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June 22, 2004 

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 Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot 6/22/2004
The mission of Going Global is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė In part two of a two-part Q&A, FastRoot CEO Terry Howerton says ďunequivocallyĒ that his Chicago company would not exist as a successful and growing business had its team not been global. International columnist Michael Muth also queries Howerton on outsourcing, due diligence and organized crime.

Michael Muth: Have you had to deal with organized crime in the Ukraine?
Terry Howerton: No. Though bribes are still part of the corrupt oligarchy economy, it doesnít consume the entire economy there and it doesnít really reach into our team.

MM commentary: When I worked in Rzeszow, Poland in the southeastern part of the country, I wanted to visit Lvov, Ukraine, which is just across the border. All of my Polish colleagues warned me against this visit because it would be obvious Iím American and Iíd be a target of the mafia there. I was disappointed but a little relieved that I wasnít able to make the trip.

MM: What about Kuchma?
TH: Well, the president of the Ukraine isnít well liked by the U.S. and thatís a justified position. Heís a relic of the Soviet days and his administration bleeds corruption. Still, that doesnít really affect us and the days are numbered for that group. Capitalism will continue to push them aside.

MM commentary: Depending on the depth of the relationship with his partners, he should be wary even if heís not aware of the influence of corruption on his partners. Heís still relatively small with 18 developers. As his team there grows, it may become more of a problem.

MM: Exchange rate risk?
TH: We pay in U.S. dollars.

MM commentary: The hryvnya/dollar exchange rate is averaging 5.48. The exchange rate prediction is probably realistic as the hryvnia has been relatively stable since the onset of economic growth in 2000.

Yes, heís presently insulated from exchange rate changes by only working in U.S. dollars, but since the Euro has appreciated considerably against the U.S. dollar, his partners could ask for more US dollars to compensate for the depreciation in its value versus their currency if the hryvnya starts to track with the Euro.

His partners currently are assuming the exchange rate risk. He could look at taking more control, pay them in local currency or Euros and hedge those risks with futures contracts traded right here at the Chicago Mercantile Exchange.

MM: EU expansion?
TH: The free market will drive the Ukraine on the path to becoming a member of the EU.

MM: Do you feel your intellectual property is protected there?
TH: We have signed documents and there is some maturity in the law today, but in the end, itís the strength of your relationships there that are the real protection. Thatís not really much different than here.

MM commentary: In an environment with weak international property rights legislation and enforcement, the presence of many talented programmers has encouraged piracy and the flagrant misuse of software. While I again agree that relationships ensure success, he should be sure to keep his partners happy. If he doesnít, he wonít have much recourse there.

MM: How did you come to your current structure?
TH: We used the former Altheimer & Gray (which at the time was the largest American law firm in Kiev) to help us with structuring the venture.

MM: What mistakes did you make? What frogs did you kiss along the way? What would you do differently now?
TH: We asked for lots of referrals and scoured the Web and kissed a lot of frogs, as you say. In the end, some might say we spent too much time getting to this point. Still, Iím convinced itís all about the relationships we formed and that only comes with time. No amount of money buys real friends and friends build successful teams.

MM: How did you find your current partners?
TH: We started with one small project with just a couple of guys there and realized that there was a personal connection. We just grew up together from there.

MM: How were you able to do your due diligence on a foreign partner?
TH: Itís not easy. Itís done mostly through trial and error. Thatís why it takes patience to get to the point we finally reached. We also sought out independent relationships with our law firm and other people who were doing all sorts of business in the region.

MM: India seems to be the current rage for outsourcing. Why not go there or Russia?
TH: We did. India is a market thatís saturated. Itís tough to find real quality and entrepreneurial teams now. Most of the best talent is already working for large firms and it wasnít possible for us to ďmergeĒ our business culture with a pre-existing group.

Much of finding the right partner can be hit and miss and a lot of it comes down to luck. In many ways, eastern Europe is the India of 10 years ago (and not because itís lower cost). There are some fantastic and educated workers entering the global free market there right now.

MM: How should small technology firms approach international relationships?
TH: Itís all about building long-term relationships and having the patience to see them through. Also, you can find a U.S. partner thatís already got the relationships you can leverage.

MM: What resources do you suggest to research the Ukraine and international outsourcing?
TH: The Enterprise Group of Funds are a good source of business research. Itís American aid in the form of investments being made in the region. They can be anxious to see businesses succeed.

MM: Do you work with any other foreign partners? How?
TH: Yes. We also work with a small group of six in Bucharest, Romania. Two of the guys there have their doctorate degrees. They have been a part of some projects but they arenít a core part of our team.

MM: Where are your customers?
TH: Our customers are in the U.S. and primarily in the Midwest. Many are in Chicago.

MM: Why are you based in Chicago as opposed to the east or west coast?
TH: When I launched the company, we came here because we wanted to target mid-market firms. If you want to serve the Fortune 500, go to New York. We thought the mid-market where buyers sat out much of the technology adoption a few years ago was a good opportunity.

There are more of those companies in Chicago than any other city in the world. There are something like 1,150 companies in Chicago that match that description. We also wanted to be in the position to invest our business model into high-tech start-ups. There was a vacuum in Chicago for real and meaningful start-up incubation.

MM: How did you prepare for this venture? School? Internship? Study abroad? Prior experience?
TH: Iíve been an entrepreneur my whole life. I started my first company when I was 15 and wouldnít be happy doing anything else. Software and IT is a pretty universal language.

MM: What do you have to say on the politics of outsourcing?
TH: Outsourcing for small and medium-sized businesses is going to be one of the hottest growth sectors in IT. Much of the hysteria over outsourcing lately has more to do with politics than reality and thereís no denying that some U.S. jobs have been replaced by offshoring.

Something thatís mostly missed in the debate, though, is how many jobs have been created here because of it.

I can say unequivocally that FastRoot would not exist as a successful and growing business in Chicago had we not built a global team. With no venture capital available, entrepreneurs created their own currency and used the labor differential to fund real growth.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muthís full biography.

Previous Columns:
Q&A: FastRoot CEO Terry Howerton on Blended Chicago Approach (6/15/2004)

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