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Two veteran rock stars are sharing a joke under the late-afternoon June sun as around them American- and Chinese accented money men sip cocktails and glance towards a Tesla Roadster being driven silently across the manicured lawns. Nearby, a huddle of senior executives from the likes of Facebook, Google and Amazon is debating AOL's disastrous disposal of Bebo, the business opportunities offered by the iPad, and where the venture-capital titans here tonight will be investing their next billion dollars. The talk is of "hundred-million-dollar exits" and start-up "burn rates" -- yet despite all the aggressive deal-making, this is no Silicon Valley power powwow. We're 9,000km from California -- at a charmingly English Four Seasons Hotel in rural Hampshire.
The Founders Forum, a by-invitation private gathering that has temporarily raised the hotel's GDP to that of a mid-sized east European nation, unites successful business founders -- mostly from the online, media and tech sectors -- with investors, politicians and power brokers, plus some music legends and at least one well-known model-and-actress. As dinner gets underway, it's striking how many of the high-profile start-ups being lauded are British -- among them Autonomy,
Ocado, Shazam, Net-a-Porter, Mind Candy, Betfair, mydeco, Wonga, TweetDeck and Plink, an image-recognition software firm so hot that Google just bought it. Kristian Segerstråle, who last November, at 32, sold his Chelsea-based social gaming firm Playfish to Electronic Arts (EA) for a sum approaching £260 million, takes the microphone to update the crowd on its progress: from 25 million active monthly users to 60 million today. "Our reverse takeover of EA," the Finnish-born entrepreneur declares with a grin, "is well under way."
The audience -- among them top-rank investors from Accel Partners and Index Ventures -- laughs knowingly at Segerstråle's chutzpah, as if it's only right that a barely three-year- old British start-up should now be aiming to supplant a five-billion-dollar California-based gaming giant. The message, emanating confidently from the dining room, is watch out, Silicon Valley. Europe -- and especially Britain is now ready to compete, wielding both the entrepreneurial startup culture and the VC backing to create the next world-dominating Google or Twitter.
Yet as Playfish was launching its first social-network-based game in 2007 -- an IQ tester titled Who Has The Biggest Brain? -- an American entrepreneur called Mark Pincus was also becoming excited about Facebook's vast growth creating a gap for a new category of social games. Pincus, determined to move fast, launched Zynga, which began by creating card games such as
Texas Hold 'Em and Blackjack.
Both Zynga's and Playfish's user bases grew rapidly. Over the next year, venture capitalists poured millions of dollars into the two firms. By 2009 both had a string of hits, including Playfish's Pet Society and Zynga's mega-hit Farm- Ville: played by tens of millions of people, it went on to become Facebook's most popular game. Yet whereas Segerstråle decided, that November, to accept an offer from EA that might eventually be worth $400 million, Zynga, a month later, took a new $180 million investment from Digital Sky Technologies, a Russian firm that had invested in Facebook. Based on a multiple of Zynga's rapidly growing revenues, the New York Times estimated that the deal implicitly valued the firm at up to $1.5 billion -- with others suggesting twice that. Zynga had now raised $219 million in three rounds of venture capital (as well as an undisclosed amount from an early angel investor, LinkedIn's Reid Hoffman). By contrast -- according to the CrunchBase technology database -- prior to its sale Playfish had received just $21 million in seed funding and venture capital.
By all accounts, both companies' stories suggest untrammelled success. But the background to the two firms' nearly parallel lives also provides some revealing insights into both the opportunities and the challenges of creating a high-tech start-up in Europe today. Could Playfish's London origins have held it back from reaching for the big time?
There's certainly less investment money in Europe than there was. According to Dow Jones VentureSource, $4.7 billion was raised last year in 979 funding rounds across the continent, compared with $7.5 billion in 1,234 rounds a year earlier. And the US remains an order of magnitude ahead of Europe in terms of backing start-ups.
Nine hundred and eighteen European companies attracted $4.1 billion last year; by contrast, 4,390 American firms took $21.4 billion.
That's not keeping globally competitive, billion-dollar tech firms from emerging in Europe. In fact, since 2004, seven of the 25 tech companies that went public or were acquired for at least $1 billion were Europe based -- from Skype and TeleAtlas to TomTom and Q-Cells. "Great technology companies have been built here," says Davor Hebel, a principal at London VC firm Fidelity Growth Partners, noting SAP and Nokia. "We do have global leading firms," says Julie Meyer, CEO of Ariadne Capital, a "super angel" firm that funds tech businesses from London.
According to Niklas ZennstrÖm, the good news is that today, smart European start-ups are more likely than ever to become the next global giants. He should know: Skype, the London-based firm which he cofounded and sold for $3.1 billion to eBay five years ago, remains the world's biggest telecoms business, with more than half a billion users and serving around 13 per cent of all international phone calls. "Now is the healthiest [the European start-up market] has ever been," Zennström says. "When we were seeking funding for Skype in 2002-03, we went to 26 different VCs, asking for €1.5 million in exchange for up to a third of the company, but no one in Europe wanted to invest and we had to bootstrap it ourselves. We said we had a great idea, great technology, we wanted to go out and change the telecommunications industry -- but they saw something they hadn't seen before, and they didn't want to bet on that."
Today, he says, the whole culture in Europe -- from talent to funding -- is "so much healthier: you have people who take risks, more entrepreneurs, and more investors who know what it takes to bet on people rather than on companies with cash flow. An ecosystem is being built."
Zennström now invests in almost30 other start-ups through his London- based Atomico fund, which recently raised $165 million. A lack of funding is no longer a barrier to startups in Europe, he says. And although the risk-taking culture has still fully to cross the Atlantic -- "in Europe, when you fail, you fail; in the US, you gain an experience" -- he says it's no longer the case that its vast, English-language market gives a US start-up an edge over one based in our linguistically and culturally more divergent continent. "Ten or20years ago the US market was so important, but today China is a larger car market than the US, and Brazil is growing much faster. In the next decade, it's going to be more important to be global. With Skype, we expanded internationally from day one. If you think globally from the start, you're better off." David Yu, CEO of Betfair and former vice president, engineering, at AltaVista, believes this is one area in which European ventures have an advantage. "European businesses tend to be more global from the off," he says. "Take Betfair: we knew that we would start in the UK, but this was a borderless international business."
Meanwhile, tech hubs are thriving across the continent, especially in Paris and Berlin's Mitte district. Yet the real centre of gravity for start-ups is London, which provides the deepest pool of technical, legal, financial and marketing expertise. "London is absolutely dominant in Europe," says Fred Destin, a partner at Atlas Venture, a VC firm that operates in both Europe and the US. Rapidly expanding online music service Spotify, for example, was launched in Stockholm in 2006 by cofounders Daniel Ek and Martin Lorentzon, but has since set up its headquarters in London.
And although entrepreneurs on this side of the Atlantic usually receive far less funding than their US peers -- on average, since the start of the decade, early-stage European start-ups have received approximately one third of the financing of US rivals -- this has tended to make them more capital efficient. "On average, a $100 million exit [sale] in Europe has received $40 million of VC funding, compared to $70 million in the US," according to Mattias Ljungman, a partner at Atomico. He adds that, adjusted for size, the European VC industry has three times as many exits that provide a return of ten times the original investment. Still, far more US ventures are able to raise capital in the first place.
Brent Hoberman, the Lastminute.com cofounder who now invests through PROfounders and helped to create the Founders Forum, adds that Europe has far fewer "spray and pray"-style VCs willing to take smaller punts on large numbers of start-ups. "Being able to take a diverse approach and bet small amounts on lots of companies, and bet that one in 20 or 30 will win -- there's less of that in Europe."
When European entrepreneurs (and the VCs backing them) do want to sell, the most common buyers are US tech firms. This can be a disadvantage. "The ecosystem of buyers is almost 100 per cent American," Destin says. "So the unfair advantage of US start-ups is that they have time to build close relationships with US buyers."
US firms also have the well-established and highly liquid Nasdaq and NYSE exchanges to explore initial public offerings (IPOs), whereas Europe hosts numerous small national exchanges with more limited cash flow. "Healthy exit markets don't really exist in Europe," says Scott Sage of the British Venture Capital Association, which argues for the creation of a pan- European stock exchange. Former Last.FM chair Stefan Glaenzer, a serial European entrepreneur and investor, agrees that this is a problem. "When we sold Last.FM, we were approached by maybe ten different firms, all US-based. Not a single European one."
But what's changing is the emergence of a generation of successful European entrepreneurs, such as Zennströmand Hoberman, that is starting or funding the next ventures. Software engineers and management from Bebo, Betfair, Last.FM, Business Objects, MySQL and Skype, among others, have all gone on to help to launch and grow new ventures across Europe. "In the past five years, an ecosystem of entrepreneurs and venture capitalists [has been] emerging which understands you can build a billion-dollar business in Europe," says Destin.
Such an "ecosystem" is what has allowed Silicon Valley to thrive. "Nothing on Earth has the decades of tech history like the Valley," says Glaenzer. Companies ranging from Hotmail to Google, PayPal to Intel, have created an enormous, interlinked network of high-net worth individuals with deep technical expertise, experience of taking a company public, commercial savvy and a lengthy contact list of like-minded peers. And nearly all are within easy travelling distance of the same coffee shops in a few square kilometres of California. "You need entrepreneurs, financing, universities, digital companies and the right mindset and culture [close by]," Glaenzer says. For all the buzz around London's Silicon Roundabout, a cluster of startups centred around Old Street, Europe lacks what Glaenzer calls this "micro-cosmos". "It's all there, but not within a few square miles."
Some of those successful founders are also rethinking the venture capital model entirely. Lars Hinrichs, whose Hamburg-based XING business-networking platform went public in 2006, is now making "pre-seed" investments in good prospects through his London-based company HackFwd. Within 72 hours, he promises "Europe's most passionate geeks" an opportunity of enough funding to take them through the next year, as well as access to advice on skills ranging from marketing to finance. "Because the market for tech is borderless, new European tech companies have the potential to be incredibly successful," Hinrichs says. "We believe that there will be far more Skype sized successes in the future."
Philip Petersen is pitching his company, Adinfa*,* to a room filled with 50 investors and other entrepreneurs at a "low-carbon start-up" event in Bath. He and his business partner, Craig Waddington, left their corporate roles to set up their own business in 2007, bootstrapping their way as they developed an online application that helps companies monitor their data centres' energy consumption. Petersen's pitch is well received: he has a working product, customers such as Tiscali and Cisco on board, and a smart business plan. Since last summer, he's been working to raise about £1.25 million to fund expansion.
After the formal part of the conference breaks up, Peterson networks with a VC, an angel investor and a business adviser, but ultimately walks away empty-handed. And not for the first time. "VCs here don't tend to do anything early stage. They don't do any real venture capital, it's more about derisking," he says later. "A common comment is that, 'This is really interesting, but come back when you've got a million in revenue.' A million in revenue doesn't sound like a start-up to me."
Yet in the US, the niche that Petersen has identified is being rapidly funded for expansion. Over the past 18 months, the start-up SynapSense, for example, has raised $7 million, Power Assure $18.75 million and Sentilla $7.5 million. For now, these firms are focused on building the US market, leaving a gap for Petersen in Europe.
But as he sees it, UK investors don't understand his company's niche. "Few UK VCs have any startup experience or have done anything more risky than working at an investment bank," he argues. "Most US VC firms have people who've been there, done that."
Risk aversion, as Philip Petersen discovered, is a crucial barrier that holds back European start-ups. "All of us are less willing to take risks than we pretend," says Brent Hoberman. "Europe simply has fewer people with these capabilities, so it's more risk averse, because it's harder to assess whether a deal is going to be something," says Hussein Kanji, a former partner at US VC firm Accel who also spent time at Microsoft and Sun Microsystems before coming to London. Take Facebook, which received $12 million in first-round funding from Accel in 2005, when social networks were still largely unknown. "It takes a lot of balls to write a $12 million cheque," says Kanji. "But it also takes know-how and expertise."
Alastair Lukies, CEO of mobile-banking and -payments firm Monitise, knows how hard it is to launch a new venture amid sceptical venture capitalists. Monitise was set up in 2003 and is now listed on London's AIM market; it recently raised an additional £32 million on the market in what was effectively its fourth round of funding. "We've been through just about every corporate journey you can imagine," says Lukies. "Luckily I used to be a professional rugby player, so I'm used to being smashed up." In the end, he bypassed venture capitalists altogether and took a corporate-venturing route instead, spending three years being incubated within a technology firm, Morse, before spinning out on to AIM in 2007. "Corporate venturing gets a bad rap, but I think it's a fantastic model. All of a sudden, I could go out to market as the director of a major PLC."
As with Hoberman, Lukies notes a European aversion to risk. "In the UK, you get responses like, 'Ooh, not quite yet, why not keep at it for one more year and see you how get on, then come back to us.' It's bugger-all use." David Yu also stresses how the European approach pales in comparison to the US's. "Structurally, America rewards and incentivises and has that culture of ensuring entrepreneurs are able to do it again," he says. "In Silicon Valley, failure is celebrated because it means you've learned something and can apply that to your next venture. In other parts of the world, people are a bit more cautious."
One advantage of being part of the close-knit southern Bay Area tech community is the speed at which an idea can become a business. "You find the Valley will invest in a company, then six months later, Europe will make a clone," says Kanji. He cites Group on, in which his prior firm Accel invested $30 million late last year, its second main round of funding. Soon after, in January 2010, European VCs put €4 million into Citydeal.de, a German Groupon clone, which was promptly acquired by Groupon just four months later. The implication? "You're probably not going to become the global champion. The best you can do is become the regional company," says Kanji.
The difference in value between first and second place can be hundreds of millions of dollars: Playfish and Zynga is one example, but a sharper one is AdMob and Quattro Wireless, two US mobile-advertising firms.
AdMob was founded in the Valley in 2006, the same year that Quattro Wireless was set up on the east coast. AdMob grew fastest and became the subject of a bidding war between Apple and Google, with the latter snapping it up in 2009 for $750 million. Thwarted, Apple picked up Quattro Wireless this January for just $275 million. "The winner takes it all," Kanji says.
For some in Europe, though, second place appears to be just fine. This has led to accusations of "clone factories", which copy emerging US businesses with the aim of controlling a local market, before being sold off as quickly as possible. StudiVZ is one striking example: a Facebook clone launched in Berlin in 2005, it grew rapidly in Germany, Austria and Switzerland, before being sold on to a German publishing firm in 2007. "It's a local champion. It is beneficial to the ecosystem, but it's not how the West was won," argues Atlas Venture's Fred Destin. "Copycats are not the model," adds Hoberman. "What is the economic value added to Europe? They end up owned by American companies, and taxes go back to America, so it's not very productive for Europe."
However, the fact that copycat firms can start up quickly and cheaply highlights a key difference today from the dot-com boom of a decade ago: the capital requirements for internet-based companies have dropped dramatically. Today, anyone can rent cheap server space from Amazon. "Technology costs a tenth of what it did a decade ago, so many businesses don't need millions to get going," says Ariadne's Julie Meyer.
Besides, now that Silicon Valley has built the internet, any business anywhere can take advantage of it to go global."Talent can be anywhere, and I'm not restricting myself by geography," says Niklas Zennström. "This is not a business where you go door to door."
Where, though, are the European role models? Ask someone to name the first five hi-tech businesses they can think of, and their wealthy founders, and the list will likely include Google (30-something billionaires Sergey Brin and Larry Page), Apple (Steve Jobs), Microsoft (Bill Gates), Facebook (Mark Zuckerberg) and perhaps Dell (Michael Dell). It usually takes a while before a European company features on the list. And if it does, most people struggle to name its founders.
Who runs Nokia, for example? Or SAP? And which European tech bosses are billionaires? Famous and wealthy tech pioneers are in short supply to spur on the next European entrepreneurs. By contrast, the continent excels in creating retail billionaires: according to
Forbes, the richest five Europeans are all from the retail sector. None of the 25 richest Europeans made their money in technology.
In the UK, whenever examples are sought of great British innovators, James Dyson is usually celebrated. "Really, the vacuum-cleaner guy?" exclaims the BVCA's Scott Sage. "Who are the
new heroes?" Sonali De Rycker, a partner at Accel Partners, is concerned about such a lack of role models. "Entrepreneurs do not have enough people who have done it before that they can speak to and learn from, and hence the successes are just 'stories'; the multibillion-dollar outcomes just words." She believes that even though many entrepreneurs talk the talk, their ambition is lower. "We need to applaud entrepreneurs and make them the heroes. Silicon Valley founders are household names in the US.
Not so over here."
Fidelity's Davor Hebel says that too many European entrepreneurs lack "the audacity and drive to change the world". Why, he asks, is Mark Zuckerberg building up Facebook? "He could have sold at $100m, then $1bn, then $5bn." Instead, he wants to build something world-changing.
But although there is a shortfall of brand name billionaires, a growing list of financially successful European tech entrepreneurs is emerging, many of them now actively backing others. Skype's Niklas ZennstrÖm and Janus Friis are perhaps the best known; Saul Klein is another. He worked on Skype's executive team, before moving on to ventures such as Lovefilm. Klein is now an active investor and supporter of start-ups via Seedcamp, a micro seed fund. Building on Europe's retail success, Jacques- Antoine Granjon runs online fashion retailer Venteprivee.com, a 2001 start-up expected to top $1 billion in sales this year. Simon Nixon made a fortune by helping others save a fortune on Moneysupermarket.com.
Edward Wray and Andrew Black of Betfair have cashed in on the success of online gambling. Brent Hoberman, who helped sell Lastminute.com to Travelocity for £577 million in 2005, can count more than 20 new ventures that ex-Lastminute.com staffers are now involved with, ranging from Qype.com to Travelmatch.co.uk. This "ecosystem" means that London, in particular, is now attracting a growing number of talented US entrepreneurs to build and invest in new businesses.
Jason Trost, an American, came to the UK three years ago to set up Smarkets, an online betting firm, in which Stefan Glaenzer is a key investor. Trost sees several benefits in launching over here: one is the UK's visa rules for highly skilled migrants, which attract young, educated workers. "That's a major win for Europe, which VCs and the UK should tout," Trost says. He waves aside oft-cited concerns about restrictive employment laws and capital-gains taxes, but points instead to a concern about a shortage of technical talent as a problem. "It's Europe's key constraint," he argues.
Michael Acton Smith of Mind Candy, the online gaming firm behind the Moshi Monsters game, struggles to recruit talented developers. "We see great people who get resistance from girlfriends or parents who say: 'Don't take that risky start-up job, take that City job instead,'" he says. Playfish's Kristian Segerstråle felt the pressure himself: "I left Cambridge in 2000, and there's a sense of peer pressure about which consultancy or bank to join," he says. "It's seen as the prestigious thing to do.
Whereas in Stanford and the west coast, the prestigious thing to do is to join a start-up. Nobody here talks about the entrepreneurs."
Still, Segerstråle sees plenty of benefits in being London-based. For one, local start-ups are having to think globally from day one, simply because the UK market isn't big enough. "As London entrepreneurs, we should be able to take more advantage of this, because these days it doesn't matter for consumer internet firms where you are physically," he says. "I would love to see more London [start-ups] rise up and dare to dream bigger and build some world-beating companies."
Brent Hoberman, too, is upbeat about the opportunities: London's start-ups, he says, are well placed to move into the fast-growing Indian and Chinese markets ahead of their US rivals. "This is where I hope to see examples come up in a couple of years," he says.
Julie Meyer agrees. "Silicon Valley is a smart place, but it's incredibly American. In the UK, people think much earlier about how to expand globally." All that's missing, she says, is a public acknowledgement, from government and media, that -- since the financial crisis -- the tech sector has emerged as Britain's golden hope. "The technology-enabled ventures are creating wealth for society, much more so than the City," Meyer says. "Entrepreneurs are going to be creating the taxable income that all society benefits from. Let's get out and say it."
James Watson is a managing editor at the Economist Intelligence Unit. He wrote about getting a continent online in our 07.09 issue
This article was originally published by WIRED UK
