GlobalNova: Entrepreneurship and Corruption in Brazil

Company Origins and Initial Financing

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). The politician approached a local business tycoon — whose family controls the largest steel company in Brazil, Gerdau Group — for start-up financing for "a company to exploit the internet." (Gerdau, 2011) The tycoon, thinking that the politician was looking for the usual political handout, readily agreed. He frequently mentioned that his family recognized the realities of making sure that his representative in Brasília was treated well. He was later astonished to learn that his money had actually been used to fund the early operations of GlobalNova. (Consultant, 2011)

VoIP Technology and Early Development

From that initial, loosely defined objective, the engineer decided that the best opportunity would be to use the internet to transmit international long-distance telephone calls from the expatriate Latin American community in the United States — estimated at 50 million people and growing rapidly — to their homelands. (South Florida, 2008)

After some initial technical exploration, the engineer discovered that the public internet was not really designed for this function and that performance would be unacceptable. He therefore used a portion 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). The engineer hired an instructor of computer science from the local university, who recruited his best students at very modest cost — a clear benefit to both the instructor and the new company. It took time, but eventually the research team produced brilliantly useful systems and procedures. A significant part of the delay was attributable to the complete lack of defined business requirements; the engineer literally constructed the business plan as he went along. (Consultant, 2011)

Miami Headquarters and Major Funding

The engineer opened a headquarters office in Miami, FL, and recruited a team of Brazilian expatriate marketing and accounting professionals to run it. Miami was chosen because of its geographical status 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)

Among the recruits was a talented RS-born investment banker, previously employed by JP Morgan and Morgan Stanley, who joined the company as CFO. The CFO subsequently convinced the engineer to recruit a consultant to serve as non-executive Chairman of the Board of GlobalNova. The rationale for that assignment was related to the decision by the engineer and the CFO that they needed a credible American face to persuade U.S. institutional investors to provide large-scale funding. The CFO and the 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 company's employees lived in Brazil. The CFO and the consultant visited BNDES at its Rio de Janeiro headquarters, but the agency showed no interest in funding GlobalNova. It later became clear that the expected bureaucratic financial contribution might have made a meaningful difference. Moving to Plan B, the Miami office of NationsBank was hired to market the funding round, 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 NationsBank, JP Morgan, and GE Capital. (Consultant, 2011)

The investment thesis was based on an enormous unfilled need and compelling economics. At that time, AT&T charged 50 cents per minute for a call from Florida to São Paulo. GlobalNova proposed to charge five cents, of which two cents would be profit. With the potential for 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 later looked back on 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 while consumer costs fell by 22%. Woolley titled his article "Telecom Investors: The 21st Century's Biggest Chumps." (Fortune, 2011)

Operational Issues and Leadership Failures

The engineer had other business interests, being a serial entrepreneur, but had no real training in running a company. His management style was to arrive in town once or twice a month, intimidate the accounting and sales staff by threatening to fire them if they did not produce more business, and then leave. He conducted the business as a personal fiefdom, burning cash at a rate of $300,000–$400,000 per month, for another year before the U.S. investors concluded that the situation was out of control. Even then, the investors were powerless to take corrective action. The terms of the Series B investment tranche granted them a 40% stake in the company with the right to seat only two of the six board members. However, the Series B documents also provided for a ratcheted reset of ownership if the company failed to meet its revenue target in the year 2000. The company missed the target by a substantial margin, and the change of majority ownership and control was accordingly realized. (Consultant, 2011)

The engineer was removed as CEO and board member, and the 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 a new permanent CEO. The consultant's first step was to clarify the duties and responsibilities of the executive team, which immediately revealed a critical need for a VP of Sales — a function the engineer had egregiously neglected. A search began immediately, and an experienced telecom sales veteran was hired. Under the consultant's guidance, the company achieved profitability and apparent stability within six months.