In 1996, money was still flowing freely in Silicon Valley and the creators of the Whistle InterJet, the first Internet appliance for small-to-medium size businesses (SMEs), were the eager recipients of $10 million in venture capital funding. But as many start-ups discover, $10 million doesn’t go as far as one may think. With lower-than-expected revenues, Whistle’s chances for a second round of funding look bleak, and its founding partners are faced with three potential strategies:<UL>
<LI>Look for a new distribution model in the US
<LI>Find a strategic partner
<LI>Enter new international markets
Each potential strategy has its advantages and disadvantages, say Ha Hoang, Associate Professor of Entrepreneurship and Rudolf and Valeria Maag Fellow in Entrepreneurship at INSEAD, and Michel Darnaud, principal at Rialto Ventures.
InterJet is the brainchild of three former investment bankers who quit their Wall Street jobs in the early 1990s to start a company on the US West Coast. Soon after the trio developed what would be the first browser-based network management tool allowing SMEs to connect to an ISP via a phone line and connect their internal network on the other end, allowing each employee to have access to e-mail and the Internet, while allowing the company to create an intranet protected by a rudimentary firewall. All of this could be set up in a matter of hours, versus the days or weeks of traditional solutions. With industry reports putting the number of SMEs (companies with fewer than 100 employees) at around 6.5 million in 1996, the market appeared wide open.
Despite rave reviews from analysts and industry publications, the InterJet took off much slower than expected and failed to meet initial sales projections. For several years, management shifted between two strategies: the first business plan called for partnering with the top two ISPs to sell hundreds of units each month; when this failed to materialize, they shifted to a volume approach, with the idea of partnering with over 100 ISPs in the hopes that if each sold just a few units each month, they could still reach their sales quota.
Another year and another round of funding later, sales in the US remained at less than 50% of initial projections, leaving its management to explore the three strategies outlined above.
While looking to partner with a telecommunications firm in Japan, Whistle was approached by Ricoh, the copier giant. Ricoh saw in Whistle the possibility to break away from its stodgy image and to diversify, while Whistle valued Ricoh’s strong presence in Japan as well as among SMEs. Despite some significant localizations costs (for example, to reengineer the product to support Japanese characters), Whistle went ahead with a partnership agreement.
Still keen to partner with a telco, Whistle responded when telecom giant NTT came calling. Its impeccable reputation could only help to raise Whistle’s credibility as an international partner. But, like the Ricoh deal, Whistle would need to make significant concessions. NTT wanted to distribute the InterJet under its own name and wanted its version to have a higher speed connection than Ricoh’s as well as major modifications to the user interface.
Both partnerships turned out to be financially successful, and by 1998 Japan represented 60% of Whistle’s revenues. As Whistle looks to continue its expansion to other territories, its management decides that it must define a set of rules that will ensure adequate return on investment. The main issue they face, say Hoang and Darnaud, is: what should be the threshold for accepting a new customer and taking on the necessary localization?