“Conceived in Australia, born in the USA”

A discussion with Phillip Merrick, CEO webMethods www.webmethods.com  NASDAQ WEBM

webMethods is arguably the most successful “Australian” technology company in the US.

The ANZA Tech.Net. chatted with Phillip about his background, his experience in the US and what advice he might offer other aspiring entrepreneurs – or companies wishing to enter the US market.

 Phillips Background

Phillip was born and raised in Werribee, Victoria. He attended Werribee High and graduated with a Computer Science Degree from Melbourne University. His first job was with Telstra who, ironically, became one of webMethods first major international clients.

He worked for a few start up software companies in Melbourne during the 1980’s, which allowed him to gain an insight into the difficulties of starting a software company in Australia.

In 1988 Phillip moved to the US with the idea of gaining some experience before going back to Australia. It didn’t take him long to realize the environment in the US was more conducive to starting a software company. It took him 8 years and an 18-month visit back to Australia before he was able to accomplish his goal of starting a company in the US.

How it all started

It was during this visit to Australia in 1994 that the nucleus of the idea of webMethods was born. During this visit Phillip ran Engineering for Opensoftware Associates.

Phillips background was in ‘distributed computing’ and data interchange between companies. As the Internet began to grow, Phillip believed it offered a perfect platform to make it easier for companies to connect with each other in real time. After doing his R & D and planning in Australia, Phillip returned to the US in 1996 with the specific intention of building a business around this idea, and webMethods was born.

Two years of bootstrapping with limited angel investment help followed. Like many entrepreneurs, during this initial period he used his credit cards for cash flow and the finances looked precarious. As Phillip says “ it looked pretty ugly, meeting pay role was a major issue at times”.

In 1998 webMethods secured $39M in Venture Capital backing from well known companies such as Mayfield Fund, Goldman Sachs, KPMG and Michael Dell of Dell Computers.  With that capital they were able scale quickly. In essence, webMethods went from famine to feast in a relatively short period. Phillip is proud to say he only used $9 million of this initial investment, as the company has been cash flow positive for the last 15 months.

This is proof that you can build a substantial technology business on a sound business model and real technology. This is in stark contrast to the examples of burn rates experienced by many of the, now defunct, dot com start-ups of recent years.

webMethods Today

Today webMethods is the leading independent provider of software products for the multi billion-dollar business integration market.  The company has offices through out the US, Europe, Australia, Japan, and Asia and employs over 1000 people.  Revenue run rate is currently $250 million per year. Phillip believes it has the potential to be a multi billion-dollar software company some day.

We asked Phillip a number of questions that might assist other Australian companies.

What were the major obstacles for establishing, and growing, the company in the US

According to Phillip there are four major obstacles:

1. Finding funding

It took webMethods over two years to secure the necessary funding for it to scale. This took significant time and resources.

2. Gaining credibility in the market place

Because webMethods was a small, relatively unknown company it was difficult to gain the creditability with its target marquee clients. His first potential clients asked why they should entrust their business with webMethods when they only had 30 people and not much money.  Early on, webMethods had to provide incentives to win the business so they could go back into market place with great references. 

As most of its clients are Global 2000 companies this was critical for success. Fortunately for webMethods, H/P and Dunn & Bradstreet were their first customers. This gave their marketing effort enormous credibility with other potential customers.

3. Finding the right partners

Partnering with the right companies brings contacts and credibility to a small burgeoning software company. Fortunately, at a relatively early stage SAP chose to use webMethods software throughout their product line. This carried with it huge cachet, brought in many potential clients and was a significant catalyst for growth.

4. Hiring the right people

Given the business climate of the last few years finding the right people was a real challenge. webMethods ramped up in stealth mode, growing from 500 to 1000 employees in 8 months. Phillip says the rate of growth has slowed due the downturn in the market.

Operating in the Current Economic Climate

Phillip says webMethods is still in growth mode but it has slowed in recent quarters. March quarter sales were 6% short of projections. However, as most software companies were 30-50% short of projections, webMethods is doing well by comparison. Demand remains strong due to the fact that many companies need webMethods products.

Phillip says that when you experience growth rates in the 40% range quarter to quarter it is hard to control costs. In these leaner times Webmethods has reallocated resources and concentrated on controlling costs. Travel for example, which was once a $1 million a month expense, has been scrutinized, as have other operating expenses.

A good time to launch in the US?

Phillip believes that, contrary to popular opinion, now is a good time to start a business here in the US, particularly for Australian companies. Because of the less hectic business environment, people have more time to devote to the start up process.

And, like investing in the stock market, it’s best to start at the bottom of a business cycle than at the top.

Differences between doing business in Australia compared with the U.S.

Phillip highlighted two major differences brought about by the enormous size differences between the Australian and US economies

Business relationships are still very informal in Australia. Because of the size of the market in the US, there is requirement to do business in a more structured manner with more formal relationships.

Business moves more quickly and with greater activity in the US. Because of the scale of the market there are significantly greater opportunities and business sale cycles seem to be shorter.

 webMethods clients are primarily Global 2000 companies they have experienced this difference first hand. In Australia, there are just a few billion dollar companies in comparison to the US where there are over 1000.

The importance of networking in the US.

Being an unknown Australian, Phillip experienced a lot of negativity when he first arrived in the US looking to launch webMethods. He didn’t have a network he could tap into immediately. To overcome this problem Phillip built one relationship at a time over the course of years.

A former boss introduced him to a technology attorney, who had a client with angel money. The angel later became the CFO of a leading VC Fund. Through another avenue, a friend who invested in webMethods early on had a neighbour whose brother was a VC in Silicon Valley. The neighbour who invested, later became CFO at the Mayfield Fund, a company that also invested. They in turn provided the introduction to Goldman Sachs who introduced him to Michael Dell who also invested. These kinds of networks take years to build and require effort to build and sustain.

Phillip’s take on the ANZA Tech.Net.

Phillip believes the ANZA Tech.Net. has a role to play in establishing a network of leading technology executives and companies who can help others quickly break into the US market. Making the right connections is crucial to the success of establishing new technology companies in the US.

Tips to Australian Technology Companies Looking at the US market.

Build a business model to scale to the US market very early on in your development. Plan on setting up your head office or at least your sales and marketing offices in the US. Any significant business is still done face to face in the US so you have to have a presence in the marketplace. You have to do business like you are a US business to be successful here; despite the Internet and technological advances of recent years, the distance and time difference is still an impediment to being successful in the US.

Use your available networks as much as possible when you arrive.

Understand there are real cultural differences between the US and Australia, the economy, the school system, and the legal system among others. Don’t be fooled by the superficial similarities, the Americans have a different way of looking at things.

Don’t underestimate the capital you will need to become established in the US. It is going to take significant resources.

The Hybrid Model for building a US presence

Utilize the world-class engineering and computer science talent that exists in Australia and do your Research and Development there.

Set up sales and marketing operations and headquarters in a technology centre like Silicon Valley or Austin.

Find financing either from Australia or in the US to help quickly scale to the US market.

The ANZA Tech.Net. thanks Phillip for giving us his time and congratulate him on his success to date with webMethods. Long may it continue.