidiaries for a fee and equity
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
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
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
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
Business Week Online