Global Nova Case Study Globalnova a Case Case Study

Global Nova Case Study

GlobalNova

A Case Study in Entrepreneurship and Corruption

Company Origins

GlobalNova was conceived by a Brazilian Engineer while working for IBM. He allied himself with a Brazilian Politician from the southernmost State of Rio Grande do Sul (RS). Politician approached a local business Tycoon, whose family controls the largest steel company in Brazil, for start-up financing for "a company to exploit the internet." (Gerdau, 2011) Tycoon, thinking that Politician was looking for the usual political hand out, readily agreed. Tycoon frequently mentioned that his family recognized the realities of making sure that his representative in Brasilia was treated well. Later he was astonished to learn that his money had actually been used to fund the early operations of GlobalNova. (Consultant, 2011)

Voice over the Internet

From the initial "fuzzy" objective, Engineer decided that the best opportunity would be to use the internet to transmit international long distance telephone calls from the ex-patriot Latin American community in the United States -- estimated at 50 million people and growing rapidly -- to their homelands down south. (South Florida, 2008)

After some initial technical exploration Engineer discovered that the public internet was not really designed for this function and that performance would be unacceptable. So, Engineer used some of the initial funding to set up a research laboratory in Porto Alegre (RS) to write the software necessary to enable and control the transmission of voice over internet protocol (VoIP). Engineer hired a Professor of computer science from the local university, who recruited his best students at a very modest cost of talent, clearly benefitting both Professor and the new company. It took a while, but eventually the research team produced brilliantly useful systems and procedures. A big part of the delay had to do with the complete lack of definition of the business requirements. Engineer literally made up the business plan as he went along. (Consultant, 2011)

Headquarters in Miami

Engineer opened a headquarters office in Miami, FL and recruited a team of Brazilian ex-patriot marketing and accounting people to run it. Miami was chosen because of its geographical claim as the gateway to Latin America. He was also impressed by other factors such as tax concessions, available capital, transportation, communications infrastructure and a multicultural workforce. (Enterprise Florida 2010) Notwithstanding the Florida location, he was correct to incorporate the company in Delaware, the premier legal home to companies around the world. (Delaware, 2011)

Major Funding

One of the recruits was a talented RS-born Investment Banker, previously employed by JP Morgan and Morgan Stanley, who joined the company as CFO. Subsequently, CFO convinced Engineer to recruit Consultant to serve as non-executive Chairman of the Board of GlobalNova. The rationale for that assignment was related to the decision by Engineer and CFO that they needed a credible American face to persuade U.S. institutional investors to provide large-scale funding for GlobalNova. CFO and Consultant prepared a persuasive Private Placement Memorandum and began the marketing process. The natural source of funding for GlobalNova could have been the Brazilian Development Bank (BNDES), since the vast majority of the employees of the Company lived in Brazil. CFO and Consultant visited BNDES in its Rio de Janeiro headquarters, but the agency showed no interest in funding GlobalNova. Later, it became clear that the expected bureaucratic financial contribution might have made a difference. Moving to Plan B, the Miami office of Nations Bank was hired to market the round of funding, initially seeking $30 million. The funding was completed near the height of the internet bubble in the late 1990s, for a total of $10 million. The investors were first-tier institutions led by Nations Bank, JP Morgan and GE Capital. (Consultant, 2011)

The investment thesis was based on the huge unfilled need and compelling economics. At that time, AT&T charged 50 cents per minute for a call from Florida to Sao Paulo. GlobalNova proposed to charge five cents, of which two cents would be profit. With the potential for millions and millions of minutes per month, the revenue stream seemed limitless. The investors did not foresee that the entire telecommunications marketplace was about to collapse. Scott Woolley of Fortune recently looked back upon the decade of 2000-2010 and observed that the number of high-speed residential internet connections increased from two million to 74 million and that cell phone usage tripled. All of this expansion of power was accomplished with a total reduction in consumer cost of 22%. Woolley titled his article Telecom Investors: The 21st Century's biggest chumps.(Fortune, 2011)

Operational Issues

Engineer had other business interests, being a serial entrepreneur, but had no real training for running a company. His management style was to arrive in town once or twice a month, terrorize the accounting and sales people, threatening to fire them if they didn't produce more business, and then leave. Engineer conducted the business as a personal fiefdom, burning cash at a rate of $300-400 thousand per month, for another year before the U.S. investors concluded that the situation was out of control. Even so persuaded, the U.S. investors were powerless to take corrective action. The terms of the Series B. investment tranche granted the U.S. investors a 40% stake in the company with a right to seat only two of the six board members. However, the Series B. documents also provided for a ratcheted reset of the ownership if the company failed to meet its revenue target in the year 2000. In the event, the company missed the target by a substantial margin and the change of majority ownership and control was realized. (Consultant, 2011)

Interim CEO

Engineer was removed as CEO and board member, and Consultant was installed as interim CEO while retaining the Chairman's role. The agreed goals of the interim assignment were to: assess the operational capabilities of the company, take needed corrective action and recruit the new permanent CEO. Consultant's first step was to clarify the duties and responsibilities of the executive team -- revealing the crying need for a VP of Sales. Engineer had egregiously neglected the management of the sales function. A search was started immediately and an experienced telecom sales veteran was hired. Under Consultant's guidance, the company achieved profitability and apparent stability within six months.

Corruption and Demise

Brazileiros are used to living with corruption, as it is commonplace and widespread in society and government. It is so pervasive that it has become a normal part of life. Constituents routinely sue elected officials to get their attention, which usually results in money changing hands to resolve the dispute. The administration of Fernando Henrique Cardoso was rife with corruption scandals. Political and bureaucratic corruption was fundamental to the industrial state monopolies, not to mention the deliberate favoritism in the granting of licenses and allocating government funds. This rampant corruption negated the publicly popular laws enacted in a spirit of encouraging entrepreneurship. (Palifka, 2011)

The widespread corruption in Brazil has taken its toll on entrepreneurship in several ways. By limiting access to government funds and permits, the government agents on the dole direct public support for entrepreneurial activity to their family and friends, and often to people who can afford to pay for access to this privileged circle. In a very real way, personal relationships, whether familial or commercial, represent a kind of scarce social capital. Capital and contracts are not directed to the most deserving proposals, but to those with sponsors within the governing agency. Coincidentally, this endemic corruption reinforces the belief that the only paths to commercial success are sometimes through luck but more often through bribery, and certainly not through education. Therefore, the financial returns from education are widely thought to be meager, resulting in higher school dropout rates than would otherwise be the case if there were no corruption. (Palifka, 2011)

GlobalNova was operating without a proper license in Brazil, leading to a lawsuit filed in the state court of Rio de Janeiro by a Brazilian long-distance telephone operator. He couldn't prove it, but Consultant thought that this devastating lawsuit was probably initiated by Engineer's timely revelations to the Brazilian telco. Aided by the influence of Politician, the Ministry of Telecommunications finally issued GlobalNova a provisional operating license. Consultant discovered that the general manager of Brazil had been involved for some time in bribing an employee of a local telco to allow GlobalNova to use the telco's facilities for no cost. He also learned that the judge in the state court had been bribed to issue an injunction which effectively shut down the Brazilian operations despite the license being granted. Consultant learned from first-hand experience that Brazil is indeed one of the most corrupt countries in the world. (Consultant, 2011)

Over the next two years, the economic climate declined in the wake of 9/11 and the glut of telecom capacity in Latin America. GlobalNova never recovered from the loss of its primary market in Brazil and ultimately the investors agreed to sell the company at a fraction of.....