The European Startup Revolution Ivo Špigel the European Startup Revolution Copyright © Ivo Špigel, 2015

Home , Amiando, BT Sport ESPN, Martin Varsavsky, Mate Rimac, Nordeus, Peter Arvai

Published by Fores, Zagreb

Publishing partner Tech.eu

Cover design Dada Špigel

Copy editing Alexander D. Hoyt

Interview transcriptions Dunja Odobašić Vacula, Mirjana Markić

Layout and printing ArTresor naklada, Zagreb

ISBN 978-953-58822-0-6

A CIP catalogue record for this book is available from the National and University Library in Zagreb under the number 000919312.

For Dada and Fran – my gurus Contents

Foreword to The European Startup Revolution 9 Introduction 13

1 Zemanta Boštjan Špetič and Andraž Tori 17 2 Seesmic, LeWeb Loic Le Meur 33 3 FanDuel Lesley & Nigel Eccles 49 4 Atlas Ventures, Accel Partners Fred Destin 61 5 Skimlinks Alicia Navarro 73 6 Playfish, EA, Super Evil Megacorp Kristian Segerstrale 87 7 Last.fm, Passion Capital Stefan Glänzer 103 8 Rebate Networks Michael Brehm 123 9 Dailymotion Cedric Tournay 135 10 PriceMinister, Rakuten, Kernel Investissements Pierre Kosciusko-Morizet 157

5 THE EUROPEAN STARTUP REVOLUTION

11 GetJar, Nextury Ventures Ilja Laurs 173 12 Seedcamp Reshma Sohoni and Carlos Eduardo Espinal 195 13 Seedcamp, Index Ventures, The Accelerator Group Saul Klein 211 14 Supercell Ilkka Paananen 233 15 LundXY Morten Lund 257 16 Mendeley Victor Henning 275 17 Prezi Adam Somlai-Fischer and Peter Halacsy 295 18 SoundCloud Alexander Ljung 311 19 500 Startups Dave McClure 323 20 Deezer, Plizy, StreamNation Jonathan Benassaya 347 21 Business Model Generation Alexander Osterwalder 369 22 Fon Martin Varsavsky 383

6 Contents

23 Techstars London Jon Bradford 393 24 Huddle, SoftTech VC Andy McLoughlin 407 25 Nordeus Branko Milutinović 429 26 TransferWise Taavet Hinrikus 453 27 Rimac Automobili Mate Rimac 463 28 Iskon, MicroBlink, PhotoMath Damir Sabol 475

Acknowledgments 489 Contributors who funded The European Startup Revolution 493

Foreword to The European Startup Revolution

By Robin Wauters, editor-in-chief, Tech.eu

Watching the European technology startup ecosystem develop for the past decade or so that I’ve been blogging has been nothing short of fascinating. From covering a handful of industry giants such as Nokia and SAP and a few outstanding startups here and there, we have come to a moment in time when it has become downright challenging to merely keep track of everything that’s happening across Europe even with a staff of experienced, full-time journalists. Both anecdotally and factually, we are observing an ongoing maturation – and transformation – of the European technology industry that is bound to have a ripple effect on a global scale. For some regions in Europe, this advancement isn’t measured in the number of tech “unicorns” they produce every year, or in the number of euros raised (or returned to investors) by its homegrown startups, but in the gradual shift to a cultivation of entrepreneurship and the laying of the foundations needed to build healthy ecosystems on top of. Simultaneously, certain European hubs have already birthed global category leaders (Skype and Spotify as the most commonly cited examples), and there’s a whole new generation of founders working hard at building lasting, impactful technology companies in a variety of fields. Certain European tech stars are able to do this even without trying to “make it” in huge markets such as the US and China; cases in point include companies such as Rocket Internet, BlaBlaCar, Fon, Zalando, Truecaller and many more. More will also follow in their footsteps; some of them will undoubtedly fail, but others are bound to thrive. Relevant statistics and research – even the conservative kind – show almost all numbers going up and to the right. In nearly all corners of Europe, we are witnessing a gradual, sometimes even linear, increase in the number of first-time entrepreneurs, capital invested in startups across all stages, valuations, funds raised by venture capitalists and private equity firms investing in tech, exits, average ICT spending, involvement from large corporations and policymakers – the list goes on. Europe is hardly the only region in the world where we can see that evolution, and to believe that the numbers are going to keep ballooning every year is to believe

9 THE EUROPEAN STARTUP REVOLUTION in a pipe dream. In fact, some observers argue that Europe is growing too slowly vis-à-vis other regions. To wit, it cannot be denied that the largest, most talked about and arguably most innovative Internet companies in the world are not, in fact, European. From Google, Amazon, Facebook, Tencent and Alibaba to the “new” generation of mega- companies such as Uber, Airbnb, Tesla and Dropbox, casual observers would conclude that Europe is incapable of producing such juggernauts. This is not as far from the truth as some would like to believe. The gap is real and demonstrable, and the challenges ahead are clear and undeniable. The devices we use to connect to the Internet – and the operating systems at the heart of them – are decidedly not designed or made in Europe, even if many of the innovations that made them possible were developed here. It is highly unlikely that European companies will be able to displace the Apples, Microsofts and Samsungs in this world and I would argue that the sooner we come to grips with this reality, the better. And yet the data shows that Silicon Valley or even the US is no longer the only place where the mammoths of the technology world are being created or grown. Tomorrow’s Internet giants may come from places like San Francisco or Boston, but there will be many more coming from places like China, India, Southeast Asia and, indeed, London and Berlin – just to name a few. While it may not yet be true that great companies can come from anywhere on the planet, we are definitely moving into that direction – and Europe will not be left behind. It is often said that Europeans are bad at celebrating successes, and that some are even unwilling to. An oft-heard refrain tells us we need more role models in Europe to learn from and to light the path for upcoming entrepreneurs. The reality is that Europe is fragmented in more ways than one, making it difficult for successful entrepreneurs to break out of their home countries and gain status as role models on a European scale. That doesn’t mean they aren’t there – it just means they’re not as visible as they probably should be. This is one of the reasons The European Startup Revolution is more than just a good read, or a collection of stories worth reading. As the saying goes, the whole is greater than the sum of its parts. I believe it is vital to periodically shine a light on Europe’s movers and shakers, the people from all corners of the region who are building, investing in or otherwise betting on the technology companies we will be writing about – and learning from – long after this book is published.

10 Foreword to The European Startup Revolution

Ivo’s book offers a rare glimpse into some of the brightest minds in European tech, from successful entrepreneurs such as Ilkka Paananen (Supercell), Martin Varsavsky (FON) and Alexander Ljung (SoundCloud) to savvy financiers like Saul Klein (Index Ventures, Seedcamp and The Accelerator Group), Fred Destin (Atlas Venture, Accel Partners) and Dave McClure (500 Startups). It’s not a revolution unless it gets chronicled, and what better way to do that than to interview some of the captains of the European technology industry? There are many exciting things being dreamed up and built around the world, and Ivo’s book offers a front row seat to the extraordinary women and men who are making an impact on business and society from all corners of Europe.

Introduction

There was a decidedly Dickensian air about the streets of London in April of 2009. Across the pond, Lehman Brothers had collapsed only a few months earlier, a vivid symbol of the financial crisis that had started in the United States and now seemed to be tearing apart the very fabric of the global economy. Walking around the British metropolis, one could almost taste the gloom and doom. “Budget to reveal bleak picture for UK” proclaimed the Financial Times. “DT shock prompts fresh telecom doubts” read another headline for the day. I was in London for a seriously boring tech conference organized by Open Text, a large Canadian software company serving buttoned-up corporate customers, known by very few outside of the world of enterprise IT. I decided to drop by another event while I was there. As I walked into the elegant, wood-panelled Jarvis Auditorium of the Royal Institute of British Architects, I might as well have been beamed up to another world by the organizer and host, an energetic fellow by the name of Mike Butcher. Mike is editor-at-large at TechCrunch, a leading online publication covering technology and start-ups. The conference was called GeeknRolla. The difference between the energy and optimism inside the venue and the bleak atmosphere outside was nothing short of dizzying. The Jarvis room was on fire on that early spring day in London. One by one, entrepreneurs and investors talked about their companies, their investments and their dreams. After each presentation, loud rock and roll music blared as Mike announced the next speaker. A great, fun video, produced by Inmaculada Martínez, featured startup founders from all over Europe jumping about and playing air guitars, symbolizing the energy and optimism of the startup world. Lesley Eccles was there, delivering a passionate, TED-like speech about Hubdub, the company she had founded with her husband Nigel. Beautiful images of their home town of Edinburgh provided a backdrop as Lesley spoke of the hopes they had for their project and how important it was for them to keep the company headquarters in Scotland, even though all of their customers, each and every one of them, were in the United States. Over the course of the next five years, Hubdub would undergo radical changes in the strategy and the business model

13 THE EUROPEAN STARTUP REVOLUTION of the company, including a rebranding. Known today as FanDuel, the company has raised more than 360 million dollars and has emerged as one of two leading players in the fast-paced, exciting and sometimes controversial world of fantasy sports in the United States. Fred Destin was also there. Already one of Europe’s most respected venture capital investors, Fred chastised European founders and entrepreneurs for their lack of ambition, dedication and hard work. Their competitors in the States, but even more so in Asia, were more obsessed, Fred warned, with building world- class, dominating companies. It was clear from his talk that this wasn’t merely a patronizing critique – it was a motivational plea to Europeans to take their game one step further. A few weeks later, I found myself at another startup event in Ljubljana, Slovenia, much closer to my home town of Zagreb. Seedcamp, one of Europe’s most active early stage investors, set up one of their many Mini Seedcamp events, looking for exciting startups throughout the continent. The organizers had asked me to join a large group of mentors, providing feedback to the twenty teams presenting – or “pitching,” which is the proper startup were the co-founders of Zemanta, a Slovenian startup that had received an expression. Boštjan Špetič and Andraž Tori were also among the mentors. They investment from Seedcamp the previous year. These two events – GeeknRolla in London and Mini Seedcamp Ljubljana, both in the spring of 2009 – would eventually provide me with the idea and motivation for this book, although I didn’t know it at the time. I had started to write for the Croatian edition of Forbes magazine a few months earlier. After Mini Seedcamp, I suggested to my friend and editor at Forbes, Viktor Vresnik, that perhaps it wouldn’t be a bad idea to write an article about Boštjan that company was Fred Wilson of Union Square Ventures, one of the most highly and Andraž and Zemanta, the company they founded. After all, another investor in respected American venture capital firms. Wouldn’t that be interesting for our Croatian readers? Viktor agreed. The Zemanta interview turned out to be the first in a series of conversations with European entrepreneurs. Over the years, these interviews turned into articles in Forbes, in the short-lived first version of The Kernel, as well as, subsequently, Tech.eu. Tech.eu is an online publication about European

14 Introduction technology and startups which I co-founded in 2013 with five friends: Alejandro Barrera, Jon Bradford, Adrian McShane, Roxanne Varza and Robin Wauters as editor-in-chief. This book is published in partnership with Tech.eu. After some of the first interviews and articles, I thought it would be a good idea to publish a collection of the interviews as a book. I never expected it to take five years to complete! Unlike many of my friends in tech journalism, I am not a full-time journalist. I work at a software and services company, Perpetuum Mobile, in Zagreb, where my partner (and our CEO) Blerim Sela and I are a two-person management team. Besides working at Perpetuum, I have created other projects in the meantime, all of which pulled my time and attention away from this book. In 2012, with three

ZIP – the Zagreb Entrepreneurship Incubator, Croatia’s leading startup program. other friends – Mihovil Barančić, Saša Cvetojević and Damir Sabol, I helped start Then, as already mentioned, in 2013 it was Tech.eu. Somehow, I can’t manage to stick to the advice Yoda is giving in one of my favorite “techmeme”-generated pictures: “Too many things you do – focus you must!” I hope readers will find, however, an upside to the book’s having taken such a long time to complete. Collections of interviews such as this one are usually “snapshots” – conversations with people at a certain point in their lives and careers. The conversations in this book provide a “before” and “after” view, showing and explaining, from the point of view of the entrepreneurs, how they and their projects developed, which of them turned out to be great successes (happily, that’s the case for most of the companies here) and which provided their founders with more of a learning lesson than commercial success. I worked by a loose definition of what I consider to be a “European founder”. Alicia Navarro was born and grew up in Australia but built up Skimlinks in London before expanding globally. Stefan Glänzer started several highly successful companies as an entrepreneur, but by the time of our discussions, he was well established as an investor, as were Reshma Sohoni, Carlos Eduardo Espinal and Fred Destin. Dave McClure is an American who created a global network of offices, micro-funds and partnerships for his investment fund / accelerator, 500Startups, quite unlike any other that I know of. Founding a startup in Europe back in 2009 was, more often than not, a lonely and frustrating experience, especially outside leading cities such as London,

15 THE EUROPEAN STARTUP REVOLUTION

Berlin, Paris or Stockholm. There were precious few resources to support Italian, Croatian, Estonian, Polish or Portuguese founders. Co-working spaces, education, funding, professional services – all of these were sorely lacking. Perhaps worst of all – it was often really, really hard to seek out other people who were as crazy as you were, people banging their heads against the wall about the same issues (“How do I know if my product is ready for the market?”). Things have changed tremendously on “our beautiful continent” (to steal a phrase from Stefan Glänzer). Sometimes it seems there are more accelerators (educational programs with small funding usually attached) today than there are startups. Funding is plentiful, especially at the early stage, and new funds and initiatives are emerging almost daily. One by one, the slow and bumbling governments of Europe are adapting regulations to support innovators and free thinkers, and the European Commission has become an active supporter of technology and startups in a way almost unimaginable five or six years ago. Founders starting their project today – “kids,” as some of us call them affectionately and not disparagingly – have many opportunities to meet their peers and compare notes. The sometimes strange language of “Startupese” has become the lingua franca of the community – MVPs, funding rounds, cap tables, pivots, customer startups are different from Spanish, Irish or Belgian ones, my response is, “They development, churn, traction, pitching . . . When I’m asked in Croatia how Croatian are not different at all. They all share the same worries, compete for the same funding, and go after the same global audience and customers. When they meet at conferences, they immediately recognize each other’s problems and frustrations.” That’s because they are part of the same community – the community and ecosystem of European startups. More often than not, they are taking cues and lessons from a generation of entrepreneurs that has come just before them. Many of these, by now well-established, founders and entrepreneurs speak from these pages. Hopefully, the “kids” building their dreams today and tomorrow will pick up some ideas and some inspiration from this book. Ivo Špigel

16 1 Zemanta Boštjan Špetič and Andraž Tori THE EUROPEAN STARTUP REVOLUTION

I first met Boštjan and Andraž at Mini Seedcamp Ljubljana in the early summer of 2009. They had become one of the earliest Seedcamp investments two years before that and had gone on to raise capital from The Accelerator Group, Eden Ventures and Union Square Ventures. Fred Wilson of Union Square was in town for the event. Intrigued by their story, I suggested to Boštjan and Andraž that we do an interview for the Croatian edition of Forbes magazine, for which I had started writing a few months earlier. It came out well, so Viktor, my editor, and I decided to try and reach out to other European entrepreneurs. That turned into a long series of articles for Forbes, The Kernel and Tech.eu, and eventually into this seemingly never-ending project to create a book out of those interviews. By May of 2014. Zemanta had a new CEO, and Boštjan was back in his beloved Ljubljana after spending four or five years in New York. I reconnected with the guys five years after our original Skype chat, to find out how things are going. They were going quite well! We got in touch briefly again in September 2015 for another quick update.

18 1. Zemanta • Boštjan Špetič and Andraž Tori

Skype chat, July 2009.

These interviews usually start with a little history and background. Before we get to that, Boštjan, I’m curious about one small detail. Your Twitter ID is “igzebedze.” I was wondering what that meant, but Google was of no help at all. Could you enlighten me? Boštjan: Igzebedze is the name of the Indian in the movie “Deadman.” It means “he who talks loud and says nothing.” – a.k.a. “nobody”

Ahhh . . . Thanks a lot, good to know. Boštjan: It’s a good movie, with Johnny Depp and a good soundtrack by Neil Young.

OK – let’s talk a bit about your background as partners. Andraž, you won prizes in the computing olympics while still in high school. Boštjan, if my info is correct, you majored in philosophy and sociology. Did you meet at the Ljubljana cyber club Kiberpipa [which in Slovenian means “Cyber-pipe”] or even before that? Andraž: Yes, we met at Kiberpipa. Boštjan: That’s where we met. I joined Kiberpipa a few years after it was founded. Those were the days of antiglobalism, hacktivism, and tech-art. Andraž: It’s great to have a space and time to develop your ideas and ambitions, worked on together was the ascii videowall, I think? and doing that while studying is great use of the time . . . the first project we Boštjan org/~igzebedze/cp/vw-howto/ : Must have been . . . The web site for that project is http://www.kiberpipa. Andraž: Boštjan worked on the hardware, while I was doing the software side of the project. Boštjan: The thing consisted of 12 original IBM PS/1 machines, interconnected so that they could project any video stream in ascii characters. The installation weighed some 500 kilos and it almost killed me – twice.

I can see the headlines now: “High tech entrepreneur risks life for artistic creation.” Boštjan

: Andraž has more war stories . . . 19 THE EUROPEAN STARTUP REVOLUTION

Andraž: Yeah, I almost got killed by that project once, too! But the main point is this: there were many people with great skills and great ideas at Kiberpipa, which was really great for our next steps.

Help me out just a bit with the timeline . . . Andraž, you were among the founders of Kiberpipa, is that correct? Andraž and I met in 2002. The videowall dates from around that time. It wasn’t the only : Yes . . . Kiberpipa started sometime around 2000 or 2001, and Boštjan project we worked on, but it was the most prominent one – and it’s still standing!

WasThere there were manysomething activist projects,from that filming, time traveling . . . that you would say was key – “formational” – for your later work at Zemanta? Andraž: The key thing that we’ve kept to this day was the spirit of “Why don’t we just do it?” – anything was possible at Kiberpipa. Boštjan: That was also the time when we started working with some of the key team members of Zemanta. Andraž: There were many, many issues and problems with management (as in any organization), so we learned a lot about that, too. Boštjan: Exactly.

Was Aleš also involved, or was he already elsewhere? (Aleš Špetič, Boštjan’s older brother, was CEO of Zemanta from August 2007 until Febrary 2010 .) Boštjan: I believe he was in Activa Holding at the time, and later he became CEO of ITS Intertrade Slovenia (a Slovenian IBM partner). After that, he started his own consulting company.

So it seems he wasn’t active on the Kiberpipa scene. Boštjan: No. Andraž: I didn’t even know him at that time. Boštjan

I wanted: At to around ask about that time, that . . . Andraž Zemanta and I started has its on roots our TV in project. work you did for Slovenian national TV (RTV Slovenija)? Andraž offered a solution. RTV was a sort of “visionary client.” : Yes . . . we were working with them. We identified some problems and

20 1. Zemanta • Boštjan Špetič and Andraž Tori

OK . . . which problems and which solution? Andraž: The problem was that all of RTV’s own video production was published online, but users couldn’t find them. Search engines don’t understand video and audio. So the solution involved subtitles for the hearing impaired, combining natural language processing with video and creating a separate web page automatically for each online show.

So every TV show had subtitles for the hearing impaired already, regardless of your project? Boštjan: Yes – every national TV in Europe, and many commercial ones, use such a system.

So you used these subtitles to index show content? Boštjan: Yes. Andraž: We left the indexing itself to a search engine. Our job was to preprocess the content in such a way that both people and search engines could understand it better and find the relevant content more easily. Text + video = automatic web- page creation for every show every day.

You did this as part of your Kiberpipa projects? Andraž: No – this was contract work. The original idea for Zemanta came from this project. Also – Boštjan and I produced a TV show on RTV Slovenia about IT and consumer electronics.

Aha . . . So you were really focused, what with Kiberpipa, TV-show production, and a contextual search project, not to mention that you had some studying to do as well. Boštjan: Yep :-) Those years were well utilized. Andraž: Oh, and by the way, we organized a campaign against Bush & NATO and other activist projects. Also, Boštjan was producing films and music, etc.

LOL – I put in some time at anti-nuclear protests in Ljubljana myself, in the ‘80s – but that’s another story altogether. This interview is about you and not me :-) Let’s go back to the TV project – did you make any money out of it? Andraž: Yeah – not much, but enough to see there’s something there.

The young entrepreneurs’ “first blood”?

21 THE EUROPEAN STARTUP REVOLUTION

Boštjan: Yep! Andraž actually be valuable to someone. The great thing was that, at the time, we didn’t : Yeah . . . but more importantly, we could see that this idea we had could know there was no one else in Slovenia we could sell this to.

OK – let’s move on to Zemanta. It started in 2006 / 07? Andraž: Formally – early 2007. Boštjan: Right after the RTV Slovenija deal. We started with an improvised office at home and it was just the two of us. 2007 was a long, hot summer. It didn’t take long for us to understand that the future market for what we had done at RTV Slovenia – a “custom enterprise” project – would be quite small, not only in Slovenia but even in Europe. So we started thinking about what kind of a service, at least broadly related to this, would be interesting for anyone and everyone. At the same time, we saw the invitation to compete for Seedcamp.

OK . . . let me get this straight . . . You saw the Seedcamp announcement and started thinking, “what might be a useful service”? Andraž: We had a rough idea of what we wanted Zemanta to be, but the strategy was completely different before Seedcamp. We knew which technologies we were good at and where we wanted to go, but other stuff was wide open.

When did you settle on “let’s help bloggers”? Boštjan: At the time of the Seedcamp application.

So when you applied, basically all you had was a good idea? Boštjan: Yes.

OK . . . So how much time did you have until the presentation, and what did you do in that time frame? Boštjan: When we heard we would have a phone interview, we put a super demo together in three days. It’s still up there on the site. All of this was happening in August. The demo wasn’t even in English – it was in Slovenian, and we had to explain to them what it was doing. So Seedcamp Week was in the first week of September, and we went there with nothing but a Slovenian demo. I think they really appreciated the fact that we already had a major customer in RTV Slovenia. They were not a Zemanta customer, but the Seedcamp team liked

22 1. Zemanta • Boštjan Špetič and Andraž Tori the fact that we had some experience in selling & presenting our stuff. Plus the RTV money was a sort of seed funding for Zemanta.

A lot of what happened since then is now “history” – or at least it’s on public record, so there’s no need to focus on it in this interview: Seedcamp & Red Herring winners, first round funding with TAG & Eden, second round with Union Square Ventures . . . Boštjan: I just hope further developments with Seedcamp – such as more and more Mini Seedcamps – will make things easier for future startup founders. We really didn’t have it easy at all.

I think startups will never have an easy road. It just doesn’t work that way. Boštjan: Yes, I agree. But the key thing is that you have role models nearby to inspire and encourage young entrepreneurs. We didn’t have anything like that when we started out, so there was no way to learn what’s important and what isn’t.

Sure – I agree 110 percent. That’s why Seedcamp and Zemanta in particular are important, especially for companies in this region. Andraž: All we need to do now is succeed :-)

Well – you’ve already done so much, but of course you still can’t lay back and say “we’ve made it.” Andraž: Exactly. After each milestone such as Seedcamp, one funding round, then another, you wake up the next morning and know you’re only just now at the starting point, and you need to prove yourself all over again.

Reminds me of the entrance exam at university. When you’re studying for it, it seems like a major goal; you sweat and worry and panic . . . Later on, during your studies, you look back and think, “Oh, that little detail, getting into university . . .”

But let me ask you about the two rounds of funding – any comments or advice to those guys and girls who are now in the place where you used to be back then? Boštjan: The most important thing is to consider your investors as advisors. Each of them has their strong sides, and you need to know and understand how to use

23 THE EUROPEAN STARTUP REVOLUTION them best. There’s not really much to “learn” there – you simply need to be open and have a very broad view of the project.

How hard was it to make the Union Square Ventures deal? It must have really helped that Fred Wilson was an enthusiastic user of Zemanta already, right? Boštjan: It was easy for us. Fred liked the product and the vision. It took a lot of networking, though, to get Zemanta on Fred’s radar. Andraž: I think every investor should be a fan of the product he’s investing in. It’s a good sign. Boštjan: Just read Fred’s first post about Zemanta on his blog (www.avc.com) and the comments. Everyone in the first 10 comments is a friend.

But you had already done a great deal of networking: Seedcamp, TAG, Eden . . . Boštjan: Yes – and a lot of grassroots networking at conferences. That was key for us, and many new startups don’t really grasp that – they don’t get out of their garage, at least not enough. Andraž: An informal impression can mean a whole lot more than formal communication channels.

I met Esther Dyson many years ago. When she met a company for the first time, she would always ask the same question first, very bluntly: “How do you make money?” Boštjan: Our revenue is currently based on our API and enterprise clients.

A freemium model, then? Boštjan: Well, not really freemium – more of an enterprise-oriented revenue model. When the Zemanta network expands, our revenue will be based on providing links and charging for them. In other words, customers will be able to pay to get into our content pool and get exposed to our network of bloggers.

If it’s not confidential, what is your current revenue? Boštjan: It is confidential. But it’s not a big secret that we’re not making a lot of money at this point.

How long is your runway? Boštjan: 2011. Sounds scary!

24 1. Zemanta • Boštjan Špetič and Andraž Tori

Where is Zemanta going to be in 2012? Andraž: In every edit window in the world :-) Boštjan: That’s right. Think “spell checker” or “bold” button.

I get the picture . . . How about the evolution of content creation: Twitter vs. blogs? Andraž: Twitter is going to be a hit for the next few years. Blogs will be OK, just not so much hype around them.

OK, but where is Zemanta in the real-time web? It’s not just Twitter, it’s a whole new generation of tools. Boštjan: There are lots of apps you can build with our API. We won’t be able to build all of them ourselves. Andraž: We can analyze any text, but we’re not building a Twitter client. Boštjan: There are already several people out there doing semantic tagging of Twitter content using our API. Andraž: But basically, Zemanta isn’t part of the real-time scene. There are many scenes :-)

So – Zemanta as a platform? Boštjan: Yes.

What’s your relationship with your investors? Do you share a vision of where Zemanta needs to go next and how to get there? Boštjan: Sure, we have a good relationship. Andraž: Good investors more or less let the entrepreneur run the business.

Any competitors you’d care to name? Andraž: You’re the journalist, you should find that out yourself :-) Boštjan: Reuters, Google, Microsoft :-)

Guys, thanks for all the info as well as your time, and best of luck with Zemanta!

25 THE EUROPEAN STARTUP REVOLUTION

Skype conversation – April 2014.

Let’s start this follow-up with recent events. Boštjan, Todd Sawicki just replaced you as CEO? Boštjan: Yeah – Todd’s been with us for a while now as president of the company – we’ve now promoted him to CEO, so that I could move back to Slovenia and be head of a product again. So yeah, I’m enjoying the European weather and lifestyle again.

Welcome back! Boštjan years both of us are on the same continent again. We have 25 people in Ljubljana : Thank you! Andraž is still running technology. It’s great that after five now in product and technology, we have 10 people in sales in New York and San Francisco and Todd is based in Seattle and mainly running from airplane to airplane.

OK, tell me about the new stuff you’ve done. I’ve been looking at “Circles” and the content network, so maybe you can help me understand those better. Andraž: Basically, we still have our primary product, which is the “blogger’s personal assistant, or “editorial assistant,” as we call it, and that product is going strong. However, at the same time, we figured out that we cannot really be a one- trick pony. We needed additional products and a more diversified business. So we started exploring adjacent businesses and opportunities happening in the market, especiallywith the growing importance of “content marketing”. We were doing content marketing before that buzzword was popular. And so we looked at what our capabilities in that area were. We started with a couple of projects, and as with anything, you can either succeed or fail. So we really had two or three projects that didn’t materially impact our business, and now we are in a third project that’s expanding this content marketing into the space of a buy-side platform for content marketing – for content ads, basically. That’s the thing we’ve been iterating towards over the last half year, and we have great hopes for it not just as a good product but actually as a good business.

Can you explain that to me like you would explain it to your mother? Andraž: Trick question!

26 1. Zemanta • Boštjan Špetič and Andraž Tori

No, I just want to understand it better, no tricks. Boštjan: No, no, it makes sense. So, I think, what happened in the last couple of years is a change in the market where much many more people have been creating content with the intention of building an audience with it. So essentially the trend is, simply put, that brands are starting to behave like publishers. Brands are investing in content-based web sites to attract an audience to them. A good example in Croatia is Podravka and its Coolinarika web site.

OK. Boštjan: The same thing has been happening all over the US, for two or three years, now. So some of the early adopter brands are on this bandwagon. Everybody is expecting more brands to start doing this, and brands – when they are creating content, they are also more interesting in paying to get it distributed as widely as possible, right? To promote the content.

Yes. Boštjan: So these content discovery networks like Outbrain, Taboola, and us were developed to, basically take their content and, on a CPC basis, distribute it as widely as possible, through widgets on publishers’ sites. We tried this with the content discovery network last year, and then we noticed that distribution is just one part. Since now we have several content discovery networks available, the marketer doesn’t know any more where to buy and at what price. So we are developing a buy-side platform that will help the brand or the marketer to buy from several different locations, several different networks, at appropriate prices and then bring it all together and report on it and whatnot. Is that simpler?

Yes, that is simpler. So these are content ads? Boštjan: Content ads, yeah.

OK. So let’s say I’m Nike: I have a ton of content on my site, I have descriptions of products, I have people blogging or commenting, I have forums and things like that, and I use your platform to figure out where I want to establish links linking back to my content. Boštjan: Yeah, more or less. But not just figuring out – you give us a budget and a max price, and we will find all the sources for you, programmatically. We partner with all these content distribution networks and some other publisher networks,

27 THE EUROPEAN STARTUP REVOLUTION and we measure their quality, we measure their audience, and based on what type of audience you want reach, we decide where your content goes.

OK, so for me, as Nike, you guys provide a service using this technology for content ads. Boštjan: Yes, correct. There are interesting problems, though. This whole content marketing space is very new, so the whole ecosystem is still developing. For instance, every destination has its own rules for how content should look as well as what types of articles are interesting, and you can optimize your headlines and images for each destination individually, such as to improve conversions and stuff like that.

OK, but does this involve physical work from your team? Boštjan: Well, in the beginning, yes. We closely monitor all the campaigns and optimizing, using our brain power to figure out what the patterns are, and we slowly automate it.

No, what I mean is this: when a customer like Nike or Podravka or some other brand comes to you guys and says, “I need this, this, and this, and I would pay you that much money monthly for it” – does that involve your people physically, by hand, setting up whatever they need? Or is it a self- service platform where they just use your tools? Andraž: Historically, we have seen that, with marketers, usually you basically set it up for them and then they use it, they use the reporting, and so on, but you do the initial setup of the campaigns. That is our experience from the market.

OK. And when you say, “historically,” is that something that you expect is going to change? Andraž: That really depends on which kind of advertisers you are attacking. Basically, if it’s very small ones that spend, I don’t know, a hundred dollars a month, then it’s all automated, and we don’t do anything in that space.

OK. Andraž: We are trying to work with prime marketers, marketers that have been in business for some time and have the budget to promote their brand and their company, not 100-dollars-a-month campaigns.

28 1. Zemanta • Boštjan Špetič and Andraž Tori

OK, that makes sense. So your main customers, the people that you are actually selling to, are content marketing people, people that are in charge of the content marketing at brands? Andraž: Yeah.

And you are partnering with the content delivery networks and also with the publishers themselves to provide these services. Boštjan: Yes, but more with the content discovery networks.

I’ve seen somewhere that this is now like half of your business or something like that? Boštjan: Well, not yet, really. I think 80% of our business is the classic product. Andraž: It’s half in terms of the amount of investment going in. Boštjan: Oh, yeah, OK, fair enough. Andraž: If you can look at the headcount, that’s how much of the company works on each product.

If the former business is still most of the revenue, that would imply that the new business is growing faster? Andraž: Yes, correct.

When do you think it will surpass the old one? Boštjan: Well, hopefully at the end of the year – that’s the rough plan.

You mentioned some of the tools that you played around with but that didn’t really get traction. Are you referring to Circles and Streams? Boštjan: We could go even further back. At one point, for example, we tried with a project we called “Blogspire” The idea was that we would send daily emails to bloggers about what they might blog about. Basically, this meant providing daily inspiration, directly integrated into the blogging platform, so that the user was able to blog immediately. After working on it for like 6 months, I think, it proved not to be a winning product, so we simply abandoned it and went on to the next one.

On your blog you mentioned that Circles was a kind of experiment? Andraž: That experiment is still running.

But it’s still an experiment?

29 THE EUROPEAN STARTUP REVOLUTION

Andraž: Yes, it’s still an experiment.

OK, because I was looking for Circles on Fred Wilson’s blog and wasn’t able to find it there, so I was a bit confused about whether he is using it or not. Boštjan: He is using it through the classic – through the editorial assistant product now, so he manually selects links. It’s not automatic through Circle anymore.

Do you see this as also as a potential source of revenue , or is it a kind of gift from you guys to the community, just to provide “goodness”? Andraž: It’s an experiment. Boštjan: Circle is not a revenue product.

So it’s going to be mainly the classic product and content ads going forward. Andraž: Yeah, correct.

Tell me a little bit about funding. You raised 3 million previously and now two. You mentioned that you purposely wanted to hold that to two and not more for the purpose of not diluting too far etc.? Boštjan: Yeah, we felt that we don’t need more to build out this content product and when the product is roughly breaking even or something, we’ll probably fundraise further but not before.

OK, so you do have some further fundraising planned? Andraž: Every company always does fundraising.

Yes, I know, but there is always a difference between “theoretically fundraising” and “I’m going to raise this much at this point when I have this, this and this target.” Andraž: The way we see it, you always have to have a type of fundraising. One is seeding the product, the other is scaling the product. 2 million is here to build the new content product and when that’s ready for scale we’ll probably be raising the scale round.

Are you willing to share what the valuations have been in the last rounds? Boštjan: That’s not publically disclosed.

OK. Andraž: It was a nice up round.

30 1. Zemanta • Boštjan Špetič and Andraž Tori

OK, cool. So, you are now 35 people altogether. How fast do you think that’s going to grow once that content ad thing starts growing? Andraž: This year we probably won’t go above 40, but next year we could, I don’t know, even double again. I don’t know – that is for the next period. Boštjan: What matters is that you always adapt to the circumstances of the market. So, if we feel there is going to be fast growth, we will be growing fast. If growth looks like it’s going to be linear, we will be growing linearly. Also, scaling a revenue product probably means hiring as many sales and account-management people as you can, to sell faster. That’s a whole different thing than growing the technology team.

Yeah, obviously. What about your market, are you mainly or exclusively in the US, or you are more evenly distributed globally? Andraž: No, it’s like 90% in the US.

And have you thought about geographic expansion as one of the possible scaling strategies? Andraž: Not yet, because the US brand content marketing market is 2 or 3 years ahead of everybody else. Well, maybe we’ll work on that. I mean – hopefully. I’d love to expand globally, but the rest of the world is just not ready yet.

Not even the UK? Andraž: The UK is not big enough. Boštjan: Even the UK is a bit behind, yeah.

OK, it all sounds good. So basically, the plan going forward is to build up the ad stuff, keep growing the old stuff, as well, and just scale from there, right? Andraž: Yep, exactly.

And enjoy life in Ljubljana? Andraž: Exactly.

31 THE EUROPEAN STARTUP REVOLUTION

Update – August 2015

Boštjan: In the last year we have turned completely to the advertisers’ side, building a “demand side platform” specialized for content/native advertising. We are the first and most advanced platform where marketers can buy native advertising for their content programs from all of the specialized networks like Outbrain and publishers like Reddit, bid on a whole range of native ad formats, use advanced targeting techniques, without limitations on the amount of content. We charge a platform SaaS fee. Our clients today include Coca-Cola, Intel, General Motors and Walgreens.

32 2 Seesmic, LeWeb Loic Le Meur THE EUROPEAN STARTUP REVOLUTION

Loic Le Meur is one of France’s and Europe’s most high-profile serial entrepreneurs, having founded, built and exited several companies in his rich career. At the time of our first conversation – a Skype IM chat – Loic was very much focused on Seesmic. These were the early days of social networking (September of 2009). Seesmic was one of the front runners in the crowded space of “social media clients” – single applications for desktop and phone from which you could post and follow streams on various social media platforms, particularly on Twitter. A very interesting story in this chapter is how a single tweet from Pierre Omidyar led to an additional six-million-dollar investment in Seesmic! Aside from Seesmic, Loic is the public face of one of Europe’s most successful tech conferences, LeWeb, which takes place late in the year in Paris. Having moved to San Francisco some time ago, Loic and his wife, Geraldine, built up Le Web from a small bloggers’ gathering to a multimedia spectacle, for which thousands of participants would pour into Paris from all over the globe. A signature of the conference are high- level executives from Silicon Valley’s hottest new or established startups and tech companies, drawn from Loic and Geraldine’s amazing network. Loic and I had a second conversation in May of 2012. This time we were able to meet in person, sharing a glass of wine at the very elegant London hotel where he stays when in town. Geraldine and he were launching LeWeb London that year, so our conversation focused on the conference.

34 2. Seesmic, LeWeb • Loic Le Meur

Skype chat – September 2009

Let’s start with yourself and your background. My homework tells me a quite amazing story. Seesmic is startup #5, rubbing elbows with Sarkozy, interviewing Emma Thompson at Davos. Jeez! :)

So my first question is “focus”. You have many, many interests, Seesmic and LeWeb would be full-time jobs each even without the blogging, video, etc. How do you balance your time and focus amongst such varied interests? I devote 99% of my time to Seesmic, and I enjoy it every day. LeWeb is managed by my wife, @geraldine. I “just” help on the editorial, the program, and I MC the event, but she organizes everything.

OK, now I can understand that much better. Is that her on that video invitation on top of some snowy mountain with you for this year? Yes – looks like she would love Croatia http://twitter.com/Charles_Nouyrit/statuses/3913548780 LOL

I’ll be sure to check that out! Tell me about your first business. What was it, and how / why did you get started with it? I started my first business when I was still at the French Business School HEC during an internship at the car manufacturer Peugeot in 1996. I suggested they create the first dealer network on the web in Europe, on the model of dealernet in the US and they said, “That’s a great idea! Can you do it for us?” Here I had my first customer, so I created one of the first web agencies in France – B2L – with a customer and my student loan of about 10,000 Euros. Later, it became a self- funded 100employee agency, one of the top three in France. The communication group Omnicom liked it so much that they acquired it four years later. It eventually became BBDO Interactive France, with clients including Chanel, 20th Century

Fantastic.Fox . . . Lots How of fun! long did it take from start to 100 people? Four years – but no business angels or VC’s – I didn’t even know what that was!

35 THE EUROPEAN STARTUP REVOLUTION

Apparently you’ve learned something about it along the way :) What was your first angel or VC ( i.e., investor) experience?

OKHmmm – as let’smuch see . . . as you I’m can unsure recall. about the first one. But I am a proud series A investor in LinkedIn, like in 2003 or so, and I’ve also invested in dozens of startups. I lost most of it, though :) I love startups too much, so I always want to help them. But I completely stopped investing in order to focus on Seesmic.

I meant – what was your first experience when someone invested in one of your businesses – sorry if I wasn’t clear!

OKAh . . . – let’sFrankly, move the on first to realSeesmic: big one obviously was Seesmic. it started Before out that as it somethingwas very . . . slightlyFrench! different than what it is today. Yes sir!

At what stage with Seesmic did you seek out investors – from the very start, or later? Seesmic has always been in my mind a project that had to be international and ambitious – innovative, so revenues would take time to arrive, so raising funds was always planned, but the *way* I raised funding was not planned. I have known Niklas Zennstrom, the co-founder of Skype, as a friend for nearly 10 years, and I explained Seesmic to him in Davos at the World Economic Forum to seek his advice as a friend. Niklas liked the idea and offered to help me build it. We had always wanted to do something together, so Atomico quickly decided to fund Seesmic’s first round. That was in September of 2007,. Then, as I decided to move to Silicon Valley, I thought I would need some help from American friends and started to talk to my network about it. That’s how Jeff Clavier, Reid Hoffman (LinkedIn), Ron Conway, Steve Case, Mark Pincus, and many other Silicon- Valley–based angels invested, too. We raised a total of $6 million. Then, six months afterwards – on Twitter, I can find that tweet :) – the founder of Ebay, Pierre Omidyar, after having showed up himself in a Seesmic video and having a convo with me and the members there, tweeted me that he wanted to invest. Even though I was not raising money, I was very excited to have him on board.

36 2. Seesmic, LeWeb • Loic Le Meur

There was also the VC fund Wellington, one of the most well known in Europe, who wanted to invest, so we raised another $6 million. That’s the story :)

Amazing. Most of the dry facts I read on CrunchBase (homework!) but the background reads like a thriller. If you could send me a screenshot of Pierre’s tweet that would be fantastic! http://loiclemeur.com/english/2008/06/how-omidyar-net.html

Thanx! http://twitter.com/pierre/statuses/710259212

Howquite longa tweet . . . would you say it took to put that first round together? The reason I’m asking is that I’d like to analyze, in this series of interviews, the US vs. the EU startup scene, and the *speed* at which things take place is in my opinion one of the key issues / differences? One month – it was really fast.

For a typical European startup that doesn’t just happen to know Niklas – would you say it would take significantly longer than in the States? Okay, except maybe the U.K. – that’s a bit different, right? I think Europe is changing. Look at the 2000 participants of LeWeb. High quality VCs such as Atomico, Wellington, Index and others are very active. Seedcamp is great, too, so I am very positive about Europe. There are great business angels such as succeed in Europe fast. You just need some traction and a good team. Marc Samwer, Brent Hoberman, Martin Varsavsky . . . So it is possible to raise and We’ll get back to that, but I’d like to discuss a bit more that little company which takes 99 of your time. How many people are at Seesmic now? I’ve seen your pics from Romania – is all or most of the development done there? Anything in Paris, or is it all SF / Bucharest? We have developers in the US, Europe and even Asia, in Singapore (okay just one developer there!), and we work as a virtual team. But a considerable percentage of the team is in the US and Bucharest.

How large is the team? About 15 people, we’re a small company, but we do a lot for that team :)

37 THE EUROPEAN STARTUP REVOLUTION

That’s what fascinates me about this generation of companies vs. the dotcom boom. Back then it was “hire, hire, hire,” and today, you, Zemanta and Twitter are making big strides with small but obviously highly talented and effective teams! It has its challenges, but yes, we try not to hire like crazy and do our best to be very efficient, with a low cost of operation, while keeping a very high quality standard. I agree, the trend is small teams that are very tight, rather than big, disorganized, costly teams!

Zemanta has a guy (Jure Cuhalev) who is a “community manager.” It would seem to me that you are Seesmic’s community manager, but presumably your colleagues are also actively involved with the community? We have a full-time community evangelist. I do not like “manager” because you do not “manage” a community. It’s like a garden, you help it grow, but you do not manage anything. So yeah, John Yamasaki – @jyamasaki on Twitter – is with me behind @askseesmic, and we try to answer as many tweets as we can. We also have have teamseesmic.com, our community Ning site

I met John on Twitter and we emailed. I tweeted and blogged about some issue, and he came back quick as lightning. I was amazed! Good – that is what we like to hear. In public customer service, Twitter and other social software is a key factor for success.

I was also amazed when I tweeted about some feature and you responded on Twitter yourself in like a few minutes. Word of mouth is the most important, so we want to answer our users as fast as we can. I am answering all day long, myself – it helps me understand better what our users want – sometimes very late at night, too.

Yeah, you and Seth Godin in that interview were like twin brothers ;) I am a big fan of Seth Godin, and we have the same haircut :) LOOOOL

I watched your video about shifting focus from video conversations to the current apps. It was fascinating, obviously very sincere and very convincing. If I remember well, didn’t you do that at 4 am as well?

38 2. Seesmic, LeWeb • Loic Le Meur

one of our users. I had no idea it would end up everywhere, but that’s fine. Yes . . . It was not meant to be retweeted and shared that much. I was just answering I am honest and transparent. It’s the only way to go, and video helps a lot with that. So that’s just how I am. Forget fake PR – that’s something of the past. It does

Absolutely!not work anymore . . . Another if question:it ever worked. how concrete or specific are your plans to do the “capitalist thing” and – some day – make money with Seesmic? Revenue . . . ? Seesmic aims at becoming the best tool to manage your own community, for you as an individual or your brands. People start to realize how important it is to have a very active community, so, long term, they will realize how much value there is in helping them do that. At that point, I am confident we will be able to charge a small fee to our users and have some very light advertising on the free version. Read Chris Anderson’s latest book – Free – it’s very good at explaining those dynamics. Giving away our products is the best way we can have more users. We have a very loyal user base, and many spend hours a day on Seesmic. Lots of brands will be interested in advertising, and many users will realize the value. So in short, some light advertising + premium offering, but no rush.

If it’s not a business secret, how long is your “runway” with the current 6M? Would your next stage be more funding or “turning on the revenue”? Of course – as far as you are comfortable with disclosing? Years of runway is all I can say. We have all the time we need to build a fantastic product for our users. Look at how fast we update it.

On the product: you’ve announced an iPhone client. I’m not an iPhone user myself, but just asking – when can all the iPhone fans expect that? In a few weeks. We’re aiming at high quality standards in everything we do, so we do not want to rush it. Especially on the iPhone, you have only one chance to make did not take off because of bugs or crashes, and we do not want to do that. a good impression, since there are 60 000 apps . . . Some Twitter apps rushed it and How about other platforms? Probably in a few days I’m getting an HTC Hero (Android) . . . Nothing to announce, but we obviously take mobile very seriously.

39 THE EUROPEAN STARTUP REVOLUTION

Let me end the Seesmic part by saying that I’m a loyal user and a huge fan :) Will surely get some input back to you and your team! Thank you, Ivo. We appreciate your kind words and loyalty.

You deserve it! On the US / Europe comparison – would you say there is a significant difference in enterpreneurial climate and possibilities between the two, or is it fairly similar in your experience? Very different – I mean in cultural terms. I will have to write an entire blog post about that, it’s difficult to give a short answer, but basically everything here in Silicon Valley is a block away. You feel like you’re on a university campus – everybody sees each other all the time, so that helps doing business very fast.

Exactly – again the issue of speed. Frankly, you can feel that there are the people based here, and then there are the others. Even LA-based is not Silicon Valley, not a block away or an hour’s drive the same with Facebook, LinkedIn, MySpace friends – I keep seeing them randomly. away. So in my case . . . For example, I saw Evan Williams yesterday by chance. It’s Again, it’s like a campus that helps create tight friendships and therefore trust

So we might say it’s not so much the US vs. Europe, but the Valley vs. “the rest of the Universe”? In Europe you have to fly all over the place to meet everyone – that’s why I launched LeWeb – so that at least once a year we can all meet together! European entrepreneurs and VCs are of great quality – it’s just slower. To really compete we would need a Silicon Valley of Europe – that is, everyone at the same place. That has been tried and will not happen anytime soon, since we all like own countries too much. friend Xavier Niel of Free ISP – with 2 billion euros in revenue, it kicks the asses of But don’t get me wrong – huge successes can be done in Europe . . . Just look at my quite a few Silicon Valley startups!!!

At Geek ‘n’ Rolla earlier this year, I asked Fred Destin what he thought about US vs EUenterpreneurs in terms of “hunger” and aggresiveness. He said, “Asian enterpreneurs are the most aggressive, then US, then European ones.” Of course, there are great examples (e.g. Skype and others) but it seems to me they are still more the exception than the rule.

40 2. Seesmic, LeWeb • Loic Le Meur

than $, for example. Many entrepreneurs make that mistake, so I don’t like when Interesting . . . One should define “hunger,” though. I think passion matters more people talk about “hunger” too much.

Sorry – I just said that from the top of my head; I wasn’t quoting anyone . . . Did you ever finish HEC? Many people get too involved with their businesses once they get going . . . Yes I did. I graduated.

Great. Congratz :) thanks :)

And finally – the next steps for Seesmic. You’ve already stated your aim, so what are the next stages, roughly, ahead for the company? We have Seesmic Desktop, Web and iPcoming soon, so making those three consistent and talking to each other is what we are working on, as well as a few (big) surprises before the end of the year. The userbase is growing daily, so we are frankly “just” focusing on delivering the features our users want, and that is easy – they are at feedback.seesmic.com. Plus, again, some surprises! Very exciting stuff – I have not been this excited for a while. Each time I go to an event I meet users of our products, and the online feedback is huge – that’s the driving force. The entire team loves seeing how our users love our product, and that is the best motivation you can get.

41 THE EUROPEAN STARTUP REVOLUTION

Live interview in London – Spring 2012

Tell me about LeWeb coming to London. Is it true that you were invited / encouraged by the Prime Minister himself? It’s true – we met with David Cameron at the Founders forum with Brent Hoberman in June last year. Mr Cameron said “Hi” and as we were shaking hands, he told me “You should move LeWeb to London.”

So it was his suggestion? Yes, it’s true. I was very impressed – I think he has a very good team around him.

So it was probably the idea of one of his guys. Originally it was Brent Hoberman. Brent introduced us to the team at Number 10. I think the context is that they want a lot happening for the Olympics, and I think they will be very successful at that. He suggested it to them, that’s how it started. My answer was: “LeWeb started in Paris and it will stay in Paris. We love Paris. But we could talk about doing another one.”

So you didn’t say: “Let me think about it”? No, I didn’t say “No” because it would’ve be very impolite. I was honored and flattered, that was very impressive. But London wasn’t our plan at all, it wasn’t was surprised by the traction that we got. But yes, that’s the story. They were, like, even on the map. And yeah, then I posted a stupid Tweet, as I always do . . . And I “OK, what should we do to make London even more special?” Brent told them: “Well, you should get LeWeb to come to London.” That’s how it started, and then they told me, and so yes, I said: “Let’s see if we can, you know, we won’t move it because LeWeb is in Paris.”

Were there any comments from the French? There has never, ever been a question about whether it would be replaced. That’s a rumor that was completely untrue, moving LeWeb. Some French reacted, and yes, the team of the French president contacted me, that’s true. They said “Hey, what’s going on here?” We had our speakers’ reception this year with the President at the most international tech event in the world, with seventy-six countries. This is the Elysee Palace, and so on . . . LeWeb has a very strong position – we’re probably

42 2. Seesmic, LeWeb • Loic Le Meur very different than anything else, and it’s great to see that they realise that, both the the French and now the Brits – it’s fantastic! No one cared as much before. You cared, because you were in this sector. Outside, people didn’t care. So, yes, we’re doing it! It took a few months because, as you know, LeWeb is only me and my wife, still, and then we have a lot of great people around, freelancers helping, up to a hundred people. Coming to Le Web, one cannot help but be impressed, even amazed, at the quality of production. A herculean effort goes into ensuring that 3,500 gadget-crazed geeks have uninterrupted connectivity – something most other conferences, even much smaller ones, fail at. Multiple cameras are filming, everything is available for free in streaming video and later for watching online – in full HD, that goes without

Tellsaying. me But a bitit wasn’t about quite how like it all that started. eight years You ago,probably and it’s said: a huge “Geraldine, investment . . . let’s have a glass of wine and let’s do LeWeb!” wasn’t in the US yet, I was in Paris. I always had this idea that the issues a European No . . . the way it happened is, I was frustrated as a European entrepreneur. And I entrepreneur has are much bigger than the ones in Silicon Valley. So, for example, you have to travel a lot. If you want to be successful, you have to go to different places; if you want to meet the best entrepreneurs, you have to fly all around. You know what I’m talking about, right?

Yes. That’s one thing. So having everybody in the same room, and everything in English. It seems simple, but doing a conference like this in English, in France, is weird.

Yeah, I can imagine! And it actually started with a controversy, because I said: “If you don’t speak English, don’t come.” To the French! And we have many French participants, but I would say half is French, half is international, which is interesting in Paris, and very, very unusual as well. All the events in Paris are very French. And it’s showing a pattern, right? You need an ecosystem around you. It’s more difficult to raise funding in Europe because there are fewer business angels. You need the business

Europe on stage. I wanted the best in the world! I’m trying to help the European angels, you need the VC’s . . . Here is something else: I didn’t want the best of

43 THE EUROPEAN STARTUP REVOLUTION ecosystem and trying to have as many Europeans on stage as possible. But if you look at the program, it’s always at least half Silicon Valley.

Yes, I know. Why? Because half or more of the leaders of the tech world are from Silicon Valley. I wish that the majority were from Europe, but thats not representative of reality. For example, I’ve never been willing to listen to copycats too much, that’s just how I am. Even if they make a lot of money, they are not very interesting. That’s what I think.

We won’t name names! There’s a message behind LeWeb, which is that, if European entrepreneurs try to become leaders in the world of what they do, then they succeed or they fail, right? Success is a series of failures till you succeed. But, if you have in your mind that you want to dominate Spain, the best you can do is to dominate Spain. It’s a question of ambition. If you have in your mind to dominate Paris – which I had when I started as an enterpreneur, because that’s the way you think by default – then you might end up dominating Paris; by the time you do this, someone has a broader vision and bigger ambition, like Twitter or Facebook, and you’ll end up doing a copycat of Facebook in Spain or in Germany. Facebook is a great example – how many copycats of Facebook have succeeded? Fortunately, Europe isn’t about copycats anymore. We now have fantastic companies, and I have a lot of European

Youcountries even onput stage, on ansuch Angry as Angry Birds Birds, costume SoundCloud, in 2011! Wooga . . . Most people would’ve assumed they’d sent it to you, since they were speaking . . . looking for an Angry Birds costume and found it on Etsy, of all places! They are coming back this year, maybe I’ll put it back on . . . But no, I Googled, Are you planning anything different in terms of the content for London? What would you do?

There are amazing companies in Asia. You asked about Facebook clones . . . well, there is an Asian company, I don’t even know the name by heart, but there is a Chinese Facebook that is probably almost as big as Facebook. And there are other very, very large companies . . .

Yeah, like Jack Ma, I know . . . 44 2. Seesmic, LeWeb • Loic Le Meur

The Yandex guys in Russia . . . Generally, the Chinese don’t care about Europe or even the US. They just don’t show up. You invite them, and they don’t show up. Their market is so huge, and suggestion, but generally, they don’t give a damn. Russia, they come. The Yandex with so much growth . . . But even in the US, they don’t show up . . . It’s a good CEO was actually at LeWeb in the past. By the way, this is new, too: a lot of people come whether they speak or not, just because everybody’s there. I think we had twenty dinners every evening organized, it’s crazy . . . I don’t even know. It became a full week in Paris. We have three days now . . . I think there were like, twenty-five Chinese, but they don’t really bother so much! events around LeWeb, so . . . Yeah, I agree, it would be very interesting to get the You’ve often said LeWeb is a startup – does that mean we can expect many new LeWebs as the startup scales up? Moscow, Beijing, the US? It’s a grocery store, for now. I mean, seriously, it’s my wife and me, part time and a few great people working with us as contractors. With two events, we already see changes. We’ve taken on people who were very close to us, already producing Paris, almost on a full-time basis. Because two events justify it. But we have to go slowly. It took us eight years – it’s an “overnight success” that took eight years. And that’s fine – it’s funny because it’s the opposite of the classic startup model. We didn’t raise any funding, and it took eight years instead of a year. A startup needs to be fast, to didn’t take any funding, we had no team and we didn’t care about the competition, raise money, you know, it’s scared about the competition . . . We took eight years, we because there were hundreds of events already when we started. It’s like slow food. If you go into a three-star Michelin restaurant in Paris, it’s slow food, the chef has spent his life learning what he does, so no problem . . . We’re like Butslow is food. that We going are toaiming change at top in thequality . . . years ahead?I like that, actually! No. We don’t want to scale, we want to do the same quality. It’s like the chef – I really like that comparison. At one top restaurant in Paris which we take some of our speakers to, it’s a five-hour dinner with fifteen courses. It doesn’t scale very well, and the chef could not host more guests.

So you’re bringing the approach of the French chef and the slow food concept to tech conferencing? Right, we’re slow, we’re cooking very slowly (laughing).

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Without a doubt, you and Geraldine have thoughts about the future. So where is LeWeb going? I don’t know yet. Seriously, I don’t know. We experiment, and we iterate like a startup. London is a new product launch. We’ll see how that product does, and then we will decide. It’s shaping up pretty well so far.

So there is no long-term vision? No, I’ve never had any, you know. It’s funny, because you always think that

My only vision with LeWeb was to help the entrepreneurs, and give them quality founders need a product vision and so on . . . I really never had any for LeWeb. content, networking, and a great experience. Build a platform for success. That works perfectly as a recipe. But there is no vision in which I want to take over the you, because they came and they said – you should do London. Alright, but then world, and have fifty events . . . I don’t have a hidden agenda. I did London, I told what? I live in San Francisco, guys. That’s two events in Europe now.

Now that you mention it, how important does it remain for you to still be in San Francisco? Will you maybe be moving back? It’s very important, because my roots are there now. Not my cultural roots, I’m French, but my friends are. I have a lot of friends in Europe. But I live in that ecosystem now. That’s what gives it a Silicon Valley touch, as well. Most of those guys on stage are also friends, people I know. Or if I don’t, they are becoming friends, but I can feel probable trends in Silicon Valley, like Evernote a few years ago, Instagram last year, today Highlight or VoxNet. I was there, saw them grow, and so on. I’m in touch with that ecosystem, I think what makes LeWeb, LeWeb is that I’m trying to keep connected to Europe as well, and you get, you know, that recipe. In my mind I live in the middle of the Atlantic, I am in between Silicon Valley and Europe and try to bring them together. And Europe is getting better and better at innovation. I am very proud of what we’ve accomplished, actually what my wife Geraldine has accomplished really, especially when we see so many LeWeb participants becoming successful, raising funds, getting traction and getting press, like Evernote got 36 interviews at the latest LeWeb! That makes us really happy and that is what LeWeb is really about, making entrepreneurs successful and inspiring new entrepreneurs. Nowadays the youth should aim at creating their jobs instead of seeking them, and I’m proud that LeWeb helps them reach that goal.

46 2. Seesmic, LeWeb • Loic Le Meur

Update – August 2015

As we discussed in the Spring of 2012, Loic and Geraldine organized a very successful LeWeb in London, as well as the main event in Paris, both held in 2012. Immediately following LeWeb Paris 2012, they announced that they were selling a majority stake in LeWeb to the large conference organizer Reed Exhibitions. LeWeb continued in London and Paris in 2013; however, the London event has not been organized or announced since then (as of August 2015). Loic and Geraldine have divorced in the meantime but acquired ownership back from Reed Exhibitions in April of 2015. They continue to organize the conference, of which Geraldine is the CEO. After discontinuing further development of Seesmic and shutting down its Romanian R&D team, Loic sold Seesmic to competitor HootSuite in September of 2012. As of this writing, we have no news yet on whether Loic is up to any new ventures aside from his continued involvement in LeWeb. Both he and Geraldine are active angel investors in several companies and startups.

3 FanDuel Lesley & Nigel Eccles THE EUROPEAN STARTUP REVOLUTION

I first met Lesley Eccles at the GeeknRolla conference in London in early 2009. She and her husband, Nigel, were co-founders of Hubdub, a gaming company based in Edinburgh. One thing that stood out for me was the passion Lesley expressed in her talk at the conference about how much she and Nigel loved living in Scotland. Given that all of their customers were (and still are) in the US, this obviously presented some challenges. Over time, one of the company’s games, FanDuel, took off. The co-founders decided to focus on FanDuel – with a great deal of success, as we shall see – and subsequently renamed the company around the product. I chatted with Lesley via Skype chat in February of 2010 and followed up with Nigel on Skype (voice) in the summer of 2013.

50 3. FanDuel • Lesley & Nigel Eccles

Lesley Eccles, Skype chat – February 2010

Lesley, let’s start with just a few words about your beginnings as an enterpreneur – I believe you used to be a managment consultant? Yes, I worked for Cap Gemini, Gemini Consulting and Cap Gemini Ernst & Young in their various incarnations for about 7 years, I think it was. Then I took time off to have two children. We moved from London to Edinburgh, and we (my husband and I) decided we wanted to start a business together. That was in August of 2007. Hubdub Ltd was founded in November 2007 after we happened to meet the other three founding members in a pub!

Wow! We then launched our first game, Hubdub.com, in January 2008. I’m sure you know about the funding we received at the end of 2008 – we pitched to our investors the day Lehman Bros went under. Dark days! But we got $1.2m series A funding. We then launched our second game, a premium game (people pay to play) in July 2009. That’s FanDuel.com – a fantasy sports game. Both of these focus on the US.

So the concept of Hubdub Ltd. is launching multiple games Yes.

Ok – that clarifies it for me, because I was wondering why you “forked” into Fanduel . . .. Now that’s much clearer, thanks. It was pretty simple. Having a premium game was always in the cards from the beginning, but we had to be careful to make it legal in the USA. Fantasy sports is a carve out of the 2006 Unlawful Internet Gaming Enforcement Act, so it is legal, whereas other options wouldn’t have been.

The enterpreneurial experience is not for everyone. How did you feel personally going from the “safe” world of consultancy to running this? Ha, the “safe” world of consultancy seems a long time ago now, that’s for sure! However, I would say that my time as a consultant stood me in really good stead because every new project I started was always a huge learning curve – and while my house may not have been on the line all the time, the pressure to perform is always there – it was an up or out policy. Which is essentially the same as doing this!

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It’s not very common to have a European-based company selling only to US customers, and on top of that having no permanent base or people Stateside? I agree, it’s unusual. And we’re very aware of that situation. This year we’ve actually taken on a very experienced Business Development Director in Silicon Valley, and also an Affiliate Manager in Washington. We’re also planning for at least some of the team to move out there in the not too distant future. In addition, we travel over there really regularly. I’m just back from a week-long trip to Las Vegas, and Nigel, my husband, is back out there next month. I would say one of us is out there every other month, sometimes more often.

Ah, OK – so you *are* starting to develop a local presence . . . Absolutely.

I see you have a superstar advisor in Jeff Jarvis! Yes, he’s been very helpful, especially in the early stages.

Congratulations! We have had a lot of high profile people advising and helping us along the way. That is the wonderful thing about this industry – people are happy to help out. And of course we try to do what we can to help others out, too, if they’re just starting out.

Your investors are Pentech and Scottish Enterprise, correct? Correct. We also have some angel investors, but those two are the main ones.

Are Pentech UK or US based? UK.

The reason I’m asking is that I’ve heard quite differing opinions on the likelihood of US VCs investing in European projects. Any thoughts / comments? It’s a very good question. We found a great deal of reticence from US VCs to invest in us if we weren’t willing to immediately move out to the US. The East Coast VCs not quite so much, but certainly the West Coast. We just weren’t ready to move out there. We have children and family here, it just wasn’t the right time personally.

I remember you speaking at GeeknRolla about how much you enjoy living and working in Edinburgh. :) oh yeah! We may make the move Stateside at some point, never say never!

52 3. FanDuel • Lesley & Nigel Eccles

As a European project, do you feel you are on equal footing with US-based startups, in various aspects – funding, customers, marketing etc.? The main difference is the funding. VCs in the UK are much more conservative than in the US, much less willing to take risks – and the focus here from the outset is always on revenue rather than user growth or anything else. It’s hard to handle when you meet companies from the US who have received several million dollars worth of funding for an idea that you know is fundamentally flawed. In terms of customers, we are very conscious that we’re not in our target demographic, so we use an approach called Customer Development (propounded by Ste- ve Blank), which advocates making all your development customer centric rather than product driven. And we constantly talk to our users and survey them to ensure that what we’re creating is the right thing, not just what we think they will want.

Regarding enterpreneurs launching and running startups – would you say there is a general difference between Euro- and US-based founders and teams – commitment, aggresiveness, execution ability – or would it be hard to make such a generalization? I don’t think you could make that generalization.

How are HubDub and FanDuel doing & will you be focusing on those two in the near future, or can we expect more games soon from Hubdub Ltd.? Right now we are focusing heavily on FanDuel. Hubdub is doing well, so it doesn’t need much attention right now. FanDuel is still in its infancy, but it’s growing fast with some major partnerships on the horizon. We’re still a small team, so we don’t have the bandwidth right now to spread ourselves too thinly. I imagine it will be 2011 before we plan a new launch.

Sounds like the right answer ;) Well, thanks a lot for your time, Lesley. Much luck and success with your company, and we’ll be in touch! Thanks Ivo, it’s been a pleasure. Hopefully I’ll see you again at a TC event!

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Nigel Eccles, Skype call – May 2013

Nigel, I spoke to Lesley quite some time ago, in early 2010. I wanted to catch up with both of you about the project and hear from you what has changed since then. So what’s changed is that the company is much bigger. Two years ago we only had around fifteen staff, and now we’ve got, what, fifty-two staff. Our revenues fifty thousand a month in revenue; now we do have about a million a month. would have gone from . . . Let me see . . . Summer 2009 we were probably doing That is really nice for a fifty-person team! Oh yeah, yeah, I know, it’s really ramping up.

Fantastic. Where are you in terms of profitability? Yeah, we had profitability this year.

The core team is the same? Yes, and we have five co-founders, and they’re still very much in the business.

How much of a challenge is it to run a startup as a family business? I actually think that it’s been easier working together than it would have been with just one of us doing it, because otherwise you don’t understand what’s going you know, it has been really good for us. on – the challenges, testing the limits of the business . . . I find it to be really good, Actually, I first met Lesley at the GeeknRolla conference in the spring of 2009. I still remember how part of her talk was about how much both of you loved Edinburgh and living there and how much she enjoyed it. Are you still based there, or are you in the States? We opened a New York office about a year and a half ago. One of my co-founders moved to New York, and around half the company is based in New York. I travel a lot – I’m in New York probably every two, three weeks.

But you’re still based in Edinburgh yourself. Still in Edinburgh, yes, absolutely – we just got a baby! I think we probably will move at some point. We’re just trying to think when that might happen.

54 3. FanDuel • Lesley & Nigel Eccles

I was curious about one of your investors – Scottish Enterprise . . . This is a government facility for high-tech technology startup companies. And they were both in your A round and your C round. Is that right? Yeah, they were in A, B and C. Scottish Enterprise is a co-investment fund – they effectively match funding of accredited investors. Pentech are an accredited investor, so if Pentech put in a million dollars, Scottish Enterprise would match that million dollars. You know, pound for pound. they don’t take board seats, and they are very hands-off in the management of their portfolio companies.

And obviously they focus on Scottish companies? Yes.

They haven’t felt the need to step away and cash out in one of the previous rounds? No, no. If you take a look at the venture capital business, you make your money with your breakout successes, and therefore, it makes sense for them to continue to invest in their winners.

In the last round Comcast was the lead investor? We didn’t really strictly have a lead investor in that round. It was really a combination of Comcast, Bullpen and our existing investors. The purpose was really growth. We were doing well in terms of profitability, but we just saw an opportunity to grow much faster, and that’s really what the series C was for. In terms of investors, we really did like Comcast, given their depth of experience in the media world, and Bullpen as well. We really like Paul Martino. He is on our board. Also, their network in Silicon Valley is just exceptional.

Comcast is based in New York? Our partner is based in New York, Comcast itself is based in Philadelphia.

The reason I’m asking is, you have a New York office and investors that are based in New York. So in terms of access to the US, you have apparently chosen New York as a base. Yeah, we opened an office in New York.

Is there a particular reason why New York, and not the Valley?

55 THE EUROPEAN STARTUP REVOLUTION

We spent quite some time deciding between New York and San Francisco, and I think there are number of reasons why we went to New York. One was that it is a much bigger media center – for example, NBC is based in New York, ESPN is

Another one was just logistics. You know, we have a UK base as well – logistically just outside New York, some sports networks are there . . . That was one reason. it’s a lot easier if you have an office on the East Coast.

Most of your customers are in the US? 100 % of our users are in the US and Canada.

Have you ever considered any other markets? No, not any time soon. There’s something like thirty million fantasy sport players in North America and we just barely scratched the surface of that.

Can you give me some stats? We have around half a million registered users, about a million monthly unique users and we’re growing about 4x year on year.

Great! You are primarily web based, is that right? Well, no. Actually, around 50 % of our visits are on mobile. We have a very highly optimized mobile web product. It’s not an application, it’s a web version, a mobile web version.

I see. Have you considered just creating an app? Yeah, that’s something we’re definitely working at.

How about social aspects? At least for European football, social is pretty strong. Actually, do you know what Nordeus is? What’s that?

Nordeus? No.

Have you heard of Top Eleven? Yes, I have heard of that.

Top Eleven is a company based close to . . . I’m in Zagreb, Croatia. And Top Eleven is based in Belgrade, in Serbia. And they are the number one football

56 3. FanDuel • Lesley & Nigel Eccles

– European football – game on Facebook. They have amazing numbers – a hundred people – and they are growing very fast. So, obviously, Facebook and the whole social platform can be a really strong area for sports. Interesting, yeah. We’re not planning any development on Facebook with the app. We definitely want to create social interaction on the side, and that’s something what we’re working on at the moment.

That’s cool. And you have this championship event in Las Vegas this year. So how does that work? We have qualifiers every week. And then the winners of those qualifiers are taken to Vegas. They get an all-expenses-paid trip to Vegas, where they get to compete in the final. There is a million dollars in prizes! It’s a great weekend, we have something like twenty, twenty-five finalists. The atmosphere in Vegas for the

Ifinals . . . can imagine, It’s pretty right. electric And as in you terms can imagine!of finances, the prizes come out of the qualifying entries. Is that correct? Correct, yes. So the event effectively pays for itself.

I see. Sounds like it’s a spectacular marketing exercise. Yeah – there is a lot of buzz! Every year we try to make the event significantly bigger. We started out with a fifty-thousand-dollar prize pool, last year’s was half

Ia sawmillion . . . in one of your interviews that you’re not allowed to know how much, they wouldn’t tell you? Yeah! I could before but some journalist got it out of me and now my marketing team says: “You know, well, we can’t trust you, so we’re not going to tell you!”

That’s cool. Lesley and yourself both have management consultant backgrounds? Yes.

And you left that world behind you quite some time ago? That’s right, yeah

What motivated you two to not be management consultants, you know, for your own careers?

57 THE EUROPEAN STARTUP REVOLUTION

We actually went back to the startup world. I actually enjoyed being a consultant. You get to work with really great people, work on really interesting problems, it before. I really loved building a product, marketing the product to customers, was very challenging . . . All of these things I liked, but I had also been at startups being completely responsible for its success or failure. That really was why six years ago I decided I needed to make the leap and just go and do it!

Seems like, in retrospect, it was a really good decision? Yes. The one thing, though, that what was a surprise for me was just how risky entrepreneurship is. We had a number of points where it could have failed. I had never fully appreciated that before, we made the leap, but now in retrospect it has been successful. That’s great, but I kind of know now the risks that I was taking at the time. I don’t think I fully appreciated that.

And if you had appreciated that, would you have done it anyway? I do say that, if I had known, if I had fully understood the risks, without knowing the outcome, I’m not sure if I would have.

OK, so it’s a good thing you didn’t know or understand? I think so, yeah, absolutely!

58 3. FanDuel • Lesley & Nigel Eccles

Update – August 2015

FanDuel has continued its rapid growth, still focusing on the US market. Since my talk with Nigel, the company have raised two large funding rounds – a 70-million- dollar round in September of 2014 and a massive 275-million-dollar round in July of 2015, valuing FanDuel, according to media reports, as a company worth more than one billion dollars. The investors in this last round, led by the legendary investment firm KKR, included Google Capital, Time Warner Investments and Turner Sports, as well as existing investors Shamrock Capital, NBC Sports Ventures, Comcast Ventures, Bullpen Capital, Pentech Ventures and Piton Capital. Their headquarters have since been established in New York. However, FanDuel still maintains a strong Scottish presence. Lesley and Nigel are based in Edinburgh, both commuting regularly to the US. At the time of this writing, about half of FanDuel’s 320 employees are in Scotland, and the rest are across the Atlantic. In order to support the rocket-like growth of the business, they have been acquiring whole teams of developers. In May of 2015, the company hired a whole team of 38 developers based in Orlando, Florida, from Zynga. Two months later, in July, FanDuel acquired an Edinburgh-based development company, Kotikan, with which it had already had a long established partnership in product development.

4 Atlas Ventures, Accel Partners Fred Destin THE EUROPEAN STARTUP REVOLUTION

Most of the interviews in this book are with entrepreneurs. I decided to make a few exceptions, including Fred Destin. Fred’s talk at GeeknRolla, in the spring of 2009 in London, was one of the direct points of inspiration for this series of interviews. I found his discussion and comparison of European vs. US vs. Asian startups and entrepreneurs intriguing and inspiring. I’ve had the privilege of speaking with him and listening to his talks on several occasions since then, so I decided if the investor side of the startup equation needed to be represented amongst these cool entrepreneurs, one of them may as well be Fred. When we first chatted on Skype, it was just about a year after that London conference, in April of 2010. Fred had just relocated to Boston from London, and Atlas Venture was a bigger, much more complicated investment firm than it is today. Our followup call was in August of 2013. By then, Atlas had reinvented itself as a small, tightly focused and still very successful fund. You can learn about this and much more, by the way, on Fred’s excellent blog at www.freddestin.com. After ten happy years at Atlas Venture and the feeling of a job well done, Fred decided to come back to Europe for the next stage of his career. Whilst there were personal dimensions to the move, he shared with me how excited he was about the maturity and quality of the ecosystem (as witnessed by the succesful IPO of a business he backed, namely Zoopla). Fred annouced in May of 2014 that he would be joining his former friends and colleagues at Accel Partners in September of that year.

62 4. Atlas Ventures, Accel Partners • Fred Destin

Skype chat – April 2010:

Let’s start with Atlas and your move to Boston. How much does that change things for the fund in terms of focus on US or Euro projects? We will continue to invest in Europe, based on the long-standing relationships we have here. Anytime I can do a deal with e.g. Harry or Sonali at Accel, Laurel at Greylock or Philippe at Partech, I will. By the same token, we are likely to concentrate on companies that feel the need to add a US angle to their support base. We are less likely to do e.g. Zoopla, a UK-focused solo seed deal. Hence there will be an evolution in the type of deals we do, but we intend to keep doing them.

So you don’t necessarily expect the fund and yourself to shift your balance more to US teams and companies? I do circa 1 non-seed investment per annum, and I will do the best deal I can find, wherever that deal may be :)

Ok – fair enough!

Thinking about globally recognised “high-tech” brands coming from Europe, three come to mind – GSM, Airbus and Skype. Would you agree? The fact that I am struggling to name many more is depressing. Like the challenge of naming five famous Belgians.

René Magritte! Nokia

OK – agree. But you were struggling :)

Your comments at GeeknRolla last year about US vs. Euro vs. Asian entrepreneurial “mindset” was partly an inspiration for this whole series of interviews. Good :)

But moving on . . . How would you comment on European “quasi-government innovation” projects such as Quaero? Has anyone heard about that outside of it’s team and perhaps funders?

63 THE EUROPEAN STARTUP REVOLUTION

Government needs to rethink its policies when it comes to innovation. 1. It is not the job of Government to supplement the private sector by putting money into venture capital funds on the inane notion that “there is no money around” – not now. 2. Government should not be doing direct investment into companies, either. It is incapable of devising investment structures that attract appropriate investment talent. 3. Government should be focused on boring, discrete, fundamental long-term objectives, such as: – providing efficient and consistent tax breaks that reliably drive investment from the private sector into startups – providing and fostering infrastructure that supports the the spread and adoption of information technology – supporting high-quality education in the fields of engineering and science – funding long-term science projects Quaero could fall into the latter category. HOWEVER – it was a politically motivated attempt at recapturing what was perceived to be a strategic asset, i.e. search, and there was no requirement to complement the private sector in this field. Google,

IYahoo, found Altavista, your “Cry FAST, for Europe”and so on . . . post plenty to be reallyof fish excellent and was particularly intrigued by your reply at the very bottom of the comments: “We need to take things into our own hands.” Can you be more specific? I always hear the same answer: “the issue is with our leadership and politicians.” This is another way of deflecting responsibility on our political class. We have the leadership that we deserve. We need entrepreneurs to go into politics! Fundamentally, most Europeans, particularly in Western Europe, have NO CLUE as to what is happening in the globalised economy. They suffer from it, but they do not have a clear understanding of the dynamics of the global economy. When you go to Shanghai, Mumbai or the Bay Area and you dive into this flow, you realise the speed of change around us. I am incredibly concerned about sliding into irrelevance.

So my own worries about Croatians and other Southeast Europeans being out of touch should not necessarily be limited to SEE?

64 4. Atlas Ventures, Accel Partners • Fred Destin

Absolutely. I was having the same debate with a great entrepreneur in Denmark a few weeks ago. He loves living in CPH, and he gets great dev talent, but as he puts it, “I just cannot get these guys to understand momentum and to get things done faster.” They all leave at 6pm. Fundamentally, we need both grass-roots improvement, including young people understanding that failure is the shortest path to greatness, and we also need top- down improvements, starting with smaller government and empowerment.

On the topic of enterpreneurs – you’ve invested in a number of European teams and projects. Would you say they are exceptions to your scepticism, or are they less dynamic than US / Asians, as well? Generalisations are by essence wrong. The team at Zoopla is incredibly fast, hard- working and dedicated. I will tell you, though, that I am stunned by how much the young kids we hire know about their pension entitlement or the subtelties of the French legal system and what they are “entitled to.” They are as good at Ruby on Rails as they are at getting the last penny from you if they get fired! They have endless debates within the “workers committee” about their working conditions and whether their offices are too cramped (believe me, we have some great offices compared to US startups) , or whether we should be doing more to recycle our coffee cups.

Thanks very much again for your time and have a nice day! You too, Ivo !

65 THE EUROPEAN STARTUP REVOLUTION

Skype call – August 2013

Fred, we talked back in 2010, and many things have changed since then. I’ve read up on the changes at Atlas, but I’d like to hear it from you first hand. Can you give me a few personal comments on the fund and your involvement and how that has transformed since 2010? My fundamental belief – and this applies to start-ups and VCs in the same way – is that we live in an era of more and more specialization and deeper expertise within niches. The VC industry was built on generalist investors that, you know, knew “how to build companies.” We are moving more and more towards the need for fairly deep and relevant expertise in terms of how you build companies within specific segments. So at the high level, in the past, people used to do health care and IT, and back then, IT people used to do everything from semi-conductors to systems to e-commerce. But now, you see more and more specialization, and you see much smaller teams with highly relevant, deep networks that outperform bigger teams with broader networks. In fact, even a firm like Andreessen Horowitz, when you dig into them, even though they are huge, they’re actually really, really quite specialized around doing two things well, right? They either do B2B very early, or they do e-commerce in acceleration mode. And that’s really all they do, when you look at it, that’s like two things that they do well. So even a firm of that magnitude, with that amount of money, is actually very very focused on a segment, and on a certain way of acting within the segment. I don’t believe venture scales very well. I think the few platforms that have done it, like Sequoia and so forth, are exceptions rather than the rule. I believe in small teams, and I believe they tend to outperform bigger teams. My mental model is always Benchmark Capital, which I think is the best example of a long-term sustainable small team.

Regarding your own organisation, what are the areas/sectors/segments where you guys really have the expertise to go deep? We really only do technology-enabled services. We were focused on a few segments, but one of my partners pretty much only does big data investing, and because he was CEO of Vertica, which was the first real-time analytics company for big data, he’s just got incredible reach within both customers and acquirers in that space in

66 4. Atlas Ventures, Accel Partners • Fred Destin terms of people talent. So Chris Lynch really only does big data. My partner Jeff Fag- nan tends to work across the board. He’s like a talent agency, but if you look at his expertise, he’s very very deep on security. He’s done things like Bit9 and Veracode, both of which are probable IPO candidates that we seeded. He’s also done stuff like my work, almost all that I do, has been around e-commerce and digital media, with Angellist, or DataXu . . . He’s really like a talent agency for A++ type CEO’s. Most of the occasional exception when I’ll do a SaaS company. What I’ve found is that there are subscription services like Zoopla, for example, which is actually a subscription business even though it’s consumer facing. I’ve found that there’s great overlap and a lot of value when you come from e-commerce, for example, and you start to apply - pline to B2B, and you’re helping platform companies and SaaS companies do their the discipline like analytics and metrics and funnels . . . you start to apply this disci job better. I’ve found that there is a great overlap between e-commerce and B2B because the customary position methods are starting to be the same, and the way you think about building and monetising funnels is actually quite similar.

How does fintech fit into all that? Well, fintech is a bit of a hobby of mine, I guess. It’s partly because of my background. I spent many, many years doing hybrid derivs and working around the trading floor, so it’s a segment I know well because I lived it. I did Capital IQ back in the in the portfolio based out of London, it’s really a cross-border payments company. day – a SaaS company . . . If you look at Currency Cloud, a fintech company I have On the one hand, it’s a SaaS business. It’s a classic: build the funnel, monetize, to do cross-border payments. I don’t really care – they could be selling HR services, subscription revenues . . . On the other hand, it’s a fintech company that happens but they happen to be selling cross-border payment services. I have decent sector

The challenge remains one of product design: how you design and implement expertise in foreign exchange, which is helpful . . . beautiful SaaS products and how you build efficient funnels. Fintech is an industry where people have no idea how to build SaaS businesses, really, except for a few examples like maybe Bloomberg. So it tends to be very old school, very brokerage oriented, very trading oriented. And one of the benefits you have is that you can bring all these techniques you learned from SaaS and from e-commerce to a world that is still very antiquated in the way that it sells to its customers. One of our competitive advantages is that everyone’s selling brokerage services, and we’re

67 THE EUROPEAN STARTUP REVOLUTION coming in with an Amazon-like platform for foreign exchange. Very few people really understand what that means and how disruptive it can be to the industry. So they all try to fight for the best spread, and we’re just saying: “Look, we’re about automation, we’re about ease of execution. The spreads are going to be fixed and we’re going to be transparent on pricing.” The notion that you can be transparent on pricing is quite unheard of in the foreign exchange space.

How is Currency Cloud doing? Currency Cloud is an investment I did a year and a half ago. Step one was to build a strong API business, and then step two is to build a SaaS business, direct to enterprise on top of the API services. We built a good, very strong team. We’re still in the process of adding to that, but we have very good engineering, a very good product, and a good CEO, who I recruited. I actually recruited him before investing, which is unusual for me, but we had founders who came from foreign exchange and really didn’t know software or SaaS or any of the work we were trying to do on the platform, so it was a logical thing to do. And so we’re selling that API service to a bunch of people, including TransferWise, which always gets a lot of press, and a bunch of others. We power a bunch of these services through our API product. Revenue has been growing steadily. We’re not burning a lot of money a month because of that. We have way more volume than TransferWise –- not that it matters, we’re not in competition with them – we’re much larger from the transaction volume standpoint. We’re continuing to build that API business, and in the next stage it would be good to have a SaaS business aimed at a different market segment, a different type of user than TransferWise. That’s going to be what we do next, as well as thinking of international expansion, particularly towards the US.

Atlas has really transformed from a very large organization with multiple offices and many partners into a much more compact, very, very focused unit. On the other hand, when you relocated from London to Boston, you mentioned that that wouldn’t diminish your interest in European companies and projects. VC firms, especially if they’re small and tight, very often tend to focus on investments in their geography vicinity. How does it work for Atlas today? Are you guys more focused on Boston, or are you equally open to Europe as you were before? The core of our strategy is to be that first call for people raising seed or first- round financing in Boston and New England. That is by far the center and the

68 4. Atlas Ventures, Accel Partners • Fred Destin core of our strategy. We also invest in San Francisco, some in Montreal. We don’t really have a New York strategy today. We’ve done two investments down there, both of which are doing great, but I wouldn’t say that they are a part of sustained strategy. London is a bit like New York: it’s sort of by exception if, through the network or however, we find opportunities there that we consider exceptional. Since I moved to Boston and we continued to change the team around, I would say at being the seed and Series-A investor in Boston that everyone wants to talk to. that . . . I want to be the best at something, right? And I want to be the absolute best And then, again by exception, by extension, I’ll occasionally look at a project in the UK, usually with people I know well already, that I’ve worked with before, but I do not have an active desire to be on the ground sourcing deals in the UK.

If you happened to hear about a really interesting deal in Europe that is outside of the UK, would you even look at it? Probably not, unless there is a clear angle to come to the US.

OK, but if there was a project that was out of Croatia, that was already working in the US, and it’s expanding in the US, how would that sound? It’s a definite possibility. If you look at Boston in particular, it’s probably the best place in the world to build a B2B, SaaS company, because of HubSpot, Aquia, Eloqua, Akamai and so forth. You get a lot of massive hits locally in the B2B space and in particular in the SaaS space, so you’ll find a bunch of companies that if they know the market well, they’ll see that it’s a very natural place to go build an HQ. It’s still easier to find people that are more reasonably priced than in New York or the Bay Area. And in some segments, like B2B and SaaS, you’ll actually probably have the best fishing pool in the world for talent, for example, specialties like inbound marketing or big data engineering. For stuff like that it’s really, really hard to beat. So when you have a natural tendency or desire to come and build an HQ in New England, then I think, by all means! If people are going from Croatia to San Fran, they really need more local help on the ground in San Francisco. We’re pretty good down there, but that’s more distant and kind of less likely.

What’s your view of the European startup ecosystem today? There’s good news and bad news. On the good side, on the ground the ecosystem is healthy and thriving. There are a lot more second-timers than there were several years ago and the average quality of companies is continuing to improve. You can

69 THE EUROPEAN STARTUP REVOLUTION feel the vibe by simply walking around Shoreditch. There is a lot of richness and depth in Europe. Berlin is somewhat overhyped and not as deep as people sometimes say, but it’s still great to see how much it has developed and how exciting it’s become, as well as, for example, Copenhagen, Stockholm of course, and others as well. The bad news is on the fund side: if you exclude Accel and Index, it continues to be an extremely tough fundraising environment for VCs as reflected by the fact that there are so few new funds being announced. A lot of the funds that do manage to haven’t been announced yet from firms that have been fundraising for a long time, raise are subscale to be full lifecycle investors . . . There are a bunch of funds that which raises a question: Where are the announcements ? Are these teams ever going to be able to close ? In the meantime, possibly half of the money going into the funds is coming from the public sector, and I’m not sure whether that’s a good thing. The public sector is holding up much of venture capital right now. The other concerning question is: Where is the next generation of venture firms? In the Bay Area there are a bunch of new names such as Floodgate, Felicis, Softech and many others, but almost none of the new initiatives in Europe have managed to raise capital, with a few exceptions like Passion and ISAI on the seed side and Notion Capital in SaaS.

How about the comparison of Europe to the Valley? Obviously Europe is behind in many ways, but some would say not as far behind as we used to be, that the gap is getting smaller over time? Let’s not kid ourselves – all the ecosystems are improving, San Francisco is not staying the same. Ecosystems are moving fast: New York is exploding and the Boston renaissance is incredible. Europe is making a ton of progress but I’m not sure it’s catching up. Asia is outpacing everyone except maybe for the Bay Area. The Bay Area continues to be an incredible vortex and may be accelerating faster than anywhere else. The good news is that we have a generation of big winners coming. Some of the best companies coming out of Europe – companies like King. com, Spotify or Supercell – are going to be big wins and create a new generation of angel investors. But again – the funding situation is dire. Which successful funds can you name that have successfully fundraised? Where is Amadeus, Advent, Eden? What’s the

70 4. Atlas Ventures, Accel Partners • Fred Destin news from the established European investors? In France, Partech, Ventech and IDInvest have managed to raise new funds – and I think that’s about it! Where are the large exits in the last three years? Some are coming down the pipeline, but we’ve simply not generated enough excitement to be back on the map for global investors. France has its own issues, of course, and seems to be moving aggressively against everything entrepeneurial. It’s like they’re commiting suicide on that front with the tax changes they’re implementing.

I’ve spoken recently to a few CEO’s of European gaming companies such as Ilkka Paananen of Supercell, Nigel and Lesley Eccles of FanDuel and Branko Milutinović of Nordeus. There seems to be a feeling that gaming is one area in particular where Europe is a global leader. The gaming market is massive. It’s the largest media market on the planet right now. Europe has done a stellar job at mixing the power of web and mobile. Clash of Clans is a nice example of European gaming success. King.com managed to build what Zynga failed to do. These things don’t happen in a vacuum – there is always a lineage. Kristian Segerstrale built DigiMob, which merged with Glu, then Playfish, which he sold to EA, and now he’s a board member at Supercell. There were a bunch of gaming companies that did well in the ‘90s and early 2000s, and today’s generation is building on that legacy. I don’t think, however, that the question “Does Europe lead in gaming?” is the right question to ask. The US and Asia are also building gaming success. The right question is – Has Europe demonstrated repeatable success in gaming? Yes! Has Europe shown that you can bet on gaming entrepreneurs and back them? Have we proven we can build repeatable, succesful, scalable gaming companies in Europe? Yes we have!

5 Skimlinks Alicia Navarro THE EUROPEAN STARTUP REVOLUTION

Skimlinks is one of those very successful companies very few people have ever heard of. Like most brilliant ideas, the core model is very simple. When the publisher of a blog, portal, news or any other site integrates Skimlinks into their site, affiliate links to the products that are covered on the site are created automatically. Suppose you read about a new wireless sound box for your iPhone. You love the review, click on the link and buy the product. A referral fee then goes to the publisher. Referral links and affiliate networks have been around since long before Skimlinks, of course, but Alicia Navarro and her dynamic team have made it very, very easy for publishers to integrate and manage the links into e-commerce sites. Alicia and I first spoke over Skype chat in April of 2010. I was fascinated to hear how she had built up her startup for a whole year while holding another full-time job, then moved to London, raised two rounds of funding and created a high-potential startup. When we spoke again, this time on a Skype voice call, in November of 2012, Skimlinks was flying high. Alicia is now based in San Francisco. The company is now sitting on a massive amount of daily transactional data points and thinking about how best to benefit from all that big data and how to crack some really tough markets such as China and Japan.

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Skype chat – April 2010

Alicia – it’s been quite a journey from Sydney to London and the world, yes? Indeed! I am from Sydney, and I lived in London for four years before returning home to Sydney, where I knew I wanted to start my own company. I started it while working full time, and working at nights and weekends with a team of developers in Romania. After a year, I realised that, to take the business to the next step, I needed to leave Sydney, so I decided to return to London. And here I am! Now I’m popping over to the US as often as possible, as its key we have a US presence, too.

So for a full year you were working on this in parallel to a day job? Wow! Yes, I deliberately made career decisions that helped me to be flexible to start my business: I could have been in a much more lucrative and powerful job, but I chose a contracting job, doing product management and business consulting. However, it meant I could work three or four days a week, make as much money as I would if I was working full time and all my spare money I pumped into the business.

Super . . . I was reading your “Birth of a Startup” blog a few days ago, and it took me a little while to realize that the last entry was Feb ‘09 and not Feb 2010! deal over a year ago. It’s been a very eventful year. Yes . . . i thought it was a fitting point to end it, just as we closed our seed funding I can imagine! My understanding is that it took you one or two changes in concept / strategy to where you are today with Skimlinks? We had two pivots: the first business was called Skimbit.com (now renamed when I moved back to London, I pivoted to turn the tool into a white-label service SkimIt.com) which was a social decision-making tool . . . like Kaboodle.com. Then, that publishers could license, and we built the skimlinks technology initially as a means of monetizing our own user-generated content. Then the recession hit, we still hadn’t secured our funding, things weren’t looking good and, in a moment of realization, I decided that our most valuable asset was not the front-end consumer shopping tool, but the back-end monetization technology that lots of other websites would have liked to own. So, in one of those pivotal moments in my life, I made the decision to dump everything I had worked on till then, and instead commercialise this internal technology.

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An epiphany! sheet. We were rescued, and things have been amazing ever since. And it worked . . . in a few weeks we had major publishers sign up and a term Fantastic! Could you give me some time orientation . . . when was the initial Sydney work, and when did you come to London? I know your first round was a year ago, right? I started the company in Sydney in August 2006, and I moved to London a year later, Sept 2007. Our seed funding round was Feb 2009, and our A round was Dec 2009.

Still working with those Romanian developers? No, we stopped once we could afford our own internal development team. Funnily enough, if you have heard of Brainient, it was that company.

I’ve not only heard of them, I met them at Seedcamp week in London last year. How did you get to know your co-founder Joe Stepniewsky? Joe and I went to university together in Sydney – we are very good old friends. He was involved in the initial concept of skimlinks, and once we got our seed funding, he was able to leave his other businesses and join us full-time as co-founder.

You work with more than 8,000 merchants and . . . how many content sites – portals, online magazines? We run on over 500k domains, made up of over 1,000 individual publisher accounts.

Sheesh . . . impressive, awesome! Your main source of revenue are the referral fees. Any other significant sources, or is that it? That’s it, although we have a number of ways publishers can increase their commissions – e.g. we have released the skimkit, and more is up our sleeve.

So when you “sell,” that basically means extending your network of publishers and merchants? Yes, that is correct.

Just looking at those numbers ticking at the bottom right of your homepage is cool in it’s own right! Haha, yes, the ticking and randomisation is ours, but the numbers it ends up at are real.

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A few quick questions about funding & revenues . . . You’ve done two rounds with the same investors, which is a strong vote of confidence. Indeed. They are delighted, we have hit every goal they have set up.

And you’re partly UK government funded :) We are funded partly by NESTA, which is the National Endowment for Science Technology and the Arts. They are funded by lottery taxes, actually :)

Great!

Have you ever approached US funds, in either of your rounds? investors like their companies local, especially after the recession, when they Yes, in the previous round . . . but we weren’t prepared to move to the US, and US want to be more intimately involved in the day to day operations.

So you would agree with some of the other people I’ve spoken with that US funds are generally reluctant to invest in European startups? They do do it, but it depends on their stage. We are still quite early stage, and in this climate, yes, they are understandably reluctant to invest if the company doesn’t want to move to the US and they are still early stage.

Could you have done Skimlinks from Sydney? Goodness no!

:) You need to be where the clients are. Being London-based was actually really helpful; I could catch the tube to visit face to face all my first clients. That is a valuable thing in a B2B business.

Clearly. But in the general sense, how likely is it that a young enterpreneur could launch a successful business, at least initially, from Sydney, Zagreb, Munich or Venice, Italy? Depends on the business. B2B, if it requires sales, its hard to do without face to face. When you are small, you have to get people to trust you and take a leap of faith – that is much more achievable face to face. I think if you are B2C, it doesn’t matter where you are based, but it helps to be near investors or other startups. The buzz of a geography helps so much when you are starting up, as do the contacts you meet, the advisors who help you, etc

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How would you compare London to the US (NY or the Valley) – are UK / European startups equally positioned to compete globally when compared with their US counterparts? on later-stage companies and surer-bets, there are less investors, there is a smaller I won’t lie to you . . . we have it a little harder here: the investors here tend to focus community, there is less of a talent pool that want to work for startups, etc.

But it is possible . . .. very much so. The community here is vibrant and passionate; commercial and gregarious than geeky. There is also more of a focus on building they tend to be less techy than Valley founders . . . here founders are more businesses, rather than features – but that is probably because features tend to be acquired more easily in the US than in the UK.

How is Skimbit doing with revenues / profitability (of course–- as far as you’re comfortable with disclosing)? How long is you runway at this point? We are doing very successfully, meeting all our revenue goals.

What are the key next steps for your company? Setting up shop in the US? Any subsequent rounds of funding in the works? We are in the process of setting up shop in the US, to have a more local sales and account management effort.

What are the chances of a European (or Australian!) entrepreneur “making it” from a European base? From a pragmatic, business perspective, isn’t the most direct route simply to head straight to the Valley (or perhaps NYC) – or are there distinct advantages to building up a business in Europe, aside from “I really like the lifestyle.” And also, when we say “Europe,” does that equate (for high tech startups) to London? Do you think European entrepreneurs are as dedicated, hard working, fast moving as their US counterparts, or are the Americans simply “one step ahead” in that regard? I think anyone can make it, and that any endeavour has its challenges. However, choosing to do a high-tech startup outside the US, in, say, London, represents a challenge, but a surmountable one, as evidenced by a number of successful exits from London. Choosing to run a high-tech startup in Europe outside of a major financial and VC-community, is yet another hurdle to overcome. There are enough challenges that a startup faces as it’s trying to grow, and as the founder

78 5. Skimlinks • Alicia Navarro of your company, you have to work out which challenges you are willing to face, and which ones you will solve in the simplest way possible. It’s not a matter of whether European entrepreneurs are as dedicated or hard-working as their US counterparts; it’s a matter of what you choose to surround yourself with. US startups often do better, as their environment is more conducive to producing successful startups. But that doesn’t mean [such an environment is] not reproducible elsewhere – it’s just harder, and you have to choose whether to take on that burden. In our case, we choose to take it on because London is actually a great centre for us: we can visit a large number of our clients personally in the UK, and we are only 5 hours time difference away from many of our other clients in NYC. That being said, we will set up US offices, so it’s about finding the balance and timing that works for your company.

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Followup call – November 2012

Alicia, how has Skimlinks been doing? Things have been good! We just continued to grow two to three times year on year, four years in a row. The team is also growing and our geographic expansion continued. I think the last time that we spoke I wasn’t even in the US?

Yeah, that was April 2010. Yeah, right, so I moved over two years ago, to San Francisco. It’s been a really successful development; we’ve got a great team here, and we’ve really built a strong presence in the US. That forced me to travel way too much, but that’s the job I signed up for.

How have your company’s operations shifted from London to the US? Do you still have a significant London team, or is everything now in the States? No, the R&D continues to be in the London office. The London office is still the main one. And for many good reasons: it’s so much easier to retain staff at, and it’s a lot more affordable than if I had the same team in New York or San Francisco. It’s just way too competitive here and really hard to retain good staff. In London, at in the States, so it’s a good place to be. the moment, the startup scene is really growing . . . We are reasonably well known How are you splitting your time? Obviously you travel a lot, but is it evenly split between London and San Francisco – or are you mainly in the Valley? It alternates as the need arises. Sometimes it’s 65% San Francisco and 35% London, sometimes it reverses – it really just depends on what the needs are. I’m an international woman at the moment!

How often do you get to Sydney? Just at Christmas every year.

So no significant business there, an office or anything like that? Oh, no – Sydney is not a great place at the moment for startups.

Can you just give me a brief overview . . . When we talked in 2010 (this was April), I think you had something like 8,000 merchants on the platform, 500,000 domains that you were running on and a thousand individual

80 5. Skimlinks • Alicia Navarro publishers’ accounts. What are the some of the metrics that you like to look at today as compared to that time? We are at about 20,000 merchants. That is not necessarily a great number to look at because, for example, our competitor has said that they’ve got 30,000 – but they integrate with very spammy networks. In our case, the networks that we work with are always ones that are very relevant – 20,000 of the most well-known retailers and brands on the internet, including good coverage across Europe and increasingly Asia. So that is great! In terms of publishers, we had about 500K then and it’s a lot more now. We have about 84.000 sites using Skimlinks.

That’s great! Have you been looking at any geographies as particularly interesting? You mentioned Asia – how about Russia or Turkey? A lot of interesting stuff is going on there. The challenge that we have is that we depend on there being a pre-existing ecosystem. We need there to be a rich blogging and publishing space. We need there to be a strong e-commerce base, and we need there to be a strong affiliate network, an affiliated marketing space. So the countries that currently have all three of those, that we are really focusing on now, are Germany (Germany is fantastic – they are our third biggest geography) and increasingly China and Japan.

I spoke with Pierre Kosciusko-Morizet, the CEO of PriceMinister, in late 2010. They got bought by Rakuten. I’m sure you know them? Yeah, exactly.

They were bought by Rakuten for 200 million dollars, and when they were first approached, they essentially had not heard of the company. They were like, “Who are you guys?” So I think a lot of things are happening in Asia that many people in our countries, both Europe and the US, aren’t really aware of. The press isn’t covering them that much. I talked to Loic LeMeur about the LeWeb and asked him why he isn’t bringing more entrepreneurs from China to LeWeb. He said he invited them many times, but they just didn’t want to come – they apparently were not interested. Really?

So it seems to me, at least from my point of view, that things are developing there which we just don’t see or understand, those of us who aren’t there all the time.

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Yeah, we were just surprised looking, this week, that the Chinese web site Taobao. com had a discount promotion to celebrate what is known as “Double Sticks Day” in China. In a single 24-hour period they conducted the equivalent of over 3 billion dollars worth of business! The closest competitor was Cyber Monday in the US last year, where the total sales across all retailers was 1.25 billion dollars. So, you know, in two days of business, one retailer in China had more than doubled the sales of all of the US combined!

That is just mind boggling . . . So you are actually active in that area? Becoming more so.

Many high-profile American brands – Facebook, Google, Groupon – had their teeth broken in China. They all had a huge plans and they didn’t make it. I know some other examples that are less high profile and have really done a good job. What is your strategy? How you are you going to crack that market that other people have not really been able to? Our approach is going to be to hire locals. We are lucky that we have a really great relationship with Rakuten and LinkShare Japan. Our investors also have a local office in China, whereby they offer help for their portfolio companies to expand to China. So we are going to be leveraging those relationships with local companies that already understand the business and the local customs. My plan is going to be to hire local people. We’ll see about the expansion. It’s been very much a pull situation: we have companies that want to use us or are already using us in these countries. In China we were amazed to see that one of our publishers is doing really well without us even optimizing it for China. That really made us realize, “Ok, let’s think about that!”

Tell me about some of your next steps. The company has been growing, and you’ve been doing well. What is the strategy going forward? Is it just going to be a continuation of what you are doing now, or do you foresee any huge steps or any really important, crucial milestones? Maybe a new funding round somewhere in the future? It’s going to be a really busy time. There is a lot that we are working on that is not obvious from the outside. There will be more funding and significant new product releases. Expansion like getting more publishers into the network is obviously an ongoing thing, but very much in parallel with that is the evolution of our

82 5. Skimlinks • Alicia Navarro product suite and increases in the yield that we get from the advertisers. So the growth that’s happening geographically – in terms of publisher growth, in terms of product expansion, in terms of the yield that we make from the publishers – all of these have a stream of initiatives behind them. We are very interested in the data space and will be making some significant product releases in that space. And it’s also a key time to build more direct relationships with the advertisers. Historically, we kind of built direct relationships with publishers and achieved scale with merchants thru other third parties, like affiliate networks. As we grow, we will end up forming more direct relationships with a lot of the key advertisers that we work with.

You mentioned data – can you be more specific? I mean, I can understand there is a ton of data flowing thru your platform – what are some examples of utilizing that data? Use cases that you feel comfortable with sharing. We – let’s just say that we collect obviously interesting information about what people read, what people click on and what products they are interested in. That enables us to build additional products in the audience targeting space.

Give me an idea of the volume of data. You mentioned the number of publishers on the platform, but in terms of data points that you are able to collect in like a day or a month, can you share some idea of the quantity of the information that you have access to? We process about 2,300 million clicks a month and, in terms of impressions, about 2.5 billion page impressions a month.

That’s a nice number! Yeah, and it’s growing very quickly. It’s tricky because size isn’t always the ultimate measure of value. We have a lot of sites generating a lot of page views that may not generate a lot of revenue. And then we have a lot of publishers that may be small but have a really engaged community and make a lot of money on their site because of our technology. So it’s a mix of different things, but the thing that we are proud of and are going to start leveraging for our publishers’ benefit is the network effect. There is a lot of information that we can now leverage that can actually help publishers be more informed in their editorial decisions. For instance, we could give them information about what they should write about that would make more money; what pages

83 THE EUROPEAN STARTUP REVOLUTION are earning them the most; and what links are driving them the most revenue[ – all of which] could help them make editorial or site-design decisions if they wish to take that information on board.

What is the financial effect of using Skimlinks for, let’s say, a small- or medium-sized publication? A platform like that’s not necessarily the New York Times or CNN. What are some of the revenues that sites like that can expect from using your platform? That’s a really hard question to answer because it’s not the size of the site that matters as much as the nature of the content.

OK, but just a few examples? Well, I mean, you know, a good way to look at is kind of the way that we tier up our sites. Really big publishers will make sizable five figures a month. The biggest ones, like Pinterest and some others, will make six figures a month.

OK, that’s a range. And then a medium one will make four figures a month and a small one will make three figures a month.

I see. Four figures a month for an online operation where their investment is not so huge is a nice, really interesting revenue stream. It is, particularly because it is completely incremental. It’s not like you have to choose whether you want to run us or another form of advertising. It’s something that works neatly in tandem with other forms of advertising. In fact, all of our publishers will use us alongside a lot of other forms of monetization. It’s very much about a holistic approach vs. choosing just one solution to monetization.

I’ve spoken to a few people here in Southeast Europe who have built successful and financially independent web sites and blogs, which are not very common at all. I asked them what their strategy was. More all less all of them said that there is no single “magic key,” but that they just used everything they could and just leveraged the hell out of whatever revenue stream they could get. Exactly. It’s about finding the right combination for the publisher. And it’s not just about the money – in many cases it’s about making sure that you balance revenue requirements with the impact on the user experience.

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For instance, you may have a site like Vibrant Media, which is a fantastic revenue generator for a publisher, but many publishers may opt not to use them because it’s just not consistent with their user experience or they are not happy with how it impacts on their community. And so you will find publishers that are finding the right balance between the right revenue stream and the right combination of revenue partners that give them good yields but also don’t damage the user experience of the community.

How many people are there now in the company? Close to 50.

Most of those are in London? Yeah, about six or seven of us are in San Francisco and the rest in London.

I’m really glad that we had this chance to speak – it’s great to see that things are going well for Skimlinks! The thing that no one ever tells you is how difficult it’s going to be. I mean, they try to tell you, but you never quite believe it! It’s still the best, most interesting and exciting thing I’ve ever done in my life, but it never gets easy. Just when you think you’ve worked out something, you get bigger and then you

You are always feeling a little bit out of your depth and that is both exciting and raise more money and then you have to expand to get to into a new market . . . fulfilling, but it’s hard. I’m really proud that with a little company – we didn’t raise that we made it! We’ve tried to bring some sexiness into it. We have a fantastic that much money – in a tough and perhaps not very sexy space . . . I’m really proud team of people that are really happy at work. They are very loyal, and our publisher community is very happy and loyal. Things are good, I guess!

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Update – August 2015:

Alicia, Joe and their crew are still busy building Skimlinks into a world-class company. In February 2015 they raised a Series C investment round of sixteen million dollars, bringing the total raised to twenty five million. The round was led by new investor Frog Capital, with previous partners BDMI (the VC arm of media giant Bertelsmann), Greycroft, Silicon Valley Bank and Sussex Place Ventures (owned by the London Business School) all participating. By now the Skimlinks team has grown to 80, integrating the platform with more than 20,000 merchants, processing 300 million clicks a month on over 1.5 million web sites.

86 6 Playfish, EA, Super Evil Megacorp Kristian Segerstrale THE EUROPEAN STARTUP REVOLUTION

Kristian Segerstrale has been an instrumental force in the European and global digital gaming industry. He founded his first company, Macrospace, back in 2001, straight out of the London School of Economics. Macrospace merged with American rival Sorrent to form Glu Mobile. The merged company went public on the NASDAQ in 2007. Only six months later, the original Macrospace founders left to start a new company – Playfish. Two years later, in 2009, Playfish was acquired by gaming giant Electronic Arts (“EA”) for 275 million dollars in cash, 25 million in stock for the founders and an additional 100 million depending on performance. On the strength of that exit, Kristian and his teammates established an investment fund, Initial Capital, in 2010. At the time of our Skype conversation, early in 2011, Kristian was a VP at Electronic Arts, involved both with EA’s global operations as well as with (still) Playfish itself. He left EA in March of 2013 to focus on investments. In particular, he worked closely with the management team of the Finnish gaming company Supercell and their CEO and founder, Ilkka Paananen. Kristian was kind enough to introduce me to Ilkka who is also featured in this book. An entrepreneur at heart, Segerstrale could not stay away from founding companies for too long. In May of 2014 he joined another gaming company, Super Evil Megacorp (seriously!) together with a superstar team of gaming industry veterans. At “Super Evil”, Kristian is the COO, Executive Director and – through Inital Capital – investor. Their stated goal: “to bring about the core gaming revolution on tablets.”

88 6. Playfish, EA, Super Evil Megacorp • Kristian Segerstrale

Skype conversation, early 2011

Kristian, first of all, congratulations on all the work you’ve done, with both Playfish and Glu Mobile before that. Thank you. You know, it’s been a lot of fun.

My first question is about your colleagues. The four of you have been together for almost ten years now. You started two companies, and you’ve gone through two acquisitions and an IPO together. I’ve been doing interviews with various entrepreneurs, and I can’t remember running into a team that’s been together since the first founding days, like you guys have. Yeah, it’s been fun, but don’t forget it’s been on and off. Sebastian was employee number seven or eight on the first venture and then very quickly made his way to becoming a founding team member. After we went through the IPO, for example, he left the company. Shukri had left the company a little bit earlier to do some other things and then, you know, when it came to setting up Playfish, we kind of got the old band back together to do that.

I see. Something like the Blues Brothers. Yeah, something like that. “The Blues Brothers of games.” I like that, that’s good!

A quick question: [Segerstrale is] obviously a Scandinavian family name, so are you from England actually, or do you come from Scandinavia? No, I am Finnish. I grew up in Finland, I left when I was sixteen.

So, you came to the UK to study? Yes, I came for the university, when I was sixteen. I actually got a scholarship to go study in the United States for two years, so I went to school in New Mexico, in the middle of nowhere. Then I moved back home to do my one year of military service, which you had to do, and after that I came to the UK for the university, in 1997. I went to Cambridge to do economics, and after that I did a masters degree at the London School of Economics.

You guys took Glu Mobile public early in 2007. Correct, yeah. Were part of the team taking it public.

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OK, and very quickly after that you started Playfish. Yes, that’s right. Six months afterwards, roughly.

So, I’m assuming you didn’t have . . . you weren’t “chained” to the operation post IPO. Well, there are different levels of being “chained” to an operation, I had agreed with was a very mature, distribution-focused business. I’m more of an entrepreneurial, the CEO of that business . . . We had discussed it for a while, whether the business product-focused person, so it felt like I may not be the right person inside Glu to do what Glu needed to do next. It was quite an amicable, longer-term discussion that let me help take the company public and make the right plans for the next couple of years, and then, you know, let’s replace me with somebody who is more interested in driving distribution, moving forward, because the product innovation just wasn’t an important factor during 2007. It’s now again an important part of mobile, but there were a couple of years that it wasn’t. So we both decided that it was the better thing for me to go out and do something different. It was a very amicable, very friendly kind of conversation across the board, between me and Greg Ballard.

OK . . . Now with Playfish, you guys have been quite aggressive from the start about growing and funding the business. Correct.

And there was about 21 million euro raised in the first two years? Correct, that’s right.

Did you know your investors well from previous projects? Well, some of the seed investors, the people who put in the initial three million – those we knew very well. We put in about half of that ourselves, and those investors who joined at that moment were people we had worked with previously, so we knew them very well. When it came to doing the remaining eighteen million, I took my time to get to know various investors and chose Index and Accel because [I knew] they would be the most useful for us as we grew, and they frankly were the nicest people to work with, but I had not worked with those specific people previously.

And Index is British, is that correct?

90 6. Playfish, EA, Super Evil Megacorp • Kristian Segerstrale

I don’t know the exact structure, but Index has a large operation in Switzerland and in the UK.

But it’s a European fund. It’s a European fund, that’s correct.

And Accel is a US fund, but they have a European operation. Correct, although Accel Europe is a separate fund. But the roots of the company are, for sure, in Silicon Valley.

One of the reasons I’m asking is that I’ve been discussing with my various, let’s say, interviewees, or “victims”, the propensity or the willingness of US funds to invest in European projects. We’ve seen a few of those but not that many. I think that’s right. I mean, it’s uncomfortable as an investor, I suppose, to invest in a place where you can’t easily drive over for lunch or see what’s going on. And the whole premise behind the VC business is that they try to help the companies grow. It’s not just a financial investment, it’s finance plus skills, and if you are not able to bring those skills and experience to the table, then what’s the point?

Do you think that puts European entrepreneurs in any sort of disadvantage compared to US ones, or do you think the financial and venture scene and community in Europe, not just London, but outside as well, is strong and mature enough to be able to sustain good projects? So I think that overall, the European venture and entrepreneurial scene is at a little bit of a disadvantage compared to Silicon Valley because of a lack of network effect. I wouldn’t put it down to finance so much. It’s true, finance is one part of it – there’s perhaps not as much financing available here as there is in Silicon and entrepreneurs available on the financing side in Europe. I would also put it Valley . . . Much more importantly, there are not as many experienced investors down to skills across the board – skills and experience. I think one of the often undervalued and underestimated contributors to the success of companies in Silicon Valley is this concentration of talent, the network effect, many companies doing similar things in the same space. It means that people who work at these companies, even very junior people, have the experience of the cutting edge of technology and the cutting edge of consumer Internet services. This means that, when you start up a new company, you already start with people who are very

91 THE EUROPEAN STARTUP REVOLUTION experienced in specific fields, and, for example, if you need a specialist skill set for something, you’ll be able to find that specialist skill set quickly. So it’s enough skills across the board ranging from junior engineering talent to very senior engineering talent to financial, you know, [from entrance-level] talent talent. Now, the flip side of that is this massive competition for talent in Silicon to board-level talent, even to investor talent . . . I think that applies to all kinds of Valley, so if you are not a really exciting venture, it will be very, very difficult to get hold of that talent. The advantage that we have in Europe is that we have a lot of raw technical talent and skill. We have some of the best technical universities in the world and some of the most skillful engineers in the world, and we don’t have the same level of competition for that talent as in Silicon Valley. So a venture in Europe is actually able to scale potentially faster than a venture in Silicon Valley because there’s not the same level of competition for talent. The challenge is that because you don’t have the same management talent for the same, you know, senior engineering talent, being able to tap into that growth is more difficult. So I think that things that make it more difficult to be a venture in Europe is that you don’t have the access to the same experience, the same skill set, as you have in Silicon Valley because not everybody has worked two years for Google, two years for Facebook, you know, two years for somebody else, with all talented graduates from technological universities you can draw from. The other that knowledge to draw on . . . At the same time, you do have a ton of smart and advantage of being in Europe is that you are not necessarily as US-focused as a company. There are hundreds of companies in Silicon Valley focusing completely on the US market. When you start in Europe, you understand that the world is round and that there are many languages and many people in different parts of the world who would also enjoy using the service, so you’re able to understand from the start the importance of things like localization and being relevant in different parts of the world. In the first six months after starting up Playfish, we set up an office in Beijing and we set up an office in San Francisco, because we believed those are two very important territories for computer games, and we wanted to be native to both. So [we are] a good example of understanding a global need from the start.

I understand. Are those offices primarily sales and distribution, or are they primarily business and technical development, or a combination of both?

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They are combination of both. We are big believers in the idea that products should not exist outside of business talent, and business talent should not exist outside of a set of products. There’s a mutual kind of reinforcement to those two skills, and you need to have an appreciation for the whole business to be able to go forward in the correct way.

OK, how does the Arctic office fit in to all that? Our Arctic office got set up because there was a guy that we had worked with for a long time, Kim Arthur, who initially had been my executive producer and later studio head for Macrospace in Europe, at the Macrospace London studio, and later we sent him to Beijing to build up the Glu Beijing studio. Then he had to move back home to Norway for family reasons. I tried very, very hard to recruit him to come to London to join us at Playfish, but he wouldn’t move for family reasons. So, because he wouldn’t move to London, we decided to set up an office around him instead – in Norway! That’s the birth of Playfish Arctic. It’s made some of our more successful games.

Excellent! That’s a very cool story. Kristian, just few quick questions about metrics. TechCrunch mentions that you were looking at something like seventy-five million in revenue in 2009. Is that roughly how it came out? Just roughly, you know, order of magnitude? We never release our revenues, so I think all guesses are fair guesses. Those sources are as good as you’re gonna get.

OK, that’s fine. And in terms of metrics, I guess those that are driving the business are the number of users, the number of games played . . . Can you just give me just a few rough, key numbers that you’re looking at today? In terms of monthly actives at the moment, across the board we have about 50 million. And I think for our top games, Pet Society and Restaurant City, we have fourteen and ten million, respectively. Those are the main public metrics, if you like. They are the class of metrics that we look at, as well as engagement across the board, like how much time people spend on games and how virally they act in terms of how many other people they get involved in the game, as well as – obviously – how much money they pay us at the end of the day. So all those metrics are important.

And if I’ve counted correctly, you have fifteen games right now. Is that correct? Yeah, out of which about, I believe six or seven, are really active.

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That was going to be my next question: are those games evenly . . . is the popularity or the active usage evenly distributed, or are there games that are leading in your portfolio as compared to the others? Yeah, very much, Pet Society, Restaurant City, FIFA Superstars, My Empire and Hotel City are probably the biggest ones.

You’re basically pushing the frontiers of social gaming? Well, I would say pushing the frontiers of gaming, full stop.

OK, but the social aspect is key? We set out to change how the world plays games by creating social and connected experiences between friends. That’s why we set up the company, because we felt that there was an opportunity to move gaming away from being a solitary activity in front of the TV, where you just spend time by yourself, to being a social activity between friends, where the reason you play is not what’s going on the screen, but what’s going on between friends. We’ve made a long journey over the past three years, and in some way the rest of the games industry has really started to take note – and then we’re part of the “yaay” right now. One of the things we are doing is really figuring out how to push the boundaries of the whole industry moving forward. If you think about it, there is an order of magnitude more people playing games on Facebook today at any given moment than playing games on all other platforms combined.

Facebook is certainly your main environment – are you looking at doing social connections on other social media platforms? We are live today on something like eight or nine different platforms. That different places. Facebook does remain our biggest platform, by some margin. But includes Dena in Japan, MySpace, Bebo, Yahoo, iGoogle . . . we’re live in lots of I think the platform layer in the industry will continue to evolve, and there will be different places where people will hang out and play games. More game-centric social networks probably will emerge over time. And that said, I think more and more games themselves will acquire direct, inherent social functionalities within them. If you think of a game like World Of Warcraft, actually, a lot of people come because of the game and stay because of the community. At one point in time, it was very important whether your access to the internet was through Yahoo or AOL or whatever. Social networks and social infrastructure will become more

94 6. Playfish, EA, Super Evil Megacorp • Kristian Segerstrale like plumbing in the background, and the actual applications will be more in the forefront, so you’ll think less about this as a Facebook game, and you’ll think more about it as a great game that uses one of the social networks behind the scenes in order to drive social awareness or functionality or, you know, some social distribution behind the scenes.

For a company such as your own – and I think we’ve seen this much more publicly discussed than the Zynga case – the whole relationship with Facebook is, I’m sure, something you’re looking at very carefully. If we look at a completely different example, such as location-based social networks, we’ve seen Foursquare be very, very successful, and then when Facebook comes into this location space everybody asks, OK, what happens now with Foursquare, Gowalla and the others? Do you have any concerns about Facebook coming in tomorrow and saying, you know, “This game space is really nice, Facebook will now release a set of games directly themselves”? No, not really, I think there is a very symbiotic relationship between the game developers and Facebook right now, just like there are between all game platform and publisher across the board. It’s not impossible that Facebook would release their own games at some point in time, but in my mind that would be very much specific features on the platform. Overall, it’s been proven over and over again that like Sony Playstation and Xbox . . . They both released their own games to showcase the ecosystem proves to be much more valuable if it’s open. It’s not in Facebook’s DNA to be a content creator. They are extracting a fair amount of revenue and profit from the game marketplace with their Credits Initiative, and they agree with us that this is the best way for them to participate in the economics.

How many people are at Playfish right now? How large is the operation in terms of number of people? We’re approaching about three hundred people at the moment, but it’s kind of difficult these days to say where Playfish ends and EA starts, because we are working on lots of things together.

What about mobile? How important is the mobile space for you, and how do you see it going forward? EA is the world’s largest publisher of mobile games by a big margin. It’s largest on the iPhone, largest on Java handsets and on pretty much any mobile platform

95 THE EUROPEAN STARTUP REVOLUTION you can think of right now. So mobile is obviously a very important part of the EA business. If you look at how people access the Internet, all of the people use mobile platforms, and they are constantly becoming more and more important. I think mobile access to games will become very, very important over time. It’s still a question mark exactly what form it will take, whether it’s going to be applications, a that are kind of competing in some way, but the consumer won’t care – they will browser interface, Flash, HTML5 . . . There are a lot of different access technologies just use whatever works. We will see an interesting fight between apps vs. browser- based environments. Google would want to see a browser-based future, Apple believes in apps, so it’ll be interesting to see how it turns out.

In my experience – I’m an Android user myself – I think apps still provide a much deeper, better user experience. We’ll see what happens with the developing technologies like HTML5, but I think native, at least from my point of view, currently beats web-based. Well, yeah, I think it does at the moment. The question is if you take the form factor of an iPhone, and your apps have, you know, a button on the main UI screen of the device, if you press something, whether behind the scenes the technology actually is one where you download a 2 MB file and it runs something locally or whether behind the scenes you access a much thinner client which then accesses the internet in the background – it’s kind of neither here nor there in some ways – the only real difference between apps and browser is what the discovery technology is. Obviously, apps are found in the App Store, and the open web is the open web, so search engines, social networks and other things are very relevant in a browser-based world and not so relevant in an App-Store-based world. The other thing that’s significant is how powerful, how fast and how good a consumer experience you can deliver through the browser, and internet vs. local apps. I think the browser environment will always be more open and easier to grow in, provided you can create the right level of products and the right level of consumer experience. In the next couple of years, as everything becomes faster, it will be interesting to see which one wins.

Or there may not necessarily be one winner, there may be a situation where both coexist and there is an advantage to each one over the other, and some people prefer one, some the other. I just think it will be interesting to see what the access model to applications and information will be moving forward.

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One of the very interesting companies in the gaming space are your countrymen from Finland, Rovio, creators of the Angry Bird franchise. What do you think – if they are going to continue their global success, will they be able to do that out of Finland, staying there, or will it be necessary for them to get up and move to London or to the Valley, or to New York? One of the great things about the globalised world right now and the Internet is that you can be successful from anywhere. I think the only thing that would hold them back would be if they felt they didn’t have access to the right talent or to the right financing by staying in Finland. Both of those would be a concern. Ultimately, it depends on what the company’s ambitions are in the medium term – that’s going to be the biggest question mark.

You started Playfish fairly soon after the Glu IPO. Playfish is not a startup any more, it’s a very mature and big business. Are you itching to do something new? young. With the previous project, it took six years for me to feel like it’s gone from Well . . . this is an adventure that we started three years ago, and it feels very a startup to something that is a bit more mature. With Playfish, it’s gone a little bit quicker, but I feel we’re still halfway through the adventure. I am not looking at anything else at this moment. This is the adventure that I’m in, and I want to go out and change the way the world plays games. Once this adventure is over, I’ll be looking out for the next.

And I assume your colleagues feel the same way. Absolutely. That’s right.

Sebastian is actually not focused on Playfish – he’s taking a role within EA, is that right? No, that’s not strictly true. As you know, EA has a lot of labels, EA Sports, EA Games, EA Play, and then there is EAI, which is what we are part of. One of the things that we agreed upon as part of the transaction was that a key area we needed to focus on in the future is the convergence between online and mobile, and the business models between the two. So we thought it was very important for us to have influence across the Playfish business, but also to have a broader sort of view and seat around the table, when it comes to thinking about the future of mobile, and the future of other platforms. We agreed was that Sebastian was going to be contributing at that level in the company. He’s still devoting most of his time to

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Playfish, but he’s also devoting time to mobile and the other things to make sure that we are able to take advantage of those trends moving forward.

When talking about social gaming, obviously Zynga is probably the brand that comes to most people’s minds. You guys, are also very, very strong. Which other companies in this space do you see as game changers? Well, I mean it would be foolish to ignore Disney and Playdom right now. It will be interesting to see how those guys will do – they are probably the main guys to look at for a long time. They have some great games. Other then that, more companies will right now. There are some other companies as well . . . we’ve been big fans of Popcap come and go, and we’re going to see a lot of things happen over time.

What about the question of marketing – what are the main ways that people find out about your games and join in terms of customer acquisition? Is it word of mouth, is it people telling their friends, are there any specific marketing or advertising activities that are most critical to you? Well, it’s still predominantly social: people find out through their friends, either friends posting feed items, or, you know, friends inviting each other or just telling each other, even outside the Facebook platform, so it’s still predominantly viral. But increasingly, it’s also just traditional marketing, just like any other part of the game industry.

The viral part is obviously very cost-effective for you. viral channels, because there is a perception that consumers have gotten a little Yes . . . Facebook has been quite deliberate about reducing the effectiveness of bit too much of “the viral thing” recently. They want to feel a little bit less bullied into these games and a little bit less bullied about getting their friends into these games. They want to have genuine engagement with each other through these games, so I think viral remains important and word-of-mouth remains important, but I think we will see more and more of a balance towards traditional marketing.

I see. Just for a few minutes going back to the European entrepreneurial scene. Obviously, London is the biggest and the most important high-tech center in Europe. What’s your view of the European high-tech industry overall? Are there other communities, other countries that you think are kind of leading the way in terms of the what’s happening in our industry?

98 6. Playfish, EA, Super Evil Megacorp • Kristian Segerstrale

How do you mean, other communities?

Besides London – Berlin, France, Spain. Do you see any of those as standing out, being most interesting, with the most things happening at this point? Well, there are startup scenes almost everywhere. They are usually focused on slightly different things. For example, there’s a very large gaming startup scene in Germany in Berlin and other places, such as Dusseldorf. Also in the Nordic countries, there are a lot of startups coming from Sweden, for example, if you think of Spotify – they are based in London now, but originally, they were a Swedish company with Swedish management. There is also a very interesting tech scene in Finland, largely due to strong government support. There are a lot of games companies like Digital Chocolate, a games company that is actually more than 50% Finnish. There are other game companies which are interesting, like Angry Birds or Rovio – that’s a Finnish company. I’m sure there’s an equal scene in France, and maybe Spain. I know more about the one in Germany and in the Nordic countries, because they are more visible to me. It’s interesting that, as they grow, most of those companies start thinking about finding a way to either move to or create kind of “tentacles” in either London or Silicon Valley because of the access to finance and talents.

You’ve mentioned government support in Finland . How important has government policy in the UK been specifically for your company and your experience? That’s a big topic. Broadly speaking, in my opinion, government can only really do harm. But let’s start with the good things. The good things about the UK government policies over the past ten years with regard to the London startup scene have been . . . they used to have a fairly advantageous tax regime for entrepreneurs companyand owned it for four years, you actually ended up paying less tax if you whereby, if you held on to an asset for four years or so . . . basically, if you created a ever ended up IPO-ing or selling the company. That used to be the case, but it’s no longer the case. They also used to have fairly strong support for small enterprise in terms of making sure there’s less paperwork and things involved in setting up. The UK actually has been a fairly good place to set up a company because it’s just quick and easy and a straightforward process, so that’s been helpful. Also, there is an employment law which is fairly flexible, which is great. Over the past, say, five years, the government has done several bad things. The worst thing about the UK

99 THE EUROPEAN STARTUP REVOLUTION in the past five years has been unpredictability. There have been a lot of changes in policy across different sectors, and it’s still unclear what the government really wants, so a lot of change in regulation means that you don’t really know, for example, what kind of company structures you should be setting up, what kind of shareholder structures, because the government keeps changing their mind on what they’re doing. That obviously slows down your decision making. Another example: a year ago, the government was effectively promising the games industry that they were going to set up the tax credits in a similar way to Canada, with tax credit support for the game industry. Then, six months later they scrapped it, and now they are thinking about it again. There are good arguments both ways, but you can’t change your mind every six months, because you make entrepreneurs think that the government is unstable and unable to make decisions, and hence you don’t know what the return on investment on a specific decision is. A third thing they’ve done recently which is not great is that they’ve changed the tax regime so that is flat, so the capital gains tax is a flat rate, regardless of whether you hold onto the assets for six months or six years. Now, let’s say that you have some talent and you have 100,000 dollars to spend on something. This encourages you to do shorter-term investments or transactions rather than trying to build a company in the longer term. I think, frankly, that is a very significant mistake if the goal is to create bigger companies out of a place like London, encouraging entrepreneurs to hold on to them for the long term as much as possible. Finally, there is the issue of education across the board and bridging the skills gap. I think that’s something where the government has an absolutely massive responsibility, and in my mind, in the UK we have a gap in basic sciences: math, physics, chemistry – the kinds of things that are important for the high-tech industry.

I spoke with Fred Destin about similar issues in reference to a blog post he wrote called “A Cry for Europe’’ – I don’t know if you’re familiar with it. . . The reason I’m mentioning it is that, essentially, he was hugely critical of the European entrepreneurial environment and focused a lot of his criticism on public policy and the political class. When we spoke about it, his thesis was that entrepreneurs should get into politics, because it’s their only hope for changing something on the political level. For me, this was quite surprising and unusual – I don’t see entrepreneurs as typically doing that, being politically very active, do you?

100 6. Playfish, EA, Super Evil Megacorp • Kristian Segerstrale

I think you’d be very, very surprised to find me in politics any time soon.

I was wondering about that . . . I’m actually looking at the blog post right now, I hadn’t read it before. I actually among the entrepreneurial class, if you want to call it that. I think that there is – don’t believe in this . . . well, it is true to some degree. The culture is changing it’s true that there is that class of “stuffy old money,” if you like, which doesn’t see the advantages of entrepreneurship. We are building our companies, we and many others, setting examples for how this kind of thing can work. I’m hoping that, if nothing else, the legacy that we will leave behind one day is going to be that, out of the hundreds of people who work at Playfish and other companies like us and who have seen how you can grow a company out of a new idea, some of them will be entrepreneurial people who will go out and set up their own companies over smart, technically savvy class. The VCs are certainly there already, and the time . . . It is more about example and culture among the young, entrepreneurial, entrepreneurs are there already. I don’t think we need to look to the politicians, particularly. Honestly, my only request for them would be to not mess around by doing stupid things.

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7 Last.fm, Passion Capital Stefan Glänzer THE EUROPEAN STARTUP REVOLUTION

Stefan was in Zagreb for Seedcamp when we first met in the spring of 2010. What I didn’t know at the time was that he was in town not only to mentor at the Seedcamp event, but also to finalize an investment in Kolektiva, a Groupon clone spreading out from Zagreb and Croatia into Southeast Europe. There were few VC’s, let alone angel investors, willing to come from London to Zagreb to invest in local and regional projects, and this proved to be a good example of Stefan – as well as his partners, Eileen Burbidge and Robert Dighero – being open to backing great projects from all across Europe. The term “serial entrepreneur” is often misused. In the case of Glänzer – as well as others in this book, such as Martin Varsavsky and Morten Lund – there is no misusing the popular expression. His early career includes 15 years (!) as a professional DJ in Germany, as well as a PhD in finance. Stefan’s best known early success was the dotcom-era ecommerce site Ricardo.de. Ricardo eventually merged with its UK competitor QXL, and it was during this time and the structuring of the deal that Stefan met Robert Dighero, then CFO of QXL and today a partner, along with Eileen Burbidge, at the VC firm Passion Capital. Another well-known success story was Last.fm, acquired in May of 2007 by CBS for 280 million dollars. This chapter spans a time of four years through three conversations. The first was a quick Skype chat – Stefan was then one of Europe’s best-known and most highly regarded angel investors. Our second discussion was in person, at the White Bear Yard co-working space / incubator, just a few months after the launch of Passion Capital. The third one, again at WBY, was early in 2014, when Passion was running at full speed, having had a major success in the sale of the portfolio company Mendeley to the leading academic publisher Elsevier.

104 7. Last.fm, Passion Capital • Stefan Glänzer

Stefan Glänzer, Skype chat – April 2010

Stefan, you’ve done a great job in your previous career with Last.fm and other projects . . . Tell me a bit about your current portfolio – which projects do you see as the most exciting / game changing? That’s tough – you know in reality you believe in nearly all of them.

It’s my job to ask tough questions :) As of now, I really like the incredible pace of projects like DailyDeal, Kolektiva, Piku.jp – i.e. the Groupon model. I’ve loved Mendeley.com since its inception. We aim to change the way research will be done. I also love what we do here at White Bear Yard. We have Mendeley, RjDj, Smarkets.com, Timetric.com, Picklive.com, Moviepilot.com – all under one roof, all aligned with the aim of creating a global player from Europe – OK, everyone except the Groupon clones.

There must be a lot of value in having them all under one roof. Yep – since I invest very early, I love to have the companies close to me. We help with the first steps, from prototype/early traction to proper traction and hopefully hypergrowth, followed by serious funding. At White Bear Yard, we focus on the first stage, from two founders to a team of approximately ten. Then they have to leave to make space for new young and ambitious founders. I have partnered up with Eileen Burbidge, who was one of the first employees of Skype, and Robert Dighero.

Are all of the companies there of UK origin? Would you “take in” a German or Croatian team into WBY? Sure – we have teams from the UK, but also from the US, Germany, South Africa,

Let’s face it – if you want to create a digital firm who wants to compete on a global Scandinavia, Austria . . . It all comes down to the entrepreneur, not their passport. scale – and don’t want to leave Europe, London is the place to be – at least that’s what I believe.

Apparently that’s what many people believe. So do you think a team from Munich, Paris or Madrid would do best to move to London as soon as possible? Would that depend on the nature of the project? Say . . . B2B vs. B2C?

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B2B is different – but as soon as the C is involved and you aim for a global audience, London is the place. Berlin has a lot to offer, a lot of creativity and closeness to Eastern Europe. But still, working from London gives you the global bug, everything is by default international/global.

Some would perhaps say, “If you really want to make it, go straight to the US, preferably the Valley”? This reminds me of the movie industry. “Only Hollywood can make great movies.” That’s just crap. But we still have a looong way to go.

You’ve mentioned a few times how far behind Europe is in many ways. it’s great to see the way he is playing now! Yes, like the US has been in football. Btw, thanks for Ivica Olić. Being from Hamburg You’re welcome! He’s certainly come a long way. The US football team would lose in the early seventies 0:12, in the eighties 1:7, in the nineties 2:4, and in the last decade they saw their first wins/draws. I think we are in the eighties, so to say.

Hopefully we can move faster in high tech than they can in football! I think it’s going to take decades, not years. As long as we come closer, it’s good. We see a real European ecosystem evolving, with great initiatives all over. We have talent, we have universities, we have capital, we have exit channels. Let’s work on it!

Have you read Fred Destin’s blog post “A Cry For Europe”? Sure. He was very critical of the “political class.” When I asked about that in his interview, his thesis was that entrepreneurs should go into politics. Politics can set the framework – no more. Entrepreneurs can change the world! That’s what European entrepreneurs should focus on. More confidence, please!

The typical angel and VC as well is more “home turf” oriented. It would seem you are more of the exception, seeing as you were willing to come to Zagreb and go with Kolektiva. I’m still somehow undecided whether I’m an investor or an entrepreneur

Both, clearly!

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It all starts with exceptions – the first VC investments in the US (in the fifties and sixties) werethe exception, but look how it developed. We need more believers, more guts, more confidence!

So with a lot of success stories like Last.fm, we can slowly start changing prevalently skeptical European minds. Yes – music is an interesting one. Looking at entertainment, the US is clearly ahead in most categories, but not in music. We have had Last.fm, and now we have Spotify. I want to see that happen in more spaces.

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Followup 1, conversation at White Bear Yard, June 2011

Stefan, let’s start with some info me about White Bear Yard. Well, it was pretty much at the downturn, 2008 / 2009, when Eileen and I went looking for a great office where we could start something like White Bear Yard. When we saw this office, we thought “This is the place!” We wanted to build, create a hub for European entrepreneurship where guys from all over Europe, actually a couple from the US and South Africa, as well, but our heart is here in Europe. We just wanted to create a place where you can do your first steps, quickly come from a prototype to, let’s say, anywhere between ten and twenty employees. Really focusing on that seed phase and try to build, to lay the foundations, to build great, very ambitious digital companies with ambitions on the global level. And now we have, I think, ten or eleven companies. The ground floor is Mendeley, which is an example of a later-stage company with around thirty people here plus a few people in New York. And so we’re trying to build this Eastern London theme a little bit. Very close to what’s happening five minutes down the road . . . called These“Silicon European Roundabout” . . . names . . . Which I always is a funny compare name. them to their US equivalents. You have YouTube, which is very short, and then you have Dailymotion. And then you have Ebay as opposed to PriceMinister. OK, Silicon Valley is shorter still than Silicon Roundabout . . . So Europeans – not all of them, of course – sometimes come up with these totally un-marketable names. We have actually chosen it delicately. White Bear Yard is a very unpredictable name, so to say. But I think it’s just the right name for what we’re after here.

Mendeley is just in a different phase. The challenges that Mendeley has are different, In a way, this is a co-working space which happens to be run by the three of us . . . but it’s actually great that these guys have a company just downstairs! We’ve been through several iterations of growth together already. You know, Mendeley is now at ninety million research documents! The biggest global database for scientific knowledge, and it’s building a platform along the lines of how Twitter has built a platform for communication or Facebook for other types of communication. We are difference, all these other guys started within the last twelve months. building a kind of knowledge platform . . . They started three years ago. So that’s the

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Are all of them your investments as well? Yes. When we started, there were just a couple of guys who just rented a couple of desks, but at this stage we are actually quite close to our limit in capacity, all with

Andour own has companies . . .anybody left yet, except Mendeley? of the invested ones, no. RJDJ has gone to their own offices . . . And who else has left? Probably . . . No, no one So they are still here and still growing . . . twelve months to come to this kind of level. So we will see probably by the end of We started . . . let’s say . . . eighteen months ago initially, but it took us actually ten–

Thethis year . . .first birds to fly out of the nest . . . And very likely actually in both directions! You have to face it. It is a part of what we try to achieve here. It’s just a normal view on starting a business, and the

Forreality the is companies, that not every are business the three you of start you usuallybecomes the a success . . . main, the only investors, or do you have other investor partners on some of the projects?

NotSince so April, small, we actually have raised – that’s a small the venture next topic fund . . . I wanted to talk to you about. dynamics of the venture capital model, then you just go for the bigger, bigger, Yeah, it is . . . For a venture fund, it is relatively small. If you apply the typical bigger funds that are the economical rationale behind venture models. But we wanted to combine the venture model with a more modern approach to investing. So, looking at all our investments, we still act as angels. And that means from the size of our first investments to ease in dealing to speed of reaction, and actually, all the way to closing the whole thing. The vast majority of the fund will then be used in case one, or a couple, of the companies make it, and then we will have enough money to follow through alongside proper venture capital funds.

OK. We don’t have any infrastructure. You know, as a venture fund, you need a certain infrastructure and so on. We actually provide a different infrastructure;

109 THE EUROPEAN STARTUP REVOLUTION it’s infrastructure for the early, early stage, the seed and prototype phases and onwards.

So – starting from the typical team of a venture fund, where you have the analyst, the junior analyst, the secretaries etc. etc., – so you don’t have any of that? Exactly! We have one analyst working with us. You know, we are investing other angel. I mean, if that was my own money, I don’t need to do any bookkeeping, or people’s money, so we need to be a bit more careful than . . . in comparison to an accountants or whatever, because it’s my money. And that has obviously changed, we needed one person, yeah, but that’s it.

But the companies that are here now are mostly from before the fund, right? Mostly. Since we launched the fund on the first of April – that was two months ago – and now we are about to close thirteen deals.

Thirteen?

IYeah. see, SoI see. a lot I rememberof . . . A lot of you the mentionedcurrent stuff the will expected be included. typical deal size, which is relatively small for a venture fund. So, regarding the amount that was . . . that’s in the fund, you would probably need to have quite a few projects? all between 100K and 250K. So that leaves a big chunk to be able to follow up on We want to invest anywhere between . . . let’s say around fifty initial investments a couple of real winners.

And most of the money is public money, right? Most of the money is public money, yes.

The UK government . . . Two-thirds is UK government money, one third is provided by us and other private individuals.

It’s a fairly new development that governments are willing to go into this kind of venture. Especially on a relatively small scale, as you mentioned. in this building alone there are probably a hundred plus jobs. And there are others Yeah, but I mean, just look around here. We have probably created hundreds . . . Just

110 7. Last.fm, Passion Capital • Stefan Glänzer out there. If you include all of Rebate Networks’ activities, which are outside of this fund, then we have created on a global scale, without China, two thousand new jobs,

So it has actually been proven that this is very beneficial and healthy for the economy. or two-and-a half thousand . . .

You know, fifty percent of the jobs, or thirty percent . . . Don’t quote me – I’ll Google Onthe rightthe topic number . . . of jobs A big and proportion government of new involvement, jobs are created are out all of the SMEs. companies incorporated in the UK? No, they used to be incorporated in here, we needed a kind of UK angle, but in reality, if you start a company outside Europe, it might make sense to put your business development and advertising or whatever department here in the UK,

Thatbut it would doesn’t depend have to also be . . . a little bit on the business itself. For some businesses, it’s vital, but for other businesses, it could also be done elsewhere? Yeah, absolutely! If someone pitches us coming from Slovakia and says, “we want to create the Slovakian Amazon!”, then we would not do it. I mean, we would not

Forinvest the UK Slovakian taxpayer market?money into purely the economy . . . Yeah. We would not do that. But in general, we are not keen on investing in these kind of one-market approaches; what we really want to do is foster more ambitious European ecosystems. So we actually love to work with guys who are not afraid of competition, wherever they may sit.

On the topic of global plans and strategies, it was really interesting for me to read that blog post by Sarah Lacy from TechCrunch. She was basically criticizing European companies for focusing so much on the US, that there are many opportunities in the emerging markets in Asia and Africa and Latin America. When I was reading that, I was really thinking about Rebate, because I think it’s one of the few examples, at least that I know of, where a European company has intentionally gone not to the States, but to the other, emerging markets, to the East and so on. Yeah, I mean, that was the case with my first company, or first digital company, Ricardo. We went towards the East, you know, with Allegro in Poland and pretty

111 THE EUROPEAN STARTUP REVOLUTION much all over Eastern Europe. Certainly, I think it’s probably more likely you’ll have great success without the US than with US. By the way, on the topics of East, West etc., any comments on the whole Yuri Milner DST phenomenon? To me, it’s quite interesting to watch how the Russians are investing in Silicon Valley and buying up some of the most important companies

Russia, and these oligarchs are usually either in jail or they are very friendly with there. And I can’t help but think . . . Milner is associated with some oligarch in Putin. So I’m thinking that maybe there is some connection between DST and the Russian government? On that level, you probably need good relations with politicians. But let’s face it, we’re doing the same thing here in the UK. I mean, we get the money from the government. I think what Yuri Milner did is actually just purely awesome! I think it’s awesome. He is talking about the old American view on what the Europeans are doing all wrong – that the only way to start this stuff is out of the Valley. I mean, the fastest growing company these days came out of Chicago, which is actually quite far away from the Valley. Looking at venture capital, the guy who actually changed the model did not come out of the Valley – he is Milner. He added spice and an edge of agressiveness to the show. I think it’s actually a good development, it’s really good!

How did the process of your partnership with the government take place? Was there some kind of tender issued? I know that the government set aside some funds to be invested in high tech. You just go to “Capital for Enterprise” on www.gov.uk, and it’s all publicly stated. They run a pretty intense process, they are good guys. The guys you’re mostly dealing with are former bankers from Merill Lynch and the like. They actually understand venture capital and private equity. And it actually takes probably up to two years, that’s kind of a longish process.

Your negotiations with them? out, and it’s all written there, so there is hardly anything to discuss. I wouldn’t call them negotiations . . . It’s all part of the process, the way it’s all laid Yes, I understand, but it took you basically two years? It takes a while to get known to them, to understand what they are after, they do the due diligence thing very intensely, which is the right thing to do if you’re responsible for our money.

112 7. Last.fm, Passion Capital • Stefan Glänzer

So the process itself took quite a while, but now that it’s in place, you’re acting quite fast? Now, it’s all in our hands. There are no delays, no complications. That’s a good thing, you know, they take their time, the rules are clear, they are transparent and you just have to act accordingly.

Your partners, Eileen and Robert, you’ve known them both a long time? Oh, a fairly long time. When I sold Ricardo, Robert was on the other side at QXL. He was the CFO, and I remember at that time already thinking, “whenever I do something that is somehow financially related, I would love to work with Robert.” Because he was just awesome. He was just good. We were listed on Neuer Markt and they were listed on the London Stock Exchange, so it was a rather complicated transaction. And he really impressed me! And then we teamed up, I think, when he left QXL.

Obviously the admiration was mutual. Yeah.

Eileen was at Skype? Eileen was number three at Skype, director of product, they built a beautiful product. When I started really angel investing, I met her on three deals by coincidence from different sources, so we thought we somehow liked the same team. You know, Robert being a Brit, Eileen is of Chinese heritage but born and deals. And that’s four years now . . . It’s actually great that it’s a very international raised in California, in the Valley. And me being German, so actually that’s good.

But you’re more and more in London . . . It’s been ten years. It’s home now.

Do you have any other activities in Germany? Aside from Rebate Networks? Over the last couple of years I did a couple of deals there. Moviepilot.de is one of them, a movie recommendation engine and the biggest movie site in Germany impressive to see what’s happening in Berlin right now. I very much like seeing it. right now. I was involved with Kaufda.de . . . I do have a strong German network. It’s One question. London and Berlin are both strong hubs. Yeah.

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So is Paris, and maybe a few others. Paris typically plays a different game.

The French approach . . . Yes, they play French. And they are very successful at it, don’t get me wrong. But they are looking more “intrinsic” than “extrinsic”.

I know. I spoke to both Pierre Kosciusko–Morizet from PriceMinister and Cedric Tournay from DailyMotion. They both mentioned how they formed a fund, ISAI. It’s a fund with seventy entrepreneurs on board, which is a lot, so it’s really strong, but it’s French oriented – French projects or “francophonic,” as they say. Yeah, yeah, yeah.

It’s totally opposite from what you’re doing, I mean, you are very open to any geography, passport etc. And they are really trying to push the French scene. Which is in a way also great. that way. You have to speak the language, that’s just what it is. It’s great, it’s great, but that’s the way they always . . . France has always worked Aside from London and Berlin, which other major points of interest or activity or hubs do you see? We have more of a Bundesliga than the Premier League in Europe. There are actually maybe two strong teams, really strong teams which is usually the case in the Bundesliga. And a very, very strong midfield of clubs. In the Premier League you have more like the top four, the big four that dominate everything and for thirty years one of them has always won the championship. So I think we have, with London and Berlin, two strong players, and then we have a lot of activities in various places and cities. And actually of good quality, very good quality. Way better than anything I saw five years ago. So wherever I am, I am actually very impressed about the awareness, attention, focus on digital stuff. I mean, you name it – Amsterdam, Vienna, Hamburg, Zagreb, Kiev, Stockholm – it’s great everywhere! And I could continue because, I mean, with Rebate, we are in Europe in thirteen countries or so. Estonia. It’s astounding what’s happening in Estonia.

Well, Estonia to me is always interesting because it’s part of the broader Central and Eastern Europe region . . . Sometimes I compare them to Croatia, especially in the area of telecoms. Estonia very early on radically demonopo-

114 7. Last.fm, Passion Capital • Stefan Glänzer lized telecoms. Unfortunately, compared to that, Croatia was really slow in doing that. And they sold the local (Croatian) telecom company to Deutsche Telekom, and basically, they are still monopolizing the fixed line and the internet etc. So to me, Estonia is a really good example of the good things can happen when you open up both the telecom infrastructure and the government attitude in all of that. I think Croatia should look up to Estonia in terms of public strategy . . . in the digital infrastructure, tech – all that stuff – it’s pretty awesome. They did Yeah, the Estonians . . . I think they did an awesome job very early on. They invested something very well – and you can see it – now they have Skype and this helps to foster an ecosystem. I think it’s good, I think in Europe we have all the ingredients together to build great companies in digital.

I remember when we talked last year, you were comparing the European high-tech community and the ecosystem to . . . You mentioned the parallel with Americans in soccer. And you said “many years ago, Americans were losing 0–12, and then they were losing 1–7 and . . .” . . .. And that’s where we are right now.

Yeah, I was wondering . . . Well it’s unchanged.

Aha, I was wondering if something changed . . . No, no, no, that’s unchanged! That’s a longer period. We don’t have a World Cup every year, we have it every four years, you know? Last time we lost 1–7. The next one is 2014. Let’s see what happens.

But still, as you mentioned, the developments in all these places that you talked about are really different than five years ago. At least, I think so. I’m looking at Zagreb. It’s a small scene, but nevertheless, more and more startups are appearing, and people are starting to do some angel investing. Some of the first projects from Zagreb like Shout’Em have managed to get some funding and are going to start internationally. So I would say, at least it’s my feeling, that the whole European scene is maturing visibly. really ambitious entrepreneurs who just believe in what they are doing, so I think Yeah, absolutely. Absolutely it is, and it’s not only maturing . . . I do see a couple of that is always good, the very best starting point.

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You have companies in White Bear Yard doing very, very different things. So obviously, you don’t have a topic-based agenda, you don’t go for one area. But are there any particular trends or areas or topics that you yourself feel are the most exciting ones? It’s all about the great entrepreneur, and then it should be digital. And that’s pretty much it, that’s the trend. Just look at the big companies, the real winners: Apple, it’s still the founder who’s in charge. Google, still the founder, Amazon, still the

I’mfounder . . . not so sure whether Microsoft is doing so well . . . Microsoft – it’s not the founder.

Yeah, I hear you, OK. He was an early employee.

He was an early employee. And Microsoft . . . Yeah, they . . . I mean, it still has an Yeah,unbelievably but I think big market they lost cap, their it’s still way massive . . . a little bit. times the market cap of the biggest European success. Or no, no, when compared They lost their way, but they are nevertheless in terms of . . . They are still twenty to SAP it’s ten times, but, you know. And then look to a beautiful business model like Ebay, where they didn’t perform so well, I’d say. So I think it all comes down to the right team with the right ambitions. And then they should just go after it!

So there are no particular specific areas that you think . . . I’m certainly more a consumer guy than a B2B, but looking at GoSquare, that’s a B2B product, we probably have others in here as well.

How about your partners, Eileen and Roger? Do each of you compliment the others in terms of areas that you feel most comfortable with or are most experienced in? How do you work together? What are the things you cover between you? We actually cover all the same things in one way because we love to work with ambitious entrepreneurs. That’s the bottom line. Then, Eileen certainly has a product-oriented point of view. She was doing product for so many years, so she is a product person.

OK, and Robert is the financial person?

116 7. Last.fm, Passion Capital • Stefan Glänzer

Robert is an engineer by background. He is certainly strong when it comes to the real business. Eileen and myself, we are probably stronger when it comes to building, getting the prototype out, handling traction, while Robert is someone who can transform this into a business. So that’s probably his role. We’ve all been in startups ourselves for ten to twenty years, Eileen having been number three at Skype, Robert was number two at QXL for ten years. And I founded I don’t know how many companies. We all love the startup “thing”!

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Followup 2, conversation at White Bear Yard, February 2014

So how have things been with Passion? It’s actually pretty, pretty awesome. We have thirty-nine investments, and most of them look very, very healthy. Over the past three years since we launched Passion, there has been a certain maturity to the startup ecosystem in London. This is happening all over Europe, as you know, but especially here in London. It’s absolutely fantastic to see on the very early side, which is what we are focusing on. In a very healthy part of our portfolio, we see A and B rounds, so that market is working. From the UK players, some German players, a lot of US players as well. The IPO of King.com is coming up at a 5-billion valuation and Wonga probably has the same value.

And Supercell. And Supercell! We see more and more stuff happening. Building proper successes. We in Europe are far from having anything in the double- or even triple-digit market, and I think if you give it another ten years, we’ll hopefully see more coming up. It is so encouraging for me to see that Europe is leading globally in two verticals, music and games. Music with Spotify, with SoundCloud, with Deezer. The US has Pandora, but that’s pretty much it. And in games, I just saw that the two top-grossing apps, number one is King and number two is Supercell. It’s the first time in history that we are seeing two very important verticals being clearly led on a global scale by European companies!

I was talking exactly about that about last April with Branko Milutinović from Nordeus. He was explaining to me, which I didn’t really understand at the time, that actually many of the gaming founders in Europe are like a clan of friends. They meet at conferences and they see themselves as kind of a pack fighting against their US and Asian competitors. He also spoke about Wargaming, the company from Belarus with World of Tanks and other games – they have like sixteen hundred people in the company. Oh really? That’s amazing.

Have you invested in any of these? Gaming, music? No, no. Out of the thirty-nine investments, none are in gaming. And the main reason is that I’m not a gamer, I simply don’t understand the space well enough.

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It seems to be a really, really specific area. It’s a very specific area. You need to understand the whole space, understand don’t understand gaming, then you shouldn’t do it. HTML5 engines . . . We try to get our heads around it as well, but frankly, if you Other than that, now that three years have passed for Passion, have you developed any kind of theme, investment thesis, areas that you specialize in? Other than early-stage European projects that want to go global? We have one theme only, and that is to back great entrepreneurs. It is really our only theme. If you look at the spectrum of our investments, then that’s the real theme. We were seed investors in Lulu, which is this man rating app that’s growing

Ijust was like really weed. happy We have to see B2C you’ve plays . . . invested in TruckTrack! I’ve known Vukašin for some time now. They are a Seedcamp company, do you have any others from Seedcamp? No, they are the only ones. We have some from TechStars and, I think, one from Startup Bootcamp. We are very neutral, we love all the accelerators because it’s a great source of dealflow.

I spoke recently with Victor Henning from Mendeley. It’s an amazing story, with the Elsevier acquisition. There were a lot of questions on that deal about whether they were selling out. You know, he was very critical about the model of the established scientific publishers when we spoke once or twice before. I think he said something like “their model is brain dead.” So my main question to him was “OK, you’ve been critical. Now what happens?” He was talking about how he actually sees that Elsevier is really changing, and he is driving that change from the inside. Yes, and that is the next challenge for the team. Again, the proof is in the pudding, it remains to be seen, but the guys haven’t destroyed their values. It’s going to be very interesting to see over the next two years whether or not there will be a proper change.

That was a major success for you guys. Yeah, it was all good! It was really a very good deal.

You fully exited, they acquired the whole company?

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Yes. We were a seed investor at an early, prototype stage, and it’s good to see that they are now a strong source of influence at the world’s leading scientific publisher, and they can bring some modern thinking into this large organization.

Which is not always easily done, old ways are hard to change. How old is Elsevier? No idea.

More than hundred years, I’m guessing. I have no idea, but academic publishing is probably quite old, there’s some history there!

How are Eileen and Robert? Great! The three of us are very complementary to each other.

But you expanded the organization a little bit, right? We hired Melissa Trahan, who was previously in the Valley for four years doing technical recruitment. She is doing the same now for our portfolio. Before, we had one associate who was great – he joined one of our teams, and in two-and-a-half years he became the CEO there. We have a new associate, Sandra Lee, who has a our portfolio companies. strong finance background, accounting . . . She helps with the second pain point of One is finding tech talent and the other is finance, accounting, stock option plans and all of that stuff, which hardly any founder likes dealing with.

Looking at Southeast Europe, it’s interesting to see the example of Sofia. The two funds there, Launchub and Eleven, have received between them 21 million euros of EIF money. That’s a lot, a lot of money! It’s so fantastic to see that this happens everywhere all over our beautiful continent! I love Europe, I love the different cultures. Every place you look, you see tech ecosystems emerging. Now in the next couple of years, we need to build more bridges among these ecosystems to come up with proper companies!

On the issue of building bridges, I’ve heard discussions among some investors about practices in some accelerators that they find to be not very good. For instance, some accelerators, apparently, especially in the Nordics

120 7. Last.fm, Passion Capital • Stefan Glänzer are putting anti-dilution clauses where in subsequent rounds they don’t get diluted down and things like that. This relates to some of the things we want to do with Tech.eu. One of the criticisms we’ve heard – and I think it’s correct – is that we’re too positive, too much “rooting” for the things we write about. And I agree with that, I think we need to be both celebrating the ecosystem and the entrepreneurs but also criticizing, because one doesn’t go without the other. In this case, when it comes to anti-dilution and similar stuff, especially in accelerators, I think it’s terrible to do – it goes absolutely in the wrong direction.

I totally agree. I think what we’re going to do is ask our friends and people that we know if they know practices that they feel are not good, to give us more info, more background, so we can write up a proper story with proper research. As you said, we need to build bridges, of course, but in a healthy way. Oh yes, in a very healthy way! We are one of the first ones to publish our term sheet on our web site, and we published the first plain English term sheet. We will soon publish more stuff. This is all bringing more transparency to the whole ecosystem. I haven’t heard of this case you mentioned. In case that happens, the punishment is going to be that these accelerators, once this goes public, would only attract B-class entrepreneurs.

This is a part of what I see as our job as media, to expose that. And we can only do that with proper data. It’s just the wrong way. Entrepreneurs are the ones creating the companies, not the investors. It’s neither the investors nor the accelerators – it’s the entrepreneurs.

When you talk about the next stages for Europe, how do you see it developing? What are the changes that need to be done? We have a lot of things in place, you guys have been doing great, others like you as well . . . In each stage we need an acceleration by at least a factor of five, and in some areas by a factor of ten.

How do we do that? How do we get there? By starting in school very early, learning to code and actually maybe spending less time teaching kids how to develop beautiful handwriting. Start very, very early

121 THE EUROPEAN STARTUP REVOLUTION and then bringing this to universities, creating more role models of successful entrepreneurs. Also, by bringing more money into the whole thing. At all stages, we need more money because we are still lagging behind, but I think that the most important way is by creating more role models. By creating more European champions. And then the media, and not only the tech media, but all the mass media need to accept that these are people who need proper celebration!

Update: May 2015

As of May 2015, Passion Capital had invested in 42 companies, exited (sold) three of these, while five had wound down (failed). The total valuation of the Passion porfolio at this time was GBP 407 million. In late May 2015, the partners announced that they had raised a second fund of GBP 45 million to continue investing in their trademark “super angel” approach.

122 8 Rebate Networks Michael Brehm THE EUROPEAN STARTUP REVOLUTION

I have been intrigued by the Rebate Networks story ever since one of the partners, Stefan Glänzer, first told me about it. Here was a “Groupon clone” in the midst of the group-buying craze of the late 2000s doing a few things very differently. The perfect person to talk about that was Michael Brehm, the CEO, who Stefan was kind enough to introduce me to. The thing about Rebate that got me really interested was the strategy – more specifically, the geographical growth strategy. Here was a company zigging when everyone else was zagging: staying away from the major Western European and – crucially – US markets and focusing on the gold lying in the streets in emerging markets – Eastern Europe and the Far East. A score of celebrated US mega-startups – including Groupon itself – got their teeth knocked out when they tried to muscle their way into China the same way they had been accustomed to doing it in other expansions. Rebate, with Brehm at the helm, had taken a different approach and succeeded. My first conversation with Michael was in February of 2011. I caught up with him again in the summer of 2014. That second conversation was a bit scratchy – we actually talked on the phone. He was on a train, so there was no recording material for a proper interview transcript. It’s still a good story, however!

124 8. Rebate Networks • Michael Brehm

Skype call, February 2011

Michael, perhaps you could tell me bit about your relationship with Stefan, since he connected us. When did you get to know him and how did you start with Rebate Networks? I’ve actually known him for a few years. We were both active in the same space, in the internet. I did two investments with him that went very well. We worked very well together, we liked each other. Our third investment together was DailyDeal. We liked this model so much that we spoke with the founders about which of countries, and then we said, “OK, can we go to a lot of the, kind of “far away” countries they wanted to do . . . Of course, they could just do a limited amount countries?” From their point of view, these were “second-tier” countries. We said we wanted to launch in as many countries as possible in Eastern Europe and Asia and have a little presence in Latin America. How we founded Rebate Networks actually goes back a little bit. Both Stefan and myself are serial entrepreneurs. I founded my first company when I was fifteen, in high school. I saw a lot of people were going snowboarding and the clothing for that was two or three times more expensive than skiing clothing even though the quality wasn’t really different. So I thought, I can do this myself, and I founded a little snowboard brand for caps and hats and sweaters. Then I decided I wanted to finish school, and after high school, I went to China for half a year to learn Chinese and to Latin America to learn Spanish. Then I studied business administration, and all the way, I was saying to myself, “One day I want to become a real entrepreneur and not just somebody who does it besides his main job.” I had like a hundred ideas, but nothing really convinced me, so I started working in investment banking at Merrill Lynch. By accident I met the two founders of StudiVZ. They were looking for a third person that could build the company together with them in Berlin, so I quit and moved to Ber- lin. Everybody thought I was completely crazy because it was the end of 2005, beginning of 2006. I quit like a month before the bonus would have come, and my boss first thought I was joking when I told him I wanted to quit. It was a really exciting time! The three of us took this kind of “student project” and built it into one of Europe’s largest internet sites. After it had grown to a significant size, we sold it to Holtz- brinck Publishing, which is one of Europe’s largest traditional media companies.

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Since I came to Berlin, I founded my own little investment company to finance startups in the technology space. Over a couple of years, I did a number of investments. Most of them did quite well, and we sold a bunch of them: Amiando, a ticketing service and Brands4Friends are some of the companies I invested in. I just did a trade sale on a German food ordering company to the venture arm of a large publishing house. Through this activity we met the founders of DailyDeal and got involved with them. And then in February or March of last year, we founded Rebate Networks, and since then it has been a very, very fast moving ride.

Back in November of 2010, you were covering twenty-nine countries. Where are you up to now? How many countries are you covering? We are actually still at twenty-nine. We launched these within probably seven or eight months, but now we’ve decided we want to focus on them. There might be a few more coming, but it has been so rapid that now we are focusing on building sustainable businesses.

I’m looking at the homepage of Rebate, and two big countries that seem to be missing are Brazil and India. Are you thinking about those? Not really. We’re still a very young company. The day has only twenty-four hours, and I think we’re in a lot of very, very exciting markets. I mean, Germany obviously – it’s the largest economy in Central Europe, and then there are a lot of very exciting smaller countries in Eastern Europe and Southeast Asia, it’s just fascinating. China is the future rising star of the world economy, and then there’s Japan and some really exciting countries in Latin America. With this kind of footprint, we’re very happy and want to focus on these areas.

Let me just say that I’m a very happy customer of Kolektiva here in Croatia. And I’m very happy to hear that! We are very proud of Kolektiva and very supportive of them. As a big fan of Europe, I am also very happy to see these that’s a very promising sign for the future. amazing startups, coming from the former Soviet countries . . . I think in general Could you explain a bit more about DailyDeal? You said you met the founders – were either Stefan or yourself involved with starting that company? I knew one of them because we were studying at the same university. They spoke

I discussed it with Stefan, and we told them, “Look, we’re gonna support you, but to Stefan, and he referred them to me. We liked the concept, we liked the guys . . .

126 8. Rebate Networks • Michael Brehm there are two requests we have. The first one is – you need to start tomorrow, because we were convinced that if this works, it’ll probably become super competitive.” The second request was that they start from my office because I had an office with some free space, and I really wanted to be able to support them and help them. They said, “OK, let’s do it!” We helped them a lot in the startup phase, and we are still very supportive.

And how long was it from starting DailyDeal to starting this rapid, multinational expansion? We started with DailyDeal at the end of November, beginning of December 2009.

2010?We founded Rebate Networks at the beginning of March . . . Yeah, 2010 – three months after DailyDeal was launched.

How much are you personally involved? I mean, you’re the CEO of Rebate Networks but also, obviously, each of the country operations, or regional operations, have their own people that are running them, and you’re also involved with a venture fund and other stuff. On a country-by-country base, I am not operationally involved, but I’m spending quite a lot of time on that, trying, first of all, to help them with financing. We’re basically doing almost all of our financing ourselves, except for some of the bigger countries where we have partners. That keeps them free from spending time on financing rounds that might turn out or not. We’re taking care of that, and we have a best-practice center in Berlin where we can collect a lot of information and all the stuff we know from all the different countries and markets. That way, we can also support them with a lot of knowledge and benchmarking, in marketing, sales and so forth.

And typically, let’s say in the Kolektiva example, or some other if you prefer, did the founding team seek you out, or did you come to Croatia and the surrounding region looking for somebody to start a group-buying project? We have countries where we have been approached. I think in the case of Kolektiva, we where we go and say, “We’re looking for partners to start a new company.” Sometimes approached them . . . or they us – I don’t remember exactly. There are some markets we invest in an existing company, normally at a very early stage.

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Regarding Rebate Networks itself – is it fully funded by Stefan and yourself? At the beginning we were funding it ourselves. Now we have several outside investors – you don’t build twenty-nine countries with a few euros.

Are there any key metrics that you’d like to share? Is there anything that you track closely and would feel comfortable sharing? We’re tracking a number of indicators, daily, weekly, monthly. Of course, revenue is one of them. The annualized revenue of the whole conglomerate, all the companies, is at about 250 million US dollars.

250 million dollars? Yeah. Annualized revenue.

So, assuming a healthy growth rate, that should probably go between 250 and 300 this year? Well, hopefully much higher.

Much higher? That’s a really big number. Definitely. We have over 2,500 people now in all of the countries.

So, in terms of headcount, you’re bigger than Groupon? No.

No? The last number I saw for them was 1,500, but that was a few months ago, so . . . No, I think they are at 4,000 or 5,000 now.

OK, but you are on the same order of magnitude. Well, let’s hope so. I think we’re in a similar number of countries, but they are in lots of very big countries.

Yes, I know. But, in general, the very funny thing is that it just kind of exploded! Even in the internet space, where everything is fast and so on, I don’t remember when I have seen anything similar.

Yeah, it’s really amazing. Obviously, we’re seeing zillions of other group- buying operations popping up . . .

128 8. Rebate Networks • Michael Brehm

I think what’s happening is that people underestimate – a lot – how complex the model is, how much money you need, how many people you need, how much technology. The barriers to entry are really low, but the barriers to scale are very, very high. In most markets, there’s a very clear market leader and a number two that’s doing OK. But all the others are basically burning a lot of money and then disappearing after a while.

Is there a kind of industry standard or rough estimate of time to profitability for a typical project like this in country X? If you’re the market leader, then probably after a year. If you’re not the market

250–300leader probably . . . million dollars I don’t know,this year never is actually– or after amazing! a very, very long time. It’s a very exciting model, and we are lucky that we can work together with really amazing founders and entrepreneurs and management teams in the different regions. And I think we were also able to spot that opportunity much earlier than a lot of other people. So already in 2009, we got involved there, and most of the other players are now starting to come in maybe half a yearor even a year later, which in the internet is ages.

You have a strong presence in China and Asia – eight companies? Yes.

Is this somehow related to your personal experience? You’ve been to China previously. Yes, definitely. After high school I didn’t go straight to university. Instead, I went to China for half a year to learn Chinese and also to Latin America. During my studies, I kept learning Chinese after being there as an exchange student, and I also worked there. I really like Asia, and once we started with this in Germany, I said that Asia was definitely one of the regions I wanted to go to. At the beginning of last year, there weren’t any companies like this at all. It was like a huge white sheet. We moved very fast and basically entered all of the relevant Asian markets. We started in China, then Japan, and then Southeast Asia – Vietnam, Malaysia, Singapore, Philippines, Taiwan and Indonesia. That worked out quite well. And in China, Lashou, the company there – they are really amazing. They have a very strong presence, a fantastic management team and great local investors and supporters.

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I think it’s particularly interesting because many very well-established Western and US internet companies have seen very strong competition from Asian companies, both in Japan and in China, and have sometimes either backed down or have been partnering with Chinese partners. In China there are probably over a thousand of these flash marketing sites, and Lashou currently has, I think, over fifty percent market share. They are really the clear leader, and we see similar things in all of Southeast Asia.

You have been much more successful entering Asia, and particularly China, quickly than some other well-known internet brand names. That remains to be seen, but right now I am very optimistic. One of the reasons is probably that we’re never coming there and saying “OK, we know everything and this is how it should be done.” We rather try to have strong local partners and more established local household brands than try to take something that’s “one hundred percent how it works in Western Europe or in the States” and then it should work one hundred percent in China, or in other countries. In Asia that just doesn’t lead to success.

How much does this successful entry have to do with your personal background and experience and knowledge of the Chinese language? I would say a lot, because otherwise, I wouldn’t have gone there in the first place; secondly, because I feel somewhat at home there, I don’t feel alienated, I’m not afraid of it and I just like the people there. I like the culture. It also helps if you’re partnering with people there. They have the feeling that you plan to be involved in the area for a long time.

Sarah Lacy argued recently that European hi-tech entrepreneurs and investors are constantly talking about Silicon Valley and competing with Silicon Valley, etc., but actually paying far too little attention to the potential that markets such as India and China offer to European projects. Do you have any comments on that? Do you think that your operation, Rebate, has been more active in that area than other European-based web projects and internet projects? Yeah, definitely. I think our actions and our footprints probably speak for themselves about where we put our focus. And that’s very clearly Eastern Europe and in Asia. For all these countries, internet and ecommerce and technology is still a very strongly growing area. This means that right now you have a situation

130 8. Rebate Networks • Michael Brehm where basically, in whatever country where you are present, if you have a leading position, you have a very fast-growing company. The overall economy might be good or bad, but even in Greece or Spain, which are definitely right now hit severely by the financial crisis, you see internet companies that just show tremendous growth, which in more traditional areas would probably be very tough.

Tell me a bit more about StudiVZ and the early days. You mentioned that you accidentally met the founders? When I was in high school – I think when I was fifteen – I created my own little snowboard brand and sold snowboarding stuff. It was quite a lot of fun and convinced me that I wanted to go the entrepreneurial path. It also convinced me that the next time I did it, I would be doing it full time. Not like a side job, like school. During my studies, everybody at my university knew that I was very list with a few hundred things on it. But I wasn’t really convinced, like a thousand entrepreneurial, that I wanted to do something, but I couldn’t decide . . . I had a percent, of anything on that list. There was a funny thing like, for example, I thought plastic in their mouth every day. Like with a toothbrush. So I was convinced that, you needed a toothbrush . . . Actually, I was wondering why billions of people put with all these ecological movements, you should have toothbrushes made out of wood and maybe animal hair. I thought that would be perfect! I thought it was the greatest idea on Earth. I thought about this toothbrush for weeks, and one day asked my father, who was a medical doctor, what he thought about the idea. And then within three seconds he destroyed my dream because he said: “Do you know that bacteria grows very well on wet wood?’’ I had tons of these ideas. After university, I started working at an investment bank, and a few weeks before two guys who were about to launch StudiVZ. They said they were looking for a the bonus was paid . . . I met, through a friend who recommended me to them, the third person on their team with a business background, who could help them and complete the team. I very quickly said, “That’s fantastic, I want to do that!’’ I quit my job. My boss thought I was joking and couldn’t believe it. Then I moved from Frankfurt to Berlin, and we started in a one-and-a-half-room student apartment. Then we built a great team, convinced all our friends to join, and suddenly we had a huge viral effect. People just kept registering and registering and using the product. That was a pretty huge rollercoaster ride! It was tough to keep up with the growth and the pace.

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When you met them, they had already started preparing, but had not actually launched? Well, they had launched the basic site where you could register, and there were were both working from home, and I was the third full-time person working with members, but it wasn’t like there were hundreds or thousands of users . . . They them and joining the management team. They shared some equity with me, and then we had our first intern, and then two more interns, and then a few full-time programmers and so on.

And this was in 2005? Yeah, end of 2005, beginning of 2006.

You had several rounds of investments and then sold to Holtzbrink, the publishing company that owns the newspaper Handelsblatt . . . They were already an investor at the time? Yeah, their venture fund was an investor. We had a few different offers, but they liked it so much that they bought the company.

These situations when old-school publishing companies buy internet portals or social networks sometimes turn out well and sometimes less well. I have to admit that I don’t know the German scene well enough, but do you have any comments on how that has turned out for the whole project, for StudiVZ? For the company it was really important to secure financing, and we would have needed to do probably several rounds of financing until we had profitability. There are three sites now, one for pupils, one for university students, and one for adults. And the whole conglomerate is still among the top German internet companies. I don’t have any relationship with the company any more, so I only know what’s in the press or what’s rumored in Berlin, but it looks like they are now profitable, they are on a good path, and overall it’s good. Of course there are always questions doing super! like what’s the right price, when is the right time . . . But I think the company is still It seems to me that, when we talk about Europe, in terms of hi-tech and entrepreneurship, it’s more like a collection of individual, let’s call them “islands.” There is London, where your partner Stefan runs White Bear Yard

132 8. Rebate Networks • Michael Brehm and Passion Capital. Target Partners, where you are a venture partner, is very much targeting the German-speaking area. The French fund ISAI, where a fairly large number of French entrepreneurs are involved, is looking for French-related projects. The European startup environment is quite fractured, and there’s a lack of a Europe-wide community, networking and funding. Do you feel the same way? One of the issues in Europe is that we have a very decentralized market. Even for Europeans, it’s not that easy to take on twenty markets at the same time with twenty different languages. On the other hand, increasingly, entrepreneurs and investors are trying more and more to see Europe as one market. We see companies launching faster in several countries one after another. Especially if it’s purely digital products. If you’re in the ecommerce space where you need to send tangible goods, it’s more difficult. I’ve always tried to see Europe as one huge market and support the companies in going to as many regions as possible. There is an increasing trend towards, say, a “Europeanization”, but there’s still much to do. It’s one of the largest problems we’re having in Europe, compared to the States – building really huge world-market-leading companies. If you have the same success, or even are more successful, in one of the larger European countries such as the UK, Germany, Spain, France, Italy and maybe Poland, you’re just say a fifth or sixth or seventh of the size of a company who does the same in the States. Normally in the States, companies are valued with a higher multiple, meaning that their valuations, even if you have the same success, the same everything, are much higher than that of a European company, and then they can just come here and just buy a company. Obviously, it’s hard to do it the other way around. As an example, Vente-Privee had a tremendous opportunity to do a European- wide play, but they were focused exclusively on France for too long. And it’s always like a mixture. You’re always weighing the following: Do I go international very early, risking that my model is not 100% tweaked and ready? On the other hand, if I don’t do it, then it’ll be too late and others will crack the market.

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Followup conversation, August 2014

Rebate Networks had changed significantly by the time Michael and I reconnected. Many of the companies in the group had been sold – most famously, later in 2011, Google acquired DailyDeal (for a reported $114 million) to get into group-buying in the rich “DACH” (Germany, Austrai, Switzerland) markets. Some companies were sold to Groupon’s US rival LivingSocial. The Southeast European group, headed by Kolektiva, was turned over to local competitors in the region for what sources say was a symbolic sum. The original founders of DailyDeal, the brothers Fabian and Ferry Heilemann, bought their creation back from Google a year-and–a-half after the sale. As I’m finishing this chapter in the summer of 2015, you can get a light beer and spare ribs at the Munich Biergarten for €19.90 instead of €42.40 – along with, of course, hundreds of other group-buying offers. Rebate – and Michael – were focused completely on the Far East by 2014. Lashou, the Chinese company, had remained one of the top sites amongst thousands in the highly competitive Chinese market. iBuy Group Ltd., of which Rebate was the second- largest shareholder, had consolidated companies in Hong Kong (BeeCrazy.hk), Singapore (Deal.com.sg) and Malaysia (Mydeal.com.my and Dealmates.com), along with operations in Indonesia, the Philippines and Thailand. In December of 2013, iBuy CEO Patrick Linden led the company to a A$37 million IPO on the Australian Stock Exchange. Other portfolio companies included Nhommua in Vietnam and Foodrunner in Malaysia, Singapore, the Philippines and Indonesia. Overall, excluding Lashou, the Rebate companies in Asia were generating annual revenues of $250–300 million – similar to 2011, but with only some 30% of the employees from that time. Ecommerce, travel and food delivery had overshadowed the original group-buying / coupon revenues. Aside from Rebate, companies which Michael continues to be actively involved in include Inventorum (Point of Sales & inventory management), Kreditech (Credit scoring) and Atheneum Partners (a global network of experts). As for strategy going forward? “Make sure the companies continue to develop well, and we will support them wherever we can.”

134 9 Dailymotion Cedric Tournay THE EUROPEAN STARTUP REVOLUTION

There was snow on the streets of Paris in early December of 2010. I was in town, like thousands of others, to attend the spectacular LeWeb technology conference. I also had interview meetings arranged with two of the entrepreneurs in this book – Pierre Kosciusko-Morizet1 and Cedric Tournay, CEO of Dailymotion. Dailymotion is an online video platform. Founded almost on the same day as YouTube, it hasn’t become the globally recognized brand that the California company has evolved into under Google’s ownership. Comparisons between the two, however, are inevitable. Cedric took me to one of those famous long French lunches at a lovely Paris restaurant, where we talked not only about Dailymotion but also about French and European technology entrepreneurship.

See chapter 10 for my interview with PKM. 1

136 9. Dailymotion • Cedric Tournay

Let’s talk a little bit about your early days. You joined Dailymotion not so long ago, last year? A year-and-a-half ago, mid ‘09 in fact, and previous to that I was at the Lagardére group. It’s a big media company. I was part of the digital management – I spent two years in the Lagardére group because I had sold my web company to them.

Your company was health related, I believe? Right. It was a health and wellness portal, in fact, whose name is Doctissimo, which is the leader in France and in French-speaking countries.

And this was your own project – you were the owner or co-founder? Co-founder and CEO. We created this portal in 2000, and we went public on Euronext the same year.

An interesting time to go public, because of the dot-com situation! How did that work for you at that particular time, in terms of your timing and the IPO? Just after school I started a project with one of my friends. We created a software company for the health-care industry in 1995, and we quickly decided to develop a website, a database on the internet. We specialised in the health-care industry,

Sopharmaceuticals it was oriented and towards doctors, professionals, practitioners, insurance not so much companies . . . to the consumers? Right, at first. Then in 2000 we decided to create a website for the public, for consumers, for patients, with the idea that, at that time on the internet, there was and services that could be provided in this area. If I’m sick, I’ve got questions and no relevant service for patients, for customers . . . to provide all the information I need answers, I need support and so on. So we decided to create that service; we raised money at the time through a private equity firm, the Lazard Bank, and we launched Doctissimo in 2000, and then we went public with our first company, which was named Medcost, the software firm, on Euronext, you know, for the small caps. I remember the crisis on the Nasdaq, and even in Europe, started probably in the spring of 2000.

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Yes, exactly. So we missed the first step. We were planning to go public probably in April or May 2000.

So you delayed? We delayed, we lowered the price of the stock, and we went in public in June. Every banker was saying “You shouldn’t go public now, you should wait for a while! The price will probably be the much higher in a couple of months from now, you need to be patient!” We were entrepreneurs! We had already created some companies, and there was something in the air, and I said, “No, no, no, we’d better go public now with the lower price; we are going to raise less money, but it doesn’t matter – we need that money to keep on developing and expanding the business!”

Time was more important than the amount of money. Exactly, and we didn’t want to take the risk of not going public. I think that we were one of the last ones, in fact, in France and probably in Europe to go public at this very particular moment! Then there was this crisis, this amazing crisis. I remember, in fact, there were two steps of the crisis. At first, the bubble burst, and then everybody was saying “OK, this is some kind of illusion, this has nothing to do with the internet,” and so on. But in fact, the major shock to me was the September 11 events in the US, in New York City, which was in fact much more serious for the business because, we had a very strong decrease in revenues. That was a very, very hard time for us. When we went public, in fact, our stock price was 7.4 euros, and the company valuation was around, I would say, 50 million euros. A year-and- a-half later, at the end of 2001, the stock price was 0.5 euros, and the value of the company was lower than the cash we had in the bank.

Everybody was saying, at that time, “You don’t need to remain a public company . . . you should delist your company . . . It’s not worth it to be public . . . maybe you should sell your company or close your company . . . your losses are too high . . . there is no bla, bla.” Well luckily, we were three co-founders, so it was easy to stay very tight perspective . . . you will never earn money from advertising on the internet . . . bla, and face the adversity, and at the same time, we decided to go our own way and to keep on developing the business. There was a chance that, in time, we would see the audience numbers go through the roof, because it was a real need!

Yeah, it was real value.

138 9. Dailymotion • Cedric Tournay

We were becoming the most popular website for women in France. Even on topics which were not real priorities to us, like pregnancy and so on. You now, all pregnant women from France would come to Doctissimo to share their opinions, support each other through forums and so on. And we became the most popular website for women in France, so we were saying, “OK, we don’t have money, but we do have an asset: we welcome 1.5 million women per day!” We knew this could be worth something, and we were determined to find a way to make money through it.

So a huge majority of the users were women? Exactly. This was in 2002/2003, and there was, of course, a recovery. The advertising market was becoming better and better, and we earned more and more money, so we were able to invest more and more, and then we had this virtuous circle – everything was getting better and even easier, which is important for the entrepreneur, you know. You don’t have all the problems happening every day; you have good news coming. We decided to sell the company to the Lagardère group in 2007, because at that time, the valuation of the company was quite high.

How was it compared to the IPO? Did you come back to that? It was far above. When we listed, the stock price was 7.9 euros, and when we sold the company to Lagardère, the price was 30.5 euros for the same number of stocks, with no debt, no equity debt, nothing, so apple to apple. Of course, nobody

Exceptwho was you a shareholder guys! in 2000 was still a shareholder in 2007 . . . bet. So that was a really good story, and this was an 18 x EBITDA, which was a Right – except the management team . . . pity for the others! But that was a good good ratio, of course. You know, nobody really invested in the hard days, just after

…2000, came so backwhen up, the you market . . . were there. Right, exactly. And of course, we sold the company because it was a very good price and we knew at the time that the crisis was arriving again, and, you know, could feel that something was happening – I don’t want to live through that again! once you’ve lived through that . . . You keep it in your mind, just like a snake . . . You It seems like almost a rule that, if you are an entrepreneur, if you are a founder of a company, then you are really the most motivated when you’re

139 THE EUROPEAN STARTUP REVOLUTION building it. Once it gets in the operational mode, most people have this need or motivation to do something new again. That’s right. Honestly, I was fed up with being the CEO of that company. I was spending too much time on it, and I wanted something new, I wanted to change, I wanted to create something else, I was fed up with the business, you know, living

Soall daythen long Dailymotion with health-care came along?issues . . . I had a lot of discussions with the shareholders of Dailymotion, and in fact, it wasn’t such a long discussion, because I knew that company, of course. It’s a French-based company, so I had witnessed the success of the company as a French guy, and I had always admired it. So – I thought that was a great chance for me to do something new, something really exciting, and there was a need at the same time because it was a very, very hard moment for the company, it was almost out of cash. When I joined the company, the first thing I had to do is raise new money just to keep the company alive! That was a big stress, a big job, but honestly, I would rather do that than waste my time in a big firm, doing nothing.

So you joined in the spring of 2009? Yeah, in June, to be precise.

And the next round was really very soon? Yes, in October. That was weird because I spent so much of my time meeting with bankers and private equity firms and so on, just to raise money. Even before really meeting my team!

So that was the priority? Yes. And everything went well. The company has always been supported through each and every round by its historic investors, its shareholders, which is a good sign, of course. And so yes, we could be defined as a European YouTube, I guess, or the French YouTube.

I’m sure that you don’t want to be defined as a European YouTube, just as a video leader. Exactly, one of the global challengers, maybe the last one, because it’s a very tough market, as you know. We are the most popular European website in the world, so we have a larger audience than the BBC or anyone else.

140 9. Dailymotion • Cedric Tournay

Tell me a little bit more about what Dailymotion really does? I don’t watch YouTube that much, but my perception is that you have a different approach, that you are not “yet another video site,” that you have more emphasis on curated, high quality, professional content? And partnerships. We were the first to implement fingerprinting solutions to protect copyrighted content and to work with partners. We were the first to cut deals with associations which represent authors and publishers. And we were the first to implement revenue-sharing business models with our content partners to remunerate

And yes, we created a lot of topical channels on Dailymotion in each and every them for the audience that they generate . . . or that we generate on their catalogues. country, music, entertainment and cinema, video games, news and politics and travel etc., with some publishing teams in France, in Europe and in the US to manage, editorialize and curate that content. This industry is going very, very fast.

Dailymotion?I am really amazed, I mean, this company was created only five years ago . . . … Yes, just like YouTube, only one month difference, in March ’05, and when I see the work that has been done in five years, it’s incredible. I mean, we developed very specific tools to monitor content and to provide the solutions and the copyrights, to create this revenue sharing system, the asset management system, because as a content partner, you can decide that the concert of Leonard Cohen will be available in Germany but not in Italy for some reason. The quality of the videos has been dramatically enhanced with HD, full screen and so on. And there is no longer any buffering, it goes just like this. The content itself is getting better and better, as is the monetization. And now the new frontier is connected TVs and mobiles. The usage that you mentioned – I just want to lean back on my couch,

Whenwatch myGoogle TV and comes get a streamto Panasonic on YouTube or to or Sony Dailymotion to discuss or anyone some else . . . things, it’s probably a different approach than when you guys come. I mean, you are a super successful company, but still, in the terms of the size of company, obviously smaller than Google or Apple . . . That is right, but the funny thing is that we are truly global, international. We are still quite small, even compared to local big players like Canal Plus or TF1, but we are truly global. So we have succeeded in signing global agreements with

141 THE EUROPEAN STARTUP REVOLUTION manufacturers like the ones you mentioned and global partnerships with the global web players: Microsoft, Facebook, even Google. We were part of the launch of Google TV in the US because there are very few brands and services on the Internet that are really global. And it’s quite difficult to sign deals, for that kind of players, with a lot of local players. You can have this version for France and this one for the UK and so on. So, with Dailymotion, being present everywhere with a lot of different languages, it is possible to have the application for instance on the screen of the Sony Bravia new

SomeoneTV for instance. has to Yes, do that it. is very hard work, but, well . . . You always need to have a strong conviction. This is what I was saying about Doctissimo and the evolution of advertising on the Internet and the importance of women on the Internet. With Dailymotion, it’s exactly the same – we’ve got only one vision, which is that people want to watch video content. And there will be advertising on that video content, just like for TVs. And the good news in these two last years is in fact the evolution of in-stream advertising. Which is a kind of deus ex machina. I mean, the good surprise is that the iIn-stream video advertising now is truly growing very fast. This is probably now 40–50 percent growth per year, and so money is coming in, and the revenue of Dailymotion, for instance, is increasing by 50% this year and will grow by 50% next year. It’s a brand new paradigm, it’s a brand new business model. Because a couple of years ago, every user, every video being watched that you were getting was a loss. Now it’s completely changed and every new video that you add to your business – it’s money. So it’s totally different, you know. Now, we have a really good business model, which hasn’t been the case in the past – to speak frankly – and this is in fact only an issue of market share globally: competing against YouTube and the others, but mainly YouTube, and that’s it. As well as trying to figure out what the future of video on the Internet will be, whether it will be on computers or mobiles or TVs or tablets. That is the beauty of

Thisthe web, last because round ofsometimes . . . investment things which just was happen! done last year was really focused on building up the business? That’s right.

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My understanding is that a huge part of that was going into the US, and you are explaining that the UK market is very important for you, but that your strategy came from the other side, so attacking the UK not from the east but from the west. Going first to the US to build up the presence and content and just being there and using that as a platform to basically gain UK viewers and customers? The main reason is that the US market is the best market in the world. It’s not just the world when it comes to advertising and the Internet. So yes, we’ve invested a a start for attacking the UK market, of course it is more . . . It’s the first market in lot in the US, we have a team in New York City, we have our own sales house in the US, an internal sales house, and we have signed a lot of content deals.

NBA . . . NBA, that’s right, but also EMI, the Warner Group etcd. I’m always fascinated by the dynamic of the clusters in the economy and especially in the Internet industry. If you want to be a global player, then you need to be in the US, and there is no point, because if you want to cut deals with big content firms, you need to be in the US with the US brand and the US team and so on. I would say that it’s almost impossible for just a French or European firm to have some kind of global agreements with Facebook and Twitter or Microsoft if you are only based in Europe. Of course you will be able to cut a deal for just France and so on. If you want the best content, the best catalogues in the world, they are American.

What does that mean for you as the CEO? Would it be very important for you, really to be based there, or just travelling back and forth and have your people there? You know, that is an important personal question. I’ve got three children, and I like France, probably as you love Croatia, and it would be hard for me to depart France and to settle in the US, but honestly, if it is only about business, I would already be in Palo Alto or in New York City. There is no reason why we should be in France at the moment – or even in Europe. You know, the US has become the first market for Dailymotion in terms of audience, content acquisition and revenues. This is the first market for Dailymotion – we make 15 million uniques in the US per month according to ComScore, and we do only 10 million uniques in France – which is normal, of course.

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Yes, but when did this happen? When did the US overtake France? Mid 2010, this year in spring.

So a few months ago, and this is a consequence of the investment that you made, building up the team there from the last round. Exactly, acquiring new content, leveraging marketing strategies in the US.

So how many people are there? About twenty.

Twenty people in New York? In New York City – and we have 2 persons in Los Angeles, and yes, the US is a big country; you need to have people everywhere. I mean, in France you can run a business from Paris and Paris only. In the US, of course, you can’t develop a long- term, sustainable business only from New York City, even though the advertising industry is mainly based in New York, as you know, so now the issue is that we are about to open an office in Palo Alto in California to be near our partners from Silicon Valley. The European expansion will be managed from London, our office in London and not from Paris. In Paris, we will have the headquarters and the French operations – it’s still the biggest market for us in terms of revenue. This will last probably for one year or two, and then the US revenue will be above the French revenue and the European expansion will be based in London and the international expansion will be based in California.

Why Europe from London and not from Paris? Because London is a major hub for advertising in Europe for the digital industry. Also, we are too French a company, so to change the profile of the company, you need to diversify the people you recruit and the places that you run. I am French, and an important part of my staff is French, and it’s not satisfying. France is a little country, so it’s hard, I mean, it’s a miracle to develop a global business from Paris, from a little country like France.

You say, “a little country like France,” then I think about Croatia and I think, “OK, there are smaller countries than France.” The difference is that for small countries like Netherlands, Denmark and Croatia, people are more international minded because they know they need to go abroad to develop the business.

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Yeah, the Netherlands are probably the best example – they have always been navigators and traders, that is true. The difference is that in France, most of the people keep on thinking that we are quite at ease in France and it’s a big market and there is no need to go abroad and, you know, we can do everything on our own and there is no need to try to get established in the US or elsewhere in Europe. At Dailymotion, we think the contrary, of course. We always think that we need to go abroad, we need to create; we are just opening a subsidiary in Brazil, because Brazil is of course an amazing country with huge growth in terms of digital and advertising. We are looking for a

Thatpartner was in myRussia next because question. we make 2 million uniques . . . The difficulties are, again, for a startup like Dailymotion, with limited means, it’s impossible to handle everything at the same time. We have audiences in Japan, in India, in Russia, in Australia, in Brazil, in Mexico, in Canada and so on.

So the company has very huge potential and limited resources. Obviously, financing is critically important. In terms of your growth, obtaining financing would seem to be relatively easy? Easier than before, because now this is a profitable business.

And the environment has changed, as well. Yeah, we are cashflow neutral, we don’t lose money anymore, so any money being invested now is quite a good opportunity and quite profitable. So yes, to be honest, we are having these kinds of thoughts at the moment with the board, and we know that we are in front of a choice. We could decide to sell the company, to say, “OK, we’ve done a good job for five years now. We’ve taken the risk and developed the asset, the platform, the audience, the brand and so on, so let’s give the keys to a big firm, a big company that will bring the service to a new threshold.”

Like perhaps your former employer? Probably not. It wouldn’t be a really good step to be a part of an old media company. I would rather be acquired by a global leader of the IT world, like Microsoft or someone like that. But that would be another story, and the choice has honestly not been made yet – but this is again a kind of arbitrage. You are right, either you sell the company to a big firm or you decide to reinvest, because of course, you can’t

145 THE EUROPEAN STARTUP REVOLUTION stay like this, and you need to reinvest to be a global leader on that market on that business model, just to go faster, because in fact the crisis is over, so now everybody is reinvesting, taking new risks and new bets and so on. I think we will follow the second path and reinvest in the new company, raise new money.

That sounds like quite the obvious thing to do. But that’s not the European attitude; it’s not the French attitude. You know, I get very excited when I see the people from Groupon, who just refused the offer from

SixGoogle. billion! Those guys have got balls. If I was offered a check . . . Six billion! I’m not sure I would refuse! For a French or a European startup, that’s always the obvious solution: “I’ve done the work, I’ve done the job, I sell.” And there’s a handful of companies that are able to say, “OK, I’ve got the support of my shareholders; I can go public and I can keep on growing and spreading internationally and I don’t need to sell.”

As far as I know, in the US there is already a pipeline of companies that have filed for an IPO. That would be great! If we don’t face another financial crisis worldwide – with public debts.

Yeah . . . and the euro! But you guys would be very, very well placed to go for that. And every European IPO success would be a super chapter in my book, among other things! I would love that. But then again, finding new money, whether it’s private equity money or public money, through an IPO, it’s not the hardest part of the job, of course. I wouldn’t say it’s easy to find money – of course it isn’t – but it is doable; it’s achievable. The hardest part of the job is to keep on developing a valuable service – a sticky website that attracts people, that satisfies them. You create this valuable business model with valuable content and good advertisements. This is precisely what I love about the Internet – in the end, the best service is always the winning one. There are some exceptions, but generally, you just have to provide the best service.

We talked about different opportunities and developments in the media market. Do you see any huge new strategic change for Dailymotion – something radical, aside from acquiring new markets, going to the US, India, East-

146 9. Dailymotion • Cedric Tournay ern Europe? The model is still basically advertising revenue, correct? So have you guys been thinking about some shift in the strategy? Yes, we have had some tries. For instance, we’ve launched this year a new business unit and a new offer called Dailymotion Cloud Computing, which is a B2B offer, a kind of white label platform, to stream videos for big players of the industry. You can go on Dailymotion Cloud and use the CDN, content distribution network, the player, and the infrastructure globally, and you’re charged based on the number of hours streaming, with no setup fees. This is a new business model for us, and you know, it’s the kind of business that Brightcove and Ooyala are doing in the US. We want to diversify our revenues and not be only dependent on advertising revenues. So that’s a strategy, yes. But actually, when you are in a market where the growth is fifty percent per year, you just have to focus!

Yes, absolutely. The true strategic move that could be made – that is already being made at the moment – are live programs. You were talking about concerts – this is exactly the content to do in 2010. We’ve developed a full range of live events in sports, music, politics, news and so on. It’s very funny, because Dailymotion was born to kill television, saying we don’t want to be told what we are supposed to watch – you

Butknow, some we want help tocan choose be useful what – we some want curation . . . to watch on the internet . . . And now, as we grow older, we say “OK – TV is not that bad; it’s good to lean back

Ofon course,the sofa,” because as you were there’s saying, so much and be stuff . . . offered some programs . . . Exacly. And so now we are launching some live programs. And what are live programs? They are TV.

Yeah, but a totally new kind of TV. Yeah. We re-stream the programs that have been cut into pieces – for instance, the new version of the Dailymotion TV application on Google TV is just like this – it’s exactly the same as the YouTube Leanback program or the Vimeo Couch program. You sit back, you launch and you are provided with a personalized stream of the best-in-class content of the day. I don’t need to click and watch the video. I’m provided with a long program just like a TV channel.

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Are you integrating that with recommendations by your friends? Yes, exactly.

In other words, social curation – that’s huge. Exactly, but it’s very hard. This is very hard because it’s hard to manage the privacy, and it’s hard to find the rights, to define the collective choices and the collective preferences to provide you with the right program. You can be my friend and you like tennis or basketball, but I don’t like tennis or basketball, I just like football, so…

OK, but if I have, say, two thousand friends on Twitter, and I know that ten of those friends like jazz, typically I would say: “Hey guys, I’m feeling like listening to some jazz, what would you recommend?” So I don’t ask two thousand people, because they don’t care, but I know that ten, or twenty, or a hundred of those people know the best jazz, they know the best political show out of two hundred, the best video review of some reality cooking TV show. SEO is broken, and in many cases, search is becoming useless. You’re right, social recommendations are important, and in that case, in that situation, we do rely on Facebook in fact, because we have a very deep integration with Facebook, and Facebook now represents ten percent of all our audience off site.

How about Facebook credits, is that interesting to you in any way? Yes, and this was in fact the second big strategic move that we would like to do, meaning to make people pay for something, special content, special services, special features. We are developing a system just like Facebook credits, and the code name for the project is “Dailymotion credits.” The idea is to find something, some program and so on, that people could accept to pay for. Because as a platform, as a media, we can’t only live through advertising revenues. We need to make people pay for something, and it’s a hard path to take, and it’s the same for YouTube. In fact, YouTube thought that it would be easy to make people

Butpay forNetflix video is on Netflix. demand. And well, YouTube is not Netflix, YouTube is not Hulu . . . Netflix is Netflix! And it’s a very, very, very good company.

It’s very successful. No doubt about that. It’s hard, it’s hard to change your positioning and to change the proposition, the value proposition to costumers. But we have some ideas. Of

148 9. Dailymotion • Cedric Tournay course, we would love to acquire some long-form catalogues, and to provide some VOD programs to people, and we would like to find some special features that could be paid. Could it be virtual gifts, virtual iTunes, games, just like Zynga and so on. But there is no hurry, because our main focus, our main concern is about growing the fan base, growing the audience, and we’ll have time to see how we can increase the ARPU – the average revenue per user. And again, now the advertising model is so dynamic. In many cases, we would rather provide something for free and monitor the advertising, rather than making people pay for that.

Obviously. For instance, for Christmas and New Year’s Eve, we want to offer something to our customers. So my publishing team are thinking – OK, what kind of movie could we buy on the international market and broadcast it for free on the internet for Christmas, for children, just like a TV station? They’re saying – OK, we have cool cartoons and we have really cool movies for teenagers and for younger people, and this is on Dailymotion, come on. And that’s for free. And for grown-ups we could say the same – OK, for Christmas and New Year’s Eve there will be a brand-exclusive event for free on Dailymotion. A long-form movie. And – we are French, so we’ll have the speech of Nicolas Sarkozy for New Year’s Eve live on Dailymotion. This is meaningless, but that’s an event. Free content with advertising revenues tends to be the best business model for us. We’re about to acquire the rights for the second league of football in France. So, not the first league, because that is too expensive for us at the moment. This will change, but now we are about to pay for the rights for the second league. And the second league could be interesting for people on the internet in France. If you live in some big city in France, and your location is part of the second league, you will be delighted to have the games on Dailymotion.

Absolutely! And that’s a big change, because a couple of years ago, even a year ago, people from older media told us, “You will never be able to acquire sports rights, or music rights, you don’t have the sustainable business model to acquire those rights, so you will just have crappy images with short clips.” This is what drives them crazy! It’s not right, because we have more and more valuable content in each and every topic, including sports. People in this industry never had the global vision. They don’t synthesize everything and say, “On the first end I’ve got some TV station and a newspaper and so on, that earn less and less

149 THE EUROPEAN STARTUP REVOLUTION money, so sports rights are going to decrease because they can’t afford to pay the same amount of money that they used to pay three, or five, or even ten years ago. And, on the other hand, I’ve got some barbarians at the gate, newcomers from the internet, who are getting richer and richer, who are able to pay more and more for the same catalogues, and so I will have to deal with these people. And I can’t just say, OK, I’m on the side of the older players, and I don’t want to hear about this internet thing.” It’s not like that. There’s a real change in the whole media industry that’s just happening now.

It’s a tectonic shift. Exactly. It’s not only within the same bucket of content. No, it’s not the same old producers, the same old leagues, and same old wholesellers of content, because what we’ve shown with Dailymotion and YouTube is that there are plenty of talents out there on the internet, everywhere in the world. I mean the most popular content on Dailymotion is amateur content. The most popular account, for instance, is Rémi Gaillard’s. You know that guy? Rémi Gaillard, a French guy in the south of France. His motto is “By doing crazy things, you become a crazy guy!” And so he makes some funny clips in the city of Montpellier in the South of France, recorded by his own friends with a small camera. He does jokes with policemen, for instance, he takes a football and he shoots it at the police station, just like Buster Keaton. This guy, I mean, he came from nowhere, and now he’s making good money and he’s the most popular guy on Dailymotion. Ahead of Universal, EMI, Warner. So the internet is just like this, in fact. Only twenty percent of our audience watches official content, premium content from TV stations, radios and music majors – only twenty percent. We have eighty percent of our audience watching UGC,2 which is huge. And people like watching videos coming from other people.

It’s the new reality. And it’s really hard for these old guys to understand. They cannot wrap their heads around that. They say, “It’s poor production, it’s crappy, it won’t last.” But yes – it is lasting! And we give money to these people, so we have created a bunch of new heroes or new celebrities, new semi-pro’s or semi-amateurs, whatever.

But have you thought about production?

UGC: user-generated content. 2

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Yes. This is not, of course, our first job, but since we pay for productions, and more and more, we pay some, what we call minimal guarantees, upfront payments and so on, co-productions. We tend to become producers or co-producers because we do need, we strongly need, we desperately need new appealing content! So now, we are able to sign contracts and projects, and say, “OK, you guys, you’ve got talent . . .” – this is exactly what we’ve done with the kind of people that I hundred episodes, and I’m going to pay you for that. But I want to be part of the mentioned – “ . . . and I want you to provide me with a series of twenty or one production, of the co-production, I want to have some rights on your production, because if your content goes on TV, since this is my money, I helped finance the project, I want money if your content goes on TV.”

I think if you find the right way of working with these local people, using the infrastructure of the internet for communication, producing some videos with those new HD cameras – they’re really small . . . I’m not in this business, but I would guess that you would have opportunities for those kinds of partnerships and content production that were totally impossible a few years back. Exactly. That’s one big difference between a US company and a European company. And seen from the US, as you know, from New York or even California, there’s no difference between France and Croatia, this is all a complicated continent. And US internet companies don’t like to customize. You can see that when you sign a legal contract with a US firm – you can’t change a line, it’s impossible. They don’t understand the differences between each and every country on some legal or financial point, but as a European player, we know how to do that, and we do it better. In Turkey for instance, we do better than YouTube. We are more popular than YouTube in Turkey, more popular than YouTube in Greece. It’s very, very hard, of course, because YouTube is very, very good, but we work with local players that allow us to find the right local content, because I believe that in

Butglobalization, they also peoplewant local locally content. want global content . . . … they also want local content, yes. I mean, Japanese people listen to Japanese music. And Turkish people, they want Turkish music. And people in India, they love Bollywood. At the same time, you need to have Lady Gaga, and you need to have local content. So, YouTube is better than us on global content, but I think that, in some countries, we do better than them on local content.

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That’s probably a huge competitive advantage for you, potentially. Simply the fact that they are there, they have this US mindset . . . As French guys, we know the difference between Greek and Turkish people!

Americans don’t. They don’t! Of course. They can’t understand European history, geography and so on.

What is, just roughly, your revenue run rate for 2010/2011? Cedric : For 2010, we are going to make something like twenty-five million euros in revenue, which for us, of course, is very high, but very low compared to Google or YouTube, because I think YouTube will make eight hundred million dollars in revenue this year. But this is real money, and we think we will make something like thirty-five to forty million euros next year. As you know, it’s very hard to manage hyper growth in a business. You need to scale your team. At the moment, we have something like fifteen open positions in the world, which is a lot – you don’t want to hire anybody the money or the competition – it’s just time. Time to open Brazil, time to open that you can’t trust . . . so it takes time. I always say that your worst enemy is not Japan, time to find a partner in Russia, time to find people on the West Coast in the US, time to set up our media distribution entity in Palo Alto and so on. It’s always about time.

Yes. But sometimes you can speed time up with money. In some things, but not always . . . If you accept some friction.

Yes. This is why I’m, again, amazed by the major success stories on the internet. The way and the rhythm at which Facebook has expanded is very, very amazing. vision, or money, just how can they go so fast? Foursquare, Twitter . . . how can they do it? I’m not talking just abut talent, or Yes. I mean, we are not lazy. We work a lot, we have a very valuable team, but you know, you have some biological limits . . . 152 9. Dailymotion • Cedric Tournay

Yeah, I know – physical constraints. We would all love to make photocopies of ourselves. Right!

Cloning would be nice . . . So how much of your time is spent abroad, in the US, Turkey, other places? Probably one-third, which is not so huge, in fact, because I try to protect my time. I could spend much more of my time traveling, but it’s quite tiring, as you know. Since the most important part of the product team, the IT team, the content team, the finance team, the marketing team, the sales team, is based in Paris, it’s a good way to organize the whole business and find a way to do things from Paris. But of course this is just a step, because now we need to go further and decentralize the operations, so it’s getting harder and harder. In my situation, in fact, one of the most complex things is to be able to rely on trust- worthy people. That’s a major key success factor for every startup. When you take all the success stories, you will always find some very strong teams with a lot of trust. The people that I hire in all these countries, I know them personally. You can rely on them. But then again, it takes time to create that kind of network. On the contrary, when we look at all the failures in this industry, we often find some too-fast-growing companies with few links between people, few connections, poor connections. Lack of trust, lack of coordination – this is what we’re trying to avoid, so from that perspective, you could say that we are truly a French company, because to create this kind of confidence and trust, you need to have a core team, and this core team

Areis French. there It’s any getting colleagues faster, in we your know core each team other . . . from your previous careers? No. Not one.

And are they all from before you came to Dailymotion? No, no. I’ve kept a major part of the team which was there, but I changed and re-

Freshengineered blood. the team and brought in some fresh air . . . … in the company. Blood, yes, thank you! But I didn’t want to take anyone from my previous career and previous experience, because again, I didn’t want to write the same story again and again.

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The average age of the people in Dailymotion is thirty. They are very, very young and competitive people. When I first started at first to work here, I was already the CEO, the boss, but one of my difficulties was that I was the youngest among the team. In fact, I was quite young. But now I’m quite happy, because I’m thirty-five, thirty-six, and I’m older than my team! In France and in Europe people think, “I’m quite young, I’m twenty-five, thirty, I need to wait for two, or three, or four years, and when I am skilled or experienced,

Someor when day. I have a network or, when I . . . … more at ease, some day. I will try to become a team leader, or a manager, or I will create my company,” and I always say, “It’s not like that! If you have the idea and

Go,the will,go! then go . . . ” “… do it now! You don’t have to wait. If you don’t do it now, you will never do it!” I had the chance to fall in love with the internet and this story, beginning in the nineties, so I didn’t even ask myself any questions, it was like an obvious

Justdecision . . . something you had to do. I said, “I want to do this, it’s an amazing thing!” But people now, especially young people, are often quite scared about making such decisions. So I love this start-up environment, and this is exactly what you were saying about motivating people to do something!

You know, if you read the mass media, there is so much scaring going on, people are scared of swine flu, they are scared of GMO food, they are scared of the crisis – all time the mass media are taking this slogan, “Good news is no news,” and they’re pushing mostly the bad news. There is always some kind of paranoia about something. And of course it’s creating insecurity, and young people are unfortunately often saying, “I would rather go for that government job because, who knows, you know, tomorrow, blah, blah.” They are raised in a world with a ten-percent unemployment rate, so yes, we make them scared.

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Update – August 2015:

Soon after our conversation in January 2011, the French telecom company Orange (partly government-owned) acquired a 49% stake in Dailymotion for fifty-nine million euros. The telco announced at the time that they intended to purchase the remaining shares as well. That eventually happened, but it took a full two more years, until February 2013, and it cost them a further sixty-one million euros. Soon afterwards, Marissa Mayer came knocking on the door. She had become CEO of Yahoo some time earlier. Just a few months after the second stage of Orange’s acquisition, early in 2013, Yahoo offered to acquire Dailymotion from Orange, to the delight of Orange’s as well as DailyMotion’s management, since the video platform had never found a real home inside the telecom organization. In a move that shocked the French and European tech ecosystem, the French government decided to block the deal. Dailymotion was considered a “French startup champion” and apparently should not fall into the hands of evil foreigners – especially the Americans! Economy Minister Arnaud Montebourg reportedly yelled in a meeting, “I’m not going to let you sell one of the best French start-ups – you don’t know what you’re doing!” Two years later, in early 2015, another potential buyer appeared – this one from Asia. Pacific Century Cyberworks – PCCW – is a Hong Kong-based IT and telecommunications conglomerate with worldwide holdings and interests. By this time a different, more popular minister was in charge of the French economy – Emmanuel Macron. The government’s sentiment, however, had not changed. The deal was blocked yet again, to the bewilderment of the business community. Marcon “suggested” to Orange that it would be better to look for a French or at least a European buyer. Soon afterwards, just such a buyer showed up. On April 7, 2015, the French media corporation Vivendi acquired an 80% stake in Dailymotion for 217 million euros.

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10 PriceMinister, Rakuten, Kernel Investissements Pierre Kosciusko-Morizet THE EUROPEAN STARTUP REVOLUTION

The PriceMinister story is in many ways emblematic of startups in Europe. The company was founded in 2000, right after the dot-com bust, and launched in 2001. It quickly became an e-commerce giant in its home market of France, where thousands of people and small businesses still make their livelihood trading on the platform. Sold to Japanese e-commerce juggernaut Rakuten in 2010 for 200 million euros, it was a great success story for its founders and investors, who earned 17 euros for every euro invested. Still, PriceMinister is not very well known outside of France. Like a number of other European startups, it found its home market to be “good enough” – the management team and shareholders were never motivated enough to take it to a global scale. I spoke with longtime CEO and co-founder Pierre Kosciusko-Morizet about the PriceMinister story and about startups and entrepreneurship in Europe. Our conversation took place in the winter of 2010, during that years’ LeWeb conference, at PriceMinister’s awesome Paris headquarters. PKM, as he is known in the French and European ecosystem, is a descendant of the prominent Kosciusko and Morizet families with a long history in France and Poland. His sister Nathalie (known, of course, as “NKM”) is a high-profile French politician.

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Pierre, perhaps we can start with this issue of the media visibility of European entrepreneurs and founders and companies. It would seem to me that Europe is making steps forward . . . Yeah

. . . but it’s still quite fragmented. Even media companies such as Spotify, for instance. Spotify is available in four or five European markets. I assume this is related to rights. I think we are making steps towards a single European area, but we are still not there. Well, there are two different subjects there. One is media coverage about entrepreneurs in Europe, and the other is whether entrepreneurs in Europe are building global companies or not. I mean, not even global, just European companies. On the second subject, I think that the fact is that Europe doesn’t really exist yet as a business area. Taxes are different in every country, and we don’t have one currency yet. The UK is part of Europe; other countries are outside the Euro zone as well, obviously, but I think that is not the main issue. The main issue is really tax, labor law and legal issues such as company laws. Obviously, there are also many different languages, some different currencies and different consumer habits. We say “Europe,” but it’s basically a collection of small countries, compared to the US or China or Japan, which are much bigger. When you look at digital businesses, they are mostly fixed cost businesses, so it’s basically the same cost starting a business in Germany, France, the UK or the US, and the US has six times more people than France and four times more than Germany, so that is a big difference. And I don’t see that changing so much. The other thingis – I don’t know about Germany or the UK or other European countries – but in France, I know that most entrepreneurs have quite a local view of business, so they don’t really see Europe as a local market, because their local market is France. Which is true, but it’s partly true because they decided they could look at things that way. I think that is changing, but I don’t think that Europe is becoming a reality in terms of taxes and legal barriers, etc. But I think in the minds of entrepreneurs, it’s progressively becoming a reality. Actually, this morning I talked with a friend who is an entrepreneur, and he was saying exactly that entrepreneurs who are starting

159 THE EUROPEAN STARTUP REVOLUTION companies now in France are looking more at global business than before, which I think is very good. Another thing that is happening in France now is that we are seeing a second generation of entrepreneurs – and this is quite new – basically entrepreneurs who started their first company in 2000 or so, who have sold it and who are launching another company or investing in companies that are being launched now, which another company . . . they are actually doing two things, they are either launching is one of the things that I am doing. We are doing that more and more, and I think that is very good for the European entrepreneurial eco-system. We have many entrepreneurs, but we actually lack money, and so the fact that entrepreneurs who made some money are reinvesting, I think that is a very positive thing. That’ a very interesting trend – I’m quite optimistic about entrepreneurship in Europe, or at least in France, which is the country I know best, but I think it’s the same in the UK and in other countries, so I’m very positive! Another thing that you mentioned is the media coverage of entrepreneurship, and I think that’s progressing as well. The issue we have is that we’ve always been fascinated by the US. When I started PriceMinister, I was really upset by journalists, because they always talked about the American companies. Even when they said we were a good company, they compared us to American companies. But when they talked about the American companies, they never mentioned us! Take a paper like Liberation here in France: they’ve done many articles about PriceMinister, and each time they mentioned eBay. Even last week they had an article about us and called us “the French eBay” or whatever. That’s really upsetting, and when we talk about that with them, they tell us “you know, we need to give people perspective, to compare” etc. But in the US, nobody says eBay is the “American PriceMinister.” OK, they are much bigger than us, but I think that is really an issue. Now that we have successful companies in Europe, companies that have a big valuation on the stock exchange or have been sold for a good valuation, journalists tend to speak more about European companies, and they really see that something is happening and value is being created. So, I think it is getting better, but it’s taking a lot of time, a lot of energy to convince them to talk about us and not just about Americans.

I think an important part of this story is the community. When you go to London to the various tech networking events, there is a community of people there. Most of those I’ve met are related to Seedcamp – Saul and Robin

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Klein, Fred Destin also was based there for a while, now he’s left for the US. If you talk to people about the American scene, there is a kind of distinction between Silicon Valley and New York, so in New York there is a Silicon Alley, Union Square Ventures and other funds, things that are happening there and companies that got started there . . . Of course, there is kind of rivalry related to Silicon Valley. Even among entrepreneurs who are, let’s say, the same generation, would you say there is a really European community? When you network with colleagues from other successful companies, are you focused on the French or do you have, say, a significant number of discussions and conversations and exchange of ideas with colleagues from Germany, from the UK, from Spain? Well, not so much. It’s mostly country by country. Some VCs are Pan-European,

Europe are Pan-European, but I totally agree with you, I don’t think there is a and that helps in creating this eco-system . . . Actually, most of the big VCs in real European community. One of the issues is that not so many people feel that they are “European.” Personally, I feel that quite strongly, but most people feel, you know, Czech, Polish, or whatever, but they don’t feel European.

But when I talk specifically to entrepreneurs, it seems exactly the opposite. When I talked to Martin Varsavsky or Stefan Glaenzer . . . Maybe it’s because I brought it up as a topic, but I always felt that they are really European in their thinking. I mean, Martin was born in Argentina, so he is essentially a Latin-American guy, but he lives in Spain, and Stefan moved from Germany to the UK . . . Basically, if you look at people who are travelling a lot, I think that they feel European, because they feel that they are not Asian or North American. They see the difference. And I think that there are really common things between the European countries, like having an old culture, old history, being in an old area that is declining (laughs).

But not in all industries? Exactly. I mean, if you talk about entrepreneurs, most of us are travelling a lot. We are all exposed to Americans and Asians, so we feel different from them, and we probably feel closer to each other. But I was talking more about the average European person, and I think they don’t feel really European.

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But Europe is very young as political entity, so that’s not so unusual. Yes, it is, and I’m not sure it’s evolving that quickly. In the past few years things haven’t changed so much, I’m afraid. I’m very confident about Europe, but I think it should go faster, that is my point.

And if today you were investing in, let’s say, some startup company in Paris, would you tell them to go to the US as quickly as possible or to stay here, or would it depend on different things? It really depends on the companies. Many French companies feel that launching in the US is impossible, because it’s so big, and so different, which I feel is not true. One of the reasons why I’m investing in companies is that I feel they can became global leaders. A company I invested in, Co-Voiturage.com, a car-pooling company, is mostly French – well, French and Spanish – and I don’t think they will be American that soon. It really depends on the companies. What I feel is that you have to be strong where you are. So, if you can be strong in many countries, it is great, but if you can’t, it is better to be strong in one country than to be average in many countries. So that is the advice that I give to companies. Make sure that you are strong somewhere before trying to just exist anywhere.

Let’s talk a little bit about PriceMinister. Starting, I would say, maybe from the middle, not from the beginning and not from the end. In your interview with Loic you were basically talking about the IPO, it was 2007 and you mentioned that in 2008 or 2009 there would be an IPO. And then there was the acquisition by Rakuten this summer? Yes

So between those years, your plans and your thinking obviously changed. What happened is very clear. We planned the IPO for the second quarter of 2008, and we actually almost did it. Basically, we stopped the process just two weeks before getting listed. Well, actually before doing the road show to get listed. So, what happened is that we filed with the AMF, which is the French SEC basically. They said “OK, go ahead, you can proceed.” That was in April of 2008. The market started to go down, and we said, “Let’s wait.” I think it was a very wise decision. So that is the only reason why we didn’t do it. Now that I think about it, I’m very happy we didn’t do it because I think it would’ve been a big mess. Actually, not doing it allowed us to really focus on long-term growth, and that was good. Anyway, all

162 10. Kernel Investissements • Pierre Kosciusko-Morizet: PriceMinister, Rakuten the money we would have had from the IPO, maybe we would have invested it in the stock exchange and lost it, so we are very happy about what happened. We’ve actually changed a lot between 2008 and 2010, and I think that we would not have achieved so much if we had been listed, so I’m very happy about it. But of course it’s been quite a hard period of time for us because we worked a lot on some things that didn’t happen, and then what happened was, with the crisis, we basically focused back on our business, and we have grown 30% year on year for the past two years, so that actually was a good thing.

Ok, so, the main reason for the change of plans was basically the economic environment? Yeah, that was the only reason.

How did the communication with Rakuten get started? Were they the ones who contacted you? It’s a very strange thing. They contacted us through customer service. They went on our site and sent an email saying “We are in Paris, can we meet? We are Rakuten, we are quite a big company, we have 10,000 employees.” I had never heard of the company . . . We met them early this year, they told us they wanted to do a joint said, you know, we are not doing that, and they said we can do that or we can venture and had some strange ideas, to do the JV as part of the company . . . We

And then a few months later, in April – actually, in March, two months later – we buy your company. We said we were not for sale, and we wouldn’t do the JV, so . . . had more and more incoming calls from the US about acquiring PriceMinister. So we called the Japanese back, and said, “You know, we have a lot of pressure from potential acquirers and from our investors, so if you want to do a deal, it might be good timing.” And they said, “OK, come to Tokyo and meet our CEO.” So we went there, we met with him for half an hour, he said he wanted to buy the company and it happened two months later. We went there on April 9th, and it was signed on June 17th.

That was quick? Yeah, very quick.

I’m assuming that the discussion on both sides was extremely efficient, as well as the due diligence?

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Yes, it was very efficient. We were quite prepared for the due diligence because of the IPO.

You had done your homework. Also, we are quite a simple business. We have no logistics, no inventory, so we are really quite a simple business to do the due diligence on. They put 80 people on the Japanese side for the due diligence. People in Paris, people in Tokyo to do 24h work, many subcontractors and advisors to work on the deal. So that was quite impressive, actually.

Interesting. OK, let’s move for a few minutes just back to the beginnings. The company was founded in ’99, I believe? Actually, 2000.

And then launched in 2001? Exactly, yeah.

Ok, so it was a fairly unusual time to launch a web based company, because it was right after the crash? Yes, but it was a big opportunity, because we had almost no competition. We really enjoyed it! We knew it would be hard, it would take time, because we were far from the bubble – you know, there was no easy money, etc. It was very hard to raise money but we knew that, as soon as we raised money, – we wouldn’t have much competition, so we had time, and we raised the money in one-and-a-half months. We raised from 40 different people, and we were very lucky about that, so then we really had time to build the business. So that’s really what we did – we took it step by step.

You went through three rounds of angel investment? Yeah, exactly. So the first round was one-and-a-half months. It was very quick, in September 2000. The second one was in June 2001, and the third one was in January 2002. And each one was a bit below 1 million euros, so the total was three. After those three rounds, we had sixty investors, sixty angels. So it was a very special format because there were no funds at that time to invest in the internet, so we had to really look for, you know, small pockets of money each time. But that’s the way it worked, and actually, having sixty investors gave us a lot of freedom, because no investor was a big one.

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But I’m sure that it was a very interesting situation to manage sixty investors, what with the reporting, shareholder meetings . . . month, but then we found out that a competitor had our reports. We never knew Yes and no . . . At the beginning, when we launched, we sent a report to them every by whom, so we stopped sending reports. Basically, until the sale, our shareholders didn’t even know our revenues. They knew nothing.

Until this year?! Yeah, until we sold. Even now, actually, most of them do not know what we are very happy. doing. They just know they made seventeen times their investment . . . so they are OK, so they don’t care what you are doing! But then after the angel rounds, there were, I think, two institutional investor rounds? Actually three. 3i invested in early ’05. and then again later that year for a total of eleven million euros in two rounds. Then we did two acquisitions. In one of them, (Mixad) we did a share deal where Fred Destin and Atlas Ventures were investors. That’s how he got on our board.

So, by the time of the sale, all of the original angel investors were still shareholders in the company. No one had left in the meantime? Most of them were still shareholders. Also, we bought the shares of 3i about a year ago. Basically, they stopped being VCs. They stopped venture investment, and they just focused on buyouts. So we bought them out in November 2009. When I say “we,” it was actually the co-founders of PriceMinister. We went into debt personally, each of us, and we bought their shares.

I see. And if I’m correct, there were four of you as a core team? We were five, but one left the company two years after founding. Now we are actually seven, because we brought in one of the founders of Voyager moins cher when we acquired them, and we also hired someone and we also gave him some shares. The seven of us have committed to stay five years more.

But from your original co-founders, there were yourself and three? Yeah, exactly.

That is interesting because it’s been ten years, so it’s quite impressive that you’ve stayed together as a team. There are always differences, people have

165 THE EUROPEAN STARTUP REVOLUTION a different interests, etc., but the four of you have stayed together through the history of the company and for five more years. Yes, that is quite rare; quite often when people start companies, they are friends, and most of the time friends are similar people and not very complementary. We are very good friends now, but when we started PriceMinister, we were really complementary and really looked for people who brought in, you know, different specialties. And that’s why I think it’s lasted so long. And we all respect each other for having different competencies and different qualities, so basically, I think that is why it has worked so well.

Aside from being CEO, are there are any particular areas of the business that you are directly focusing on? No, I’m not operational now, and actually, I’ve tried not to be, because I realized that, if I go into the operational things, it can be hard for the teams, to manage how, acquisitions, or not acquisitions, that kind of thing. I’m also doing some the priority . . . I’m really focusing on international growth – what country, when, communications for the company, so I’m doing some media. I took care of past acquisitions, and internally, I take care of subsidiaries. We bought Voyager moins cher, the leading site in France for price comparison in travel, a real estate site and a car site that we later sold. We have managers for these subsidiaries, but I’m basically managing the subsidiaries’ COOs.

And also the international subs? We have managers for them, but they report to me. I only want COOs to report to me. I’m trying not to be too operational.

You don’t want to be the COO instead of the COO? Yeah.

Tell me, just quickly, some key numbers which you are willing to share. How many people right now throughout the whole group? We are two hundred. We are the biggest French e-commerce site in terms of audience, so we have about 11 million unique visitors every month and twelve million members. We are growing 30% per year, and this year we do about 14 million euros EBIT in 2010. Rakuten acquired us for approximately 200 million euros. We are in Spain and the UK, but all from here, all based here, and we are now looking at other countries, to grow either organically or through acquisitions.

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In the talk I had with Loic, I learned that there are people who do this for a living – some of your members are very happy to be members. Approximately 10,000 people in France live from selling on PriceMinister, which is a source of great satisfaction for us. It’s obviously a very good achievement. We have 60% of sales done by individuals and 40% by professionals. Actually, we are increasing the professional side more and more, because that is what Rakuten does in Japan. They are really almost 100% B2B2C, not C2C. We want to keep the two, and they are really helping us a lot to get better at B2B2C. So probably within one or two years, maybe two years, we’ll be half-and-half C2C and B2B2C.

International expansion – the obvious question is the US. Will you buy eBay? Do you mean the American PriceMinister? Rakuten has just bought Buy.com in the US, in the same month they bought us. So the plan for Rakuten is to develop through the Buy.com brand. In terms of business models and technology, we are going to help them, we don’t know yet how. We might contribute our technology to the US plans, but we would not launch a new brand – that would be probably Buy.com or Rakuten, but I think probably Buy.com. That is a very good thing, so actually, we are very happy that we can share information with Buy.com.

And then in Europe probably Germany could be a logical next step? Yeah, we are looking at Germany, actually. That is probably the next country we are going to go into. We are looking at Italy as well, but Germany is a priority, and then probably Poland and maybe Russia as well. It would also be very interesting to go to the East because the markets are less mature, there is more room get to the top positions.

You mentioned before that you are very interested in Asia . . . I will personally not take care of the Asian business, since Rakuten is obviously there, but yeah, Asia is really fascinating for me. It’s one of the reasons actually that we accepted the Rakuten offer. The perspective of going there sometimes – I mean, quite often – and working with Asian people is very interesting. So I appreciate that a lot.

Super. So basically, your next steps are international expansion? Yeah.

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OK, developing the B2B2C angle, are you expecting any changes in the structure in terms of moving more into, let’s say, the mobile space or the social space or any of the trends like that? Rakuten in Japan is doing about 10 billion dollars in sales revenue, and over 20% of that is mobile, which is huge – I mean, 20% in m-commerce. I think that’s only possible in Japan. Some of the Rakuten shops do 60% in mobile. Shops where they sell things like apparel to teenagers do 60–70% on mobile, so I think that’s going to be a huge trend. It’s very small in France today, as well as in most countries, but I think it will really increase a lot. We are really looking at that very closely now, and I’ve done a lot of pushing back in the past few years where people said m-commerce is so important. I would say, yeah, well, one day it will become important, but not yet. Obviously, now it’s coming, so that’s a huge trend. And obviously, location is becoming very important. Our business is a very “distance” business, a very distance market place, distance e-commerce, so we aren’t really involved in location-based services. What I think is very interesting is, besides the location, that you are always connected. It’s not just about your mobile device knowing where you are, it’s about the fact that you always have it, you always have the internet. I think that is going to shape e-commerce in the future a lot, so we are thinking about how it will affect our business. So far, I didn’t think it would change our business so much. But we are really thinking about it, because it’s going to be a big change in how we use the internet.

There is a huge amount of attention now on location based-services. Potentially, for you that could be a interesting extension, expending your operations into things like cafés and shops and commerce related to wherever you are at that moment, mobile deals, checking in. Yeah, we are thinking about that. We haven’t yet found the way of doing things with that, but I agree, it’s about location and also about being online 100%. I think that is very important.

I’m also involved with some friends in Croatia in discussions about digital rights and related topics. One of the things that I’ve been following and I’m concerned about is this whole issue of “three-strikes laws” in France and in the UK. Here, HADOPI is the agency in charge of that . . . They seem to be setting semi-arbitrary limitations on customers with pressure from media

168 10. Kernel Investissements • Pierre Kosciusko-Morizet: PriceMinister, Rakuten organizations, saying, “You are a pirate and I will disconnect you from the internet” and things like that. You mentioned being always connected – well, apparently you can also get disconnected. I think it’s more symbolic. But I think it’s an issue. The way we take care of the music industry now is really stupid. Music is going to be free. That is so obvious, it’s just a fact. And what we are doing now is just giving that market to Apple. When you see the French government, you know, creating this entity, this

They are giving a little bit to the big media majors; a little bit to the artists who get government body to take care of that . . . We are investing money in helping Apple. almost nothing, but they are really making money on selling iPods and iPhones. Of course, everybody knows that except the government, so it is really a very strange situation. Anyway, all the music they are selling is through Luxemburg, so they aren’t paying any VAT in France. They pay 5% VAT, while we pay 19.3% here. So, you know, nobody cares, and that’s quite annoying. And I think that we have a huge issue here in France – probably in most European countries, – but mostly in France, I’d say. People do not understand that the internet is global and not just local. The players are global, so if you do local laws, it’s just wrong.

When you talked about limitations to European integration, you mentioned tax and labor and things like that. In the digital space, however, content and entertainment is growing rapidly in importance, but the whole copyright structure is amazingly out of synchronization. I would say not twentieth century, but probably more like a nineteenth-century setup. I think it’s a big issue. The time the governments in Europe spend fighting with each other about taxes and the time companies spend in Europe trying to optimize everything related to European issues is time that is lost in global competition. So I think that is a big issue.

Let me ask you just a few more questions about your own investment activities and your relationship with startups and younger entrepreneurs. Have you set up a fund or joined a fund, or do you just invest privately as an angel? twelve – small companies in the past few years, but really small amounts, because I have done two . . . actually three things. I’ve invested in about ten – or actually, I’ve actually had no cash, so I invested really small amounts. And so far, they

169 THE EUROPEAN STARTUP REVOLUTION are all doing well. Then, I’m the co-founder of a fund called ISAI, which is the French internet entrepreneurs’ fund. We have about 70 investors who are all French internet entrepreneurs. We have 35 million euros to invest. The average investment is 1 million euros in one company, and we invest in one company per quarter. We just launched in April, and we’ve just signed our third investment. We have done two investments that are already disclosed, and there is a third one. That is doing very well. I mean, it’s just the beginning, but we have a very big deal flow. We have 300 companies per quarter, and we do only one, so it’s very selective. And in that fund, I’ve invested quite a lot alongside the others. I also have a holding with my partner Pierre, who is the COO of the company, and we are investing in companies that are usually bigger than the ones in which ISAI invests.

ISAI is more early–stage? Yes. We invest two to six or seven million euros per company. We are currently looking at two investments, but they are not in the internet space, actually. We want to do internet, but other sectors as well.

It’s all French? Actually, no. One is in China. Another one is a French company but already global.

It would be interesting to see more projects like ISAI, to see that kind of a structure on a European level. Yeah, ISAI today is mostly French, but actually, the third investment we are making is a half French and half American company. The thing is that the ecosystem of entrepreneurs we have is mostly, well, it’s more useful in France than in other countries because we basically have almost all the French internet entrepreneurs in France. So that is very useful in France. It would be less useful in Europe but still useful. We might invest in companies that are not French, but there is also the question of deal flow – most of the deals we are looking at come from France. But I agree that we could do a kind of a federation of European entrepreneurs.

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Update – 2014 / 2015:

I reconnected with PKM early in 2014 to write a Tech.eu piece about Rakuten in Europe. By that time, he had become a non-executive director of Rakuten Europe. The company was aggressively acquiring companies in the US (Buy.com), Brazil, Germany, the UK and Russia. Just a few days before that conversation, Rakuten had acquired Viber for 900 million dollars. In mid-2014, Pierre Kosciusko Morizet decided to leave Rakuten and focus on his investment activities through the Kernel Investissements fund which he had founded many years back, in 2008, as well as on ISAI, of which he is the chairman. Most recently, by July of 2015, Pierre had assembled a team of fifteen people “looking for the next big, global, impactful business idea.”

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11 GetJar, Nextury Ventures Ilja Laurs THE EUROPEAN STARTUP REVOLUTION

Ilja Laurs and GetJar were flying high in March of 2011. The company was fresh off a $25 million funding round from Accel Partners and Tiger Global, bringing the total funding to $42 million. GetJar was not necessarily a household name. Ilja and his team were working hard to break the lockdown on the distribution of mobile apps held by the two giants in the space – Apple and Google. Aside from Apple’s AppStore and Google’s Play Store, GetJar was by far the most successful independent app store – a place to get mobile applications for your phone. A huge boost for GetJar’s popularity came in October of 2010, a few months before my conversation with Ilja, the founder and CEO at the time. Angry Birds, the worldwide phenomenon, decided to make the Android version of their mega-popular game available through the GetJar store. Ilja had a grand vision for GetJar. They wanted to build a free, open and transparent distribution platform for mobile apps, just as the Web was an open space free from the “walled garden” approach promoted by some of the early Internet platforms such as America Online (AOL). By the time of our second conversation, in July of 2015, things had not quite turned out that way. The combined market power of Google and Apple had turned out to be too strong for an independent competitor. In the second part of this chapter, I talked with Ilja about how GetJar came to be acquired by the Chinese NASDAQ-listed company Sungy Mobile and his new career as a venture capitalist with Nextury Ventures.

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Skype call – March 2011

Ilja – how are things at GetJar? Yeah, it’s going really well; the space is exploding, so we only need to make sure that the expostion is under control. It’s really tricky sometimes, but so far. we have been able to do pretty well.

First of all, let me congratulate you on this last financing round. Thank you.

You’ve built up quite a war chest. We’re looking forward to flexing some muscles.

Until this financing round, Accel Partners was your only investor, and now Tiger Global Management has joined in? Yes.

There is always an aspect of a VC investment that is more than just the money. To some of their portfolio companies, Accel is very important because of their stake in Facebook – probably to GetJar as well. What is Tiger bringing to the table? Apparently, they don’t have a very, very big portfolio. Well, if you look at the quality of their portfolio and the amounts they typically invest, you will clearly see that this is not an early-stage investor at all.

Yes, I can see that. So is there a particular strategic advantage or a particular part of your strategy for which you feel that Tiger would be, at this stage, specifically, critically important as a partner? Absolutely. As I mentioned, we already feel that we are a pretty mature company. We have figured out what our strategy is. And in a few words, I would say that we are trying to make the mobile applications space as open, neutral and tax free as the Web space itself. As you know, if you launch a web site, you do not have to approve your site with anybody, you don’t have to pay any tax on what you earn from your web site, you are free to choose this billing or that billing, you are free to use Flash and so on. So our thesis is that mobile apps are essentially an extension of the Web. It’s not a standalone content business such as music and songs –

175 THE EUROPEAN STARTUP REVOLUTION it’s more an extension of web services. As such, the platform for apps requires the same openness, neutrality and “tax freeness” as the internet. Otherwise it is not compatible with, let’s say, the most established internet businesses such as Amazon, eBay, Facebook and so on. So that’s our core thesis. We are heavily investing in building the platform, the distribution platform, because unlike the Web, where you publish your web site on a small machine running an Apache applications, just simply delivering – distribution – is very complicated. server and it is accessible to all computers in the world . . . Unlike that, with mobile So a significant part of this investment is really going into the technical infrastructure? Almost entirely.

Are you relying on any of the large platform operators like Amazon, or is it entirely your own proprietary infrastructure? Just maybe a few words about the technical aspects of your delivery platform. essentially, they are the ones who are building closed environments. It has to be our own, because the players that could potentially be of help . . . Yes, I see, so Amazon has their own mobile app store. Google obviously has the Android Market. So, for those reasons, you need to go for proprietary infrastructure? Absolutely.

Is this technical part based in the US, or is it distributed? It is mainly based in the US

Tell me about your early days as an entrepreneur. Well, in a few words – I was at the university around 1999–2000. As you know, Lithuania had just gone through the separation from the Soviet Union. So the general environment, as I would describe it, was total anarchy. The large companies I could potentially go for, you know, had a hundred people – by Western standards you can consider that a tiny place. So at that time, building a career was not really a choice, and the only way to essentially survive was to do something on your own. Even the salary level at that time was, I don’t know, let’s say a hundred euros for a full-time job. And you know, to fund an apartment, just to be able to study at the university, I would need two hundred euros. But luckily, the Internet started at that

176 11. GetJar, Nextury Ventures • Ilja Laurs time, so being familiar with the basic computer technologies meant that I was able to put together simple web sites if necessary. And the funny thing is that it would take one evening to put together the most simple web site, and you could charge a thousand euros for that. The alternative was a little bit of private English teaching for school kids, for which you could charge, say, ten euros an hour. So, in the first couple of years, it was ad hoc combinations of private English lessons and random development here and there. At the end of the second or third year at the university, I realized that the density of development work was high – essentially, I needed a team of two or three of us to simply handle everything. I needed a simple place, an office, a small room with a phone, a fax machine, simple company, no longer working as a private consultant renting a small office, putting accounting . . . It probably took another year to establish a legal entity, a full-scale in a simple fax machine, hiring the team who did it as a part-time job, initially. The one dramatic difference between this path and what typically happens here in the US is that the whole process between my first, like, paid assignment to actually establishing a small office – that process took two years. And in the West, even a kid would go to a VC or an angel and get a couple hundred thousand bucks, just like that. Because, you know, he’s a kid and he has an idea. And on day two, he has and that period takes a week here in the US. a professional CFO and he can hire all this staff, a consultancy, legal advisory . . . The good side of doing everything yourself is that you really know the cost of a dollar. You count every single dollar, and you spend it wisely. So, when it comes to the efficiency of dollars spent in the early days of the company, I would say we squeezed ten times more value out of every dollar spent compared to somebody who does not know the price of the dollar. And secondly, if you bootstrap the company, you retain full control over it. So the company was doing great. It was highly profitable. So the conditions at which a VC enters at that stage are dramatically different than, you know, if you are like a young kid and you have just an idea and you give up control immediately.

So the roots of GetJar go back to 2004/2005? The company itself, or the people behind the company, started professionally to sit down and work in the year 2000. And from 2000 to 2005, as I mentioned, we were involved in many activities. But towards 2004/2005, we did a lot of mobile games. The portfolio of games that we made was over one hundred titles.

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You had more than one hundred mobile game titles that you developed with your colleagues? Yes, I mean, don’t be surprised at the quantity, because at that time, mobile game development was extremely simple. I mean, especially if you consider the class of SMS games. For example, funnily enough, at that time, the best seller was SMS hangman.

SMS hangman? It was a massively profitable game. We ported it to one carrier, the Lithuanian carrier. The idea is very simple: we have one text file. Anybody can manage the words – we initially put in a couple hundred of them, and the operator could change them at any time. You send a premium SMS message – let’s say “hangman” – to a short code. You receive, like, five dashes, and then you send letter by letter. So if the letter exists, you receive back dashes with the letter there, and it says “bingo!” So that you know if the letter exists or not. At that time, each message would cost, let’s say, half a euro. In order to open just one word, you generally need ten or fifteen messages, so opening one word would cost you five to seven euros.

OK, and when you say massively profitable, what kind of numbers in terms of users or revenue are we talking about, for instance, for that particular game? It’s in the six euro digits range.

Just within Lithuania? Yes. Just for Lithuania. That was pretty significant.

That’s fantastic! At that time, were most of your customers for those games still local to Lithuania? No, not at all. One of the reasons why we started GetJar was total frustration with the distribution at that time. Because, essentially, you were totally dependent on the carrier, so at that time, you know, I remember we had contracts with dozens of carriers around the globe, including countries such as Egypt, where we did it a pretty big port of WAP games for Egypt for Vodafone. Do you remember WAP games?

Sure. We did a pretty good deal with Wind in Italy and Telesonera and of course all the big carriers in Lithuania – we had a dozen or so carriers around the globe.

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But there are two huge problems with carriers. One is, as we realised, it takes cost of signing an agreement is twenty thousand bucks for each carrier. So, you enormous effort to get a contract . . . like eight months on the average, and the know, for a small company it’s significant, very significant. The biggest problem that I realised is that, at that time, carriers weren’t really interested in dealing with small developers, and they never really were interested in the quality of the game. Instead, they would cut a deal with a well-known developer who would deliver them “Ice Age,” “Spiderman” and all these branded games. I called that whole process “selling splash screens,” because essentially, behind the splash screen, you know, there would be no quality at all. As a small developer, you put your heart into the game. You really develop – not because you want to get rich or something, but, you know, your motivation to really, really create the coolest stuff is very high. That’s something that no larger company really possesses. But then you realise nobody even wants to see your game because it’s not called “Spiderman” or “Ice Age.” That’s really frustrating – when you’ve really built something and it’s objectively much better than the splash screen experience, but nobody wants to hear about you, because you are a small developer with a portfolio of ten titles. Who wants to buy ten titles? And on top of that, you don’t have “Spiderman” or “Ice Age” or something like that, so what you get is total ignoration. So partially the reason we launched GetJar is that we realised that not only do we have this problem, but there are couple of dozen other developers all across Europe who were facing exactly the same problem. There was a massive demand for quality apps in Europe, but these quality apps weren’t available from the carriers.

So there was a clear bottleneck between those two spaces – the developers and the customers? Absolutely. Totally. We initially started GetJar as a beta testing platform to test beta versions of our games with consumers. The fragmentation at that time was had to test the game on the Siemens C35 and then on the Siemens C45 etc. etc. terrible. Unless you physically tested each build-on device individually . . . You There were only two ways for us to deal with that. The first one was professional porting and testing services – out of the question, that would cost much more than we could ever earn for a title. And another way was to crowdsource – to put it online and just let anybody download it and tell me where the problems were

179 THE EUROPEAN STARTUP REVOLUTION with their specific device, and then build a matrix of compatibility based on what was actually reported by the consumer. You don’t charge a consumer for that, so the consumer gets it for free, and he doesn’t mind if it does not work because he does not pay. And what you get is a matrix of supported devices so you can bring it to the carriers. So initially, this whole GetJar project was a little bit more like beta testing. But very soon, the beta testing community became so big that we converted the service to full-scale distribution, not just beta testing.

You already had some experience with mobile payment? Yes, we did. But what I realised is that developers didn’t really need payments. Payment fragmentation still exists. It’s very fragmented. What works in Croatia, if you sign a premium SMS agreement with three carriers, does not work in the UK and does not work in Germany. And in the US, it will be more like carrier best strategy for us, in fact, was to stay away from payments and let developers cards; in Canada as well . . . I realised that the space was so fragmented that the individually solve the payments themselves specifically for their app, specifically for their audience and specifically for their territory. The request from the developers was this: “We don’t care about payments, we just need distribution. We have a great app, we have great billing around the app, we only need a hundred thousand users in that specific territory.” We realised early on that the developers would sort out all these payment issues, the advertising and any other business problems they had, and the only thing they really need was distribution. This is what we decided to focus on completely.

My initial assumption was that one of your revenue streams was a cut of the payments. No. As I said, we want to make the app space as open, neutral and tax free as the internet itself. So what I really meant is that we charge zero revenue share for any transaction or business that developers do on our platform – zero.

I noticed in several other interviews that you mentioned that VCs started calling you? Yes.

That is not the typical experience for most entrepreneurs. Totally.

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Apparently, one of the VCs that called you was Accel? And how did they even find out about you? I mean, you guys were in Lithuania . . . I can only speculate about how they found us. I have a theory on that which is still unconfirmed. But we might take a step back and talk about our business model.

Sure! We realized that developers are not willing to pay per transaction or even pay a revenue share, but they need our distribution. What all of them, with no exception, want is massive downloads. The more the better. It’s really simple – as long as the developer has some kind of business model, any at all, they make some kind of revenue from each incremental user. And they are willing to allocate a portion of that revenue to get as many users as they can. So if I make, let’s say, on average one dollar per user, selling prescriptions or selling dating services or selling an arcade game or anything – I’m willing, in general, to pay 20 or 30% of that back to marketing. So I can get as many users as I can possibly buy. So what happened very early in 2005 was, as soon as we became, you know, a very big destination, the usual developer path in our store would be (a) submitting his application and (b) realizing that it has received a certain position in the store, you know, maybe ten, maybe one hundred, maybe one thousand, and it brings them, say, anywhere from a couple hundred to a couple hundred thousand downloads a month. And instead of the free listing, they would approach us and say, “We have ten thousand downloads a month, position us in your best spot. We want a million downloads a month, and we are willing to pay for that.” So that was the very early beginning of the business model. What we realized is that there was a great demand for developers to be discovered. You know, funny enough, that is exactly the biggest problem of the existing app stores now. Everybody talks about the difficulty of being discovered.

And how exactly would you then charge the developers? Initially, it was very simple – simply sell slots. Let’s say that the front page has five slots. Each of those is then a premium position. I remember charging first slots for a thousand dollars a slot. Then we realised there was much more demand, so I

Perstarted month? to charge two thousand dollars a slot, and then four thousand . . . Yeah, per month. And then we decided to rotate, so you would receive a quarter of impressions on that slot and so on. The demand for these slots was much greater

181 THE EUROPEAN STARTUP REVOLUTION than the supply of the slots. Our traffic was exploding, so the number of downloads that developers were getting from the slots was constantly growing. This is where the VCs come into play. We are talking about 2007, when we cut the deal with Accel. We started to talk at the beginning of 2007. I call this time the “second wave of mobile startups.” If you recall, the first wave was 2000/2002. Then in 2003/’04/’05, there was a bit of frustration because mobile games and mobile startups were not doing so great. But in 2006/2007, essentially on the back of the ringtones business, VCs started again to put money into startups, and as you know, for a startup, the most critical part is to report the hockey stick growth to the VC. Otherwise, they stop funding, and you are out. So acquiring users to build that hockey stick growth was the number-one priority for each of the mobile developers. And all of them realized, naturally, that step number one at that time was to go to the carriers. As you know, experience at that time would be, a VC gives me a million, two million, five million carriers are simply . . . well, they are completely not helpful. So the general startup bucks. I spend half on the product and half on marketing, and initially, I start marketing to carriers and I hire a small bizdev team to chase the carriers. I realize that each carrier takes six to eight months to close, and then I get ten, twenty, fifty thousand users for one carrier before he throws me out for somebody else, and that is simply not the way I can do business. The opposite is when they discovered a place like GetJar. They would pay ten thousand bucks a month for a quarter of a slot, and they got hundreds of thousands or millions of downloads. So they realized early on that spending money on GetJar for app marketing was by far the best way to acquire users and to report the hockey stick growth. Coming back to the VCs, the reason why I believe that a lot of them decided to call us is that GetJar started to appear too often on the marketing budgets of all of the startups. For example, at that time, at least five Accel portfolio companies were spending massively on marketing budgets with us. Now, assume that you are a VC, and you have a board meeting and there are board presentations and, you

Naturally, you follow the money and find out who the hell this GetJar is and where know, x-thousand dollars goes into the marketing of the GetJar, GetJar, GetJar . . . all the money ends up. So that’s my theory on how VCs started to talk to us. From the beginning of 2007 to mid 2007, we received probably a couple dozen calls from tier-one and tier-two investors.

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Why did you pick Accel? Two reasons. One is, in general, I realized that, at that time, we really needed less cash; I mean, it was fine to get it, but we really didn’t need it that much because we had an awesome, highly profitable business model. But I realized that, for a small Lithuanian company, most of the doors to the West were totally closed. I couldn’t go to Nokia, I couldn’t go to Microsoft, I couldn’t go to Google. Realistically, I couldn’t even hire somebody good. Because, ex-Yahoo execs simply don’t go to small Lithuanian startups in Lithuania. So I realised that what we really need massively was the support of somebody who was extremely strong in that space. Because of Facebook, Accel was by far the number one choice in terms of image,

Believe it or not, in 2007 my general assessment was that VCs had no clue about the firm’s profile and so on. And the number two reason . . . mobile. What happened was that the concentration of VCs was on the West Coast, in Silicon Valley. There were not many European VCs at all. And at that time, believe it or not, the mobile business didn’t really exist in the US.

No, I’m not so shocked, because the whole US mobile telephony model was pretty much upside down for a long time . . . What I realized is that US VCs had no clue about mobile, like, they were totally lost.

Rich Wong from Accel. He was an ex-Openwave guy and had been in the mobile I mean, that may sound a little bit arrogant . . . Except for a very specific guy called world for quite a long time. So what I discovered was a perfect combination: here was a tier-one VC that could massively help with added value, and the specific partner that worked with us was Rich Wong. He was by far the best person – still is, by the way – if you asked me the name of the top ten mobile persons in the world, he would certainly, with no hesitation, be on that list. So I realized – here is the perfect combination: somebody who really understands mobile and somebody who is coming from a tier-one VC.

You mentioned that you still haven’t spent even most of that first round, is that right? For the first two years, we didn’t really touch the money. The reason is very simple. As I mentioned, the bootstrapping startup always knows the value of each dollar. So it is naturally extremely careful with every dollar spent, and going global from Lithuania was something that I simply couldn’t do fast. I was only half familiar

183 THE EUROPEAN STARTUP REVOLUTION with the environment, we needed an executive team, I had no clue how to build a team in the US – you know, all this kind of stuff. It took me a year to two years to very, very slowly get myself comfortable with what we were doing, what our strategy was, what exactly the structure that we were building was, and so on and so on. The first two years were a time of really careful growth, even to the extent that the VC was, well, not pushing but suggesting we take a more aggressive route. You know – they would rather see the money working than sitting on the account. So they were suggesting that we take a faster route. But I wasn’t comfortable going at that speed. We only launched the US office in 2009. By that time, I was much more sure of our executive team, the ability to execute, and so on. If you remember, in 2009, the concept of app stores started to be very hot. So there were two reasons why I realized that we really want to take a much aggressive route. One was that at that moment I felt comfortable with what we were doing, and the second reason was that the stakes started to increase. App stores started to pop up, we had to maintain the pace and we could no longer do that moving slowly. Luckily, by that time we were really, really ahead. At the time Nokia launched OVI and Google launched the Android Market, we were six years into the app store business and we already had hundreds of millions of downloads. So we were quite ahead, but we also decided to take a much more aggressive approach.

You had the next round of founding in 2010? That was a not really a full round – it was more of an extension of the Series A, since it was Accel, the same investor.

Looking at your management team, I assume they are all more or less US based. Yes, they are all based in the US.

I’m assuming that a good chunk of your development team is in Lithuania? That is the pretty common mistake about us. Actually, it’s totally the opposite. Essentially, what happened is that we preserved the Lithuanian team as is – it’s still the same six guys that were there four years ago – and the US team is now approaching 60, primarily developers. The common mistake is to think that, for a tech company, the cost of development is the most important thing. So for that reason, they assume that we would build a team in Lithuania, because currently East European costs are still, I would say, between half and a third of the US costs.

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Well, actually, that wasn’t necessarily my logic. I’m simply looking at some other startups from this region, Slovenian, Croatian and some others that have built up teams here and then found a need to open up offices in the UK or the US for sales and business development reasons. The same goes for Seesmic with Loic LeMeur. OK, he is not from Romania, but he still has a significant Romanian team. So my assumption wasn’t coming primarily from the cost standpoint, but just from looking at some other startups that have some roots in this region. Usually people think that, but the reality is that the development cost for a startup is not even the tenth priority. The reason is very simple: if you win, you win so big and you create so much value that the cost of the development simply sinks, it’s irrelevant. If you look at the value of the development in Facebook, for instance, it totally disappears.

I understand. If you lose, then, so what if you have saved a few thousand bucks from your VC money, right? You lost anyway. But what is important for a startup is the ability to scale fast. Suppose you are building up the company, suppose things are going great for you and you need to hire one hundred people in one or two years. That speed, while still preserving the quality of the hire is simply not available anywhere outside of Silicon Valley, period. For example, in Lithuania on average, if we do a massive job search campaign, hiring three recruitment agencies, supporting that with newspaper ads months! So, realistically, you can hire five people in a year. For a startup that’s doing and online . . . You can find a good person in three months – one good person in three great, that is way too slow. In one year, the market completely changes. You need to be in an environment in which you can experiment a lot, because you never know which specific part of your company needs boosting. For example, you may realize that your business model requires a lot of manual sales, so you need to build a sales team. In two weeks you might need twenty sales people. Or maybe you realise that you need to scale your servers fast and you need to have a team of five ops. Again – in one week, because your traffic is exploding or something like that. So you need an environment in which you can scale fast if necessary; otherwise, you simply lose opportunities. If you want to become a global player, which means you might need scaling really, really fast, then there is simply no other environment in the world compared to Silicon Valley from that perspective, period. It’s very easy to find a LAMP developer. But when it comes to, say, a very specific distributed memory specialist or a MYSQL scaling specialist or a MYSQL optimizer.

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Or the UI specialist who knows how many millimeters you have to add to the input box on the “go” button. I mean, just extremely narrow, specific professionals don’t exist outside Silicon Valley, because the market is too small for them to survive. So, if you really want to beat Google, you need to have the best people. And the best people need to specialise in a very, very, narrow thing, and that means they would be not be able to make a living in a small market such as Europe, and they tend only to appear, to be available, in massive markets such as Silicon Valley. So today they are doing UI for Facebook, and tomorrow they are doing UI for Amazon and so on – people of that calibre. And all of them are here because they cannot make a living elsewhere because of their narrow specialty. These are critical things for a startup. Far more important than the cost of development. That was the main reason, in addition to bizdev, sales and marketing, I decided that we wanted to move development to Silicon Valley as well.

I see. So, as opposed to some of the startups where the founder takes off and goes to Silicon Valley and builds a team in Europe, you kind of went the other way: you built a team in the US, but you largely still stayed in Lithuania. The funny thing that I always joke about is that I’m probably the only example of an Eastern European company outsourcing its development to the US!

What’s next for GetJar? You are going up against the big guys, against Google and the Apple App Store. Well, Apple – we are too small right now to do anything about it, the platform is too closed. First of all, as I mentioned, the whole investment primarily is going to be spent on the platform, on technical investment. We are not doing marketing or any other stuff. Now, it would probably be naive to believe that a startup could beat the big boys in their fields, to beat them in UI or something like that. But what we have built is pretty significant and different. If you look at the major differences in what we are building, there are two, in fact. One is that we totally believe in cross platform vs. single platform. Our app store does not distinguish between Android and iPhone or Blackberry or Windows or anything else. That is a completely, dramatically different approach from the other players, who are focused on verticals. The Google marketplace is only Android, period. And Apple is only iPhone, Nokia is only Symbian, Blackberry is only Blackberry and so on. The comparison that I use here is the early Internet. If you remember, when the internet started, essentially there were a bunch of vertical services: there was the AOL portal, the Prodigy portal, etc., so that a major ISP would essentially create a

186 11. GetJar, Nextury Ventures • Ilja Laurs range of services within their own portal. As you remember, when Netscape first levelled the field, it enabled services to be equal across all ISPs. Then companies such as Yahoo and Google came and started going across all ISP’s and started to specialise in one specific area like search, portals, gaming, e-mail or something else across everybody, so each individual ISP simply had no chance. It took five to seven years, and all of them disappeared as service providers. This is a dynamic that, I believe, might be also applied to mobile platforms. The space will be fragmented, and services running across all platforms will eventually be much more powerful, simply because of the scale. The second thing is that, as I mentioned, we built a platform which is, like the Internet, tax free. We put zero restrictions on the developers as to what kind of business models they have to run, what kind of payment model they have to run and what their billing partner is and allowed them to keep all the revenue. So, if Paypal works for you, that’s fine, you can pay them 2% of the credit card transactions and keep the 98% for yourself, just like the Internet, but that is not the case in the vertical app stores. They will force you to use their billing. Android Market will force you to use CheckOut. Apple will force you to use iTunes, and secondly, they will take a 30% cut on anything you make. We believe that, to achieve the best conversion, the developer has to have different billing forms in different segments of the market. We have to use SMS in Germany or Croatia, because the most active mobile set there – youth – is 12 to 16 years old and cannot use credit cards, period. So that means that, if I am an Android developer and I’m targeting the youth segment in Europe, CheckOut simply does not work there, because they don’t have credit cards and the only way to convert is to sign up with a local payment aggregator, and SMS billing is the only way to make money there. That flexibility exists on our platform – we don’t tell you what to use, and you are free to use anything that works for you. And B, we do not tax anything that you make. These are two strategic differences: A – cross platform, B – fully open, neutral and free of taxes. And if we win, again, we win not because we have the better UI or something, because we don’t have the same level of resources to polish that part. We win because of the strategic difference. That is the strategy. And that enables an ecosystem to evolve which is much stronger compared to any ecosystem in a closed environment. That’s our thesis.

What are your revenue streams? You mentioned positioning the app in various places, on the front page and on particular pages. I see a little banner ad for “Mafia Wars” running at the top of the homepage. So the revenue streams are positioning and advertising. Are there others?

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OK, we talked about the business model back when it was the most simple, display and banners. Since that time, which was four years ago, our business model has massively evolved. I always draw comparisons between apps and the internet. On the internet, where you have open space, the strongest business model in fact is Google AdSense. Because what happens is, again, web sites want to be discovered, and the more users the more revenue. Google didn’t invent this, they simply enhanced the Overture model. But it is very simple: you bid for visibility. So, as a web site, you bid for key words, and the more you bid, the higher your position. Right? We took exactly the same model to apps and we said, well fine, because of such massive demand and limited supply, we’ll allow developers to bid for downloads.

OK. You can start with one cent, you can pay ten dollars, whatever you want, whatever portion of your revenue you’re willing to put back into marketing. Depending on your bid, multiplied by your click-through rate, which we will take as a proxy for the quality of the app, we multiply those two, and we arrive at an effective bid, or eCPM. And we rank this, what I call “sponsored position space,” on the bid, multiplied by the click-through rate. It’s similar to the bid and the quality score with Google. So the more you bid and the better your application is, the higher the visibility you can buy. This is all transparent. So, if you look at the site now, you will see sponsored apps. Every time somebody downloads a sponsored app, that developer pays us the bid amount for that download. So call it quality, page discovery, sponsorship model, lead generation, or whatever, but essentially it’s an equivalent of Google AdWords. So, not banners, but this auction-based sponsorship marketplace is our core business model. It was really strongly proven by Google. It’s the strongest and most profitable business model ever invented by a human being. We believe that it’s both powerful and profitable, and it has allowed us to run the whole operation very profitably. But it’s also very applicable and very supportive for the open space. And the second step which we did was a syndication of that business model. As you remember, Google initially started AdWords on Google search, and then it started to sign up partners and started the whole AdSense program, so any web site can run Google AdSense. So we started to syndicate the sponsored apps, and we started to deliver them to carrier decks, to OEM stores, to search engines . . . So there is a portion of the revenue that is 188 11. GetJar, Nextury Ventures • Ilja Laurs coming simply from syndication. Suppose we sign a deal with a carrier, and the carrier puts a copy of a sponsored application on their portal – every time one of their users downloads that copy for free, that developer pays us, and we pay a revenue cut to the carrier. So that is the equivalent of the syndicated AdSense.

Let me ask you another question. You’ve also been mentoring startups. I noticed that you’ve been a mentor at Seedcamp, and you mentioned in one interview that this is something that you enjoy doing, helping companies that are now beginning their careers. When you work with younger startups or younger companies, do you attempt to do more of that work in the Valley or in Lithuania? No, it’s almost entirely in Lithuania.

I see. Slightly less in Western Europe. The one that I really like is Seedcamp, but for a very specific reason. When Rich called me from Accel four years ago, despite the fact that I had a Master’s degree in economics, I had no clue what a VC was. No clue, not even a clue what the name stands for. So what I realised is that Eastern Europe has great potential for ideas. Startups and people in general are much more technically savvy here than in the US. But their basic understanding of business principles, like, if you have an idea how do you fund it? If you ask that question, I’m totally sure, even in Croatia or any Eastern European country, 95% will tell you that you need to go to the bank, you have to get a loan against your house or something like that, but that is total nonsense – total – that is a non-starter. So I realised the added value of explaining a few basics to someone who’s got an idea. Things like how to put together a ten-slide presentation for an angel investor, what VC events to hang around at, etc. You know, the basics. The ROI on that activity is the best because that is exactly where the bottleneck is in Eastern Europe. A basic, 45 minute course can change the lives of the younger startups. I have sentiment for my own country because I took the hard route. Seven years into the business – I realised only then that someone had invented modern, civilised, powerful and convenient ways to scale your business fast. So I realised that there is a massive lack of knowledge on this topic in my part of the world, and part of my social responsibility, I feel, is to deliver that knowledge back home. That can change lives, you know.

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Followup Skype call – July 2015

Ilja – it’s been more than four years since we first spoke. Tell me about what’s happened in the meantime. Let’s start with the sale of GetJar to Sungy Mobile early in 2014. A lot of things have changed since then – time really flies! Sungy Mobile was one of our largest customers, and we were a critical source of revenue for them. They were preparing to go public in 2013, and they felt they needed to resolve the issue of a significant part of their revenue coming from a company that was a good partner, but nevertheless an independent one that could potentially be acquired by anyone. Sungy felt that acquiring GetJar might be a safer route than simply continuing the partnership, so we had conversations about this for a few months. The original GetJar idea was shooting for the biggest app store on the planet – this was the promise that brought in investors like Accel and Tiger Global. Apple and Google, however, verticalized the space and made it clear that the world was not going to be multi-polar; it was going to be bipolar. Nokia was going down and Symbian along with it, Windows Phone wasn’t going anywhere and it was clear there were going to be two ecosystems: one controlled by Google and one by Apple. We could have continued as an independent, profitable company, but we all could see that this was not going to be the ten-billion-dollar opportunity we thought we had been building from the early days. So we decided that the smart thing to do would be to capitalize on the work that had been done, and in the beginning of 2014, we went for the sale. In the process, we split the company into two parts. The Chinese acquired the US company with the monetization, virtual currency, advertising platform and so on, but the original app store part was separated out into another company and was not part of the transaction. After the sale, we paid back all the investors, and I remained the sole shareholder of the app store part of the business, which continued in the UK and in Lithuania. The app store company, named AppDay, was acquired by US-based Spigot in September of 2014. This was quite profitable for me personally, since I was the sole owner. That allowed me to focus on my next gig, which is now Nextury Ventures.

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Let’s step back a moment to the Sungy sale. You mentioned that you paid out all the investors. Wasn’t the sale price much less than the investment?3 Actually, we never announced the exact terms of the deal. I can tell you, however, that it was on par for the investors and very profitable for the early founders of the company.

But the publicly available information says the cash portion of the deal was $5 million. Hadn’t you guys raised over forty million dollars? We never mentioned any official numbers. Depending on where you look, you can find figures from 5 to 150 million. The $5 million figure is probably referring to the cash part, which in fact was five million, but the value of the stock was in the upper double-digit millions. The agreement with Sungy was not to mention any numbers at all. However, one of the tech blogs – I believe it was VentureBeat – leaked some numbers ahead of the deal. This was not authorized by any of the parties involved. The Sungy guys were quite unhappy about that but felt they needed to issue something, although the deal hadn’t even been signed at that point. So any numbers you find are just speculations. However, we all agreed that an acceptable wording subsequently would be “upper double-digit millions.”

Let’s switch to what you’re doing now with the investment fund, Nextury Ventures. How is that going and who are the investors? I sometimes think of it more as an incubator than a VC fund, since it’s not following the typical VC structure with limited partners’ money, a management fee, carry and so on. You need to manage at least $50 million in a VC fund to be able to support even a small team based on the management fees, and it would be really hard to invest that much money in Lithuania and the region, at least predictably. So Nextury is 100% my own private money. It also allows me, as opposed to the VC model, to spend a lot of time with each company with their operations and to get my hands dirty in really building stuff.

According to a Sungy Mobile press release, the sale price was $5.3 million in cash plus an earnout, by3 early 2016, of up to 1.4 million shares in Sungy (http://ir.sungymobile.com/mobile.view?c=25 2388&v=203&d=1&id=1899375) The Sungy stock price at the time of the acquisition, early 2014, was between $20 and $25, while at the time of this writing (July 2015), the price is $4.7.

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Tell me about the Nextury team. How large is it? Firstly, there’s my partner Mindaugas Glodas. Minda and I complement each other very nicely. He’s a guy with a lot of corporate experience and an excellent network in the corporate world. Aside from the two of us, we have three more people in the core team handling marketing, legal, and office and administrative work. We have a fantastic network of advisors here in Lithuania. The great thing I discovered when I started Nextury is that senior, experienced people aren’t as burdened by multiple advisory roles and board seats as in the Valley. Practically everyone we approached to help as a mentor immediately agreed, so I see that as a competitive advantage of building your startup in Lithuania as opposed to the US.

Tell me about the Nextury portfolio companies. How many investments have you done so far? Our sweet spot is 10, as a function of our bandwidth and also as a minimum to hedge your risks – as you know, early-stage startups can be very risky. Actually, in 2014 we did precisely ten investments, although for various reasons we haven’t publicly announced all of them.

Is there a typical deal structure in terms of the investment amount and equity stake that you typically take? It’s very case-by-case. Our largest ticket has been around half a million USD, and the smallest was around ten thousand euros. In fact, that latter one got follow-on funding almost immediately after our investment. Our equity stake goes anywhere from the typical 20% to maybe 50 or 60%. We have to keep in mind, of course, that the founders will be on a vesting schedule, so their stake is worth essentially zero on day one and then grows as the shares vest. They will usually get diluted over time as the company needs more money. If you can get to NASDAQ on the back of a 100,000 USD investment with a 50/50 ownership split between the investors and the founders, everyone’s ecstatic, but often more money will be required, and the cap table will get complicated.

Forty or fifty percent sounds like a pretty large stake for an early-stage investor to take. It’s a derivative of the model. We come in at an early stage, we spend a ton of time with the company. We also need to prepare ourselves for dilution, because we know that a successful company will have at least a couple of funding rounds.

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But you also want to keep the founders motivated. It’s a two-way process. At each round, we sit down with the founders to figure out together what makes sense. It’s not unusual for the founders to get additional equity by making new commitments, via earn-outs etc. But in general, we believe in fifty-fifty as a starting point.

Which of your companies is furthest along in terms of revenue, customers and growth? One of them is Toyze. It’s a global frontrunner in the customizable 3D printing marketplaces space. It’s like an app store, except you’re not getting apps, you’re getting 3D printed customizable characters. We’ve done deals with Talking Tom, Cut the Rope and other popular brands. In five to seven years, there will be a ton of 3D printers in people’s homes, and they will need to get the objects from marketplaces such as this one. We have half a million users and more than one million 3D objects created. Another one, probably the fastest growing, is AirThemes. It’s about making your phone a branded experience. For example, if you’re a Ferrari fan, everything on the

Our first branded theme was Cut the Rope. We had 600,000 downloads in the first phone would be in the Ferrari style: the wallpapers, ringtones, skins, themes . . . month and a half, with retention off the charts, like 92% of downloads continue to be used actively.

What are the next steps for yourself and Nextury? We’re very excited about developing and then scaling out the incubator model we’re working on. We see a lot of potential to expand outside of Lithuania, to Eastern Europe, Russia, Ukraine, Belarus. It’s a really exciting challenge!

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12 Seedcamp Reshma Sohoni and Carlos Eduardo Espinal THE EUROPEAN STARTUP REVOLUTION

Seedcamp has been an agent of change in the European technology and startup ecosystem ever since it was established in 2007. When it first appeared on stage, it was an unusual creation – part accelerator, part investment fund, part “traveling salvation show” (to quote Neil Diamond), organizing pitch competitions throughout Europe and beyond. Seedcamp was unique and innovative in many ways. The organization itself has been very lean from the outset, both in terms of the team and the capital involved. The first Seedcamp fund raised a seemingly tiny amount – two-and-a-half million dollars. Even at that time, however, the initiative was backed by many of Europe’s best and brightest business angels and early-stage venture capital funds. My first contact with the Seedcamp crew was in May 2008, when my friend Berislav Lopac organized the Web.Start conference in Zagreb. Reshma Sohoni, one of Seedcamp’s two Partners (the other being Carlos Eduardo Espinal), came to Zagreb on that occasion. We talked about startups, Europe and a bunch of other things, and I ended up joining the formidable ranks of Seedcamp mentors. In the years since it was founded, Seedcamp has supported and funded some of Europe’s most successful companies. At Seedcamp Week in 2011, I watched two Estonian guys pitching their startup in the field of financial technology, usually referred to as “fintech” by industry insiders. That startup, TransferWise, is today a billion-dollar-plus juggernaut with more than 400 employees, backed by the likes of Richard Branson and Peter Thiel. Check out chapter 26 in this book for an interview with co-founder and CEO of TransferWise Taavet Hinrikus. There are two conversations in this chapter. The first is a live conversation with Reshma from 2011, when Seedcamp was a team of 5 or 6 people borrowing some office space from one of their portfolio companies, EDITD. The other is a Skype call with Carlos from November 2014. The organization had grown substantially by then, hiring a larger team, raising a new twenty-million-euro fund and setting its sights on pushing the European startup and technology landscape to new heights. What hasn’t changed since the early days is the commitment of the Seedcamp team to staying lean and mean and providing continued support to European entrepreneurs.

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Reshma Sohoni – Interview at Seedcamp office, June 2011

Reshma, a lot of the work for this book has been centred around Seedcamp. Many of the people that I’ve interviewed I first met at Seedcamp, or they introduced me to others there, so it will turn out that Seedcamp is at the heart of European high tech. Excellent! Well, actually in a way, physically it is, right? Because it happens every month, so there are 220 startups that get mentored and 1,100 mentors that come through. Where else you are you going to get that kind of a footprint?

You have Mini Seedcamps every month? Yeah, one a month now.

It’s kind of strange to see you guys in the office. I’m used to seeing you in various different places, on the road. Yeah, exactly.

So you just moved into this office last week? Yeah. Actually EDITD, one of the Seedcamp winners from last year just took it. It was a very attractive price, and everyone is trying to look for space, so we knew, or they knew, that they could probably easily rent it out. (Note: at the time of interview, Seedcamp was working out of part of the office that EDITD had rented.)

What does EDITD do? They are the Bloomberg for fashion, or for fashion analytics, but actually much more for brands and retailers at the product development stage. It tells you what are the colours and fabrics and cuts that are really flying off shows on the runways right now. So that, as a buyer, as a decision-maker of what you are designing next, you can take those into consideration. Because right now it’s a very creative, non- scientific, very non-quantitative process.

I see. Garmz comes to mind . . . No, it’s totally different. This is like Google analytics for the fashion industry. Garmz is much more a market place.

Yeah, connecting designers and customers . . . And these guys are UK based?

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Exactly – Australians, but UK based. And Garmz is over here now, as well.

In London? Yes.

OK, I haven’t been following them closely enough. I like those guys; I think they are really cool. Exactly. Both of them should be announcing their funding rounds soon.

Let’s talk a little bit about your background. It was 3i, and before that, investment banking . . . Well, yeah. I started in investment banking in New York, in tech.

And you are from New Jersey? India, New Jersey, Philadelphia, New York, there you go. So, Tech M&A – I got a lot of experience at the height of mergers and acquisitions back in 1998 to 2000.

The go-go years. Yeah, it was a good time to be in that part of the world and that industry. I worked in an incubator for about another year or so after that.

While still in the States? Yes, with Softbank. Then I moved over here and joined Vodafone for a few years, and then 3i very briefly, right before starting this.

Is there a particular reason why you moved to Europe? To do my MBA at INSEAD. When you talk about some of the central points of the network and ecosystem, it’s amazing. INSEAD graduates are everywhere in Europe, in some of the best organizations!

Why did you choose INSEAD instead of a US business school? Because it was shorter (laughs). It was a ten-month program, and actually, I had done my undergraduate in both engineering and business. So I had had four years at one of the best schools in the world for undergraduate business. I felt that I didn’t want to do two more years of this. I wanted to kind of get it done, finish quicker. So that was ten months and a brand new experience of being on a continent that I didn’t know. I was born in Asia, grew up in America, so it was a whole new continent that I experienced. My plan was to go right back. I thought,

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“Europe is nice and all, but things are happening in the US.” So here I am, eight years later!

What made you stay? You got a position at Vodafone? I made a conscious decision to stay, actually. I felt the fragmentation of the cultures, the best of Europe: It was really interesting and exciting to be part of that! I decided capital. I wanted to get some industry experience, some operational experience. to stay, and therefore, I looked around . . . I wanted to actually not go into venture So I went into a combination marketing and commercial strategy role at Vodafone and worked all around Europe.

And how long was that for? Over three years.

And then 3i for a short time? 3i for all of about 7 months, a very, very short time. They essentially folded their venture capital business the year after I left. But even while I was there, the VC part of the business wasn’t very active, and the partner that hired me had left, so it was all fairly messy. But they did support me in starting Seedcamp. I’m grateful for that.

And this was what year? 2007. You started to see some more activity happening here. Because after the was this conference in Zaragoza. I met Fred Destin there. It was run by the Wired .com bust everyone sort of ran away . . . Everything was kind of dead, but there got to be friendly and he introduced me to Saul Klein. Things were starting to guys, who were friends with Arrington . . . So I met Mike Arrington there and we happen. The Future of Web Apps conference is where I met Saul. And after that it’s just been booming!

When you met Saul did he already have this idea about Seedcamp, or did you kind of come up with it together? How did it get started? You know when you start talking to somebody and you know you have similar ideas? I kind of had this idea about providing mentoring because at 3i, I used to see that the building would be empty after 5 or 6 pm, and I kind of thought, “It’s a waste,” right? Why couldn’t you just have a Wiki online and people, mentors could sign up and companies could just sign up, right? So I just had this rough mentoring

199 THE EUROPEAN STARTUP REVOLUTION idea, but no real form to it. Saul had been watching Y Combinator and thinking about that kind of structure. We thought about getting a few VCs together, putting some cash in. So I had this idea around mentorship, but he had the main idea, really. He had already gotten the advisory board together, and they needed one person to take charge. You know, in all these things you need one person to say, “OK, fine, I’m going to do this full time.” I wanted to leave 3i anyway at that time, and they wanted me to leave as well, so it all worked out. They said, “Well, we’ll support you for six months to work on this, and we’ll see where you take it.” You always need that as a young startup; you have to know “How are we going to pay our people?” So, I was kind of taken care of for six months, which gave us enough room to raise the funds, and that was that! Then when we sat down, we realized that three months probably wasn’t long enough. There was a need for something long term, and we said, “Why don’t we raise money for three years?” That was Saul, Robin,4 me, and our early advisory board at the time.

So the first Seedcamp was in 2007, right? We started in June. We met in April, May or so – maybe March or something like that. In April, May, June – some time around then – we started to work on it.

And had the first one in September 2007? September 2007, yeah, exactly.

How many different investors were in the first fund? Ultimately there were 22, but we started off with a little over 10 investors, and then right after that, in September, some more came on board, and then in the next year a couple more came on board as well. So 22 investors, half venture capital funds and half angel investors.

I was talking to Pierre Kosciusko-Morizet at PriceMinister. When they first raised funding, in 2000 or 2001, they had 60 investors in the first three rounds. It was really funny, I mean, we were talking about how they managed all these investors. They just sent some reports and didn’t have any active

Robin Klein, entrepreneur and investor, Saul Klein’s father. 4

200 12. Seedcamp • Reshma Sohoni and Carlos Eduardo Espinal meetings with all the investors. They were just sending out reports, and then it turned out that some of these reports got leaked to the competition, so they stopped sending anything for years. And when they got bought, it was the first time the investors had heard anything about the business of the company, after several years. That is such a story. Wow!

It’s interesting. So, your first funding round was in 2007? Yeah, exactly. We decided we were going to make a guaranteed commitment to investing in companies. It was a big deal in Europe at that time, to make that kind of a commitment.

Out of those first years, 2007 and 2008, which company is on the best path to really getting big? Well it’s still early for a bunch of them. Zemanta continues to grow and do well. When we first backed them, it was like, who knows how big or small it can be, but they’ve got such an interesting model, which you can do with blogs and monetization, that can potentially be huge, depending on how they manage the business. Uberview is doing really well, another Eastern European company. MyBuilder is the leader in the UK market, and hopefully, they will continue to grow and expand. So I think those three companies are interesting.

The US and Asia are kind of new for Seedcamp. You started last year with that? Exactly. You know, we are experimenting, right? It’s always evolving and growing. You know, Asia and Africa, there’s really interesting stuff going on there. We linkages between Asia and Europe more. And if we can find that, then it makes wanted to find out . . . for us it’s still a bit too far away. We are trying to work on sense to do more in Asia and Africa if we can actually find linkages back to London or back to Europe. As for the US, it’s about the bridge between the US and Europe. As you’ve been interviewing founders, I’m sure that for many of them, the US is a part of the overall plan for world domination. With the US, you have to kind of be there. It’s a way for us to continue to showcase the best European companies to the US and also for US companies that might want to start something in Europe – so kind of helping from both angles.

Do you see Seedcamp becoming more of a global organization, or remaining with a focus on Europe?

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Definitely still with a strong focus on Europe. However, we’ve always taken a ten-, fifteen-, twenty-year approach to this. Since we always keep doing this in three- year cycles, however, it remains to be seen where we’ll take the business in 2013. It would be interesting to hear what Saul (Klein) would say if you asked him that question.

Of course I asked Saul! What was his answer?

I asked him something like, “What’s going to happen in three years?” and he said, “No, no, not three years. We have a much longer perspective than that.” But he said that for him, from his point of view, even in the long term, he sees Europe as a home base, and he also talked about giving European companies exposure in the US market and finding US companies that are interested in coming to Europe. There was a very interesting blog post by Sarah Lacy from TechCrunch. She wrote a guest post at the Daily Telegraph about how European and US companies, particularly European companies, obsessing too much about the US in their plans and objectives. Her theory was that they were overlooking Asia and in general the emerging markets. Which was, I think, a very interesting remark. I don’t know how close you’ve followed Stefan Glänzer’s5 Groupon clone company, Rebate Networks? Hmm, yeah, right.

I talked to Stefan, and he then connected me with Michael Brehm,6 who is his partner, who runs Rebate Networks. If you look at their map, they are everywhere except in the developed markets. They are not in the US, they have a very small presence in Western Europe, but then they are all over Eastern Europe, they are in Asia, they are number one in China . . . So that is a very interesting strategy, I think. That is really smart. At a very large level, there is a South African media company called Naspers. They do that. I think they are in Yandex.

See the chapter with Stefan Glänzer in this book. 5 See the chapter with Michael Brehm in this book. 6

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Tencent? Yeah, exactly, Tencent. That strategy paid off big time for them. They just shunned the developed markets.

It’s kind of a default option. “We are from Bucharest or we are from Spain, and we want to go to the US!” It might make a lot of sense for some, but probably not for everyone. Exactly. I mean, they were smart, they did that seven or eight years ago. They investigated these companies long before they became so huge.

You guys are one of the few who are looking at and ready to invest Europe- wide, actively looking for companies in that sense. For instance, the French guys, the ISAI fund? Yeah.

Seventy entrepreneurs, which is a huge number of investors, but it’s French focused. They are all French, and they are focusing on France, at least the francophone area . . . The Samwer brothers in Germany, I don’t know how much they are German- vs. European-oriented, but I think there are relatively few investing organizations or entities that are really looking at Europe as a potential market. I think that is true in America too, right? There is no one that looks US-wide.

Yeah, the Silicon Valley people, New York, Boston, and then the others. But there is such high density in those three locations, people don’t talk about it that much, and it’s a homogeneous market. Here, you talk about it more.

You can have a startup in Texas and they can be selling to the US very quickly vs. in Europe. It also depends a lot on your business. I mean if you are doing music, someone like Spotify, they have five European countries, and then you want two more, but it goes really slowly. So companies that apply to Seedcamp and win are really from all different kinds of sectors. Do you see any trends, looking at the past year or two? Any areas that are becoming interesting? Well, every year it changes. If we talked next year, it would add more and different trends. Fashion services has certainly been a big one, we saw three companies

203 THE EUROPEAN STARTUP REVOLUTION basically around the product or product search or social shopping, pricing related, the “four P’s” of marketing. It’s all around the product, distribution, discovery, price, product search. There are a bunch of companies coming out of the data space – updates on Twitter and Facebook and how to make sense of the data, around the different verticals. That’s probably the latest trend. One of the judges that I was on a panel with recently probably put it the best. He said, “None of you companies are necessarily resolving real problems. You are resolving problems that have been created by technology or by so much data and information being available out there. That is quite interesting, I think that is spot on, actually!

How about the applications to the Seedcamp program? Have you been getting more and more over the years as the name becomes more and more familiar? We get roughly 2,000 applications a year. Next year it will be probably be a little bit more than that or something like that.

So just roughly, it’s about ten percent that get to present? Exactly, ten percent get to present, and ten percent of that we fund, so out of all our applications, overall that’s one percent.

What about angel networks? Is the angel ecosystem evolving? Have you seen it change over the past three or four years since you started? Oh, definitely! There is a long way to go, but it’s definitely improving. It’s going in the right direction. You know, it’s great that Michael Birch and Brent Hoberman and all those guys came together rather than each one trying to do their separate and different things.7 Robert, Eileen and Stefan got together to do Passion Capital.8 It’s great to see the super-angel phenomenon that’s been happening, and it would be great to see more of that. Compared to three or four years ago, there are definitely a lot more people at the table willing to put money into businesses. A lot of it is happening centrally around the hubs – London and Berlin.

Reshma is referring to PROfounders Capital. 7 Robert Dighero and Eileen Burbidge are Stefan Glänzer’s partners in Passion Capital. See Chapter8 with Stefan.

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When your companies get funded, do you typically remain as a shareholder, or do you typically exit? Or does it depend from case to case? Mostly we remain as a shareholder in the next round. As our companies are now getting to the point of the second, third round, that question is a new one to be answered about what we want to do. We may start to implement some new policies, for example, if we see X amount of return – or maybe we’ll at least take out our capital plus something extra and leave X amount in.

Have you actually cashed out of any projects in the past few years? Yes. Mobclix was acquired for a little over 50 million dollars, so that one we had a return on, and there is a another one which we sold our equity in.

OK, so one or two actually, not very many. Yeah, not very many just yet.

One thing that I’ve seen happening that is that you are funding more companies from year to year. Yeah, exactly.

So, at first, it was like five each year, and then last year it was ten? Ten, roughly, and now we are going to do twenty.

Twenty this year? Does that raise the chances of getting to present? Who knows – they might get worse, I don’t know.

How about your plans for the next year or two? Now that we’ve moved our model from just a few each year to twenty, the immediate plans for this year and next are to make sure that model works. Because it’s a step change in the quantity, we want to make sure it works and focus on the quality of the mentors continually, to keep it high. Because we are getting more and more mentors in the flow, as that pool gets bigger as well, we want to make sure that we keep the highest quality of people. Also, more relationship building with corporates like Google, who has always been our long-term partner, to make sure that they are getting value out of it and that our companies continue getting more and more value out of them, and then more connections to the VC network.

And maybe more interaction with the local community?

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Yes, add that one to the list.

It’s been a pleasure to follow the whole development of Seedcamp and maybe be a small part of it – it’s a lot of fun.

You know . . . it’s been great!

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Carlos Eduardo Espinal, Skype cal, November 2014

Carlos – how has Seedcamp been changing? You’ve raised a significant new fund. You are still working with early-stage teams, but now you also want to do “scale”? trajectories of companies can vary quite a bit depending on their industry and Well, yeah . . . acceleration is critical at every stage of the business. Growth target customer. What’s changed with Seedcamp is that we are now focusing on helping both pre-seed and seed-stage companies, and our larger fund allows us to do both. So we still do our typical investments that we have done in the past, but now we can also invest in the companies that are raising a bit more as part of a syndicate with other investors. As part of this syndicate, we help them scale up to some level of initial traction and to try and hit product market fit. So we are really still focusing on pre-seed and seed companies that need acceleration in reaching product market fit. I appreciate that there’s a subtlety there. It’s not like everything that is a small round necessitates being called a “micro seed” or “accelerator round” or whatever. It’s actually quite broad. A lot of companies now are raising relatively large seed rounds. It depends on the type of business. Some businesses require more money, and others don’t. For example, if you start to look at hardware companies, there’s a different cash profile. We just wanted to make sure that, with the new fund, we are able to cover a greater variety of ambitious companies, and also to be able to invest throughout the company’s life cycle. So that’s the major change – we can now do both of those things.

With the new fund, I guess a logical thing would be for you to invest further rounds in your existing portfolio companies. Are you going to be looking at companies that are maybe not Seedcamp companies, or you will be focusing exclusively on your portfolio? For us to invest in seed-stage companies now, they don’t have to go through our usual process. For those kinds of companies, they have to come via another investor – there’s a syndicate there. However, we still are going to continue to invest in pre-seed stage companies. One way to think about it is: for investments less than 75,000, we are going to go through our normal process, the process that we have done for the last eight years.

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For investments of more than 75,000, however, we do this alongside other investment we made with Sten Tamkivi, at Teleport. That was a company that was investors when the opportunity presents itself . . . For example, you saw the being led by somebody that we know. In this case, it was Andreesen Horowitz. We just participated in their round and helped Sten with the experience we’ve accumulated over the last seven years of operation. That’s a company that is not “in our portfolio,” so to speak, and did not go through our program.

How many investments have you done from the new fund so far? forty per year. There are a few that are not closed yet. But, yeah, basically it’s Good question. Hmm . . . Let’s see . . . it’s around twenty. We do about twenty to around twenty at the moment.

I was asking specifically about the new €20 million fund? It’s still the same because we are scaling up the amount of money that we can provide to the companies depending on their life cycle, where they are in the pre- product market fit. It doesn’t mean that we suddenly magically became more capable of providing investments typical of a later-stage investor or increasing the volume of and how we provide the support that we give to the companies. We just feel that, investments . . . Think about it this way: We rely on having a certain level of quality for now, between twenty and thirty is the appropriate level of staffing and timing for us to be able to do that.

Let me rephrase the question – how many investments have you done that are larger then 75K? How many “scaling” investments? As of this chat, I think we’ve done five. Another way of thinking about it is, we want do to twenty or thirty investments per year; twenty will be of the usual type, and ten will be sort of the growth type. However, we’re always happy to increase that as we see possible. (For the latest on this, check out – http://seedcamp.com/ your-first-round-fund/.)

Teleport is out of the States, right? Sten is from Estonia; he used to run the Skype operation there, and he’s now based in the Valley. So basically, this means that you guys are not going to be exclusively focused on European companies?

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Obviously, Sten’s company is a bit geographically ambiguous. After all, it is a travel & moving company! Every company that we want to invest in that wants to become a billion-dollar company is going to have a US angle to it. I don’t think the right view to have is that you are only going to invest in one geography for the sake of that one geography. What we do focus on is European emphasis businesses. Sten’s company is going to go global. It’s going to have a European angle to it, and it’s going to have to expand. If there was a US company where the only market is the US, and there is no international aspect to it – yeah, that would fall outside of our focus area. If, for example, it’s a US company, but it’s going to be opening offices in Europe and we can obviously help with that, then definitely that’s what we want to do, which is helping expand and grow global companies, especially with a European angle to it. But generally speaking, I would say that most of the companies are going to be European, just by the nature of who we are and where we meet companies.

Tell me a little bit about the organization itself. When we met in London in 2011, I think there were five of you, and maybe one or two of those five were interns. Today, there are not that many more people. How has Seedcamp changed, in terms of the team? Are your relationships with your investors in any way different with the new approach, with the larger fund . . . ? Whenever you’re looking to evolve something, whether it be a product like an iPhone or something else, it’s an iterative process. A lot of what we do is iterative. We’re not going to go from a team of four to a team of thirty overnight, because it would both kill a lot of how we work and our culture and also remove the ability for us to continue doing things in the same way. We’ve seen that it works this way and that it has shown some level of success. So the team has grown, but there have also been some changes.

What’s next for Seedcamp? The mission is to continue what we’ve started, which is to find great founders, help them build billion-dollar companies and help the ecosystem along the way. With the new fund we can just do that across a wider berth. We can still do initiatives like Seedsummit and Seedhack, we can do office hours and we can do many Seedcamps at various different locations. Now, we’re simply able to invest in companies throughout their life cycle and expose them to the kind of process that we have internally.

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And that’s really it! I don’t think the right thing to do is to go crazy and drastically change things when they are working. It is about evolving things – the bits that are evolutionary are really around being able to scale companies throughout their life cycle in terms of funding, because we can now do more follow-ons, and we are able to invest in companies in a wider berth because of the larger fund. But with the general focus being pre-product market fit. I think, generally speaking, even though it’s the same brand as in 2007, it’s evolved a lot. If you even look at the logo – the logo is actually no longer a seedling. It’s actually growing and it’s an evolution, right? And so a lot of the things that have changed . . . It’s not like you went out and you completely radicalized . . . Even the way that we do that over the years, and the way it is now is so different than in 2010. The way that things internally . . . Take, for example, our academy program. We’ve been evolving companies get selected – then they go through onboarding, they go through our process and they go through the US trip. Each one of these things has evolved, and when you say, “What’s new with the new fund?” it implies that the new fund turned on a switch and at that point when the switch was turned on, all of a sudden, things changed. But actually, that is not how it has played out. The way it plays out is, like, every six months there is something of an experiment. For example, let’s say, the US trip. We decided, let’s do this twice a year, and let’s see how that goes. We did that last year for the first time, and we said, “Oh, that turned out well.” We used to have the US trip to different cities that we experimented with to see what city worked out the best. Then we removed some cities and added some other cities. In terms of internal operations, it was like, “Do we use this particular tool for communicating with our startups, or this particular tool?” And so, when the new fund came in, all it did was allow us to scale up certain types of investments, but the underlying infrastructure had already been evolving, and it will continue to evolve.

So it’s not like, all of a sudden . . . it was not like a switch was turned on when that It’s a constant cycle of talking to founders and understanding what their needs are money came in. It was more like we just continued that iterative experimentation . . . or how they are changing, how much money they need now to go to the next stage of their company life cycle, what kind of support they need, what kind of mentoring making that better, seeing if it works – and if it does work, institutionalizing it. That they need . . . And then every quarter or every six months trying a new way of is a better explanation of how we evolve rather than sort of like, “New fund, let’s go to a new office, new stuff!” It doesn’t quite work that way. Our ethos is iterative.

210 13 Seedcamp, Index Ventures, The Accelerator Group Saul Klein THE EUROPEAN STARTUP REVOLUTION

Saul Klein is living proof that you don’t have to study programming to be a digital entrepreneur. He studied English literature at Cambridge, after which he got involved with a pioneering project to build the The Daily Telegraph’s first web site. Saul’s career has been more diverse than that of almost all the other entrepreneurs in this book. He has started successful startups and worked at large corporations such as WPP, Microsoft and eBay. He was a key member of the team that built Skype and went on to become a venture capitalist at one of Europe’s most respected investment funds, Index Ventures, all the while teaming up with his father, Robin, in The Accelerator Group, their angel investing organization. Saul Klein’s great contribution to the growth of the European startup ecosystem has been Seedcamp, the pan-European hybrid early-stage investment fund and startup accelerator (more on Seedcamp in the previous chapter). In this age of discussions about Europe and incoming immigrants, it may be worth noting that none of these key people at Seedcamp were born in Europe. Saul is a native South African. Reshma was born in India and Carlos in Honduras. So we might well ask where Europe’s startups would be had it not been for these immigrants! Saul Klein announced that he was leaving Index Ventures in April of 2015 in order to focus on investing in, and building, very early-stage companies, primarily within the London ecosystem. In the two conversations in this chapter, one in 2011 and the other in 2015, Saul and I talked about his career, the various organizations he has built or worked for, investment, startups and the need for governments and tech companies to work together to build a better digital economy and digital society.

212 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein

Skype call, May 2011.

Saul, I want to start our conversation going back a little bit to 2002. OK.

That was the time when you came back from the States, is that correct? That’s right. I got married that year and moved back from the US.

In the US, directly before that, you were with Microsoft? I was with Microsoft from ’97 to ’99, after Microsoft acquired a company I had helped to start in Boston, called Firefly. After Microsoft, I was in New York for a couple of years, doing seed investing and starting The Accelerator Group, a kind of “Incubator 1.0”.

Right after you came back to the UK and got married, Video Island was your next major project? Yeah, that’s right.

In an interview you mentioned that the UK and London were really different places in 2002 than when you had left in ’97. Yeah.

And just briefly, I’d like to ask you: it’s been nine years since then – how much and in what ways do you feel London and Europe have changed? If you had left in 2002 and gone to, let’s say, South America, and come back yesterday, would that change have been as dramatic as the one you described coming back from the US? Yeah, I left in ’95, actually, so, you know, in ’95 even the European Union wasn’t still a very monocultural city; you didn’t have a lot of people from across Europe really . . . The common market wasn’t really a major fact at that stage. London was had changed a lot by 2002. I mean that aspect of it hasn’t changed very much living in London; you didn’t have a big American population in London . . . so it since 2002 till today, but what has changed is that there is a much, much more confident and vibrant startup ecosystem in London than in 2002. Back then, even in 2002, we’d gone through one wave of excitement over the Internet. People were actually, generally pretty sceptical and negative about the Internet as an

213 THE EUROPEAN STARTUP REVOLUTION investment opportunity, people really weren’t funding startups very actively. The big companies in London and in Europe felt that the Internet wasn’t so much of a big deal. Today, a lot of that has changed, although I do think Europe and London are still very underdeveloped when it comes to the web.

And obviously, with Seedcamp you’ve been all over Europe, not just in London, investing – any impressions on how and how far Europe itself has changed since that time, since 2002? What’s been great with Seedcamp and also something I learned with Skype is that the innovation and the drive to build entrepreneurial businesses is really happening all across Europe and beyond. I mean, I was really amazed, even in that first year of Seedcamp in 2007, to see companies like Zemanta from Slovenia, or then, the following year Branient from Romania and Erply from Estonia and Uberview. There’s clearly an amazing wave of entrepreneurial businesses that are waiting to happen all across Europe. It’s not just in the Balkans and in Hungary and Romania or Estonia. Obviously, there are great companies that are getting built in Scandinavia, France, Spain, Italy, Germany, Russia, Israel and Portugal. Europe has already become a very, very vibrant place to start companies. Obviously, there are still very significant issues in terms of starting businesses and the market being very fragmented, but that was really one of the things that we were aiming to address with Seedcamp: to create a network that entrepreneurs from all over the Europe could plug into and then use as a platform to grow their business.

When you mentioned fragmentation, a lot of your career has been with content. Right out of Cambridge, I think, your first experience was with The Daily Telegraph, is that right? Setting up their first web? Yeah.

So, looking at newspapers as content area, a number of your investments has been in music and obviously video, which is again content, an entertainment space . . . Over the past couple of years, looking at either the most successful or the less successful European content and entertainment projects, looking at Last.fm, LOVEFilm, SoundCloud and others – It seems to me that, regardless of whether it’s in Europe or in the US, content and entertainment companies have, due to the various copyright restrictions, had a much harder time becoming global enterprises and getting global customers on a single

214 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein platform than perhaps some other internet players, such as communication companies like Skype, or advertising companies like Google. Very often, you want to listen to a song, and it says: ’’We are sorry, but our service isn’t available in your country, or your area.’’ Spotify is very well known, but even they only had, I think, five or six European countries up until very recently where they were available. So do you have any thoughts on this issue, or problem, or limitations that come up because of copyright restrictions? It’s difficult to really build global businesses in many areas. I think it’s true in commerce and retail, as well as in content. Arguably, Google is a content business as well and has found it very, very hard, especially in China, to build a business there, as has Facebook. Skype found it hard, and it’s very hard for Twitter in some countries, as well. Although the Internet gives you the opportunity to build global and international businesses, you still have to be aware of local law and local customs and culture. Obviously, content owners like the record labels and the movie studios and people who own intellectual property have built their business models on basically controlling the flow of content and licencing that content per market and also per media, and that’s a business model that has shown that it’s gonna take a while to change. A lot of the most interesting opportunities going forward aren’t necessarily just media-related or commerce-related. I think there’s still a lot of opportunity in those areas as the social element becomes more important. The web is becoming so ubiquitous that it’s gonna start to impact much, much bigger areas of our life than the entertainment that we consume and the media that we consume. Companies in those fields are gonna have to negotiate with new companies, as they are doing with Netflix and with LOVEFilm and increasingly with Spotify and Pandora and Last.fm. A lot of those things are changing. If you look at games, for example, what Zynga did, what Playfish did out of Europe – they created a new category of content that is independent of the big companies in that space, although EA has obviously now bought Playfish. So I actually feel the content issue is well on its way to being solved, and probably, although there are big opportunities in that space, there are bigger opportunities in areas that are more fundamental to our lives, like education and health and energy and security and finance.

Sure. But if we could come back just for a few minutes more to when you mentioned the music labels and film studios, I find it really fascinating that

215 THE EUROPEAN STARTUP REVOLUTION music labels nave not been able – at least that’s the way I perceive it – to go very far beyond, you know, chasing pirates via the RIAA and other national copyright organizations . . . I think the cost base of a traditional media company is completely out of whack with what it needs to be in the modern world. Many of these companies are not independent units. Some of the music companies are, but the TV and the film companies are typically part of large media conglomerates. The focus that you urgency to change has only really been apparent in the last year or two and only have to bring to bear if you’re a standalone business maybe isn’t so harsh . . . The really, fundamentally in the music business. Most of the companies in the media and entertainment space have felt that the intellectual property they own, if people want to distribute it, they need to pay for it. That is the mental model in which they operate, and it’s very, very hard to change that unless people feel that the very life of their business is threatened. That’s only really starting to happen now. This is not to say that people didn’t see it coming, but there’s a difference between seeing something coming and it actually happening. That might sound like a small difference, but I think it’s psychologically a very big difference, and it’s only really now that that’s starting to happen. As EMI have done, the medicine that businesses have to take in that space is going to be very, very strong, and it takes an exceptional business to give themselves such strong medicine.

Having worked in the music industry, what’s your opinion of Pirate Bay and it’s founders – as entrepreneurs, perhaps? Honestly, I don’t know that much about their business, or about them. I mean, as Spotify has shown, as Pandora has shown, there are ways to really work with the music industry to give consumers an amazing amount of choice. For consumers to pay for the content, and for the artists to get paid. Obviously, the ideal solution is one where people, listeners, get the maximum amount of choice and the artist gets properly compensated so that they can keep on making music. Companies like Pandora and Spotify are at the cutting edge there. I also think companies like Songkick, which is an investment of ours, which is focused on live music, is in a very, very good space because live music is where artists make most of their money.

How would you compare your experience in working for a large tech corporation such as Microsoft versus starting up your own companies and being an investor later?

216 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein

I’ve always thought that Microsoft was like going to business school for me, and actually, all the big companies I had a chance to work at – Telegraph, WPP, Microsoft and eBay – I learned an enormous amount at those companies. You learn a lot about scale, you learn a lot about process. Any small company really hopefully aspires to be a very, very big company, and having worked inside some of those big companies, I’ve got a sense for what a small company looks like when it grows up. Microsoft is a very big company, and even when I was there, ten years ago, twelve years ago, it was a very big company. When I was there, I think it was twelve thousand people, that’s half the size Google is today. But remember that Microsoft in 1975 was a startup. That seems like a long time ago but it’s really not that long ago, and it’s an amazing experience to work at a company where the founders are still running the company. They had very, very entrepreneurial leadership, running a business in hundreds of countries producing billions of dollars in revenue and billions of dollars of profit. So for me, it was an amazing experience to be there at the time when Microsoft was as dominant as folks like Google are today, and Facebook maybe in the future. It was a very, very great experience to see how to or how not to deal with that kind of market dominance.

Is all of this, I mean, your whole career, is this something you had in mind when you studied English at Cambridge? No. I had no idea what I was gonna do.

Ok. So you didn’t have a specific idea, you didn’t go to study English to maybe be a professor? No. What I loved about English was, you studied literature and you studied the works of art that people used to communicate. Communicating and media has always been very interesting to me, and when I saw the Web for the first time, at the Telegraph I recognized that certainly in my lifetime, but maybe in many lifetimes, this was the most interesting communications media that had come along. So for me it was kind of a natural transition. It wasn’t something that I did deliberately – I didn’t ever think that this is what I would be doing.

So, in other words, if some kid today goes to study philosophy, or history, or English, it doesn’t necessarily mean he won’t be the founder of a startup a few years down the road?

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and starting businesses was something that was common and accepted in my No . . . I was very lucky. I grew up in a family where my father was an entrepreneur, family. As long as people have the mentality of being open to starting businesses and having the risk profile that says, “I could be part of a startup,” then no, I don’t think it matters what you study – you don’t even necessarily need to study anything. People who come into our industry come from all sorts of different places and backgrounds, and that’s actually one of the most exciting things about it.

When you say a mentality that is open to risk, an entrepreneurial mentality, then, going back to what we talked about previously – in many discussions comments come up that Europe in general is not, or at least has not historically been a very entrepreneurial-friendly or risk-friendly place, at least speaking from World War II up till today. I mean, hundreds of years ago Europeans were obviously entrepreneurial enough to set sail for America, so there’s a tradition that’s maybe been a little bit stifled over the past couple of decades. Do you think that mentality is changing now a little bit, so that people such as yourself will not be such an exception in European societies today as they maybe were when you were younger? I hope so! As you say, Europe has a very deep, rich entrepreneurial heritage going all the way back to Christopher Columbus and before. The entrepreneurial DNA is very, very deep in Europe. Let’s not forget that it was the Europeans who went to America, and that was an entrepreneurial venture. So there’s nothing inherently un-European about being entrepreneurial. It’s very difficult in established societies and cultures that have a huge amount of stability and predictability to go against the grain, and to be a good entrepreneur, you have to be willing to go against the grain. But there are more and more role models in Europe, great entrepreneurial role models, as I said, in sort of the newer countries in Europe. Whether it’s countries like Croatia or Hungary, all of these old countries that have become new again. I see the mentality of the entrepreneurs that come out of these countries is incredible and really, really exciting, because people feel like there are that’s not much more than sixty years old. In young countries, entrepreneurialism new rules to be made . . . I saw that in Estonia, and I see that in Israel, in a country is the main profession. Honestly. So I don’t think there are any reasons why Europe can’t be a home for great entrepreneurs. It has been in the past and actually, even

218 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein in the present, outside of the tech industry, if you look at fashion, if you look at, like, Zara or H&M, if you look at furniture, IKEA, if you look at airlines, Ryanair, EasyJet – some of the most entrepreneurial businesses in other sectors in the last ten, twenty years have come out of Europe.

Absolutely. But Saul, when we talk about our own sector and when you mentioned the term role models, one of the reasons and motivations I started doing this series and writing this book is that I’d say most of the people that are in the industry and that follow the industry tend to read, let’s say, the most popular blogs, which are very often US-based, or other sources of information, and European entrepreneurs and founders of companies such as yourself are very often not recognized enough by the tech media. There’s a huge celebrity-oriented trend where people just talk about Zuckerberg . . . I mean, they’re all wonderful entrepreneurs, but it always seems to me that not enough people, especially European people, know about European success stories and European founders that they can look up to, people who are closer to home than others who are living in San Francisco or the Valley. I think that’s right. I did a presentation a few years ago at Robin Wauters’ event in Brussels – Plug – and I showed a bunch of European entrepreneurs, you know, from Vente Privee, from Spotify, from mySQL, obviously the Skype founders, etc. There’s no question that there’s a whole generation of really strong entrepreneurs and entrepreneurial role models in Europe, and at Seedcamp every year we try to showcase some of those stars, but we also can’t kid ourselves: the ecosystem in the US has been going since the mid ’50s.

Yes, of course. It takes a long time. They are probably in the sixth or seventh or eighth generation of entrepreneurs and investors, of big startups that have become huge companies, and we’re probably just coming into the second or third generation. So it’s absolutely the right thing to do, to showcase the role models, to inspire people to think big, but I also think the whole US versus Europe thing is not helpful. I think there’s an enormous amount we should learn from the US and can learn from the US. It’s one of the reasons why going to the US is a big part of the Seedcamp program, because we think it’s really important for entrepreneurs to spend time out there and to meet people out there and to build a network out there if they’re going to be really big and successful.

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So I think the US will remain for the foreseeable future, at least in my professional lifetime, a major, major force in the economy at large and particularly in the tech economy. I would always encourage European entrepreneurs to learn whatever lessons they can from the US, but then also to forge their own way. I think it’s also increasingly important to start learning lessons from Asia as well, because a lot of the really interesting companies in the next twenty-five years are going to come from there as well.

We’re also seeing at least one example of a very interesting European company that has intentionally based its expansion strategy and its growth strategy on emerging markets – I’m talking about Rebate networks. Right.

You obviously know Stefan Glänzer, but I don’t know how much you know about Rebate itself. They’ve kept a fairly low profile.

Exactly!Did they openBut their up a lotfootprint of Groupon is all clones . . . over the ? emerging markets space, so they haven’t gone into the US, which is obviously dominated by Groupon and many, many others, but in other places, such as Croatia and Eastern Europe, Southeast Europe and then over in Asia and China and Japan, they’ve been very successful. It’s an interesting strategy for a European company to go East, instead of West. That’s what Skype did.

Enlighten me? All of Skype’s original business development deals were in Asia and Latin America. Until the eBay acquisition, there wasn’t any real major work done to grow the US market. The initial deals were in Japan, in China, in Taiwan, in Korea. We did deals with Maktoob in the Middle East, we were doing deals with the Times of India, with Yandex, with folks in Latin America, so I think you are absolutely right. US companies tend to be incredibly US-centric and it’s a great opportunity for European companies to capture markets outside the US first, and then, potentially, either just stay there or – what Spotify will do is go into the US at a later stage from an incredibly strong base.

Saul, a lot of the work that I’ve done on these articles and the book has obviously been around Seedcamp-related investors, founders and entrepre-

220 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein neurs, so my conversation with you is somehow something that’s been waiting for a long time, since I’ve been working on this. So tell me a little bit about the early days of Seedcamp. You know, my understanding is that it was essentially your initiative. One of my great learnings from Seedcamp is that it’s all very well having a good idea, but unless you’re working with someone who can turn that idea into a reality, like Reshma did, it just remains an idea. The idea that I had with Seedcamp was really inspired by a conversation I was having with my friend John Borthwick, who started betaworks, and he was telling me about what Paul Graham was doing with Y Combinator, and I thought: “That’s a great idea! In Europe we really, really need something like that to help first-time entrepreneurs get a start.” As I said, it’s a highly fragmented ecosystem, so having something that can bring not just entrepreneurs together, but also mentors and investors, would be very, very helpful. I put a blog post out, I think in February 2007, and I was actually introduced to Reshma by Mike Arrington at a conference in London – Future of Web Apps (FOWA). She had said to me she was very, very keen on doing something to move the European community forward. We started working on it together and over that summer raised two million euros for the first Seedcamp fund, found a venue and invited mentors and got applications for teams. It was a real startup. You know the story from there, but for me it was very much an idea that seemed great. It seemed like something that we really needed, but it would never have been possible without Reshma’s involvement and her taking on the ownership of Seedcamp going forward and building it into what it’s become.

How long idid it take it to raise that first two million? Raised it pretty fast. I mean, we raised it over that summer – so a few months.

You probably understand what I’m aiming at. What I’m saying is that it’s a typical, very good example of a European project that started up as quickly as some US-based projects. In many other examples, Europeans would take a much longer time, so I think it’s an awesome example of how Europe is moving forward as a startup environment. One of the things I wanted to try to bring to Europe was the experience that I’d had as an entrepreneur, both in the US and in Europe – that sort of attitude of, OK, let’s just make this happen, and get it done and do it fast. I had a track record from the US and from Europe, so that would’ve made the fundraising easier, but from

221 THE EUROPEAN STARTUP REVOLUTION an attitude perspective, it’s about believing that things are possible and just going out and trying to make it happen. I think that’s an attitude that a lot of startups in Europe have. In particular, you hear stories about startups in Berlin who really have that scrappy, just-get-going- and-make-it-happen type of attitude. I think it’s really possible to do it now – you don’t need a lot of money to start a business. You can get a prototype up and running and live, if you can write code yourself for nothing or for a few thousand dollars. And even if you can’t write code, you know, you can hire people on an hourly basis, invest in oDesk and Elance and get something up and running for ten thousand dollars.

So what are the next steps for Seedcamp? I mean, obviously in terms of the number of companies, in terms of the continuity, the mentors, it’s been a great success. Clearly it’s growing, in terms of geography. You’re going to New York, you’re going to Asia and planning to fund, I guess, fifteen or twenty companies this year? Yes.

So from a slightly longer-term perspective, how do you see Seedcamp evolving over the next two or three years?

Ok.For meAs longthat’s as a short-termyou like. perspective . . . When we started Seedcamp, I always said to the investors and to Reshma that I think this was like a fifteen- to twenty-year project. You don’t build an ecosystem over night. I see Seedcamp today as kind of series A company. It’s still very young, it’s still got a lot to prove, and it’s done a lot in three-and-a-half years. Reshma and the team published a lot of data yesterday on the blog which got featured on TechCrunch.

I read that, yeah. So I think a lot of progress has been made, but we’ve always seen this as a very, very long-term project. The way I see Seedcamp, Y Combinator, Techstars, etc. is that it should be the best start in life, or the best education that a prospective entrepreneur can get, so if you are comparing this to universities or MBAs it would be like going to Harvard or Yale, or Stanford, or Oxford, or Cambridge. What I

222 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein would like is if in ten years’ time someone who wants to start a business and wants the best possible start for that business should think of these as an Ivy league of accelerators, or whatever you want to call these things, and that Seedcamp is one of them. Obviously it’s focus is on Europe, on the time zone between London and Tel Aviv. The reason, as I said, we sort of reached out to the US historically is because we listen to the entrepreneurs that we work with, and it’s very important for them. We help them to access customers and investors in the US, and the reason we started to dip our toe into Asia last year is because we believe, in the long run, that’s going to be important as well. We had a successful Seedcamp in Mumbai last year, and in Singapore as well, and I just heard this morning, actually, that one of the companies at Seedcamp in Mumbai got funded by Sequoia in India, and they met there, at Seedcamp in Mumbai. So, to me, this is a very long term project and in the short term, in the next couple of years, what we need to do is keep holding great events that entrepreneurs and mentors want to come to, keep investing in good companies and keep helping them to be successful – and it’s as simple as that. If we can keep doing that, then we’ll still be around in ten, twenty years’ time.

So, in the foreseeable future, you see Seedcamp as continuing to be European focused? Look, I think that’s where the need is greatest and where we’ve invested the most time building our network. I think we’ve probably under-invested, even though I think we’ve invested a lot more than most, in the ribbon of countries between Estonia and Slovenia. I expect in the next five to ten years many, many more startups coming out of Croatia, Slovenia, Romania, Hungary, Poland, the Czech Republic, Estonia, Latvia, Lithuania, Turkey, etc. Those are the areas where Seedcamp has really pioneered in terms of connecting those areas to the wider tech community and to the US, and we see those as a great opportunities. You

Yes,know, I rememberone of our exits watching was a themJordanian in London. company, Talasim . . . We’ve got a lot of opportunities really offering a great service to companies in between London, Tel Aviv, Oman and Istanbul. We are certainly going to hold events in Asia and in the US, but more to expose those companies in our core markets to those regions.

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Excellent, excellent. Well this absolutely sounds very encouraging for myself and my friends here in Croatia and the region around Croatia, so I’m really happy to hear what you’re saying! The big moment for me was understanding that the real genius at Skype was in polished, ambitious team in the first Seedcamp and then seeing, you know, Dragos Estonia and seeing Boštjan and Andraž (the founders of Zemanta) being the most and his co-founders from Uberview and Emi from Brainient, and Chris from Erply, and now the guys from Vox.io – these are really talented entrepreneurs who over time, I think, can hold their own with the very best, anywhere in the world. So it’s an amazing, amazing region for entrepreneurs, and hopefully, all of those guys will turn out to be great role models.

I don’t know how much you’ve been involved with this at all, but just recently there was a lot of publicity about two companies that you’ve been very much involved with in your past, but I don’t know how much you’ve been involved with this particular transaction. I’m referring to Microsoft buying Skype. Index Ventures has been kind of involved in that transaction. So do you want to comment on that at all? Sure. The most recent transaction wasn’t something that we were involved with. We were investors in Skype at Index prior to the eBay acquisition, and not subsequently. It’s not something that we were close to and not really something I have any special knowledge or information about.

Do you think it was a smart move for Microsoft? Yeah, it’s a great move for Microsoft, I mean it’s an amazing company, Skype. If you look at the value that people are placing on other businesses in the major franchises on the internet today, you could argue that they got a great price for Skype!

Saul, just one last comment. I don’t know how much or how carefully you read that piece that I wrote for the Telegraph, but my main argument there was that, in Europe today, in the hi-tech space, there are many hubs. You’ve mentioned probably all of them going from London to Scandinavia, to the South, and then to the East. But I feel personally there’s a need for a another move by European funders and entrepreneurs to work more actively to bring Europe together as a single platform, to make it less of a series of islands, and more of a unified high-tech startup platform.

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Yeah, with Seedcamp, obviously, that was the motivation behind it, and we’re doing okay. Brent Hoberman does something called The Founders Forum in London, which is spreading it’s wings more and more every year. There’s the Founders event in Dublin, that’s happening annually now. Loic does LeWeb, obviously, in Paris. The Next Web is becoming a major event. Actually, there is a lot going on, and on some level you run the risk of too much going on and then diluting the coherence and the potential for aggregating people. Honestly, if I was going to be critical about one thing in Europe versus the US, Europeans still do not like to share as much and are not as open to really collaborating in the same way that they are in the US. It’s actually something we’ve got to get over if we don’t want to slow down our progress. So I would encourage people to get behind the initiatives that are there, rather than try to start too many new ones. Try getting involved in those initiatives if you feel that they are missing certain things, or missing certain areas, or missing certain sectors. I’d rather try to change some of those things from within, unless there are glaring holes that we’re missing. But I actually think there’s quite a lot going on in Europe right now.

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Skype call, July 2015.

Saul, tell me a little bit more about your reasons for leaving Index – how is what you will be doing now going to be different? You wrote in your blog post about focusing on early-stage companies, but wasn’t that a large part of what you did with Index Ventures? There are two key differences. One is that, going forward, I’m going to be pretty much exclusively focused on seed. At Index, seed was a big part of what we were doing and an area that both Robin9 and I helped to build out. But as you know, Index does seed, early-stage and also later-stage investments. The Index portfolio covers companies in 39 cities and 20 countries. For me, the primary focus going forward is going to be seed and starting businesses. And also, the geographic focus its going to be seed in London. We will, by exception, look at seed opportunities in all the other places around the world where we have developed a network: Berlin, Tel Aviv, Stockholm, LA, San Francisco, New York etc. There could be interesting opportunities there, but London is a logical second or third home for us. London has gotten to a point now where there is a volume of really, really interesting companies getting started. I mean, it’s been great in the last fifteen years. I think other than the Bay Area and China, more billion-dollar companies have been born in London in the last 10 years than anywhere else. But I think it’s only just starting – actually the pace, the level of innovation, it’s just accelerating. So my focus is really seed, it’s really London and it’s also not just about investing in these inception-stage businesses. It’s also, as I’ve been able to do with Kano in the last few years, starting new businesses as well. While it’s been amazing that Index has given me the room to start new businesses in the last eight years, Seedcamp being the first and Kano the second, it’s not a core focus for a Tier 1 venture fund.

Has Robin’s leaving been along the same intentions and focus? Yeah, exactly. We are going to be doing effectively the same seed fund that we’ve been working on for 16 years. We are going to continue doing that, but now more

Robin Klein, Saul’s father, left Index Ventures at the same time as Saul. The Accelerator Group has9 been Saul and Robin Klein’s angel investment vehicle since 1995.

226 13. Seedcamp, Index Ventures, The Accelerator Group • Saul Klein formally and with more focus and full time. It’s really kind of business as usual but with more focus.

Does that mean that you are going to build a somewhat larger team within The Accelerator Group? Yeah, the plan is to build a small team to work with us. It’s a seed fund and it always was. It’ll be super focused on London and on being the first institutional investor into businesses. You know, as we’ve done over the years with Moo, Mind Candy, Transferwise, JustPark, Zoopla and others.

In the role of a co-founder at Kano – and perhaps some of the other companies – how operational are you going to be in terms of not just being an investor but in terms of going back to your “entrepreneurial spirit”? Look, at least as related to Kano and to Seedcamp and to other new businesses that I’m working on, I’m always trying to do these things with other people. In the case of Seedcamp it was with Reshma, and in the case of Kano it was with Yonatan and Alex. My contribution is trying to help get things off the ground, help with the initial plan and product and financing and team building. And as the team and the product and the company evolve, it becomes less important for me to

In the first fund, it was primarily myself and Reshma; in the second fund, Carlos be particularly hands on. Certainly the evolution of my role at Seedcamp was . . . joined and I played a smaller role; and in the third fund, I played pretty much no role in terms of raising the funds. But I’m obviously still there and available to the guys and will also play a supporting role in the fourth fund. With Kano, three years ago, when we started, I was very much involved. I put Alex and Yonatan together and helped to provide funding for the first 200 kits. I introduced them to investors, etc., etc. Now it’s a company of over 30 people and they just raised a 15-million-dollar series A round. This is something that Alex, Yonatan and Tom, the COO that we hired last summer, have really been doing with my support, but I wouldn’t say that I’m operational at all. I haven’t been for at least a year or so. I always feel like I’m trying make myself redundant.

Apparently, you are pretty good at it! Saul, Kano reminds me in a way of a couple of other projects in companies that I would call, say, “independent producers of hardware products.” I’m referring to the Jolla phone from Finland and also the Fairphone. Are you familiar with Fairphone – do you know the founder, Bas van Abel?

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I don’t know him, but I know that the Fairphone is a phone that is made from, like, conflict-free raw materials

Exactly, yeah. Yeah, very cool concept. In Amsterdam or something?

Yeah they are based in Amsterdam, exactly. I’ve seen the site and read a bit about them, but I’m not quite familiar with them.

You might say, “who needs another phone?” However, they sold sixty thousand of them, and you guys sold forty thousand or more of your kits. So do you feel there is kind of a similarity in terms of the projects or the products being built, existing products being built in a different way with a different approach and gaining some popularity as independent companies in the same space with giant corporations? I don’t know about the Finnish business, but I think Fairphone is doing something very interesting. It’s taking a sort of, as you say, standard mass-market product and saying, people (or at least some people) are going to care that the raw materials are ethically sourced. You see that movement being true in food, in fashion, in make-up etc. So there is no reason why on some level there isn’t going to be a market for ethically sourced electronics.

No,With of Kano, course actually, not; I weunderstand are not trying that. to build a cheap computer . . . the most celebrated industrial design in technology – not just Apple, but Nest – Most of the technology that we have, smartphones, tablets, computers . . . in fact, a lot of it is around hardware and software – but particularly hardware – that is really closed and inaccessible. It’s all about what it does for you as a consumer, and our hypothesis with Kano is that there are people around the world, potentially hundreds of millions of people around the world, who want a more open, creative experience of technology and want to be able to see how technology works. They want to assemble it, they want to disassemble it, they want to remix it. It’s technology more for the skateboard generation than for the turtleneck generation!

An interesting part of the fairphone approach is that they are also trying to make the phone as easy to assemble and repair by yourself as they can.

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Cool, I didn’t know that! I’ve been following the project from a distance, and I’ve been interested in the concept. I didn’t realized it was more than raw materials, so that’s very cool.

You’ve also been investing personally in a couple of startups, aside from Index –Thington, for example. You have a pretty amazing group of investors there – Eric Wahlforss, Joi Ito, Loic Le Meur, Ray Ozzie and others. How involved are you with that, and how excited are you about that project? For me, this is a good example of inception investing. What made me excited about the project was two things. One, Matt Biddulph, who was the CTO at Dopplr, is one of the best product people that I’ve ever worked with. The other one was Marko Ahtisaari, who was also CEO at Dopplr and went on to run design at Nokia. Marko was the angel investor who put the syndicate together. I mean, with Marko and Matt involved, I would’ve pretty much invested in anything they wanted me to. It’s a really cool software vision of how people will take control of and interact with all of the 50 billion devices that are going to be around us in the next five years. They are not only smart people, but they are fishing in a really big ocean. That kind of ticks all the boxes for me for that kind of foundation, inception stage investing.

Any other companies that you are currently very excited about? with Jay Bregman, the guy that started Hailo. We invested in a company that he Well, it’s always hard to single out businesses . . . I’m really excited about working started called Verifly, which is, if you like, Verisign for drones. If you remember, as I do, ‘95 and the beginning of the internet, people were really afraid of e-commerce because they didn’t want to give their credit cards to a web site. They didn’t know if it was Amazon or Walmart or if it was someone else. Then Verisign stepped in and created an infrastructure which allowed people to identify and authenticate third parties on the internet. And if you think about drones and the drone economy or unmanned autonomous vehicles – how do you know what that drone is, who sent it and what it does?

I understand. For every useful application that drone is going to undertake, from aerial photography to delivering parcels, there’s going to have to be an infrastructure for identity and authentication. Again – this is an amazing entrepreneur and I think it

229 THE EUROPEAN STARTUP REVOLUTION is a huge idea. Obviously, it’s incredibly early, but those are the kind of things that are exciting.

Is this a personal investment or from The Accelerator Group or Index? It’s Accelerator Group, both of them.

Let me ask you about your article in the Financial Times10 and about public policy in the UK and in Europe? The area of policy that I have been interested in is around the policy of D5. D5 is an organization made up currently of the UK, Estonia, Israel, New Zealand and South Korea – a sort of coalition of like-minded digital technology governments who share a common vision for open data, for coding being part of the curriculum, for governments making sure at least 25% of procurement is coming from small businesses, particularly around technology, to stimulate innovation. So I think that is a really interesting area where governments, taking a proactive role to use the assets or the policy-making leverage or the purchasing power they have to make data available which creates a huge amount of innovation around services. I mean, things like City Mapper couldn’t really exist without open data. Obviously, I think coding being part of the curriculum is a good idea. Kano and Codecademy and others are riding that wave. The whole notion of government, which is one of the biggest buyers of technology, not just buying from big companies like IBM and Accenture but buying from small companies is great for startups. So all of that is really good, and I’ll continue to be interested in and support that. There is a really interesting emerging debate that’s starting to happen between public policy makers, cities and the sharing economy. I think Hillary Clinton mentioned it in a speech yesterday, that it’s time to start thinking about how government and the sharing economy may work and whether regulation or legislation is required. There is a huge opportunity for policy makers and tech companies, particularly the ones that are building these mega platforms like Uber and Airbnb and others – to think much more constructively and creatively about how they can work together. Historically, both tech companies and governments have taken much more sort of an attitude of standoff to one another, and I think if there was more constructive, collaborative dialogue, there could be really amazing outcomes!

“We hunt unicorns but must also value technology zebras,” FT.com, February 24, 2015. 10

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Have you been actively involved with the D5 processes and discussions? Yeah, some, because I’ve been working over the last few years as the UK’s tech envoy to Israel, and the UK and Israel are obviously both D5 members. And then I’ve worked quite a bit with the guys in the UK. Liam Maxwell, who is the UK’s CTO, has been the driving force behind D5. So I’ve definitely been close to these discussions and really support them, but I think these are the five countries right now that are really role models in different ways. They’ve got some very advanced thinking around technology and the role that it plays within society.

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14 Supercell Ilkka Paananen THE EUROPEAN STARTUP REVOLUTION

The world was a different place back in 2011, when Ilkka and his team of highly experienced game developers joined forces to create the ultimate new generation game – Gunshine. It was to be a unique Flash-based desktop game, free to play, with highly addictive ways to pull in your friends via Facebook and other social networks. The team commanded a lot of respect in the gaming industry, including that of potential investors, so they were able to raise a significant investment round early on – twelve million dollars from “Tier-1” funds including Accel Partners. Gunshine became popular . . . but not quite as popular as the team had hoped for. In the second part of this chapter, Ilkka and I talked about what the Supercell team did next, having realized that the world had indeed changed and that mobile gaming was the way to go.

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Skype call, October 2011

Ilkka, I wanted to start with a few questions about your earlier career. You had a company before Digital Chocolate – was that Sumea? Yes, correct.

How did it get started? Was this your first venture? It was my first venture. I basically joined the Sumea team just fresh out of university, and it was almost kind of a coincidence. I just happened to know a few guys who were in the midst of starting a company back in the year 2000. It was the summer of 2000, and I happened to start talking to those guys. I got really interested in what they were about to start, and all of these guys, they are very technical, game designers and developers at heart, and they were not really that interested in, you know, any kind of business issue or anything like that. So I offered to join the group, and since I was the only one who was interested in the business side of things, I became the CEO of the company. And that’s how I got started.

And your university was technical or business? Your academic background? It was the Helsinki University of Technology but I actually had a business major. It’s a technical university, but there was a small business major group, and I was part of it. Officially, it was called industrial management, that’s the name of the department.

Apparently, Sumea grew very nicely for those three, four years. Absolutely! If you think about that timing – on one hand it was really, really bad, because right after we established the company – I think in the next four or five

On the other hand, it was really good for us because it wiped out all of the months – basically the dot-com bubble burst. It was impossible to get funding . . . competition, and actually we basically had to kind of study the basics of the business. I mean, we had to get the cash flow positive statement, and we kind of had to work our way out. We had two really difficult years in the start, because we had to do work for hire and that kind of stuff just to be able to pay the rent. On the other hand, it made the core team very tight, and it kind of taught us the value of money and those kinds of basic things that are good to understand.

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So we had to do work for hire to get some cash flow in, and on the side we were developing our own IP, because we really believed that at some point, this new wave of mobile phones would come out and you’d have, you know, color screens and you’d be able to download stuff to them. Even though there were really no phones like that out in the market and nobody believed in any of those things. It was very new, you know, developing a few games on the side and doing work for hire to finance those. I was basically using student tickets to fly around Europe and trying to make deals with telecom operators in Europe. It actually got to the stage where, by the end of 2002, we had a direct distribution agreement with almost every single major operator in Europe, so we actually covered all of Europe. It was a really fragmented market at the time, so we had to close a hundred distribution agreements with the local telecom operators. As it happened, around Christmas of 2002, the first Java-enabled color screen phones came on the market, and people started to buy those phones like crazy. We were one of the few guys who had games ready for those phones, and we had all the distribution agreements in place. So all of a sudden, the business started to grow a lot. We had revenue-sharing agreements with the telecom operators, so every single time a consumer downloaded our game, we got basically 50% of whatever the consumer paid. The business scaled really, really well, and in the middle of 2003, we all of a sudden realized – “Hey, we have this really great, great business that is scaling really well, it’s extremely profitable and it’s growing like crazy!” And then, if I went fast forward to the beginning of 2004, we had like 40 people working for us and the business was still very profitable and we hadn’t raised any venture capital money whatsoever. We had just established an office in the US, and everything was looking really, really good. We were one of the top players in Europe, and then we started thinking, “What’s the next step? How do we take this business to the next level?” At that time we really didn’t have any good venture capitalists in Finland who understood the consumer entertainment business. We were thinking that, for us to take the business to the next level, we should raise some money – actually, a lot of money! Especially to be able to expand in the US. We had some difficulties

– something like eight or ten million Euros. It turned out that in Finland it was trying to work it out from Europe . . . We were basically trying to raise a big round impossible to raise such an amount. In those days, US and European venture capitalists were not that interested in investing in Finland. Nowadays, the situation is different, but at that time that was the situation. Our thinking was, “Ok, we can’t

236 14. Supercell • Ilkka Paananen really raise enough money and this whole business will consolidate in a few years. We need to get bigger, so one way to do it is to look for acquisition opportunities, to get acquired or to merge with somebody. We actually hired a few investment bankers to look for opportunities. Digital Chocolate looked like a perfect opportunity for us. I mean, we were young guys at the time, and they had a very credible management, so it complemented us nicely. It was great having Trip Hawkins as a CEO – he’s the founder of Electronic Arts and still has a great name in the in- and at that time it really didn’t get any better in terms of venture capital. From a dustry . . . As two of their investors they had Sequoia Capital and Kleiner Perkins, founders perspective, we were also able to get some cash off the table, reduce our risk, and then be part of something bigger. So we made the deal in 2004, and then if I fast forward, the next two years were like really crazy. I became the managing director for Europe at Digital Chocolate, and I grew that organization from 40 people to 200 people in two years. That was an amazing time. And it was mostly organic growth. We did only one acquisition on the way. It was kind of a great school of entrepreneurship for myself, even though we had sold the company. When we did the deal I thought, “Ok, I’m gonna spend a few years here.” But I actually ended up spending six years at Digital Chocolate because I got promoted all the time. The last four years I was president of the company, basically working as the right hand of the CEO, and I was managing our whole product organization, which consisted of studios in Silicon Valley, in Barcelona and in Helsinki. So that’s basically my career. Then I left in June 2010 and here I am now!

Fantastic! When you say it was like an entrepreneur school for you, I would say it was more like “learning by doing,” wouldn’t you? Definitely! Learning by doing and also learning from people who are more experienced than yourself. We had a hugely experienced management team, especially in the US. Especially with somebody like Trip Hawkins, you can learn so much from someone like that. The guy has taken two different companies public, and he’s just a fantastic entrepreneur. So yeah, I was in a very lucky position, but I was able to learn from him as well.

Today it’s Supercell and also Lifeline ventures? Yes. When I left Digital Chocolate, before I decided what to do next, I was contacted by these early-stage investors, this fund called Lifeline Ventures. It’s a very, very small

237 THE EUROPEAN STARTUP REVOLUTION fund with two general partners, and they asked if I would like to become a sort of a part-time partner, to look after some of the games stuff, and I was, of course, really interested. So that became something that I got involved in first, and then actually a little bit later I founded Supercell and then became the CEO of the company.

Regarding Supercell, looking at the web site, there’s a list of the team, and you’re listed not as one of the founders, but as one of the managers. So, that’s a little bit confusing to me . . . Well, it depends on how you look at it. I’m not the original founder of this company. The original founder is a guy called Mikko Kodisoja. He assembled a great team around him. I obviously knew most of these guys from my previous working life, and I was helping Mikko on the side when he started, raising funding and all that, but I very soon realized that this was a fantastic opportunity, and I wanted to get involved full time. So I was somehow involved from early on, but I wouldn’t call myself an original founder.

OK, so that makes it clear. But obviously a whole bunch of you had been together in Digital Chocolate and perhaps even with Sumea before that. Yes, that’s correct. Some people have been somewhere else in the meantime, but one of the strengths of the team was – and still is – that everybody had worked together before at some point in their lives. So in one way or another, everybody knew each other.

Your first product obviously is Gunshine. Yeah, correct.

And tell me a little bit about the growth. I see some really impressive numbers – the number of active players, the number of people who have registered . . . How has that been developing? The launch was done in a couple of phases. We launched the closed beta, I think, in mid-February of this year, we opened up the beta to everybody in early June. This is actually an exciting time for us because we are about to sort of “launch” the game officially and get out of beta next week. In the beta we had a little bit more – I mean, I think we currently have a little bit more than one million registered users, with roughly half a million unique monthly users, I think. We haven’t really promoted it aggressively, but obviously,

238 14. Supercell • Ilkka Paananen we’ll start to do so – actually, starting next week. We are really happy with the amount of beta users, and it’s been very valuable for us to test the game with such a large number of users. We’ve actually done a lot of changes to the game, modified the game based on what our community has told us, and of course what we’ve seen with the metrics of the game.

You say you haven’t promoted aggressively. Did all these people find out about the game just through various gaming portals and various online publications talking about gaming? And obviously, they’re inviting each other, because you have a strong social component, right? Yeah.

So how did people find out about this? It’s a combination. The vast majority come from the sources that you just mentioned – those are exactly the main two things. But then of course we’ve done some paid advertising, just to test out different channels. What really makes Gunshine different from, for example, Facebook games is that it works both inside Facebook and outside Facebook. Basically the thing is that you don’t need to have a Facebook account to be able to play. That makes a very big difference compared to the current generation of Facebook games. We’ve been doing some minor testing in terms of customer acquisition outside the Facebook channels. You know – just something like a very small test advertising stuff – and then also, obviously, we’ve tried some advertising on Facebook as well. But it’s really been very minor.

Essentially, your first round of funding for Supercell was quite early on, right? Yes. The company was started with the founders putting in some of their own money. You know – working for free and using some of their own savings. We raised a seed round of financing in November, which was exactly the time when I became the CEO. I was helping Mikko to raise the round. I was obviously talking to all of these investors and everybody was telling me that they would be even more interested if I joined full time, and already at that time I kind of had convinced myself that this is the thing to do, so it was a good match. So we raised the seed round in November, and at that time we got these guys from London Venture Partners and Initial Capital and others – more of the angel type of investors. That was followed by the bigger series A round in May, which was led by Accel.

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Moving back to the seed round . . . When you say “seed round,” in the startup environment and in the community, a seed round is often something that you refer to coming from one of the accelerators, going to, I don’t know, fifty thousand euro or a hundred thousand euro or something like that. But here, already in the seed round you have four quite serious venture investors coming in. So, it looks like quite a serious seed round at that stage. It’s definitively one of the more sizeable seed rounds – it’s even a sizeable seed round by Silicon Valley standards. It would be at the higher end of the scale. We actually haven’t disclosed the size of the round. It was still within the ball park of a seed round, but yeah, you’re right, it wasn’t your typical European very small seed round.

Tell me about the investors. Obviously, Lifeline is the fund that you’ve already mentioned, and you’re now part of that fund. London Venture Partners, in my understanding, is also quite gaming focused, is that correct? Yes, that’s absolutely correct.

And the other guys, Initial Capital and Cerval Investments? Initial Capital was founded, I think, by a guy called Shukri Shammas. He was one of co-founders of Playfish, which obviously made it very interesting to us. And then the others, they have some very experienced people in the funds as well. What they collected most of the money, if not all of the money, from the business angel else could I say about that . . . They are early-stage funds – I’m not sure, but I think community.

Just a few months later, you moved into this very widely publicized series A with Accel leading. Yes, correct. First of all, as you know, the golden rule of fundraising is that you raise more money than you actually need, or than you think you need, and it’s always good to be raising money when you don’t absolutely need it. The really good thing about Supercell is that they never actually needed money! I mean, we’ve always taken care that the base is in such good shape that there will always be a long runway before we run out of money. After we got the beta out, two things happenned. First of all, and this was in February, we received a huge amount of attention from the venture capital community and all kinds of other people regarding the game, because we are doing something completely different.

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I mean, nobody really had seen a game like that yet, done on flash, in the existing browser. Then, on top of that, we started to see some quite strong metrics from the game itself. Even though it was really early – it was a closed beta – we were starting to see some quite encouraging metrics on the level of engagement and that kind of stuff. And then, you know, one thing led to another, and we started to seriously fact consider raising a bigger round of financing sooner rather than later. With consider . . . Hey – since everything is going so well, maybe we should actually in that, we would be able to scale the business more aggressively and start to do more products earlier. It felt like we were on the right track, anyway, so why not just accelerate the progress a little bit. We started to talk with a few venture capitalists who had the strongest interest. Out of all those, Accel was the clear winner and by far the best VC. Those guys have, first of all, an amazing track record, they know our domain extremely, extremely well and they were able to provide us with some much needed connections to companies like Facebook, etc. So in the end, it was quite an easy choice to pick them once we had decided that, yeah, we wanted to do one more round of financing.

Obviously, some of your previous investors also participated in this round, right? Yes, yes. London Venture Partners participated as well, and we got one new angel involved, Klaas Kersting, who is the founder of Gameforge.

Just quickly, what’s the headcount in Supercell now? 45 people at the moment.

And presumably you will be growing that, due to the funding? Yes. We’ve already grown it quite a bit. But yeah, we are on a fairly aggressive growth curve.

And this is all in Helsinki? Actually, we are in Helsinki and in a place called Kajaani, which is 600 km north of Helsinki, in Finland. We have a studio of ten people in Kajaani as well.

I see . . . So those are really arctic guys there? Yeah, exactly.

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It’s interesting to see Accel really being active in the Finnish gaming market. I mean, with you guys and with Rovio. They are probably one of the major players now in this particular segment in Finland. Absolutely! I agree, and I think it’s a really, really good thing for the Finnish startup community.

Just a few technical questions . . . It’s a Flash-based game, obviously. What about some of the discussions that are going on now about the future of Flash vs HTML5 and perhaps some other technologies? We are following those discussions very closely. From a developer’s perspective, you have to be ready for almost anything. Your technology base fundamentally has to be able to support both of those. Our view is that Flash will be here for quite some time. There’s such a huge installed base of Flash – just Zynga alone, all two years. We’ve actually started to do some development for the next version of their social games . . . They will probably maintain a Flash base for at least one or Flash, version eleven. It’s also called “Molehill” or “Stage 3D,” which brings stuff like hardware accelerated 3D and those kinds of things. We don’t really know where the world is going, and we don’t even pretend to know. Our approach is that we are prepared for everything. Likewise, we are starting to look at HTML5 and the WebGL extension of that as well. But from our perspective, HTML5 isn’t the technology of today It’s more suitable right now for more casual, simpler games. We want to provide a richer gaming experience, and in our view, HTML5 isn’t really ready for that right now.

Do you have any feeling for when it might be ready? Are we talking one year or are we talking further in the future? I would say two to perhaps three years. But who knows, these things change so incredibly quickly these days!

Tell me a little bit about the revenue model in the Gunshine game itself. Obviously, it’s free to play, but can people perhaps buy virtual goods within the game to get better? Exactly. That’s a pretty standard model these days – in most of the free-to-play games, what you do is you sell a currency, so the player can earn the “soft currency” or “in-game currency” by playing the game and being a good gamer. And then there’s the so-called “hard currency,” which is when you buy that with real money.

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There’s an issue of striking the balance between those two. Most of the items should be able to be bought with one or actually with both currencies, so that the game is considered to be fair for everybody. The people who are not willing to spend money, they don’t have to – they just spend enough time and invest their skill in the game. But then there’s always this group of people who perhaps don’t have that much time to spend in the game, but want to compensate for the lack of time: they will just use some real money, and that of course opens up the business opportunity for us to monetize. We view the free-to-play model as a kind of a model where ideally everybody wins. So first of all, gamers can get great quality games for free, and basically, the beauty of the model is that everybody can pay as much or as little as they want to. You can choose. Of course, the great games can make a lot of money because there is always that smaller group of people who are willing to spend quite a bit of money, real money, in the game.

And are you thinking about anything else? Like, you know, in game advertising or anything like that? Not at the moment, really. I mean, we prefer to keep the revenue quite simple. The way we see it, if a game adds a lot of value to the users, they will be willing to spend money on it. So far, we’ve decided not to take the risk of advertising.

Do you have an idea, even roughly, when the game might break even, once you start the official launch? Well, definitely the goal is to break even in just a couple of months.

One of the assets that you’re really looking to develop is not just the game itself, but the backend. Yeah.

Can you tell me a little bit more? what is it specifically about this backend technology or IP? How do you think it will give you a competitive advantage? Of course – as much as you’re willing to talk about, but I’m sure you can give me kind of a general idea of where you want to go with that. It is actually not only about the backend. It’s really a comprehensive technology suite, sort of a platform, both on the server side and also the client side. It’s basically just a set of tools and a platform on top of which you can very efficiently create new, massively multiplayer online games, and you can also very efficiently

243 THE EUROPEAN STARTUP REVOLUTION create new content for those games. On top of that it supports multiple platforms, so it supports Flash, IOS, and Android as well.

Well, as Android user, I’m happy to hear that. Great!

So, we should be expecting more titles from you guys? Absolutely. We’re actually working on three new titles at the moment and hoping to get at least one of those publicly out by the end of this year. We’ll definitely have at least four titles live in total by the end of Q1 of next year.

Any data on the geographic distribution of your users. Is it just evenly spread out over different continents and countries, or there are any particular geographies that have more enthusiastically joined this game? Well, I would say that there are a couple of major territories for us. So the US and Canada are definitely a big one; Germany is another really big one; then I would say the rest of the “more-English-speaking” territories in Europe: the Nordic countries and the UK. And there actually is a very fanatic community in Turkey, and then I think there’s another one in Indonesia. So those would be kind of the biggest countries for us.

Any reasons for why those countries? I’m sure you haven’t actively promoted it in any geographies more than any others. Well, I think that English geography explains a lot, since it’s only in English.

I was referring more to those that are not natively English speaking. Yeah, well it’s a great question, you know! I actually don’t know. We’ve talked to a few guys about this who know this space well, and all they had to say was that it’s always hard to predict in which countries you find success. So to be honest – I don’t know!

Ok. Perhaps you’ll invest some of your time to find out? Yes, yes of course! You know, usually how this business works is, you can put your game out as early as possible, and you just see who it appeals to, and then you just try to make the game better for those specific people and try to target those people through your marketing.

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Free-to-play games, or in-browser games, are considered somewhat controversial among hard-core gamers. Are you targeting, in any sense, more of the hard-core guys or rather the casual users – or do you not care about that at all? I would say that we are more after the casual market. It’s a bigger market. Sometimes it’s a little bit tricky, as you say, to please this super hard-core market, and usually those kinds of people don’t really like the free-to-play model, as you said. They still prefer, I think, the old-school model where you pay a fixed price and that’s it.

Regarding the last investment that we talked about, the series A . . . Are there any specific uses for those funds, other than the usual, you know, we will use this money to grow, we need to develop our teams . . . Are there any particular areas of investment that you feel are critical for which this particular series will be really, really key to you? Not really. For us it’s the typical situation – we want to strengthen the team, the reasons why we wanted to get Accel involved – is that we will set up an office in game, the advertising . . . One of the things we are working on – one of the primary the US. We will open up an office in Silicon Valley early next year.

Ilkka, you’re also active in the entrepreneurial scene, supporting new startups, helping or mentoring through various incubators and initiatives. Is that right? Yes, that’s correct.

A lot of what we’ve heard from Finland and from the other northern countries – but especially Finland – has been about gaming. Would you say that gaming in particular is something that the Finnish developer community and the startup community is really specifically interested in? Is gaming becoming a kind of specialty for Finland? I would say so. The funny thing is that it has been a specialty for the last ten years, but it has never sort of broken through, because lots of Finnish game developers creators of Habbo Hotel, that you could call Finnish companies. But most other have been . . . There are just very few firms, like Digital Chocolate, , or Sulake, the developers in Finland have been basically selling their games to international

245 THE EUROPEAN STARTUP REVOLUTION publishers, and those publishers, of course, take most of the credit and the profits. For this reason, the Finnish games industry remains quite small in terms of financial leverage. But now that we live in this new era of digital distribution and there are possible to do your own game and go directly to the end user. Needless to say, the all these democratic app stores and Facebook and everything . . . Now it’s actually success of Rovio and Angry Birds has had a huge impact, for a couple of reasons. First of all, Angry Birds proved how big you can get if you get it right. Also, it raised the bar for everybody else in Finland! It’s just great – people are not satisfied with just small things anymore. Finally, which is very important, the whole Angry Birds

Suchphenomenon as Accel? has attracted some venture capitalists to invest in Finland as well . . . Such as Accel. So I’m actually quite optimistic about the future prospects of the Finnish gaming industry. I think you will see more successes coming from Finland in the next few years.

Fantastic! You guys also have traditional strong connections to the Estonians? Yeah.

I know a couple of guys there, and when we talk about the Baltic countries, I ask them “How well do you know the people in the Latvian and Lithuanian startup communities?” The comments are usually, “Well you know, actually, we don’t know them that well, but we communicate much more closely with our Finnish neighbors.” So there seems to be a really strong relationship between the two countries. There’s always a good relationship with those guys. I think it could be even better. We are using a company from Estonia as a subcontractor, and I’ve been extremely satisfied with that cooperation. Some guys from Estonia come to Finnish startup events quite regularly, which is great.

I spoke with Kristian Segerstrale recently about Nokia and the huge problems and troubles there. His comment was, “No, actually, it’s really great because now many talented people will be leaving Nokia and starting their own companies and startups!” What’s your view of that? I completely agree with Kristian on that. I absolutely agree. Of course it’s very tragic what’s happening with jobs for some people, and it’s sad to see such a great

246 14. Supercell • Ilkka Paananen company going through such difficult stages. But still, I have to say, like Kristian, from the Finnish startup community point of view it’s probably a net positive.

When you talked about your first company, you mentioned that, back in 2000, 2001 etc,, you were actually doing mobile games. Yeah.

Well, now it’s 2011, and the mobile platforms have really grown up since then. Yeah.

But here you are doing browser games and not mobile games! Well actually, mobile is a very big part of our plan as well. We just happened to start with the web browser because that instantly gives us the widest reach, but you won’t have to wait for too long to see mobile stuff from us as well.

Can we talk a bit about your future plans in a broad brush – how do you see Supercell and also Lifeline developing over the next couple of years? For Supercell, we clearly want to be number one in what we call the next generation of online gaming. We are big, big believers in games that are first of all very accessible, I mean available for all the mass market platforms like the iPads, iPhones, Android phones, tablets and web browsers. We believe that we can take the gaming experience on those kinds of casual platforms to a whole new level. Then you start to do truly social games, and for us, truly social doesn’t mean that you’re growing your farm, asking people to send you resources, but actually playing together with your friends. And we think there’s gonna be a category of games like that, and we want to be the number one in that category globally, so that’s the plan for Supercell. For Lifeline, I think our big dream is to help our entrepreneurs become huge successes. Our goal is for the next big thing like Facebook or Spotify or Skype – one of those hugely successful firms – to actually be born in Helsinki and not in Silicon Valley. That’s our dream. We want to help our people be successful!

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Skype call, August 2015

Ilkka mentioned in our first conversation that “mobile is a big part of our plans.” Little did I know at the time that Supercell’s new strategy was already well under way. The new strategy was expressed in two simple words – “Tablet first” – which over time morphed into “Mobile first.” The team was ready to throw Gunshine out the window and start anew. More precisely, they had already started, only Ilkka wasn’t prepared at the time to share all the details. On June 21, 2012, Supercell launched a new mobile game called Hay Day. Two months later, in August of that year, the company launched another mobile game, Clash of Clans. These two launches were followed by a third, Boom Beach, in 2014. Each of these games became enormously successful. So much so, in fact, that Supercell, with only (roughly) a hundred and fifty developers, is generating mind- blowing financial results. Revenues for fiscal 2014 were 1.7 billion dollars, with earnings of 565 million. To put this in perspective, with a reasonable projection of earnings growth, Supercell makes 2 million dollars of profit each day. In late 2013, the Japanese telecom and software giant Softbank paid 1.5 billion dollars for a fifty-one-percent stake in Supercell. In June of 2015, Softbank bought out the remaining investors in the company, which had raised 142 million dollars prior to that, raising its ownership stake to 73.2 percent. In our follow-up conversation, Ilkka, now one of the most successful entrepreneurs of the global gaming industry, talked about the company culture, how they test and launch their hit games, and what the Softbank relationship means for the long term future of Supercell.

248 14. Supercell • Ilkka Paananen

Followup Skype call – August 2015

Ilkka, The last time we talked was in 2011, and you guys were really excited about Gunshine. Ha ha.

… and obviously, a few things have changed since then. I wanted to start this second part of our discussion by talking about people. In all of your interviews you have always emphasized how creating the best teams is the number one priority for Supercell. Correct.

How do you find those teams? You mentioned once that you had, or maybe still have, a relatively high turnover. Who makes those hiring and firing decisions? We try to push as much responsibility as possible to the team. Ultimately, it’s whoever is leading that team. I mean, nothing much has changed about the basic philosophy since we last spoke. Everything else has changed, but we are still all about people, and we are still about small and independent teams, so these teams are operating very independently, and you can almost think of them as being kind of small companies inside the slightly bigger company Supercell. Ultimately, it’s the teams and ultimately the team leaders who make those calls.

Ok, so it’s not really your decision, and you don’t have an HR department. We still don’t have an HR department. Of course, I try to help the teams in any way I can, but it really should be the teams who drive these decisions.

That’s not just “ideally”, that’s how it works in practice at Supercell? Yeah. That’s a really, really big part of the culture.

Tell me about intuition and creativity vs. data driven and metrics. Obviously, creating games is a very creative thing. On the other hand, in technology and startups, everybody is looking at data very closely. You guys distribute KPI reports to your whole team each day; so how does intuition and creativity blend and balance out with the need to relentlessly look at the numbers and data?

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For us, metrics are just there to validate whether we are right or wrong about something. Great metrics follow great work. That’s a long way of saying it’s all about creativity and intuition. Gaming is a form of art; it’s not a form of science. So, for us, specifically and very consciously, we wanted to put creative people and their creative minds front and center in everything that we do. We create something that we are proud of and something that we think is great, but then we put it out for all the players to try, and the players are the ultimate judges – they say if the thing works or not. You can almost think of it as internal product development, like two different phases, and those two different phases have two different kinds of people who have control. So first, we are developing something, and the control belongs to the developers themselves. They develop something they think is great and something they can be proud of. The only entity who can stop or kill the game at that point are really the developers themselves. But if they are happy with the result, then they put the game out for a beta test, and we use Canada as our beta test market. They put the game out for players in Canada to try. At that point, the control and power shifts from the developers to the players. They will actually be observing the metrics very closely. It’s not that important what the players say. What’s really important is how they behave. We look at retention and engagement metrics at that point, and obviously, if the game is great, that will show up in those metrics, and if the metrics are great, then we will proceed and launch the game globally. But if it isn’t. then they will just kill the game and we’ll start all over. It all begins with creativity and intuition, and then we just use metrics to validate if we’ve been right or wrong about the intuition.

Since your pivot in focus to tablets and mobile gaming, have you launched any games globally that you later took down or killed? Are the three games that you have now the only ones that you’ve ever launched globally? Those three are the only ones that we’ve ever launched globally. We had two games in beta test, but we weren’t happy enough about the results, so we killed those games.

So you’ve never had a “New Coke” moment, when you launch something that you’re very confident about globally and then you figure out that you’ve made a mistake?

250 14. Supercell • Ilkka Paananen

No, no, that we’ve haven’t had. The reason is that we’ve always done these beta tests, and the bar is very, very high for us in terms of what we want to see from those tests. So if something meets our thresholds during the beta test, it’s quite likely that it will do well globally as well.

And it’s always Canada? It’s always Canada. In some cases it is also Australia. We want to test these games in English-speaking markets that are big enough, but not too big.

How far do you go with localization? How many language versions for each game do you have? We go very, very far. I think we have like around fifteen languages on average, per game. And from our perspective, even a great localization isn’t enough. It has to be perfect. As a Finnish player, it’s easy for me to understand the need for that. Sometimes as a console or PC gamer, I see games that have been localized in Finnish, which is of course a very small language, globally speaking.

Yes. Whenever I see a great localization or a perfect localization, it makes me really, really happy as a player. Sometimes I come across a very sloppy localization, and that’s irritating to see. In those cases, I always switch to English. So just based on that personal experience, whatever we do at Supercell, we always want to try for the best, best possible result and perfect quality. And we are actually trying to put as much attention into localization as we can.

How soon does Finnish come up in the localization? on the market size, and Finland is a relatively small market. Ha, ha . . . Unfortunately, it’s pretty late in the queue! Of course, we prioritize based So, patriotism does not come into effect, into play? No, no. In that case it doesn’t.

I’m just kidding! It comes into play with other things, but not with the localization.

I understand. I’m sure that you’ve heard about Prezi, the Hungarian company? Yeah, sure.

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They are also in the book. Speaking with them recently, they said the same thing. Unfortunately, the Hungarian version of Prezi is not very high on their priority list. Finnish and Hungarian are related languages, so I think it’s an interesting observation. Yes, it definitely is.

Do you feel that the Europeans are the leading group globally when it comes to gaming? There are other great regions as well. It depends a bit on the platform. If you look at the companies that have been coming up in the last couple of years, especially in mobile – quite a few of them have come not only from Europe but from the Nordic countries. King and Mojang (the makers of Minecraft) from Sweden, Rovio (Angry actually great to watch how the Nordic gaming community has been doing so well! Birds) and Supercell from Finland and so on . . . And it’s been really interesting and Replacing the former Nordic domination in telecoms and mobile technology. Ha ha! Well, as a member of the Nordic gaming community, it’s been great to watch!

In the early days, you received support from Tekes , is that correct? Oh, yes, that was crucial for us. When we started the company, we invested our personal savings, but then we also got a relatively big loan from Tekes that really helped us to get things started.

Government agencies often provide loans with attractive conditions such as soft loans, so if your project doesn’t work out then you really don’t to have pay everything back. Was this the case with your loan? The interest rate was low, and it wasn’t a personal loan. So, basically, you don’t lose your home.

The reason I’m asking is that I’m trying to address the culture in Europe of risk taking and how government public policy affects that. When the government is able to provide a loan and not take your house as collateral, that’s obviously being supportive of entrepreneurship. Yeah, absolutely. I think the key part there is that, if you can’t pay the loan back, it could happen that your company goes bankrupt, but still you can keep your personal life, so that is very important.

252 14. Supercell • Ilkka Paananen

I know that money is not a priority for you, but you are a very significant company in terms of revenue. I understand that your alignment with Softbank and Gung Ho is a very, very long-term, strategic thing. Reading your public comments about the long-term strategy of the company, it would sound very unlikely that you would want to do an IPO at any point in time, simply because of the strategic approach and the long-term vision of the company. How does that relate to your relationship with Softbank and the long-term orientation of the company vs. a possible exit for them? After all, they also have to invest responsibly and be responsible to their own shareholders. We chose SoftBank as a partner for two reasons – the long term and independence. SoftBank’s approach to investing is that they really trust the teams they invest in to run and operate the business on their own their own, and that is exactly what has happened. We’ve been running the business completely independently since the deal. I would almost say that the company has been more independent after the deal than it was before! So I really admire SoftBank’s approach in that regard. We wanted to get a shareholder who would be patient and as long-term thinking as possible, and they certainly are. You probably read the news. I think it was in May or June that they actually increased their stake in the company. They essentially bought out the rest of the financial investors that we had. I think that is proof of what I just said.

I’m sure that the deal was structured so that all the investors where very happy and were able to get back their investment in the company? The deal was really a win-win-win. It was a win for the investors, of course. They are VCs and need to return their funds at some point, and of course they needed liquidity. SoftBank is more of a long-term investor. I guess they were happy with our partnership. And it was a win for us as well, the employees, shareholders and founders. We absolutely love working with SoftBank. It makes life simpler from our perspective to have just one big shareholder and of course having a shareholder like SoftBank – it’s been great so far, it’s all good!

Going back briefly to our discussion of intuition vs. metrics and data-driven. Do you think that other gaming companies think like that and work like that too, or is this kind of thinking unique to Supercell? I would guess that most of the gaming companies think like that. If I just think fantastic about the people who I know around the gaming industry . . . Gaming is a 253 THE EUROPEAN STARTUP REVOLUTION industry to work in because there are so many creative and nice people in it. I would say that the majority of the people are probably thinking in exactly the same way.

You guys are massively profitable. You released the numbers on last year, and I’m sure you are continuing to grow this year. Your earnings for 2014 were more than five hundred million dollars! So, essentially, you have plenty of money to reinvest in the company, to pay the best people, etc. It would appear that you don’t really have a huge need for that massive investment in terms of financing the business? Of course, we are in a very lucky position. We have these three hit games which are all doing well. The company of course has done well financially. That enables us to think very long term because we don’t have to worry about the next quarter or the next year. We can truly think about the long, long, very long term, trying to think about how we can build a company that will last not just for the next few years, but for the next few decades. And in that sense, I do feel extremely lucky!

I totally understand that from the philosophical point of view, but from a business point of view, what are you even doing with all that money? You guys are probably accumulating cash much faster than you are spending it. Like I just said – the company has been financially very successful and also very profitable. That allows us to take bigger risks and make bigger investments in the things that we really, really believe in, in the long term especially. It also enables us to reward our own people who are behind this and who have built all this success very well, and also to reward the shareholders who have been part of the journey all along. I think it’s all about those three things, but the number one I thing that I care about is the long term.

You haven’t done any acquisitions as far as I know, have you? No, we haven’t.

It would seem that it wouldn’t fit with your philosophy and strategy, but have you considered any possible acquisitions? Never say never, of course, but we are such a small company, and the culture is so important to us. Let’s say that if the right team with a culture that fit ours came along, and they had a fantastic game, then of course it would be possible. We’ve

254 14. Supercell • Ilkka Paananen had a few such conversations, and quite a few people have come to us, and we are always very happy to talk with everybody in the industry and help others. It hasn’t happened yet. Maybe it will happen one day, I don’t know. We are a company that is always open to new ideas and meeting new people – that’s how we think about it.

Your famous two-word formulation of your strategy at that crucial point was “tablet first”. If you look at your users now, tablets vs handsets, how is that structured? Is it changing at all? Are more and more people starting to play on their phones, or is it still mostly iPads and Android tablets? It’s actually both. The line between what is a phone and what is a tablet is getting quite blurry.

Yes, that’s true. And you have things called “phablets” or whatever that are somewhere in between. Lots and lots of users play on multiple devices. They use their phone or they use their tablet, depending on the situation. Maybe you use your phone while you are mobile, but when you are at home sitting on your couch and want to use a bit bigger screen and get a bigger screen experience, at that point you use your tablet. We’ve started talking about “mobile first” instead of just “tablets first”.

Apart from wanting to create great games, can you be a bit more specific about what some of the next steps for Supercell are? I know that it may sound simple and maybe a bit high-level, but honestly, our most important goal, and how we think about let’s say the next 10 years, is that we want to be able to say, “Hey – Supercell is still the best place for all these best people to create the best games!” We want to make sure that we still have a great culture at the company and a great, great working environment where these people can be successful. I mean, we simply want to be the best job that these people have ever had. The way we see it, if we can stay true to that, and if we can accomplish that, then great things will follow, including great games that people will love, and obviously if that happens, then we can continue to be successful. The other thing that we talk a lot about internally – our dream is to create games and game brands that people will still remember and hopefully even play in dozens of years. Of course, from that perspective it’s still very early. We want to create a few – not many, but a few – globally well-known, successful gaming franchises or brands

255 THE EUROPEAN STARTUP REVOLUTION that players will love. The people who we look up to are for example Nintendo or Blizzard – they have been very successful in doing that. We would like to be able to do the same, but of course it’s still extremely early for us from that perspective.

Outside of Supercell products, what are your favorite games that you spend your free time on? What do you like to play the most? I play a lot of sports games. I’m a huge ice hockey fan, for example, so I play a lot of NHL Hockey. I also play FIFA. What’s great about those games is that we can play them with our friends, which I love. I play a lot of kids’ games with my kids. Those are the types of games I like to play which are not part of work.

256 15 LundXY Morten Lund THE EUROPEAN STARTUP REVOLUTION

Few entrepreneurs have founded and invested in as many companies as Morten Lund. His spectacular successes and disastrous failures have been lived out in public. He speaks about them often and eloquently. Morten’s early claim to fame came not so much from his own entrepreneurial ventures. He became famous as an early investor in Skype. His relationship with the legendary Skype founders, Zennström and Friis, was deeper than the financing he provided – he provided them with physical shelter, a place to live and work at a time when they were hounded by the music industry for their work on Kazaa, as Morten vividly describes in the first part of this chapter. Having made a lot of money in the digital world, Lund proceeded to lose it all on an “old economy” project – a free newspaper called Nyhedsavisen. He backed the venture with his personal capital, declared personal bankruptcy in 2009 and proclaimed he was out of bankruptcy in 2010. Our conversation took place in late 2011, when he was focused (if you can call it that) on two companies – Tradeshift, a digital platform for invoicing and supply- chain management, and Everbread, a big-data platform for the travel industry. As it turned out, by September of 2015, these two companies had very different trajectories.

258 15. LundXY • Morten Lund

Skype chat, November 2011

Morten, I know that you are up to many things and you wear a lot of hats. What have been your main things recently? Well, I’m involved with this company called Tradeshift, where we are building the next business enterprise software platform. I really think that we can deliver some extraordinary value to small businesses, medium businesses and large businesses. This will disrupt the whole ecosystem. Not disrupt for the sake of disruption, but because it makes a lot of sense. There’s a clear, clear need for what we intend to do. From the outside, the easy way to understand it is of course that we are doing invoicing, but it’s much, much more. There are so many processes that start with invoicing. All business starts and ends with a request for a proposal and ends with the invoice. So we started to think about this in a bigger manner.

The Tradeshift website is “free invoicing,” and that sounds like a nice thing to do, but apparently your intention with this project is a lot deeper and wider . . . Not that there is anything wrong with invoicing; we are very proud of delivering to the business world what is really needed. But then, of course, you have a platform underneath, where you can do a lot of stuff when you start to have this data. You can help people with structuring it.

What is the long-term vision for this? Is this “SAP in the cloud,” is it business process management? It’s something in between. It’s a platform. We will let everyone develop apps for this that are very broad or very niche. We will just provide the platform, an API, so that you can help people handle their invoices in whatever way. And we have also told the world that we are going to offer instant payment – it’s called “factoring.” That’s pretty cool, you know – you’ll be offered factoring instead of going to a meeting at the bank. Instead of having a meeting with this crazy guy at the bank and getting him to say that he thinks that this invoice is worth his makes sense. That’s big, you know, it’s big! banking money . . . We will just do it automatically and offer you a discount if it And it’s been growing pretty quickly?

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Oh, yeah! It has grown to 60,000 small businesses, just virally. That’s a lot in business, you know! So we are very proud of it and it will probably be the world’s biggest business network within nine months.

The Tradeshift website says, in many places on the home page, 100 percent free. So I guess the first question that comes to mind is, if this is all free, how do you guys make money? Let’s say that you want to work. You are doing an article for a trade magazine for Kuehne & Nagel. You know, the shipping company. Very soon, they will tell the all the suppliers that you can only use a Tradeshift invoice. Because they don’t want all this paper flying around.

OK. And it’s free. Today there are other solutions, but they’re not free. So you’re forcing a cost on all these suppliers to sign up and buy a licence and all that shit. Kuehne & Nagel can say to their 120,000 suppliers, “Hello guys, if you want payment, you can only invoice in this way.” You understand me so far?

Yes, absolutely. That’s a big asset for one of the largest shipping companies in the world. Very smart for them, it makes sense for them to streamline all invoicing through our platform, yeah?

Absolutely. Then, you do an article for them. You are very happy, you’ve written an article for a magazine, and then you deliver it, and then you want to send an invoice, but you’ve already warned your wife that there will be no summer holidays! Even though it’s a big project, they will only pay you in ninety days. So you have already told your them, but it will take forever before you get the money. Then, if it’s a company wife that it’s going to be hard . . . that you’re working hard and now you’ll invoice like Kuehne & Nagel, we have a banking facility in between that knows Kuehne & Nagel is a AAA-rated company. So we will offer you instant payment, so that you can get the money instantly, and we of course take a small bit of interest, but not the silly interest like you normally see. We’ll be competing with the banks. You think you would take that?

260 15. LundXY • Morten Lund

Yeah, sure. You think a lot of people would do it?

Sure! You think we’ll make money?

Yes. So, what are you saying is that, although your website says free online invoicing, you are actually in the finance business?

OK,Don’t now quote I’m me beginning on this . . . tobut understand we are building this the much world’s better. fucking biggest bank! Imagine what happens when you are trading derivatives. Imagine how many trades are actually happening and when they close those books there is a real guy sitting - body wants to connect with them. People will do apps so you can track what the prices there . . . and the software there is so bad. They also want to connect with it. Every of roses are and how much the invoice is or the price rise. Instead of going into SAP and finding the data and waiting for the data to get into SAP, you can just look at the data live, like a twitter feed! You can search your own invoices, you can set up your own rules, you can do all kinds of apps that will do some crazy shit. So I’m not worried about whether we will make money – I’m just worried about why all the others are charging a dollar for something that’s like an email. There’s no fucking cost to it! I love to be a pirate, you know. It makes me very happy. We will be disrupting a very interesting business line. I’m very proud of that. So that’s what I’m focusing on, but I’m also focusing on a travel company. We are restructuring how to get travel data, so that you don’t have to wait forever when you search for travel. It’s called Everbread. What’s also very interesting is that we’ve had fifty PhDs working on this forever, and now it actually works. I’m trying to get more into business software. Enterprise software in the cloud – it’s the most interesting thing right now because a lot of small business don’t even have an ERP system. But they would love to have a small system where they can do accounting and control their balance sheet. But you know, the biggest accounting system in the world is still called pen and paper.

Let’s just go back to Tradeshift for a few seconds. Do you see Tradeshift as developing frontend apps for accounting, or being more like a platform and motivating others to write the frontend and the apps in the cloud. I think you just answered your question.

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OK. We don’t have the capacity; we don’t have the old-school thinking that we should produce everything. We’ve opened up some amazing APIs so people can come and do all the things for themselves and make money from it – you know, we offer people access to use the platform. And we offer some other services.

Are you already partnering with applications developers? that you can hedge your currency. We have some of the biggest companies in the Yeah, yeah. The biggest banks . . . we have some people who want to forex apps so world doing apps already.

What about the startups that are doing cloud-based ERP? We will partner with them. We have the self-confidence to be the platform that people will turn to and use for handling this very important data which is called “your invoice.”

So you are the chairman at Tradeshift? Yeah. They did it in my basement, you know. They came to me, and they thought that I was crazy when I told them to do it in the cloud, and we did it together. So we really started literally in my basement, no bullshit. One year ago it was ten people, and now it’s 65.

I assume they are not in your basement anymore? Oh, no, no. They have swanky offices.

One year from today how many people will there be? I think three hundred. We are opening in San Francisco and we will be between two and three hundred. Hopefully it won’t be too many. I would like to do it like Dropbox, and only have like sixty people; that would be fantastic, but we can’t. When you are signing with the biggest companies in the world, they are just signing on a string, you know. We are creating enormous value.

Tell me about the geographic distribution of the company. Obviously, it’s based in Denmark, right? It’s based in London. We have a development office in Denmark, and we are opening in San Francisco, and of course we are thinking a lot about Asia – where to start. I have a very good relationship with the Singapore government.

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You’ve raised a lot of money! And we spend it, dude!

Regarding the last investment round – where is all the money going? Developers, people, investing in the platform. Salespeople and the platform. Sales

Soand you platform, are actually sales and not platform . . . using the investment money to fund the transactions themselves? No, we have partners for that. One day, we will probably take money and do it ourselves, but let’s not go deeper into that.

OK. Let’s switch for a moment to Everbread. With Tradeshift you’re the chairman, and with Everbread you’re the CEO. But from what I’m hearing from you, these are just formal titles, and you are involved in a similar way with both companies. Yeah, with Everbread I’m more running it. I’m cranking out the product. Amadeus and SABRE and those guys, the existing technology they’re using is not made for today’s world. It’s forty years old. The paradigm is changing. We want to be able to search, and we want to be able to combine low cost and old-school carriers. We want to be able to decide where we want to jump by. We want very special results. The airlines have a big interest in serving very targeted results to everyone under 25 who lives in Hungary. If they can target, I mean, if they can show some of their fares only to this group, then they can still sell some of the expensive business-class seats to the guy over 35 who owns a company. And never before in all history have there been targeted offers from an airline or travel agency. Look into your inbox; you’ve never had an offer that is just a little bit targeted just on you.

Yeah. That’s never happened because technology cannot crunch it, and of course, the social graphs are so new that you have to use a Google Plus or LinkedIn graph or the Facebook graph – then you can target people so hard. But you need to be able

We have the traveling salesman problem. If you have one jumpover when you fly to suck the data out, and you need to have the system so that you can calculate . . . to Copenhagen, the jumpover could be anywhere in the world. That’s a lot of math, and then we have all the taxes in the world. When the world is in crisis, taxes are

263 THE EUROPEAN STARTUP REVOLUTION changing all the time, and we fix the taxes on all these routes before we serve you the price. This is insanely boring and insanely complicated, but our guys in Bulgaria have solved it.

Did this get started in Bulgaria? Well, we have a development office there, but we are in London as well, and I’m working from Copenhagen with one guy, managing the business development and

Thethe company reason why and I’malso asking raising specificallyof course money . . . where it The got stuff initiated I do, you it is . . . know. I’m also from Eastern Europe, so it’s interesting to see Eastern European projects. Over the past year or two particularly, we’ve seen a rising number of very interesting startups coming from Central and Eastern Europe – has this been something that you’ve observed yourself? I think it’s a trend that I have seen for ten years. I started my antivirus company in obvious trend; you have super smart kids who have an urge to tell the world that Romania, in Bucharest, ten years ago. Skype was from Estonia . . . I think it’s a very they can do it as well, you know, why shouldn’t they be as good as anyone else? There’s no monopoly of good ideas in Silicon Valley!

Was Everbread the idea of the Bulgarian guys, or your idea – or did you come to it together?

It’s been a very painful process of two-and-a-half years. It’s been like having a They came to me, and then I found the cash. The company had to be restarted . . . toothache.

How did they get to know you? Did they just look you up on the web, or did you meet somewhere? I think they searched online for the craziest motherfucker on Earth, and then they found me.

Oh, OK. So if I do a Google search, you will came up first as the result? I’m sure (laughs).

Morten, let’s go back a little bit in history. What where some of your first projects? You’re best known for your involvement with Skype at an early stage. Yeah.

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How did that happen? How did you get involved with Skype? Well, I had been working with Niklas and Janus11 before, helping them out with some business development for Kazaa and some other projects while I had my own incubator. They were broke, and they were being hunted by the whole record industry. I paid for their apartments because I was rich – I had already sold my consulting company.

They were being hunted by the record industry? Because of Kazaa? They were being hunted in a way that you can’t imagine.

And so, you were like their first supporter? Yeah, I was. I was paying for their apartment because they didn’t have any money. We started talking about it, but like all other projects, Skype was not Voice over IP to begin with, it was a WiFi network idea. It was called “Skyper.” And then it didn’t really work, so the project was changed. Someone came up with the idea to make it a very simple and clean way of using IP telephony. Putting in a good voice codec, doing it simple. I didn’t really believe in it. I liked the idea, but I didn’t want to put big money into it. The competitors were so

Ibig: guess Microsoft we’ve messenger,seen this more ICQ . . . than It was once, strange the thatbig playersthey didn’t not do seeing it themselves. the new things coming. Yeah, but that doesn’t mean that I was able to see it or anyone else! It kind of grew out of curiosity. You can never see the big ideas when they are first presented to you – I mean, I couldn’t see Twitter when I talked to Evan12 about that. He was an investor in my antivirus company, and I know him really well, and he asked me if I wanted to go into Twitter. I told him, “You must be lame, who the fuck wants to be sending messages about what they do in 140 characters?!” So I couldn’t see it, but that’s very normal.

Skype founders Niklas Zennström and Janus Friis. 11 Evan Williams, co-founder of Twitter. 12

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Skype call – September 2015

All of the entrepreneurs in this book have very busy lives and complicated schedules, so none of the conversations were easy to arrange. Morten, however, was a case apart. We scheduled and re-scheduled this follow-up conversation many, many times until it finally took place late in September of 2015. By that time, Tradeshift had succeeded spectacularly. At the time of this writing, the company had raised almost one hundred and thirty million dollars, and more than half a million companies were using it to do business with each other. Everbread, on the other hand, was declared insolvent in the summer of 2013. Morten, meanwhile, had moved on to other things. He had become more of a “parallel” than a serial investor, founding and sitting on boards of multiple companies at the same time, many of them with a partner whom he talks about for the first time in this interview. According to a chart he was willing to share, there are no fewer than 26 companies in this keiretsu-like network. They are closely interlinked, often providing services such as software development or financing to each other. As we shall learn from this update conversation, a key part of Morten’s strategy nowadays centres around financial technology (“fintech”), applied to areas as diverse as insurance, at one end of the spectrum, and helping young people in Bangladesh get IT skills, on the other.

What have you been up to these days? Basically, I’ve launched a series of things. After my bankruptcy, everything is now fintech. I’ve been very lucky with Tradeshift – it’s now a half-a-billion-dollar company and the biggest invoicing network in the world.

Tradeshift has been an amazing story! It’s crazy, crazy!

How active are you now with Tradeshift? What’s your role? I’m totally, totally out. It was built in my basement; I was chairman until 2 years ago. It taught me a lot of things. The big thing that I saw, I realized that first of all, understanding money is a good thing. And then I saw that fintech is probably ten times bigger than what we see as “the Internet.”

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loan, you have everything. Every company has a loan, every company has a lot of Because fintech is . . . it’s just everything. I mean – you have insurance, you have a small fintech services that are now with the bank, but banks are stupid. Everything that you want to do with your money is, you have to call somebody, yeah?

Yeah.

On a large scale, these student loans with CodersTrust, that is definitely my biggest So spreading that out into all kinds of services for small and medium businesses . . . business now. This is the mother of fintech, it’s just beautiful.

The last time we spoke, you had another business that didn’t really work out – Everbread? Basically, we sold the company to the Chinese government, but the founders and the core team went around us and now work in China directly for the government; we got nothing (laughs)!

Aside from Tradeshift and CodersTrust, what are the most exciting things you are doing now? CapitalAid is really interesting as well. We are Robin Hood for the little guy. We go on big data and we go to all the web shops. From a macro perspective, ten years ago there were only fifty thousand shops in the world that actually had more than a thousand dollars revenue. Now we see that there are two-and-a-half million shops that have real revenue. So we go to them, ask them to install a plug-in so that we know their data, and then we can offer them a loan which is super fair. Nobody else can give them a loan, because if they go to the bank, they’re going to be sent home. You know, they can’ even get the meeting. It’s a really cool company!

What is your role with these various companies? Are you the chairman, the co-founder? I’m the co-founder and more or less the founder. I’m the builder, I take a good idea, because I’m pretty good at that, and then I find teams who can run it. And I find the money as well.

How many companies do you have currently that you are working on that way? Have you read about AirHelp?

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Yeah, I read about it on your blog. execute it, and it’s now a fifty-million-dollar company. We’ve sued the airlines, I It’s kind of funny. It’s a simple, good idea . . . We found some young guys who’d think, a hundred and twenty thousand times on behalf of the people. So it’s still Robin Hood! same. Every small company needs a bank account that is fast and easy. If your And then I have a series of these . . . I have a company called PayXO, which is the friend wants to open a company tomorrow, it’s a pain to get a bank account

Denmark it takes three weeks to get a fuckin’ bank account! anywhere in the world, in Eastern Europe, in Southern Europe . . . even here in How about Holvi? They make it really easy to get a bank account online.

OK . . . Yeah, but So it’sPayXO not workinglets me openhere in up Denmark a bank account yet . . . quickly and easily? Yeah. It also takes the pain from very large companies that have to pay out a lot of money, like Uber, all those guys. They have to pay out a shitload of money to all their “workers.” We’ve set up a very smooth structure where we can pay out money and give people a bank account in one shot, globally.

Does that mean Uber is a customer for this? It could be, but I can’t mention it.

OK. Google is doing 35 million payouts every month to people who have a YouTube channel.

How are they doing it now, and are you going to make that easier for them?

SWIFT code, it never works, you know what I mean? You always have to call twice With a bank, you have to send them your SWIFT code . . . whatever you do with the and see where the money is now, and did they really get it, and all that shit. That’s basically what’s different.

So with PayXO, I don’t have any of those problems? No.

Is it up and running? Can I sign up today?

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No. It’s coming in the next two, three months. But it’s been two years in the making. It’s very hard to do global payouts, like really, really fucking hard.

OK. So, two or three months down the road? Yeah. But clients are already signed. It’s really cool.

When you say clients, you mean big companies? Yeah, big companies who have payout problems globally, global clients.

How many of these big companies and clients? Five, real ones. But it’s also good for AirHelp, you see, because AirHelp has to pay out whenever we win the case.

I see. So CodersTrust, CapitalAid, Airhelp, PayXO . . . any others? Yeah, there’s this thing called Cashworks.

Cashworks? Yeah, it’s a super refined factoring plug-in that we sell to banks so they can instantly offer factoring in a totally sophisticated way that they can’t do today, because if you want to do factoring today with a bank, you have to show up at the bank with all your invoices, yeah?

Yeah. It’s like the most compressed way of doing factoring sold as a service plug-in to the bank. And they love it, they already buy it. The cool thing is it’s enterprise. The worst thing is that it’s boring. It’s really boring. The cool thing is, when you get to this level and you have these connections, you can go into the biggest companies years ago you couldn’t talk to a bank if you were a small guy. Now they actually in the world. And the banks, they are getting . . . they really shifted from . . . three receive you if you know your shit, they receive you as a king because they really know they have to innovate.

So you just keep coming up with these ideas, and then you find the money and the people to run them? Yeah. And I change the people a lot because there’s a big difference between a guy who takes it from idea to company and the guy who makes the company and starts selling the product. And there’s a big difference between a company that sells zero

269 THE EUROPEAN STARTUP REVOLUTION per month and one that sells for a million dollars per month. That’s the secret, but you can’t really be loud about it because then you are killing the idea, the beautiful idea that a founder can be Mark Zuckerberg or Bill Gates. It’s just totally disproportional that these guys were also good CEOs.

I see what you’re saying. Where do you find the people? Are they mostly in Denmark, or throughout the world? Are they in Asia? They are all over the world. A lot of them are virtual teams. You remember Basecamp?

Sure. They were always virtual, they were never in the same room. And Automattic, the company behind WordPress – they are also fully virtual.

Is it like that for most of your companies? Yeah, it has to be like that, because otherwise they can’t get the best people, because the best sales guy might sit in San Francisco and the best coder might sit in Bangkok.

If it’s that spread globally, how do you find the best banker, and how do you find the best coder? Through my network and social media.

So you don’t go to an HR recruitment agency?

AsideI also use from some founding of them, a of zillion course . . . companies . . . are you involved with any of them more than with the others? Is there a major one that you’re spending most of your time on? about traveling and tourists for a moment. If people come here, if Chinese people, Actually not, because it’s always in the early stage, when I get an idea . . . Let’s talk if anyone from outside Europe comes here, they’re on a holiday, they are tourists. Every time they spend a dime, they could basically get 25% back as VAT. That’s a

I wanted to do it with AirHelp, but they can’t. They have to focus, but now I’m new area . . . setting up a company where I want to use the girl in the watch store. I want to enable her to be able to set up this VAT refund in a smart way so she personally

270 15. LundXY • Morten Lund gets a kickback, the shop owners she works for get a kick back and I will collect he’s entitled to two thousand five hundred fucking dollars back! the VAT, so that the guy who comes in, buys a watch for ten thousand dollars . . . So I build a process so that we just meet them at the airport – it’s all connected – and I say, “Hey, this is hassle free. We meet you at the juice bar in the airport and we have the money for you.” And we take 20%! But that’s much, much better than having this piece of paper and standing in a line – and it doesn’t fucking work! That’s an example. It’s an idea that I can’t stop thinking about, so I’m finding a team to run it. It takes a long time, of course. But as soon as they get momentum, I try to stay a little bit away because then they have to show that they can actually have to let your kids run around. do it. I mean . . . it’s very much like parenting. You have to be there, but you also So you are, let’s say, lightly involved with each of these, but not heavily involved with any one in particular? Yeah, I would say.

What are the next steps for Morten Lund?

It’s basically . . . to make all these things work together so that, whenever I have a example. The real problem that we were not able to see was that we were going to need – and you have that often when you are starting things . . . Take AirHelp as an have huge problems paying out the money. It is a huge problem for AirHelp to pay out the money, so then we made our own service that works for AirHelp, and probably works for other companies. So keep needs them, so there’s a real need! We’re not just inventing stuff to invent stuff, building solutions that are . . . we need them ourselves, or one of our companies you know what I mean?

Yeah. We keep it on that basis. It seems to work. Only one thing can kill me, and that’s running out of money. But I’ve tried that before (laughs)!13

Morten went through personal bankruptcy in early 2009 after the failure of the free newspaper venture13 Nyhedsavisen. He resolved the bankruptcy in April 2010.

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And you survived! Yeah, I always survive. I mean, I didn’t die.

I’m just kidding. But you came back into the business. There’s one thing that is core in all these services. If you bought a listing in the Yellow Pages, you wouldn’t really know the effect, right?

Right. But all the services from the companies we build, from AirHelp to the loan services to the software we build, have to justify themselves in terms of being profitable to you as a user. It’s profitable for you as a user to use AirHelp. It’s profitable for you to use CapitalAid as a business owner because you can’t get a loan anywhere else. It’s

We always track if it’s worth it! You pay X bucks per month and we can track that profitable for you to use our software in a company called SaaSBuilders because . . . you got five new orders in your shop. That whole thing about justifying by numbers, justifying every business by numbers, that’s a very interesting perspective. That’s where we are going. It’s a little bit philosophical, but it works really well. We take that as a philosophy behind every company.

In this picture you sent, in many of the companies there are your initials, “ML,” but then in many of them it also says “LFS”?

You could be the first guy to break this . . . Nobody knows this, but I can give you read your book. the insight and no one will read . . . I’m sorry . . . not everyone in the world will OK . . . That’s my partner, Lone Fønss Schrøder – a woman who is now my 50-50 partner. She’s the craziest fucking thing on Earth. She’s on the board of some of the biggest companies in the world. She’s my partner, and we are like night and day. She’s experienced with large, corporate stuff, she’s been with Maersk for 22 years, CEO of the biggest shipping company for cars in the world, she’s the craziest, craziest

Andthing! since She’s when also with have Ikea, you Volvo . . . been partners? The last 3 years. We haven’t published anything yet. She’s the craziest, she’s the biggest Danish businesswoman ever.

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So she’s on the corporate side, you’re on the startup side, and you work on most of the stuff together? Yeah.

How did she decide to team up with you since she’s so powerful and in all these companies already? What’s her motivation? Except that you’re a very charming guy, of course! Her motivation is that she needs to bring digital into the boardrooms, because it’s not there. What you also see in this picture is that I’ve been building a lot of service companies. I’ve been building an investment bank, Tofte & Company, the same with Infinity & Sons. I’ve built my own code shop, StefanXO . . . So I have my own Sointernal, you have like, your production own bank, companies, you have fundraising your own mechanisms . . . software company, you have your own advertising company . . . Yeah.

It’s a whole Morten world out there! It’s just because we can’t get the tools unless we build them, you know! There’s also a very funny, sexy tool called PitchXO. You gotta try it, it’s very sexy way of having a data container with all the information about a company.

What’s your typical stake in these early-stage companies? I have to sit with the control for a long time until somebody performs his way in and we can see that he can manage it all the way. A lot of people have the chance to have more shares than me over four years. If they don’t perform all the way, they get cut out and remain with a smaller stake.

Once these guys are on their way and you don’t have to babysit them anymore, what is the typical stake that you’re left with? I’ll start out with all the shares and end up with 15-30%. But remember that Reid Hoffman at LinkedIn ended up at 18%.14 And he was already rich; he could’ve kept the whole company.

At the time of LinkedIn’s 2011 IPO. 14

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16 Mendeley Victor Henning THE EUROPEAN STARTUP REVOLUTION

According to one of the many myths in startup land, the ideal startup team is composed of three types of people: the hacker, the hustler and the hipster. In startup jargon, the hacker is the engineer who will create the product, the hustler is the business guy in charge of sales and marketing, and the hipster is the designer who will make sure the visual design and overall user experience is beautiful and appealing. In the case of Mendeley, the founders had none of this. They were three German academic types, one of whom had been a punk rocker in his previous life. Since they weren’t programmers, they outsourced their early product development to a company from Byelorussia. In this chapter, the story of Mendeley is told by Victor Henning, one of the three friends that came from Germany to London to build a database of academic and research work that would quickly come to rival knowledge bases that had been built by old, global giants such as Thomson, Springer, Wiley and Reed-Elsevier. Our first conversation took place in February of 2012. Mendeley was a rising star then, by far the biggest and most successful startup to come out of White Bear Yard, with initial financial backing and the enthusiastic support of Stefan Glänzer15 and his “partners in crime,” Eileen Burbidge and Robert Dighero. Since the company’s founding, another investor group with very deep pockets had come along – Alex Zubillaga and Len Blavatnik. Mendeley was among the companies and projects spearheading the “open science” revolution, pushing for the dissemination of academic research articles and data in order to make them accessible to everyone, instead of being locked up inside expensive journals and databases. In April of 2013, Mendeley was acquired by one of the giants it was disrupting – Elsevier. The investors made a great return, the three co-founders became millionaires over night and Victor – still CEO of Mendeley – became Vice President of Strategy at Elsevier. In our second conversation, two years almost to the day after the first one, Victor talked about the controversy sparked by the acquisition amongst loyal Mendeley users, the challenges of his new dual roles, how established science and research publishers are changing their business models and what it felt like to become a millionaire.

See chapter 7 of this book for an interview of Stefan Glänzer 15

276 16. Mendeley • Victor Henning

Skype conversation, February 2012

How did you guys get together, and how did Mendeley get started? Jan and I have known each other for twelve years because we went to business school together. The actual story of how I met Paul is a bit more interesting. I was speaking at a conference in San Francisco. Afterwards, I decided to do a

Las Vegas, I went to a youth hostel and got there at about four in the morning. backpacking tour across the US. I travelled to Berkeley, Las Vegas, Chicago . . . In Some familiar faces left the youth hostel, and I thought, “Where do I know these guys from? Maybe I saw them at the youth hostel in San Francisco?” You know – backpackers travel along the same routes. But then one of them said, “Victor?” Well, it turned out that those guys that I ran into by chance in Las Vegas were computer science students from the Bauhaus University, and their lab was one floor above my office on the other side of the world. The idea for Mendeley developed back in 2005, when Jan and I had started working on our PhDs. We were in different fields – mine was social psychology and decision-making, and Jan’s was information management. Both of us had tons of PDF stuff that we had to manage, and we thought “Why isn’t there a good tool that tries to automatically turn our collections of PDFs into structured databases?” Kind of like when you have a collection of mp3s and you drag them into iTunes and then iTunes extracts all of the relevant metadata like the band, track title, album and so forth. We thought there should really be a similar thing for scientific papers that extracts the author, title, volume, journal, issue and so forth from your collection of PDFs so you don’t have to enter them manually. Jan and I had been discussing this idea on and off for two years, and in 2007 we got serious and got Paul to join the team. We took our savings and went to an outsourcing company in Belarus to develop a first prototype of the software on the web site which we could use to pitch to Stefan (Stefan Glänzer) and got in touch with him. Stefan had been a guest lecturer at the business school where Jan and I had studied. We wrote him an e-mail saying “Stefan, it’s Jan and Victor from business school class four years ago. We have this idea which is like a Last. fm for research.” He agreed to meet in London. After one further meeting, when we showed him the demo, we essentially came to a handshake. So – our first seed funding came together without drawing up any contract or signing an agreement.

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We just exchanged a couple of e-mails with the key terms and closed the deal with a handshake. That gave us our first investor, which was Stefan! Once Stefan decided to invest – that was the first seed investment of about €250,000 – we decided to move to London. We started hiring our own development team and kept fundraising. At that time, we were speaking with pretty much every strategic investor. All of the big publishing companies like Elsevier, Thomson Reuters, could possibly disturb their business down the road. They were more interested Nature . . . they all wanted to invest because they felt it was really something that in getting a foot in the door of something that could possibly threaten them rather than being genuinely excited about building something great. Stephan then introduced us to the founding engineers of Skype. They are Estonian engineers who did Kazaa and then Skype together with Janus and Nikklas. We met their investment manager who had also been the director of product at Skype and the former director of strategy. Both are actually now quite active here in the European venture and startup scene as well. Eileen Burbidge is now Stefan’s partner in Passion Capital. The director of product who came in for that pitch back then was Taavet Hinrikus, who is the founder of TransferWise.16 That startup is making waves about transferring money between European countries. It was Taavet and Eileen who came into our office in Covent Garden, and we instantly decided that they were a much better fit than the academic publishers. First of all, they were much more straightforward, and it was a great brand association for us – Skype. They had experience with something that we were attempting to build, which was desktop software coupled with a client server model. They had great user interface chops, and we knew that we wanted to build something that was extremely easy to use. The third major investor, who got on board a couple of months later, and who is actually is our biggest investor today, was Alex Zubillaga together with Len Blavatnik. Alex is an active angel investor who was also head of digital at Warner Music for a while, and he was also involved in the Warner Music buyout. Len Blavatnik is a Russian oil billionaire who’s based in London and who actually bought Warner Music recently for $3.3 billion. He is also an active philanthropist

See chapter 26 for the interview with Taavet Hinrikus. 16

278 16. Mendeley • Victor Henning in science – he donated a hundred million to Oxford recently to establish a new School of Government. So – a guy with a deep interest in science and higher education but also incredibly deep pockets. Let me give you the key numbers so far. In the three-and-a-half years since our launch, we now have now grown to 1.9 million users. The biggest group of our users is in the US, 20%. From the start, we had this ambition to be global. We specifically targeted the US, and when we launched in 2009, I went on a tour of Ivy League universities on the East Coast. I visited 8 universities in ten days – Yale, MIT, Brown, NYU, Penn, Cornell – lots of high-profile universities. What has been equally as astonishing is the growth of our database. We’ve always had this vision that, by crowdsourcing, we could build not just another metadata database or not just another article database, but it would come with all of this social information that makes a database truly special and useful. So for example, for every document in our database, we know how many readers the document has, where they are from, what their academic disciplines are, what else they are reading, and what tags and keywords they are applying to the document. We know whether the interest in the paper is increasing or decreasing over time – lots of social information. We call that the social layer of our database. And that’s been exploding virtually. So we now have 285 million documents uploaded to our database, and on average, we are currently getting about five to eight hundred thousand documents per day, added to that database.

Why did you target the US initially? There was a very specific reason for that. The founders and the first investor were all German, so our network was naturally very German. If we had started by getting our network into the platform, our worry was that it would seem like a platform for German academics, and then you just wouldn’t get a Harvard or MIT guy to sign up to the platform. Vice versa, if you have the top research universities like Cambridge, Stanford and MIT on the platform, then you also get the Germans to sign up. And so we specifically decided that the best way to really position ourselves was to target the US universities first.

Thousands of startups are trying to do location-based gaming or the next social networking or doing photography, connecting your mobile phone with whoever is in the room or something like that. But the whole academic area is very non-typical for a startup.

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From the start, we met lots of people who basically discouraged us and said, “It’s a niche, why would you want to do that?”. That was the typical feedback that we got from a lot of the VCs. When we first met them, they all went, as a reflex, “Oh, academia. There is no money in academia, and it’s a niche market. How many people can there be? There are maybe two million scientists. This is not another Facebook, and I’m not looking into this further.” One thing that showed us that we are on to something was the universality of the problems that we recognized for ourselves. We saw that it’s not just for full-time academics, but also for students – if you’ve ever had to write a term paper, you have faced the same problems. And it’s not just academics in universities but also from academia, we have users ranging from the US military – the US Marine Corps engineers, doctors, nurses . . . These days, even though the majority of our users are in Afghanistan – to government agencies across the globe to a film production special effects company in London. They won the Oscar for Inception, and they use Mendeley to manage papers on machine vision and artificial intelligence! We felt that the appeal was much wider than this niche that VCs were thinking of.

Victor, let’s step away from the business model issue – I would like to ask you to comment on this huge issue of intellectual property management and intellectual property rights. The most highly profiled were SOPA, PIPA and ACTA, but I noticed on your blog that Mendeley is also very vocal about the same area, concerning, of course, scientific and research information and whether it is closed or open.

I think that actually ties back to the academic publishing industry . . . As I said, the only term that I can find for some of what’s going on is “insanity.” When I was academic publishing is a 25 billion dollar business,s but what it is built on is . . . an academic, and I published my first paper, I wanted to get a PDF copy of my own paper, and the publisher wouldn’t give it to me. My university hadn’t subscribed to that journal, so I had to buy a copy of my own paper!

That is amazing! The way it works is this. As an academic, you are paid by the university and by public money, by research grants. You write a paper and you give it to a publisher for free – you don’t get paid anything for that content. Then you provide peer review services. The publishers are always saying, ”We add value by providing peer review.” But in fact, they usually only appoint the editor for the journal. The

280 16. Mendeley • Victor Henning editor accepts – unpaid –the honor of being the editor of the prestigious journal. The editor then uses his own network to bring in the subeditors and reviewers and organizes the review process. The reviewers put in the time to read the paper, give their critique and redefine the content. So all of that is also provided and paid for by universities – hence by taxpayer money and government grants. Some publishers even charge you for layout and graphics, so if you have a color figure to go into the paper, then the publisher will charge you thousands of dollars to put that in. Now, they take the content, they charge you and then they literally turn around and sell it back to the university at a profit! You can look at the publishers’ annual reports, the profit margins are between 30 and 40 percent.

I’ve noticed. That’s in the range of the Apples and Googles to the tune of 25 billion dollars a year. Even Harvard, the most well-endowed university in the world, says that this model is simply not sustainable. Lately, publishers have been attempting to extract more money from researchers and universities by introducing additional copyright barriers. It’s not just about distributing content, but it’s also about text mining, which I think is the next big area of growth and research in startups as well, like Big Data. Elsevier tried to sneak in legislation through lobbying – the so-called Research Works Act – that was to undo the NIH’s Open Access mandate and therefore would have prevented public access to millions of bio-medical research papers. They had to pull back after outrage and boycotts in the academic community. Our vision is to crack this open by, first of all, encouraging academics to be aware of their rights, to be aware of the lobbying that is going on, and also by enabling them to post their own publications over which they retain copyright, from their Mendeley profiles. A ton of papers have been made available by Mendeley in this way, by academics uploading their own papers. So that’s our attempt at making content more accessible and science more open.

When you say “other platforms in this space” on your web site, you directly compare Mendeley to typical competitors. Are they going in the same direction as you are? Is your model or the way that you are functioning unique in terms of generating the interest and people using it for their papers? There is nobody who does exactly what we do, but we do have competitors in different areas of our activity. What you see on our web site are the competitors

281 THE EUROPEAN STARTUP REVOLUTION that we listed for the document management and reference management part. That is still where traditionally most of our users get the most value and how they find us. People tell them, “Check out Mendeley, it will help manage your papers more effectively,” and that’s the way they compare it to other traditional tools in that space. I would say the other competitors, obviously from the social side, are some of those “Facebooks for scientists” that have being popping up. The biggest academic databases, commercially so far, have been Thomson Reuters’ Web of Science and Elsevier’s Scopus, and both have about 48–49 million records. We surpassed that after a little more than two years and, like I said, we are now up to 285 million uploaded documents. If you deduplicate that – we have to deduplicate content because popular papers obviously get uploaded by multiple, different people – our database currently has about 65 million unique records, so we are already 33% larger than the commercial ones by Thomson and Elsevier, and we are still growing exponentially.

So in a few years you will probably be buying either Elsevier or Thomson Reuters or both? I guess we would need a hedge fund to blow a couple of billion into our balance sheet so we can leverage the hell out of it!

There you go! Our vision is that we really want to build a sustainable long-term business. A lot of our investment has been in the long term. The biggest part of our engineering is the platform and the data-mining team – together that would be 8 people, and we are currently 36. None of that would’ve been necessary if we had been out for the short term, just building, let’s say, a freemium or subscriptions model to the productivity tools. But for us it’s really about the long game of building an ecosystem that may replace traditional curating, traditional publishing – it might become a content distribution platform that just enables third parties to build apps that we couldn’t dream of against that gigantic interlinked database and that we could then, as Mendeley, profit from, by either charging for access to the data or by getting a revenue share.

You wanted to talk earlier about the business model, and we kind of put that aside. Obviously, you started as a freemium app, and the only thing that is visible on your web site is “you can get this much for free and if you want

282 16. Mendeley • Victor Henning more space and few more features etc., then you need to pay this and this amount of money.” Is there more to your revenue model than that? There is, yes. Apart from individual subscriptions which you can see on the site, we also have team packages and institutional packages. The latter, which we launched two months ago, have seen amazing adoption: We’ve already signed up some of the leading research institutions in North America, Europe, and Asia as customers – including Stanford, the Harvard-Smithsonian Center for Astrophysics, the Korea Advanced Institute of Science and Technology, or the Japanese Agriculture, Forestry and Fisheries Research Council. There is a really huge pipeline of inbound requests, and we don’t have any sales force at the moment. In order to help us fulfil that need, especially with respect to libraries, we’ve partnered with a Dutch company called Swets. Unless you are a librarian, you probably haven’t heard of them.

No, I haven’t. And I’m not. I hadn’t either until they approached me. They make 1 billion dollars in revenue helping libraries manage subscriptions. They approached us a little more than a year ago wanting to tie Mendeley’s usage statistics, which I mentioned earlier, into their library subscriptions dashboard so that librarians could make better decisions about which journals they should subscribe to and how the content that they have subscribed to is being used by their faculty. So we partnered up with them to develop and market the Mendeley Institutional Edition, which is sold at between 10 to 50,000 dollars per year per institution.

And obviously, you are going to be revenue sharing with them on this? Yes, there is going to be revenue sharing with them. But the nice thing for us is that we don’t have to build up a sales staff, and Swets has established sales relationships with, I think, more than 11,000 libraries in 160 countries. So they are going to sell Mendeley through those channels, giving us a ton of exposure to all of those libraries. Obviously, there are network effects. For a library that has purchased the dashboard, the data on the dashboard gets better the more people at the institution use Mendeley, so they also have an incentive to push Mendeley. We feel that that’s also going to be another huge boost to our growth. That is the productivity and collaboration part of our monetization, both for individuals and for institutions and enterprises.

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In the future, we also want to monetize the content and the data. For example, because our web catalogue, the database of articles that we have, draws so much traffic, we have signed agreements with several academic publishers to provide us with their content that we can integrate into the catalogue and thereby drive traffic their way. We have now signed the first affiliate agreements which will give Mendeley a share of the revenue of the articles that are being sold in this way. The opportunity for Mendeley is to become the iTunes or Spotify for research: to help publishers to reach end users directly through our installed base and through our recommendations engine. The third part would be the applications ecosystem that I have described. There are almost 250 third-party apps using our data, and they’re generating more than 100 million API calls to our database per month. We feel that this is not something we should monetize right now, but the first businesses are already being built through our API, and maybe by 2013–2014 we’ll have substantial businesses, big-data businesses, dealing with research data, that we can participate in.

What is the long-term vision, what is going to happen with Mendeley two, three, five years down the road? It’s really going to become focused on the platform and the applications. I could see the current productivity features that we offer becoming a prominent part of the platform, but the platform being the main aspect. We are currently investing a lot of effort into rewriting a lot of our APIs to make our internal APIs addressable by external parties so that they could use functionality which is currently only available to our internal developers. From a business point of view, our main revenue streams for the next two years will still be on the productivity and collaboration side. In the long term, I really see us becoming a platform for applications built by third parties. The Mendeley collaboration tools, our desktop tools and our web tools will be part of that platform. To return to your previous question – I think that platform could be a number of things, and it’s quite hard to foresee what it would be. It could be an extension of today’s networking and collaborations suite, so it could be very much focused on the documents, but it could also become an intelligent network of raw-data processing. For example, we have a two-million-euro research grant that we recently got from the EU of together with three partners, which is about building semantic annotation interfaces. People are creating links between content and saying, “this

284 16. Mendeley • Victor Henning paper supports that paper,” “this paper refutes the other paper over there,” “these app platform could enable incredible applications. two papers use the same method” . . . Plugging this type of information into the Any comments on being a European startup vs. the US? I don’t regret having stayed in Europe. Like I said, the most important thing for us is building our lives and a successful business in a place that we love. But, yeah, the aspect of funding is one, and I think tech coverage is another. You have all of those big tech blogs like TechCrunch, Ars Technica, Mashable being very, very US centric. It’s been very, very hard to get regular coverage there. Again, if we were a Bay Area startup, I’m sure we’d be a regular on many of those blogs. So, in terms of PR and funding, we are still at a disadvantage. But I think it’s worth it, and hopefully, we can change that in the future by building more successful tech businesses in Europe.

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Skype conversation, January 2014

Victor, great to talk to you again. How are you now dividing your time and attention between Mendeley and Elsevier? I still join all the management team calls that we do with Mendeley, us founders, Jan, Paul and myself. We still have a weekly founders catch-up, and we are always in touch by chat, WhatsApp, and Skype chat, so I don’t actually have a designated time when I say, “Ok, now I’m paying attention to Mendeley” – I’m looped in all the time. As part of my role at Elsevier, I was specifically asked to bring the thinking behind Mendeley – our approach to software development, our approach to strategy, to community engagement and how we think about the whole space – to other business units in Elsevier. So now I get to, if you will, play on a larger canvas and figure out how we leverage what we’ve built with Mendeley for the other Elsevier businesses, how we unify roadmaps and make sure that we are aligning for the future. It’s really quite fascinating!

It sounds really interesting but also challenging. Elsevier is a very, very old company. Your success must depend to a large extent on how receptive the Elsevier management and the overall Elsevier organization is. As you could probably see from the last interview that we did, we used to have a fairly schizophrenic relationship with Elsevier.

That’s putting it nicely! On the one hand, they had obviously done things that we didn’t agree with. You know, I mentioned the lobbying that resulted with a boycott of the research work etc.

Yes, yes, exactly. We always thought that was the wrong thing to do. Also, like over the years we’ve had some interaction with the legal department. They didn’t sue us, but there were a couple of questions like “What are you doing, exactly, with the content? We’re not comfortable with that.” So that was the negative side. On the positive side, the platforms team – at Elsevier it’s called the AGRM, which is short for the

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Academic and Government Research Markets – they run all the tech platforms at Elsevier, like ScienceDirect, Scopus etc. They were, pretty much from the start, quite interested in working with us. They had a social bookmarking service, for example, called 2collab, which didn’t really take off. So around 2009, 2010, they decided to close it down. And they contacted us and asked if we could do an import from their database, and they then referred all their users to us. That was one example of early collaboration. We then ran the Science Online conference in London for a while, which Elsevier co-sponsored. When we released our API, Elsevier was actually one of the first companies to build an application on their platform and the first publisher to do so. So we’ve had that weird schizophrenic relationship between, on the one hand, not agreeing with many of their policies and getting a bit of a headache from the legal department, and on the other hand, getting along well with the platforms team, who were quite eager to work with us. When they approached us, we were of course a bit suspicious at first: “Where is this going to go? What’s the plan here?” The team that we met was very straightforward with us. They said, “What you have built is a spectacular success story! Obviously, you are doing things right, and obviously, we’ve been doing things wrong.” I’m not talking about the entire company doing everything wrong, but there are things that they’ve done wrong, and there are large parts of the Elsevier that didn’t agree with some of those policies, either. It’s not like with 7,000 people in the company, everyone has the same opinion. It’s not a monolith. They were very clear that they wanted us to keep building our business in Mendeley. When I came over here to Amsterdam for the first time, I was expecting a similar schizophrenic relationship, that some people would go, “Oh, here are the upstarts. They just got acquired and they are trying to tell us how to do things,” and that other people would say, “Hey let’s do something together!” But actually, my experience was that pretty much everyone was incredibly excited that we were joining, and they all had ideas of what could be done with the Mendeley platform and how they and their business units could benefit from what we had built. So, it was an incredibly positive experience. They do realize that publishing is going through fundamental change. One of the things that I talked about in our last interview was business models and how we moved to open access. Since the boycott happened, Elsevier more than doubled the number of their open-access journals and introduced open access to publishing

287 THE EUROPEAN STARTUP REVOLUTION options across pretty much all of their journals. They are rewriting their posting policies, which makes them now one of the most liberal of the major publishers, and they are investing heavily in technology, like Mendeley and other platforms, because they’ve realized that’s where a lot of value is going to be created in the future. So, while there are obviously differences in culture when it comes to the decision-making process or engineering, I would say that the goals and the vision of how the industry is going to develop is actually very, remarkably similar.

How about the other academic publishers? Is only Elsevier becoming more “enlightened” or is the whole industry changing? That’s a good question. I would say that Elsevier has always been one of the more forward-thinking publishers technologically but also, being the biggest publisher, in terms of business models, they have been a bit more traditional than others. I think that is changing faster at Elsevier than other publishers. Like I said, Elsevier has made a massive push toward open access in the past year or two. With the Mendeley acquisition and other investments, some of which I cannot talk about yet, you will see a big change in how Elsevier approaches the market.

What about the numbers? In terms of usage, the number of papers, documents, has that continued to grow the same way it used to grow before? Has growth accelerated or has it slowed down? Any indicators on those key metrics that you guys look at? Since the acquisition, we’ve received a lot more traffic. We are now starting to integrate closely with other Elsevier properties like ScienceDirect and Scopus, which draw six, seven or eight million unique visitors a month. The current number is about 2.8 million registered users and 525 million documents uploaded to the services.

Well, those numbers have always been amazing! Yeah, it’s still pretty impressive.

Have you introduced any changes to the way your community works? I know it was a pretty impressive set-up when we last talked, with the Ambassadors that you had and the way you worked with your customers and your key ambassadors or champions; so have you restructured that whole community or eco-system in any way to reflect the Elsevier acquisition?

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No, not at all. In fact, we’ve doubled down on the whole thing. Recently, one of the Menedeley UX people came to Amsterdam to work with me on a project here, and someone asked him how the atmosphere in the Mendeley office is, you know, “How has it changed since the acquisition?” We said that basically, we haven’t noticed anything except that we are hiring more people now, you know, growing faster. And that’s what I meant – Elsevier has left us operating in the way that we were before, because they clearly saw that what we had done was working. And we are scaling up the community program, so it’s now approaching, I think, 200 Ambassadors roughly. We are leveraging the Ambassadors to also work with other Elsevier business units.

When a large company acquires a startup, very often it happens that, after some time, the startups are folded into the main company. Obviously, you want to project the message that nothing changes and Mendeley is still going to be there for a long time, but are there any specific discussions about that or long-term plans? Yeah, there are. I’ve just mentioned that the Mendeley team is growing rapidly, so we’ll have to move out of our old office space soon. The initial discussion, of course, was, would it make sense to move to a big Elsevier office? The decision was made that Mendeley should keep our own office in order to keep its own culture alive. There have been a couple of people that moved over from Elsevier to Mendeley to help us integrate on the infrastructure side because, of course, one of the advantages that we now have is better access to content and knowing who is entitled to see that content, so we can provide our users with special content access rather than just linking out the different publisher’s sites. So we certainly agreed that integration on the infrastructure side makes sense. There are some things which we had to fight for. Usually you have a back-office integration in terms of email systems – you know, everyone has to switch to outlook, everyone switches to Dell and Windows etc. We were fighting quite hard to keep our systems as they were. We still run on Google Apps, we still use Google Calendar rather than Microsoft Outlook and Exchange, we use the Internal Wiki

Well,rather Skype than a is SharePoint, now Microsoft, we still so use that’s our OK.Skype chat . . . companies get acquired, you follow the rules and you say “Well, this is just how it’s Yeah, that is true . . . It hasn’t always been so easy: I won’t lie – usually when done.” but we did get quite a bit of freedom on how we wanted to structure things.

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What is the, let’s say, single most difficult issue that you had to work through or solve during this acquisition? I think the biggest challenge was the probably aligning roadmaps. Previously, it was a fairly quick decision. Usually it would be myself and Jan and Paul and maybe the engineering leads getting together in the meeting room, saying, “Ok, this is our strategy, this is how we achieve it: let’s either shift direction or, if necessary, hire more people” You immediately get a sign-off. Now we are part of a larger company, and we are a part of that AGRM division that I mentioned, part of the platforms division. You obviously have a lot of different roadmaps that you have to combine. And apart from just the very pure overhead; there are suddenly twenty people on board, or thirty, instead of four or five. That’s been a challenge, but we are trying to shield the rest of the team from that process. So it’s Jan and Paul and myself participating in those conferences calls, going to the meetings and trying to align roadmaps, which always involves a fair amount of back-and-forth A positive challenge, in a way, is that we had to significantly ramp up our hiring, but hiring takes a lot of time as well. As you know, you spend days poring over CVs and interviewing candidates, and if you are starting from a base of 50 and you are trying to double your size in a year, a lot of your time is going to be spent hiring, and simultaneously, you want to start the integration with some of the back-office stuff, the architecture and the back-end. That then leaves very little room for your core roadmap. So we really struggled with the question of how we can still have enough time to improve the core Mendeley user experience while simultaneously trying to, you know, roughly double the team size and start a back integration which will only bear fruit a year or two years from now. The third one, quite honestly, is also that, when we were acquired, of course, we

Thatdid get is aexactly lot of questions what I wanted from our to ask.community, like . . . “Why were you acquired?” “Why Elsevier?” Of course, we were aware of Elsevier’s reputation, and we had had those schizophrenic experiences. And so, we did have to spend quite a bit of time on that issue before the acquisition already and during the preparations for the acquisition. We were constantly thinking about how to bring the team on board, because we felt that we couldn’t make this successful

290 16. Mendeley • Victor Henning unless our team believed it was the right thing to do as well. We didn’t want to risk that the team that we had built over the years – you know, which is a great team – gets blindsided by this and then, you know, after the acquisition decides to walk out the door. That’s the nightmare scenario, I think, of every entrepreneur that gets acquired.

Of course. So, what was very helpful was that, in the run-up to the acquisition, we had the CEO of Elsevier, Ron Mobed, come to the Mendeley office several times, and really spend time with each individual employee if they wanted to. He had a lot of group sessions, but he also wanted to meet with the individual people who had specific concerns. You know – what’s the plan for Mendeley, will we stay independent? Of course, there was the question, “What happens to my job, my role?” as well as “What happens to the Mendeley mission and vision? Would it stay the same?” The answer that was always given was what I told you earlier. “Try not to worry about it; we’ve recognized that you’ve built a successful team and you have a great mission and vision that we buy into. We want to help you to succeed. We will give you more resources to do it and more content and nothing much is going to change.” That helped bring the team on board, but of course, the next big question was, “How are you going to bring the community on board?” Because, you know, they don’t have that direct interaction with Mendeley and the Elsevier leadership that we had internally. So we prepared some communication to the community and the Ambassadors, who are our lead users and the most vocal users.

Yes. The night that the acquisition was announced, we immediately sent out a message to all of our Ambassadors and invited them to share their concerns with us and specifically tell us what their biggest fears were and how we could address them. We also invited them to the Mendeley office a month or so later, to really meet in person and meet with the team and tell them, you know, what our plans for the roadmapwere and show them that in the near future, what we were going to do was to, basically – let me digress for a second . . . always had to try to get to profitability as soon as possible. We had been on track The big change for Mendeley with the acquisition was that . . . as a startup, we to be profitable by, let’s say Q2, Q3 of this year – that was our goal. We had tripled our revenue in the year before, and of course we did that by making tradeoffs

291 THE EUROPEAN STARTUP REVOLUTION between user growth, giving up value for free to get more users on board, and monetizing the product. There were some things that we planned to release which we wanted to charge for like the improved recommendation engine, the new iOS app that we were about to release, group functionality, all those things. When we were acquired by Elsevier, the message that we got from Elsevier was that they didn’t acquire us for our revenues, but rather for the interaction with the community. Elsevier wanted to get closer to the community to better understand the needs of the researchers and integrate with their own workflow. That freed us from having to make money in the short term. One of the things that happened was that we decided, after the acquisition, to release the new iOS app for free, to double the storage space that we were giving out for free across all the paid accounts and we increased the group sizes that are available for free. There were a lot of positive things that were happening on the economic side, and we had already planned a lot of positive things on the product side as well, like making it much easier to input content from Scopus and ScienceDirect, to make sure that you can immediately access all the documents that you have subscribed to through your library, which we couldn’t do before. So there were positive things in store that we had to convey to people and simultaneously calm their worries such as, “Oh God, what this mean? Does it mean that Mendeley will disappear?” The advisors had spent a lot of time building local communities around Mendeley, and they were afraid that was going to disappear, that we were, as you said, being “folded into the monolith” and that all of that would go away. So we did this Mendeley Advisor Day, where we invited people to come to the office to meet the team and talk about their concerns and fears. The result was that there were a couple of very nice blog posts afterwards from the attendants, saying it was nice to see that it’s still the same faces, still the same vision and mission, and I think that was one of the challenges that we fortunately managed to handle quite well.

That’s great! When are you now on schedule to be profitable? What’s the new timeline? There is none, to be honest.

So you are going to continue making losses for as long as you like?

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Well, I wouldn’t put it that way. Of course, the idea is that we want to make money, and we are rolling out a couple of new paid products, particularly around the university business that we have, the Mendeley Institutional Edition. Sales of the Mendeley Institutional Edition have been going strong. We signed up more prestigious universities like MIT and Harvard, so that’s bringing a fair amount of revenue. As I mentioned earlier, we are thinking about what we can do for the societies which will bring revenue. Again, the goal for Mendeley is the metrics that we are measured by. It’s not revenue, it’s user growth. Our pretty much only key performance metric is user growth and engagement, and making money is nice, but it’s a secondary goal, so we aren’t measured by that.

That’s a comfortable position to be in! It is. I have to say it’s almost like being able to have your cake and eat it, because we have more resources now than we had before. You know, being able to double your team, but simultaneously, we don’t have to deal with that daily pressure about whether we are going to be profitable next year or whether there is enough for the next funding round.

I’m going to let you go after one final question. I wanted to ask about the personal angle to this. You guys have obviously received a sizeable amount of cash, so your personal lives, resources or assets are different than before. Are you looking at anything like angel investing or mentoring? Will you have time for that? How have things changed for the three of you personally? That’s a good question. As you say, things have changed quite considerably in terms of the money that we have now. Until the day of the acquisition Jan, Paul and I had a balance on our bank accounts which you could comfortably pay out in one day and keep it in your pocket – that’s all we had. I think I had a couple of hundred euros or pounds in my bank account. Now, suddenly you have this money, and you think, “Hm that’s so strange – it doesn’t really feel any different.” You don’t really have a conception of what it is to suddenly have money. Prior to the acquisition what I would imagine is that you immediately feel very different, but strangely you don’t, at least that was my experience.

OK. I can tell you that, on the day that we were acquired, it was very anticlimactic, actually. It was the eighth of April – at 12 o’clock on that day we got a call that the

293 THE EUROPEAN STARTUP REVOLUTION lawyers were on the way to our office with the papers to be signed. At 2 o’clock they came and it took about an hour to sign the papers. Then it was still not done – they took the paperwork back to their office, they witnessed everything, they faxed it over to the counterparty, so to the Elsevier lawyers, and then at about 5:30 that evening we got a call that the deal had gone through. So Jan and I looked at each other and said, “So this is it?” You know, suddenly, at that moment, you are a millionaire. At that moment, you sold your company but you look around and eve- had to start phone calls with journalists to discuss the deal. Then at midnight the rything is the same. You are the same, the company is the same . . . I immediately first story broke on TechChrunch. The next day I spent in interviews with journalists all day. Then about two weeks later, I went on vacation in Ireland with my girlfriend. We stayed in fairly cheap bed-and-breakfast places like we would before – you don’t suddenly change your habits and who you are and start to spend your money. At least that’s not what Jan, Paul and I did. Obviously, you don’t just want the money sitting around in the bank account, either. I personally haven’t started angel investing, but I might in the future. Jan has invested in a couple of startup companies, as has Paul, but what I’ve done was more on the mentoring side, because I quite enjoy it. You know, you go through so much with the company, and you learn about how to build and scale, how to deal with investors, how you resolve a conflict with the investors, how you approach the acquisition process, and how you keep it on track when it happens, because it’s very easy to go off the rails. I’m always quite happy to share all those things with startups that contact me. So I’m advising a few startups just purely for the fun of it. I don’t get any compensation or shares – I just happily spend an hour with them and talk them through it. But yeah, like I said I might start to invest in startups in the future.

294 17 Prezi Adam Somlai-Fischer and Peter Halacsy THE EUROPEAN STARTUP REVOLUTION

“Death by PowerPoint” is a commonly used phrase to describe boring presentations using long series of bullet-point slides. It’s a software product that people love to hate, but many still use it because they haven’t heard of or tried anything better. Adam Somlai-Fischer is not one of those people. He was – and still is – a world- renowned visual artist who was, back in the early 2000s, thinking about a “better way” to present his art and ideas. Like so many entrepreneurs, Adam decided to scratch that particular itch by building his own tool. He wanted to be able to present ideas, works and concepts in a non-linear way, free from the “slide-by-slide” shackles of presentation software available at the time. The first versions of his tool showed promise but were technologically primitive and quite difficult to use. Adam was the sole user of the tool for five years, until he met Peter Halacsy, then a professor at the Budapest University of Technology and Economics, who suggested to him that a much better software tool could be built around Adam’s original concept. The two set out to build it but knew they needed a business-minded, entrepreneurial partner to really make the company (founded in 2009) successful. Enter Peter Arvai, the third co-founder of Prezi. My first conversation with Adam and Peter Halacsy (“HP”) was a Skype call in March of 2012. Prezi was by then a successful, global startup with sixty employees and funding from the VC funds Sunstone Capital and Accel Partners, as well as a unique relationship with the TEDGlobal organization – clearly a very powerful marketing message for Prezi. Adam and I met in person in the spring of 2015, when I had the privilege to host a discussion with Adam and Mendeley co-founder and CEO Victor Henning, another person featured in this book, on the stage of The Next Web Europe conference in Amsterdam. The second part of this chapter is an edited version of that conversation with Adam.

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Skype call with Adam Somlai-Fischer and Peter Halacsy, March 2012

Where is Prezi today? How many users do you currently have? The last number I saw was seven million back in December, I am sure that’s continued to grow. Peter: We have 64 employees in San Francisco and Budapest. The majority is here in Budapest: engineering, design, product management, some support. We have almost nine million users. We are growing very, very fast. According to our knowledge and to publicly available information, we are growing faster than Evernote or Soundcloud did in the early days, in the first three years. So I think we are doing pretty well!

Out of those nine million people, how many are actually paying for the software? For the service? Peter: This is not a number we usually share, but I can tell you that we are cashflow positive. So, if you do the math, 64 employees times average salary, plus other costs, divided by the price of the product, you can get an idea.

Most of the employees are in Budapest? San Francisco, I’m assuming, is mostly sales and business development? Peter: Yes, exactly. That’s correct. I think it’s important to mention that in Hungary we have ten non-Hungarians, so we try to bring people here from around the

Adam: world. So we have employees from . . . Peter: The The US . . . Adam: US, Israel . . . Peter: Korea, Europe, Western Europe, not only from Central and Eastern Europe. Korea . . . Adam: design and production center here in Budapest, not just a “low-cost development We have one from the Caribbean . . . We are trying to create a very global center.” Business development and marketing is in San Francisco mainly because that’s where our users are.

Prezi is a consumer-oriented application. Do you have any contracts or partnerships with corporate customers? How much of your sales effort is oriented towards business customers?

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Peter: We have users from the most of the Fortune 500 companies, actually, but it’s typically from the marketing department, and these people typically buy with their own credit cards. It’s not like a corporation just buys a million licenses from us. These are mostly “prosumers” – professional people who think it is a high-value product – and they just use it because they need it. The purchasing process goes too slow if they go through IT departments in large corporations. Top executives use it in most of these big companies when they are presenting at conferences, but it’s not the corporations that are buying the licenses.

Have you considered setting up any kind of corporate licensing program? Peter: Right now we prefer that the users decide what tool they want to use. I don’t think we are ready for enterprise licensing. We are more focused on our product development. For that, the prosumer is a very, very good market. It’s very easy. The product is great, people like to pay, and enterprise is a bit more complicated.

Let’s talk about the relationship amongst the three of you, the founders. You are running the company, Peter Árvai is the CEO, and the two of you are the original founders. How is the work between the three of you distributed or set up? Peter: We three are the co-founders. We try to work as non-founders, but we use our titles – “CEO,” “Head of design” and “Head of technology” when needed. I believe we work pretty well together. We are a strong team.

Who is based where mostly? Peter: Adam is based in Hungary, Peter is based in the US. I have been in the US, but I moved back in April to Hungary. So two of the three co-founders are in Hungary.

That sounds good for the region, that you’re not all flying away to the US! Peter: Yeah.

Tell me a little bit about the product and the underlying technology. You’re relying quite a bit on Adobe tools. You have Flash as the basic technology, and you are also using Adobe Air for the offline version? Peter: Yes, correct.

How do you feel Air and Flash are developing? You must be following very closely the discussions about HTML5 and Flash and Air. How do you feel about the perspective of that technology in the short or the medium term?

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Peter: Our biggest challenges today are not related to technology. Our biggest challenge is how we can improve the user experience. We work on core features in the product, and the average user just doesn’t care if it’s Flash, HTML5, C#, C++ or anything else. So, this is our biggest challenge. On the other hand, of course, we know, we can see what’s happening, we can see that Flash is going to be a game- development platform. But Prezi is not too far from a game! We have animation, we have totally new interactions. So you see, we always try dependent. We are multi-platform today. This is native Objective-C code. to do different experiments. We have iPad native versions . . . we are not Flash We mentioned iPad; the obvious question there is, are you planning, do you have any plans for Android tablet? Peter: Yes. Adam: We have to!

There has been a lot of discussion about the market share of Android, but there are so many tablets now. They still haven’t cut that deeply into the iPad market share, but they are probably beginning to gain some ground. Do you see those requests coming from your user base? Peter: Yes, of course. We have lots of Android users who want to use Prezi on their Android, but the main question is, what would you like to do on your tablet? How would you like to use Prezi? What is your use case? iPad is a platform where we and our users can learn together how to use zooming presentations to another tablet computer.

It seems that you have a very strong, very vocal community of users. I see dedicated Facebook groups of Prezi in Japan, in Korea; I see that users gather together and discuss Prezi, so do you have any structured, organized way to interact with them? To get their feedback, to support these communities as they are developing? Adam: There’s a lot out there. There are already eight or nine books about Prezi written by different users in different countries. We have dedicated user research with ethnologists doing interviews, trying to find interesting cases. The users are extremely loud; they like the product, so they request a lot. Now that we have nine research, we talk to them and we try to target the ones that represent larger groups. million users and a combination of all those customer requests . . . We do a lot of

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We also rely on data a lot. We are extremely data driven. We have a lot of information about usage, and we have a whole team, a very high-quality team who work on preparing that data. Actually, all of the development at Prezi today is driven by these kinds of metrics. In many ways we are very much driven by what works for people, but we try to be smart about it and try to use our own innovation ideas and to set an interesting direction and then use a lot of research to see what is valid and what is just a bad idea.

When you say “research,” does this mean that you do data analysis of the various Prezis that are in the database, that are in the cloud? Adam: Yeah, of course, the ones that are public. We also do a lot of user research at Prezi. We have a really nice department with psychologists who analyze how people respond to our interfaces and to our products. We put a lot of effort into understanding people, their use of Prezi and their potential use of Prezi.

Can we go just a little bit back to the beginning of the company? Adam, you were a very well-established architect with a very high reputation in Hungary, and Peter, you were a professor at the university, is that correct? Adam:

Okay, sorry. Umm . . . almost. Adam: traveling globally. As a media artist, I was working with interactive stuff, so it’s not It’s alright . . . I actually became successful as a media artist and was very far from what Prezi is today, in my mind. I was often giving lectures at various schools and never used a slideshow. First of all, it sounded boring, but also, it was somebody else’s software, and I’m used to using my own tools. So I did my own presentation tool. It really helped me to put down the stories of art works and what connects them and show this to the audience. It made a lot of sense and I was really happy with it. This started like ten years ago. Year by year, my friends loved it and started to use this very crude technology. So it was 100% growth but one person per year! Then I met Peter (Halacsy), who saw the potential. He was the first nice but critical person who said “This has potential, but it really sucks. It’s annoying and useless in its current form. Let’s do something together! Let’s create a nice and easy-to-use editor.” So we were like, “Let’s do a tool for our own happiness.” We first thought about it as an open-source plugin or something. We had no idea at the time that this would would be a startup or a company. We did some simple ver-

300 17. Prezi • Adam Somlai-Fischer and Peter Halacsy sions. We were both founding members of the “Kitchen Budapest” innovation lab, so we worked on it there. After four or five months, we saw that people were getting really excited about this. Some people even mentioned things like “I want to invest!” So we set out to understand what this means. We read Wikipedia articles about understanding that we didn’t want to give away too much too fast. The most venture capital, startups, investors . . . We became pretty smart pretty quickly, important thing we realized is that we were not CEO types, so we set out to look for a great CEO, and luckily, we met Peter (Árvai), who still is the CEO today. This was, like, four years ago by now.

So you transformed from building a tool just for your own use into thinking about it as a proper project, as a company, as a startup, thinking about investment. Adam: Yes. It was all very organic and very step by little step. We always did what we loved to do, and it transformed from a cool hack into a simple–to-use product, and then into a small startup. Now it’s a medium-sized startup, and this was very nice because we could learn along this path – it wasn’t a very sudden thing.

How did you come around to your first investment? Adam: We were in a very lucky position because in the earliest days we could sell Prezis by the file, if you like. So basically, we got money from people just for a single presentation that we even designed for them, but it was very different from what they could do otherwise. So we could charge a premium for it, like two thousand euros per presentation. This was actually enough money to get the whole thing going in the first few months. We never wanted to do this, it was not scalable, but we were in a very lucky position where people were willing to pay for the output of our unfinished product! Then Peter joined. We realized we wanted to bring a VC on board. For the first time, we knew that we wanted to be high profile because of our relationship with TEDGlobal. Peter Arvai got on a plane and flew to New York and managed to talk Chris Anderson and the TED organization into investing into Prezi, even though they had not made a major investment into a startup previously. So Peter is quite persuasive, as you can see, and after that we had a really high profile. We could walk through the doors of any fund and say, “You know, TED is an investor.” Then we actually managed to more or less launch our product like this, from this self-supporting mode, and what happened is that we became cashflow positive from the day it launched publicly. Our first VC investment came a few months after that.

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We are talking about 2009? Adam: Peter: 2009. I am not very good with numbers . . . but it was . . . Adam: Yes, correct.

And the first VC was Sunstone Capital? Adam: Yes. Peter: Yes.

So they actually didn’t come in the same time as TED but a little bit after that? And you also got some seed funding from Magyar Telekom? Peter: They tried to invest, but they couldn’t because they never had the appropriate financial instruments. We had a very good relationship – we were working out of the innovation lab which was close to them, so they wanted to invest but couldn’t find a way to put it together legally.

You have been cashflow positive since the start, yes? Adam: Yeah, yeah.

Not many startups can say that! Adam: Yeah, we were lucky!

And so you’ve been growing your user base, and then in December of last year you closed the B round with Accel Partners and again with Sunstone. How did your relationship with Accel come about? Adam: We moved to San Francisco because we knew that’s where the main market was. Every American has been presenting since preschool, it’s a single-language market and the most important one for a presentation tool. We understood that it’s not enough just to be based there, but that it would be important to be part of the financial family that is driving innovation behind the internet. We wanted to be part of this game. We didn’t need money to continue, because things were going fine, but we felt it would be very useful to have a top-tier VC as a partner. We could learn so much from those guys! Andrew Braccia joined our board. He’s on the board of Dropbox, and so we suddenly got access to many fantastic companies that we could learn from – that is otherwise much harder. We wanted the network, and we wanted to be in good company. That’s why we wanted a top-tier VC as a partner, and it seemed like Accel was the best match. We were always extremely

302 17. Prezi • Adam Somlai-Fischer and Peter Halacsy cautious about the culture of the potential board members, the partners and the VCs. Even with the Sunstone, the deciding factor for us was that we really liked Christian Lindegård Jepsen, who is our board member from Sunstone. So that’s one of the most important things: that we get somebody that we can trust. They basically become our business partners, and we can learn from them. They are also open: they are interested in new things, and we just felt that Accel is the best match for us.

Did Sunstone have a major role in communicating with Accel, in establishing the relationship? Adam: by Accel San Francisco. They have a European branch, but they are a world apart. No . . . but, you know, Sunstone is a European VC. This investment was done What are the main areas where you’re going to use the capital that you’ve just raised? Adam: We can get even higher quality people on board. Secondly, we can experiment a bit more with internationalisation.

When you mention internationalization . . . Companies from Europe usually want to expand into the US. It’s a big market, English language, many people set up offices either in New York or, more commonly, in San Francisco. Have you thought about, or have you discussed with your colleagues and the investors emerging markets, such as South America or India or China? Adam: Yes. Actually, I think that the most interesting international location for us after the US is South America. Prezi is really popular there. We have really amazing peaks of usage from countries like Colombia, Brazil and Argentina, and they don’t enjoy using the English language so much. There is also an amazing amount of Prezi usage in South Korea. So we are trying to look into that as much as we can. For example, it has been possible to use the Korean alphabet in Prezi for quite some time now. It’s not a full localization, but the characters are supported, and that’s very important for us. We want to do this very globally. Sadly, I think the Hungarian language will come much later!

That’s the thing with all the countries, all the languages in this region. Croatian, Hungarian and Czech are not spoken very much outside of our countries.

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Adam: Yeah. Exactly.

If the South Korean market was big enough for you to validate setting up an office there, then potentially you could use that office as a base for other East Asian countries . . . Japan and China. Adam: Maybe that will happen. Japan, Singapore and South Korea are, I think, the most valid locations to start an Asian company. Actually, some of us have worked in Asian countries, so we have some experience there. It may happen some time in the future, but not this year.

Tell me a little bit about the innovation lab you mentioned? Adam: It’s called “Kitchen Budapest.” It’s funded by Hungarian Telecom, which is a subsidiary of Deutsche Telekom. Both Peter (Halacsy) and I were founders there because we had a background in working with talented kids and innovation. It became a really successful little lab. It’s very unique and gained a global reputation within a year. It’s not that connected to Prezi, it’s mostly working with connectivity, hardware, art stuff, devices and things that move, that respond to the Internet.

When I talked to Boštjan and Andraž from Slovenia, the founders of Zemanta,17 they also worked at an innovation space called Kiber Pipa (“Cyber Pipe”). Both of them were conceptual artists and they met each other there, and after that they started Zemanta, so it sounds like quite a similar stoy . . . Adam: There is a very clear pattern in this. These trends started maybe a decade ago. There are a lot of people, including myself, who came from different backgrounds, who saw that the spread of the internet had started to make technology really exciting, so a lot of people with interests in new things, innovation and creativity jumped onto this technology and started to do their own versions of interesting web sites, interesting interactive robots, hardware devices etc. So I think there’s a generation of people like me and probably these guys who have a background in playing around and understanding technology and its different uses from this decade. It’s funny because none of these things were necessarily supposed to be art. It’s not the kind of art that always has to relate to previous forms of art, like painting, sculpture etc, but it was always focused on people and technology and

See Chapter 1 on Zemanta in this book. 17

304 17. Prezi • Adam Somlai-Fischer and Peter Halacsy society. And in the end, this knowledge actually became very useful to me as an entrepreneur in an Internet startup!

That’s really interesting. Did any other companies come out of this background? Adam: Yeah! I have a really good friend who’s called Usman Haque; we go way back. He’s a British artist and architect, and he has a company called Pachube. It’s a very nice and successful startup around device connectivity. You can make big thing because now that every human is networked with computers, the next some sensors and connect them to devices . . . Many people consider this the next big thing, people are saying, is that all our devices, all our data is connected to the network and will be smart and responding to things.

The Internet of Things. Adam: Yes, exactly, that’s the movement. In the art world this concept has been explored a lot in the last decade. Haque has built a successful startup and has actually already sold it to a bigger company, LogMeIn.

Many, or maybe even most of the people I’ve spoken to, are active, supporting new generations of startups and entrepreneurs. Are you able to do any of that? Do you have enough time for the innovation and startup community in Budapest and elsewhere? Adam: One of the main reasons why we kept our office in Budapest is to give inspiration for people in the region or the locals. It’s nice to be here, but also it comes with drawbacks – there are not enough engineers, it’s very hard to get global, high-quality people to move to Budapest etc. But the main motivation we have is to show that you can do it from here. You don’t have to whine all the time – just work hard, work hard again, work hard again, and you can build a good business, even globally.

That’s one of the reasons why I’m doing this book. Adam: Yeah, fantastic! And, of course, this also means that, whenever we can, we organize startup events, even in our offices, and we go to all these conferences. There is really no direct benefit. I mean, all those people have already heard about Prezi – they’ve probably even tried it – but the main reason that we do this is to encourage others to follow this path and build good businesses. Because in the

305 THE EUROPEAN STARTUP REVOLUTION end, it’s just good for everybody if there are all these success stories coming up. So we try to do as much of these as we can. Yes.

Are you able to devote any time to some of the architectural or artistic projects that you were doing before Prezi? Adam: The funny thing is I started like that – I even had a contract with Prezi so doing an exhibition, I have to admit that I got bored and I missed Prezi. I missed the that I can fly off and do art anytime . . . But the last time I was in Sao Paolo, Brazil, high speed and the really challenging experience of doing this product which to me is extremely artistic – to create a really simple language or a really simple tool

2 1/2D structures of their text and images. To me it’s very related to what I was that helps people to write in space, that helps people to create these beautiful . . . always interested in. With all these millions of users and all these things, how actually finished that exhibition quickly and I changed my ticket to fly back home we work and how we can try things and test them . . . It’s just so energizing that I early . . . it was Brazil, you know, I should have been just hanging around!

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Conversation with Adam Somlai-Fischer on stage at The Next Web Europe conference, April 2015

Adam, how many employees does Prezi have today? Adam:

San FranciscoTwo hundred is mostly and ninety,sales and in offices marketing? in San Francisco, Budapest . . . Adam: Actually, no. We found that if we separate the functions into different locations, the cultural divide can grow really quickly. So we mixed up the functions, hiring engineers in San Francisco, marketers in Budapest etc. This way, the whole company is really one big cultural space. We have twenty-six different nationalities in the company, including in Budapest, so it’s quite nice.

So it’s not just a typical one-way brain-drain scenario with engineers going from Hungary to the West – you’re also pulling talent into Budapest? Adam: Exactly.

Prezi is very much about creativity. How do you pursue and encourage that culture amongst your community of users? Adam: If you look at the way creative professionals think and work, it’s always very the DNA of Prezi. It’s inherent in the product to support the way in which creative visual. They put sticky notes on whiteboards, draw charts and images . . . That’s in people think. When you see two ideas next to each other, a third one will emerge. Because of this, we always try to stay creative as a company. This is one of the reasons we opened an office in San Francisco. There are so many companies there that have grown quickly and remained creative. We wanted to learn from them.

Your official title at the company is now “Principal Artist”? Adam: It sounds a bit silly. I used to be “Design Manager,” but about two years ago I relegated management to others, so I’m not a manager any more. My mind has always been about building things and creating – making stuff – that’s what I really, really love. I didn’t want to call myself anything related to “innovation,” because we feel that’s everyone’s job at the company. We don’t want people thinking “I don’t have an idea, I’ll ask Adam!”

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Late last year you scored a very significant funding round – fifty-seven million dollars. According to media reports, you hadn’t even used up the money from your previous investment round. So why in the world did you raise fifty-seven million? Adam:

That makesWe’ve thebeen question more or evenless cashflow more relevant! positive since we started . . . Adam: It was never really about the money. There are some brilliant people out there, some really, really smart people. We figured the way to make them really think about what Prezi is doing and focus on that is to have them put their own money into the company. Then they are really motivated! That’s the thing with great VCs – they bring their amazing knowledge and of course their network to the table.

Since you’ve managed the company so sensibly this far, what are you going to do with all that money? You haven’t done any acquisitions in the past? Adam: We’re now starting to get to that scale. You can’t rule anything out, and you don’t know what the future might bring. It’s also that we really love what we do, we love visual communication. We are also much bigger now. We have 55 million users, but we think our potential market space is much bigger than that. There are many more people doing presentations and visual communications, so we have a lot of potential to grow.

You actually launched Prezi here, at The Next Web conference six years ago, in 2009. How has the European environment for startups changed since then? Adam: Back then it wasn’t “startups”; it was “Web 2.0,” if you can remember that. What is really different is that maybe you don’t *have* to move to San Francisco as fast today. Six months ago, I was on a tour in Mexico promoting entrepreneurship with Mayor Lee of San Francisco. He said at the time that he was really proud that 40% of the population of the city comes from abroad. It’s not just about the US market. It’s a global city with global cultures and multiple perspectives. Many years ago, when the startup “thing” started, many countries were proclaiming: “I’m gonna be the Silicon Vally of Europe!” “No, *I’m* gonna be the Silicon Valley of Europe!” The reality is that now we have all these different hubs and ecosystems. You get access to a lot of different cultures and viewpoints. So that can give you a little bit more time before you have to move to San Francisco.

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Europe has changed a lot since 2009. Do you see any other changes that need to be made, particularly in the area of public policy and the regulatory environment? Adam: When we started, there were these “innovation grants” that we could have applied for. We decided that we didn’t want to waste our lives on ideas that didn’t work. We wanted to get to the market in a few weeks and see if this is real. It can be a real issue if you get non-smart money into your company – money from people who don’t understand your business. It can draw out the process of getting to customers quickly and starting to learn as soon as possible. What Mayor Lee said about San Francisco being so multicultural really fascinated me. This is what we need in Europe. We need to encourage and support mixing and traveling, making it easy for an entrepreneur from one country to set up his business in another. Today, if you have a legal entity in one country, it’s a huge problem to do business in another country – we all know this. We have a lot of potential because we are such a cross-cultural continent! Leveraging that potential means making it easy to travel, eliminating roaming charges, mixing and facilitating innovation by letting people from different backgrounds and cultures meet and work together.

What’s next for Prezi? Adam: We’ve been focusing on making the whole experience smoother, slicker, simpler, better. We now have one hundred and sixty million presentations built in Prezi. Many of them are published with a license that allows others to copy and reuse content. I think it’s amazing that, when you need to create a presentation, you can go to his database, search for similar stories, mix and reuse them instead of starting to type something from scratch.

Will you be enabling your creators to monetize that in any way? Adam: Not yet, but you never know what the future brings!

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18 SoundCloud Alexander Ljung THE EUROPEAN STARTUP REVOLUTION

Apple revolutionized the way the world listened to and purchased digital music with the 2001 introductions of iTunes (in January of that year) and the iPod (in October). We could all finally purchase individual songs instead of being locked into albums with one or maybe two great songs. We could also enjoy digital music legally, at an acceptable price of 99 cents per tune. Ten years later, the environment had shifted dramatically. Wide availability of flat-rate broadband access, high-speed wireless connectivity for smartphones and tablets and the rise of cloud computing meant that “owning” music by downloading it to a dedicated music player such as the iPod was no longer the only option. The time had come for streaming. Three companies – all of them European – emerged to dominate streaming music. SoundCloud and Spotify both launched in the same month, October 2008. Deezer followed in 2010 (an interview with Deezer co-founder Jonathan Benassaya is in Chapter 20 of this book). The founders of SoundCloud, Alexander Ljung (CEO) and Eric Wahlforss (CTO) are both Swedish (as is Spotify founder Daniel Ek). They decided, however, to move from Stockholm to Berlin, where the company is still based in 2015. I first interviewed Alex Ljung in the summer of 2012. It was a critical time for the company. Having raised an investment of fifty million dollars earlier that year, Alex, Eric and their crew were preparing to take a major new version of the product (“The New SoundCloud”) from private beta to a general public release.

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Alexander Ljung: SoundCloud

Hi Alex! 2012 has been an amazing year for SoundCloud so far – you kicked it off with a pretty big bang. Yeah, every week we try to create a bigger bang. It never ends. It’s been a good year so far.

Of all the things that have happened this year, which one would you single out as the most exciting? This year the most exciting thing for us has been the private beta launch that we did of what we call “The Next SoundCloud.” We took a step back and looked at our main web application, the SoundCloud you can see from your browser. We basically started from scratch, looked at everything we learned from our different mobile applications and what is now possible to do in the browser, and we basically redesigned the web app, and we put some pretty cool stuff in there. We then decided to make the slightly scary move of releasing it as a product beta super, super early. So we launched that a while ago and had a number of people from the community using that as their main version of SoundCloud, even while we were working on it.

How many people were in this early group? I don’t know exactly how big it was at the time. Anybody could sign up for an invite and try it out. But we have been actively using it every day as the main version and every day we are getting feedback and fixing things and building new stuff. We’re sort of moving towards the point where that’ll become the main web app. It’s a gorgeous experience, much faster. There are new features like reposting, creating listen to music, browse around, find new stuff, and you know that sound will always stuff . . . we have continuous playback through the entire web app, so you can just be flowing. That’s been one of the most exciting things for us over here.

Can I take you back now a few years? You mentioned that Eric and yourself wanted to start a company and moved from Sweden to Germany, to Berlin. Why did you move, and why Berlin? It was very spontaneous. It wasn’t really something that we thought about so much. We visited Berlin for a day, and we both just really felt a connection to the

313 THE EUROPEAN STARTUP REVOLUTION city and the vibes so we just decided then that we would move down here and try it out. You know, at the time, we weren’t really sure why that was. It just kind of felt right. In hindsight, trying to figure out where that feeling came from – one of the important parts was that Berlin has this really great intersection of arts and technology. A very strong art scene and a very strong tech scene. I think that ultimately resonated with both Eric and me and just what kind of company we wanted to build. Berlin is this fusion of artistic creativity and amazing technology, and it just felt like the city represented that as well. The second important part way. And I think that’s essentially what startups are about, right? You look at the was . . . Berlin is very much about counterculture, about doing things your own world and you see that something should be different, that it could be done in a different way. And you set off trying to change the world and it turns into your real life. Berlin is almost like Silicon Valley in the sixties, like the hippie movement, the tech movement and the counterculture thing and trying to do things in their own day here, and it convinced us that this was the place to move to. way . . . It felt like Berlin really had that. Those were the things we felt after just one You’re based there now, although you have offices in London and San Francisco and a development team in Bulgaria? Yes, exactly. I divide my time mainly between San Francisco and Berlin. I’m usually over in S.F. a week or maybe a week-and-a-half each month. So yeah, we go back and forth between the places. Even though most things are in Berlin, we try to really act as a global company. And we don’t have any teams that are set up for a specific country or region or anything like that. We see the world as sort of one place. It’s kind of like an Internet way of looking at things. Countries and borders don’t matter that much: the web has really connected the world into one place, and that’s how we are trying to think about the world all the time.

It certainly seems that the music industry doesn’t view the world that way. been by nations and countries. Switching that over to something different doesn’t Well . . . the predominant way the world has been organized for centuries has happen overnight. I mean, it’s a tremendous change. But when you look at the less

People have already given up, to some degree at least, on the idea of countries. In complex things, like just how people are behaving, you know, in everyday life . . . a given hour, maybe I’ll contact forty-five different people, and it doesn’t matter where in the world they are at the moment. If I send an email to somebody, I have

314 18. SoundCloud • Alexander Ljung no idea if they are in San Francisco or if they are in Paris at that moment -– it doesn’t matter.

In those early years – 2007, 2008 – Did you guys go through any startup program such as an incubator, an accelerator, or any programs that are set up specifically towards helping startups grow and expand? No, we didn’t. We looked at a few different ones but decided to just do it ourselves instead. We did have one angel investor here in Berlin who definitely acted as a sort of mentor and helped us out a great deal, but we were never part of a startup program or received any government funds or anything like that. I don’t know if that’s right or wrong, but we thought that that might end up being too much of a distraction. We felt that we knew what we wanted to do, so we said, let’s just go and do it and we’ll figure out all the challenges along the way. One thing that helped was that even in the beginning we had a pretty good network ourselves with just other Internet entrepreneurs and we were always happy to take advice from the people around us. A lot of people helped us at the beginning, great entrepreneurs from all over the world. But it’s never been a formal alliance or a program, it’s just been like, you meet people also interested in having an impact, and what’s cool is that a lot of entrepreneurs are usually very eager to share their learning with younger entrepreneurs.

Do you ever have any opportunity, do you find the time to do the reverse? In other words, now that you’re basically a rock star in the startup world, do you do any mentoring or work with people that are just starting their own projects? Yeah, sure. That’s what I do on Sundays. (laughs) Yeah, I do. I wish I could do even more of that. There’s a limit to how much you can do. SoundCloud is obviously the first responsibility, but outside of that I try to do as much as possible. There are a lot of younger companies here in Berlin. There’s a couple that I’m more deeply involved with, but there’s a lot of them that I help out a little bit now and then when they need it.

You mentioned an angel investor. Was this person of any help in your first round with Doughty Hanson? Yeah, certainly. We had no clue how that part of the world works. How you raise money and how you structure it and why investors invest in companies. We

315 THE EUROPEAN STARTUP REVOLUTION only knew that we had to add sound to the Internet. We learned all that stuff on the way, but initially this angel was very helpful in making some of those initial connections and guiding us through how to think about it. So that definitely got us started in the right direction.

When thinking about sound, I guess the first thing that comes to most people’s mind is music. Music is the kind of sound that is, let’s say, the most structured, or the most visible. Looking at the SoundCloud platform, how much of the content that’s on there are sounds that are not musical? Sounds that are somehow from some other walk of life – cars braking, engines running, children screaming or something like that? It’s not that easy to measure – there are just enormous volumes of sound on SoundCloud. And it’s not really reliable to use tags and that kind of stuff. However, what we’ve seen, especially over the last eighteen months, is an enormous growth in non-music sounds. The breadth of it is just mind-blowing. If I just look at my and then somebody is recording sounds from the protests in Egypt, all in a row. So stream . . . There’s a musical track, then there’s Mayor Bloomberg from New York I think it’s really exciting – the growth of the audio side of it. We’re only beginning

It’s completely natural for it to be that broad because, ultimately, you know, to wrap our heads around it . . . there’s seven billion people on the planet and, for every single one of us, sound is a crucial part of our everyday experience. It takes many different shapes, but sound is ultimately one of the key things of what it means to be human. Once you enable that online as well, it may take a lot of time, but it’s going to take on a lot of different kinds of shapes. Sometimes it takes the shape of a beautiful piece of music that someone has worked on for a long time and sometimes the shape of something a five-year-old kid did for fun!

The whole concept of what you’re doing is really fascinating. It’s great to see it grow and expand. Let’s step back for a little bit and go back to the news from early 2012. The investment has been really large. In the meantime, you’ve acquired one company. Are there any more specific uses for the investment besides growing the company and growing the project? Sure. A lot of it is about trying to make the world go faster. Sound is massively underrepresented on the web, and we want to have enormous volumes of interesting sounds on the web and allow those sounds to connect people all over

316 18. SoundCloud • Alexander Ljung the world. We want to get there as fast as possible and one way of doing that is by ramping up the size of the team. We’re very aggressively recruiting at the moment and we have over a hundred people on our team – actually, quite a bit over a hundred – and we’re trying to recruit as fast as possible, just to bring more really smart people in, to help us get faster to that world of sound. moment on The Next SoundCloud. Until that is released as a public version Some of the tangible stuff that we’re doing is . . . There’s a massive focus at the available to everybody out there, the main focus for us is really on getting there faster and completing that one and making it the default. Outside of that, we’re also working a lot on our mobile apps, constantly challenging what sound can be in a mobile application. We can all see the massive trends of more and more things going towards mobile, which is relevant for any tech company, but I think it’s especially relevant for us. You have your mobile phone with you all the time, and it’s not optimized for heavy screen usage, but it’s ideal for a lot of audio usage. So mobile becomes twice as important, not just because of what we do, but because of what is happening in the world, as well.

The cameras on mobile phones keep getting better and better. Do you feel that the audio quality of the hardware that’s built into the phones is good enough, or do you think that is something that the manufacturers also need to work on? On the input side, the fact that everybody has this microphone on their mobile devices is great. Over the last couple of years, the manufacturers have managed to make phones really, really good. I’m just blown away with the quality of the microphones and the recording on the iPhone at the moment. It’s really awesome. the microphone on the iPhone is just fantastic. On the output side of it, on the And as an old, you know, ex-sound engineer . . . It makes me really happy that listening side, the speakers on the phones are not that great, but there’s good headphones available. I’m still annoyed that you always have to have a cable for your headphones. I wish there was some more fluid way of getting the sound from the device into your ears, without using a bunch of cables and stuff like that. It’s a problem that’s not being answered.

One of the key areas where you want to push and grow is the US market. On the other hand, you’ve mentioned that you’re looking at the world as one, as

317 THE EUROPEAN STARTUP REVOLUTION a single market or a single group of people. Do you have more specific plans for some of the emerging and high-growth markets? Kleiner Perkins made an investment in Trendyol in Turkey last year. Russia seems to be exploding with internet companies, not to mention China. You can’t do everything at the same time, but do you have plans to more actively push towards those markets? We don’t. At the moment we’re letting it grow organically, observing like where our users will take us. It is something that we’ll be looking at more eventually, but

We’re definitely stronger in Europe and North America. Of course we have users in at the moment we have no specific plans. We have users all over the world . . . other regions of the world as well, but we don’t have any local offices or anything like that planned. At the moment, we’re letting users lead the way.

You’re based in Berlin, you have a London office and a US office . . . Many times we’ve heard that European startups need to move to San Francisco to make it. Obviously, you’ve made it without moving, at least full time, to San Francisco. What’s your view of Europe right now as an environment for startups? Maybe as compared to the US and maybe as compared to where Europe was a couple of years ago? There are pros and cons with wherever you decide to have the heart of your company. There’s a lot of convenience in being in Silicon Valley, being close to a lot of large companies that you could partner with, of having a lot of like-minded people around you, and I don’t think that there is anywhere else in the world where you can get close to that. On the other hand, sometimes it leads a little bit towards group thinking, many people doing the same kind of thing, you can get a little bit disconnected from the rest of the world. Berlin is a great place to do a startup! There is a concentration of arts and startups coming here from Europe, too. The benefit you get from not being purely creativity . . . It’s a lot cheaper than some other places, as well. There are so many in San Francisco is that it’s easier to avoid falling into group thinking and be able to really do something different. I think it’s also easier for us to think about the world in a global way, instead of just focusing on the West Coast of the US. In Berlin I can see many more sorts of art and creativity that’s really interesting. And I think that that part is really important for a startup, as well. As technology, especially consumer technology, becomes more and more embedded within culture and

318 18. SoundCloud • Alexander Ljung society, it becomes much more important to be close to cultural thinking and skills rather than just the traditional engineering and hardware knowledge.

I’ve spoken with two other companies that, in a way, remind me of you guys, although they are from different areas. One is Mendeley. They are also German guys . . . Yeah, I know them.

OK. The other is Prezi. They are in Budapest. I went to school with (Prezi co-founder and CEO) Peter Arvai. We went to the same university.

That’s interesting! Last question – aside from wanting to grow SoundCloud into, basically, the sound of the internet, are there any more concrete or specific plans? Is there a vision for SoundCloud moving forward in the next several years that you’d like to outline? I’m not sure this will answer the question because it’s not very specific, but I think what’s really interesting about what we’re doing is that it’s super exciting, no matter what timeline you’re looking at. If you’re looking at three months, if you’re looking at a year, even three years, or if you really stretch it out to ten or even twenty years, any sort of time period you want, there’s a lot of exciting things that will be happening around sound. If you really go far out into the future, then you really start to think about the web as a place you can speak to, you can listen to, can really take it far out and it’s all also very obvious, just from today. That’s one and you can interact with . . . through your ears and through your mouth. So you of the things that is important for me. Looking out into the future I can’t see the point where this project is definite, where it’s complete. It doesn’t exist. There are always more things we can do for sound and for people who connect with each other through sound.

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E-mail interview, September 2015.

I re-connected with Alex Ljung in September of 2015. SoundCloud had grown significantly by then. Having become extremely popular with a huge number of independent artists, DJs and music lovers, the company had begun to establish relationships with major music labels such as the Warner Music Group, as well as the US-based National Music Publishers’ Association (NMPA) and Merlin, a global digital rights agency representing over twenty thousand independent labels.

Hi Alex. It’s been three years since our conversation in July 2012. Let’s start this update with some stats. How many monthly active users are on SoundCloud today? We’re at 175 million MAU’s.

How about songs? There are over 100 million tracks on SoundCloud.

How big is your team today? Three hundred employees, across four offices worldwide.

What’s your growth rate? How many advertisers are on the OnSoundCloud platform? I’m afraid we don’t share those particular stats.

Our last conversation was in July 2012. How is SoundCloud the same, and how has it become a different company over the past three years? We’re still the leading audio platform that gives users unprecedented access to the world’s largest community of music and audio creators, and we now have over 175 million monthly active users and 10 million creators on the platform. The biggest introduction since 2012 – our comprehensive redesign aside – has been our premier partner program, On SoundCloud. Premier Partners have the opportunity to earn from their uploaded works by placing advertisements against their content (currently only in the US). Since launching a year ago, we have grown it from 20 initial partners representing 2,000 labels to over 600, representing more than 25,000 labels, many of whom are independents. On SoundCloud remains

320 18. SoundCloud • Alexander Ljung invite-only at the moment, but we’re speeding up the inbound process, and we hope to roll out the program to as many users as we can as soon as possible.

How does advertising currently work on SoundCloud? Are audio ads insert- ed into the stream? Does the listener hear the ad in between tunes? How frequently? We launched the ‘On SoundCloud’ program to develop a meaningful business that allows creators to monetize their content through advertising. Brands work with us in many different ways, from audio ads to highly customised native campaigns. Our native, “promoted tracks” put brand content at the top of every SoundCloud users stream for massive exposure to our engaged audience. To date, this has been used to great extent by brands with compelling content such as HBO, Red Bull Sound Select, and Scion. We’re also developing exclusive content for brands. Artists consistently choose to premiere new music on SoundCloud – in many cases before they release it anywhere else – and we offer the opportunity to take advantage of these crucial engagement moments. We are giving brands the ability to partner with new artists on their releases and present that content to the SoundCloud audience as a co-branded experience. Recently we paired UK artist Sizzlebird with Jaguar to produce the track ‘Leaves’, and have run similar campaigns with Axe, Microsoft, Sonos, and Taco Bell.

Agreements / licensing deals with Warner, NMPA and Merlin are a clear in- dication that SC is looking for a way to build partnerships with the major labels as well as other rights holders. How important/critical are the partnerships with the other majors, besides Warner, to your future strategy? We have always enjoyed a close working relationship with the major labels since launching, and as we continue to grow the scope of the platform, our ties become stronger. The aforementioned deals with WMG, Warner Chappell, NMPA, and Merlin are all by-products of this, and we’re in active discussions with a number of other major parties whose artists value the promotion, audience building, and now potential monetization options we provide.

You’ve talked about the evolution of SoundCloud from discovery and promotion to a streaming destination, about “consumption being the new sales” and about a future where revenues – and payment to artists and creators – is

321 THE EUROPEAN STARTUP REVOLUTION driven by a mix of advertising and subscription. Do you feel that you have that model figured out and now it’s a question of execution and rollout, or are you still at a stage where your company – and the whole music business – is still in search of a framework that will be broadly accepted by hundreds of millions, or billions, of listeners, but will also enable the people who create that music to make enough money out of it to be motivated? Through our label discussions and internal development efforts, we are dedicating a significant proportion of our time to defining how music and audio content is consumed on the web. Specifically, we are charting a new course via our deals with major rights holders – including those recently announced, like WMG and Merlin – to include monetization of user-generated content such as remixes and mash-ups, which is a new avenue for the industry. Some services have tried to use existing licensing models to clear some rights in some countries, but no one has solved this as a problem globally, at scale. It’s a huge task that requires collaboration and buy-in from many different groups and rights holders, and in time, we believe we can crack it.

Do you still expect to roll out the subscription model this year? We’re working very hard behind the scenes to make our subscription offering as relevant and useful to our community as possible, and we’ll have plenty of details to share as soon as it nears completion.

What are the key next steps for SoundCloud as a platform and as a company in the next three years? Aside from continuing to grow and to offer the same standard of service that our community has come to expect from SoundCloud, our next ambitions are to introduce our subscription offering, and to roll out On SoundCloud to as many partners as possible. Additionally, mobile has become a huge part of what we do, with our apps now responsible for 70% of our overall monthly usage. As such, we’ll continue to develop and refine our mobile services as we grow to realise the true potential of audio on the web.

322 19 500 Startups Dave McClure THE EUROPEAN STARTUP REVOLUTION

“Who is the Dave McClure of Europe?” someone asked on Twitter in September 2010. “I’m the Dave McClure of Europe!” Dave tweeted back immediately. In this book about European entrepreneurs, not everyone I’ve interviewed is strictly European by birth. Alicia Navarro was born in Australia, Martin Varsavsky in Argentina, Reshma Sohoni in India, Carlos Eduardo Espinal in Honduras. All of them, however, have made Europe their home and built their various businesses on, as Stefan Glänzer says, “our beautiful continent”. Dave McClure was born in the US. Unlike most American VCs, Dave travels extensively to all corners of the world, looking for investments for the company he founded, 500 Startups, which is part early-stage venture fund, part startup accelerator. In the summer of 2012, he was preparing for yet another “Geeks on a Plane” expedition. This is a project where he and a group of (mostly) Silicon Valley investors and entrepreneurs visit several cities in a given region, organizing conferences, meeting with local ecosystems and politicians and spreading the startup gospel (some, of course, would call it “hype”). The destination for this trip was to be Eastern Europe, visiting Moscow, Tallinn and Berlin. The fourth city, Dave announced on social media, would be either Warsaw or my native Zagreb, depending in part on which community made a louder buzz on Twitter. While geeks in Poland and Croatia furiously battled to host the Geeks (“Come to Croatia, our women are beautiful!”), I contacted my friends Marko Rakar and Matija Kopić and, behind the scenes, we lobbied then Croatian president Josipović to extend a Facebook invitation to Dave McClure. The plot worked, and Dave responded on Twitter in typical McClure style: “holy crap: President of Croatia just invited me 2 hang in Zagreb, via Facebook. #MindBlown #GOAP @500”. On Facebook, his reply was more structured and polite: “wow . . . I’m honored, and speechless.” So the Geeks on a Plane project arrived in Zagreb in September, creating massive interest from the media, business and political communities. It was a turning point for the Croatian startup community, which has since then become much stronger, more dynamic and vibrant and better recognized and respected outside of the small startup environment. Our first conversation took place in the bar of the Hotel Westin in Zagreb, during that GOAP visit in September 2012. We caught up on Skype three years later, almost to the date.

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Live interview, Zagreb, September 2012

Dave, early in your career you used to work at Microsoft and Intel? Yes, as a consultant. But I never worked there officially in terms of being an employee.

What made you leave, stop consulting with them, take off and start doing other things? The contract with Microsoft was the beginning – that’s when I started my first business. I was doing database consulting, PowerBuilder, Visual Basic and SQL Server. I guess I realized that I would have a tough time working for other people, so I did a few years of independent consulting, which was really great. Somebody that I used to work with joined Microsoft and their consulting group, and they had a big contract with Intel. So I ended up doing a lot of work for a couple of years with Microsoft, consulting with Intel and managing a sort of fab assembly planning system based on a big-ass Excel spreadsheet project with a SQL Server back end. That turned into a regular sort of client, so I grew from a one-person consultant to a three- or four-person consulting team. Somewhere along the line I decided I’d try to turn this into a business. And I gradually grew that to about 20 people at the height of the business.

That was Asian Computing? “Aslan” was the name – it’s a C.S. Lewis, Narnia reference.

Oh, OK. I guess that was my first real business; I often say my first legal business. I made a lot of mistakes. I learned a lot of things about business, finance, managing people, how clueless I was – it was a rollercoaster ride. I got to a modest level of about 2 million in revenue, but it was a very bumpy ride. Eventually I ended up selling the business to another consulting group, which I then joined and spent about another year, year-and–a-half with, through a subsequent acquisition and their failed attempt to go public in 1998. So I had about seven years, two with me as an independent, three years of running a consulting business and another year, year- and-a-half in somebody else’s group.

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And after that it was PayPal? I left the company that had acquired us in the summer of ’99. I took some time off. I was like three years overdue for a honeymoon, so we finally did that! And then I did a little bit of consulting and worked with some other startups and then finally ended up with PayPal in 2001.

You were with PayPal for a couple of years? About three years. I joined them right before— about six months before they went public and through the IPO and the acquisition and a couple of years after that.

So you were kind of part of the PayPal mafia? Well, that’s a real stretch – I mean, I was much lower down the ladder than the guys who started the business.

But you know those guys reasonably well. Modesty well. I’m not super buddy-buddy with Peter and everybody else. I ended up working for Founder’s Fund later, so I’ve worked for Peter twice. I’m friendly with Reid and Chad and Steve and all the other folks. A surprising number of people, kind of amazing shit! [1]

Tell me about how 500 got started? Well, again it was a sort of failed attempted to try to get a job, working for somebody else in venture. I guess I’ve had various attempts for the last ten years or so, on and off, trying to break into venture capital as far as back as Garage. com, which was probably twelve years ago. I made a more significant attempt in little bit of money from PayPal to put into startups, about 300,000. I put it into 2007/2008 . . . I started angel investing as I was leaving PayPal in 2004. I had a maybe 13 different companies, and there were a few more that I was an adviser for. I didn’t really know what I was doing. It was mostly amateur investing. I knew, kind of, how the companies were doing. Because I’d been on the engineering side and the marketing side, a lot of other investors would ask me to help out or advise or consult. After a while it was like, “Since they’re asking me to do all this advising and consulting, why am I not doing the investing?!” So I started— I tried to raise a

I’d become friendly with Jeff Clavier, some time round 2004/2005. He sort of fund, or at least prepared to raise a fund . . . bootstrapped himself into VC through a previous company that he’d sold, and he’d started to work for the Reuters venture group a little bit earlier. So, anyway, I was

326 19. 500 Startups • Dave McClure kind of learning a few things from him, trying to pick up some stuff on my own, just kind of feeling like I had it figured out, and then in summer 2008 the market just went “boooommm.” I’d been meeting with Gunderson18 to prepare for a five-

Perfectto ten-million-dollar timing! fund . . . do marketing for Founders Fund. I sort of turned him down a couple of times . . . and that market went south. Sean Parker had been trying to recruit me to come still got that gig?” I told him, “Look, I’d like to do the marketing, but I also want and came kind of crawling back after that. I was like, “Hey Sean! Errr . . . have you to invest, so, you know, could you carve out about a million or two for me to play with?” They were kind enough to do that. I was mostly left to my own devices – it was rather surprising. In the depths of the worst downturn in venture capital in in venture! Sean had a lot of projects in those times – I would have to say he was a the past 20 years or so . . . I think I was the only person that got hired in Q4 of 2008 little bit of an absentee parent in that world. So they kind of let me do my own thing. I asked if I could take over Facebook’s fbFund, which was the JV that Founders Fund and Accel had put together to invest in the Facebook ecosystem. After the platform launched, they put that together. Facebook ran it for a couple of years, and then Founders Fund and Accel realized that Facebook didn’t really need any additional help, but I asked, “Hey, before you shoot this, could I take it over?” So, i took that over in summer 2009. From Q4 2008 thru Q1 2010, I had an investment budget of just under three million dollars, and made ~40 investments in the two different vehicles (FF Angel out of Founders Fund II, and the fbFund JV). I was kind of like a kid in a candy store. It was awesome! Walking into a job in venture and getting to do a lot of little deals and pretty much make your own decisions. I think I presented like 25 deals and I got to do 21 of them on the FF Angel portfolio thing I was managing. Similarly, on the Facebook fund we did another 22 companies. And it turns out that a lot of those were pretty decent stories! Out of the Facebook fbFund we invested in ZimRide (which became Lyft), Wildfire (later acquired by Google), and Life360 (raised Series B, valued at >$100M); from

The law firm Gunderson Detmer. 18

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Founders Fund FF Angel fund, we invested in Credit Karma (now valued at >$3B), Twilio (now valued at >$1B), and Sendgrid (raised Series B, valued at >$200M), and several others. In my own personal portfolio I had invested in the seed rounds of Mashery, Mint.com, and SlideShare, which were all later acquired for >$100M. As the marketing got a little better, I had gotten a little bit of experience under my belt, and I kind of felt like, “OK, I’m ready to go back out and give this a shot again.” The Founders Fund and Accel and RedPoint and BlueRun were, again, generous enough to give me about a million each to get started. Also, a few other individuals – Mitch Kapor, Michael Birch, who was the founder of Bebo, and a few other Japanese folks. And so, after a lot of effort, I finally got a first closing together for Fund I in the end of July 2010.

How many, roughly, investors were in that? The first closing was fairly small – about, maybe, 10 investors at around 6 million dollars. We spent the next year-and-a-half rounding up another 120–130 investors for another 23 million. So there were a lot of small investors – about a hundred investors at 100 K each and maybe 30 investors at half a million or a million each.

How much of a hassle was it to put together?

Fucking hell! A shit ton of hassle . . . Especially for a first timer, especially for the together a fund is, “I’m gonna raise X.” You aim for raising 50% or more of X; when crazy structure of the fund . . . I talked to other people, and the typical way you put you get to 50% or more of X, you do your first closing and you maybe might slowly thought I could raise a 30-million-dollar fund. We did a six-million-dollar initial get started as you raise the rest of the fund . . . We did nothing like that! I brazenly closing and then it took another year-and–a-half to get to 29 million, so we got pretty close to target, but it was a very, very long road.

You learned a lot along the way. I learned a lot along the way and invested a lot along the way. Josh Kopelman was a small LP (limited partner) in the fund. He said, “How much have you called?” I said I called about 70% of the fund in the first year-and-a-half and deployed most of that. He was like, “I think you’re the only person I know who has ever bootstrapped a venture capital fund!” It was a very non-traditional method of getting started, and a very non-traditional process of investment. Probably a lot of people would say it was reckless. Well, some might still say that! But, you know . . . 328 19. 500 Startups • Dave McClure

This is the current fund, so you haven’t raised another round in the meantime? We actually have started raising our second fund – about 20 million into a 50-million-dollar target in the second fund and again – we’ve been investing pretty aggressively out of that. We’ve probably deployed half of that capital. So 50% of our current commitment to maybe 20% of our target commitment.

Obviously you’ve had a few exits? We have. We’ve had about 15 small exits and one of those was more significant – the Wildfire exit (~$350M acquisition by Google).

That was recent? Yeah, very recent. 350 million. That was about a 15x return on our investment out of 500 startups. It was actually about a 40 or 50x return on the investment I made out of Facebook fbFund.

So you were an investor in Wildfire from two different vehicles? Yeah, there are a couple of different companies where I actually did the investment from one of those earlier vehicles – Facebook fbFund, Founders Fund FF Angel. Credit Karma, Twilio, SendGrid, Wildfire, Lyft/Zimride, Life360, TaskRabbit, and one or two others that I’m forgetting. So I had some winners. That’s what was unusual about me coming into venture – even though I was fairly new to venture, I was fairly known in the Valley. I had pretty significant access to deal flow and pretty good connections with other investors. I was a bit of a latecomer to the VC profession but had probably more experience than most associates or principals who had been in a VC fund for a while. It was kind of weird – I wouldn’t have been able to get on a partner track in any notable VC fund, but I was kind of able to raise my own fund. I somehow backed into a club that I couldn’t get invited to. What was strange was a lot of other people who were in my peer group seemed very envious of my gig. They had much more prestigious gigs – associates and principals at CRV or Benchmark and a couple of others. But we actually got to do a lot of interesting work.

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When you make investment decisions from 500Startups, how much is it your personal call? Do you have an investment committee or a group or team that you discuss them with? Well, we’ve kind of developed a process. The first check is usually an individual decision by anybody on the investment team.

How large is the investment team? Now it’s about eight. Originally there were just two or three of us. We got to the larger size very recently; we were 5 people six months ago. Intentionally – we want to encourage independent decision-making on the first check and largely still independent decision-making on the second check, or at least led by that person. The third check, when we get to a larger investment, usually that’s more consensus decisions.

What level of amounts are we talking about in the first, second and third checks? The first check is usually 50 to 100k, the second check maybe 100 to 250, and the third check maybe 250 to a million. Right now, the largest we’ve done is a half a million.

So, depending on the stage, it’s usually between 100 K and a million? Twenty-five to 250 is the range, in the extreme case, for the first or the second check and then 100k or a million for the third check.

You’re on your way to five hundred (startups)? Once we get this batch of accelerator companies’ paperwork done, it’ll probably be at over 400. I would guess we’ll hit 500 companies sometime next year.

How many companies are usually in a batch? These days about 30, 25 to 30.

And it’s roughly three months? It’s three months active period. We’re doing classes over a 6-month timeframe. It’s a month to get them in the door, 3 to 4 months, kind of, curriculum and Demo Day, and maybe a month or two after Demo Day trying to get them to the finish line on funding and get pushed out the door. We were trying to do three batches a year, but a four-month transition was just too quick – we couldn’t get everything

330 19. 500 Startups • Dave McClure working. We’ve done 4 batches so far. We did 12 in the first round, when we were still getting our feet wet, and then 24, and then 34, and then we kind of backed off to 27, and now we’re going to push it up again to 30 or 32.

So for the companies – there is a lot of mentoring and demoing. They work on the product, but more specifically – what does the program look like for somebody who is participating? Just briefly! Well, there are two models for the accelerator. One – we basically give them $50 K at about 5% of common stock stretched with some anti-dilution protection up to the first million-dollar round. We ask for options for another two hundred. The first hundred is on an advisor round; it’s capped at 3 million, and then we split half of that with our mentors, and the other hundred is kind of uncapped based on whatever the post-Demo-Day round is. The target might be around five, so we sort of step through this progression of one million, two million, five million valuations. We think this is reasonable on both sides – it’s not like crazy expensive. There’s definitely some stuff that the YC companies are pushing the envelope on, like 10, 12 or 15. There are other ends of the spectrum where international programs or other accelerators are only getting up to 1–3 million, and that may be appropriate for the international stuff. We’ll see. We try and get in, validate that they are an interesting company, help them develop. We try to get our mentors involved at a reasonable price, use them to help signal what’s working and then the Demo Day. We hope to raise at least 250 to 500, maybe up to a million or so. A slightly different version of that structure is if the company has already raised 250k or more and has some traction. Then we’ll modify our terms and split our normal deal – 25K on our market terms and 25K on their terms. That is a little bit of the structure that we put together to encourage companies that are further along but still want to go through the accelerator and have access to Silicon Valley. It gives us the opportunity to get into some companies that were hitting product market fit internationally but weren’t in a market where they could get as much capital access or platform, company, mentor access. We’re still playing with those models. We’ve recently started doing this co- investment program with our mentors, where we are trying to get them access to companies early, at a somewhat preferential price that is not overly dilutive for the companies. It’s still the company’s selection who they want to take those

331 THE EUROPEAN STARTUP REVOLUTION mentor roles. But I think we are sort of getting that to work reasonably well. This is our second effort trying to roll that out. In addition to the accelerator program that we run, we also do a bunch of other investments at seed stage, maybe even an A round occasionally, and those could be all over the place: in another accelerator programs, companies that are with other VCs, they could be in the Valley, they could be in the rest of the US, they could be in the rest of the world. We’ve established a lot of partnerships, formal or informal, with other incubators. In the case of the Mexican VC we ended up taking that over and running it and brought them over to be a part of our team. In the case of Brazil and India, we have people in those countries. We’re working with other accelerators in Singapore and in Shanghai and in Nairobi. We’ve made

…hopefullyinvestments ZIP,in other19 maybe? incubators, in places like Seedcamp in London . . . Maybe, yeah! We have informal relationships where we don’t have investments – we just work with them to bring some of their companies over. We’ve been very flexible about those structures, about the variety of different techniques to develop channels for new companies that we think are interesting. I think we’re probably one of the more unique investors in the way that we run our own accelerator program, but also compete and cooperate with other programs.

Seedcamp is somewhat like that. They are really funded by other VCs. What is unique about us is that we are a follow-on investor in a minority capacity, which most accelerator programs won’t do. Unlike most other seed funds we have a physical space and run our own program. So we are a hybrid model with a pretty substantial focus on the international stuff.

I was wondering about that – up until a few years ago, a typical Valley VC would not tend to invest outside the States or even the Valley. It’s still the case. It’s not “a couple of years ago” – it’s now.

There are some exceptions, like Accel . . .

ZIP is Croatia’s first startup program which I co-founded in 2012 with Damir Sabol, Saša 19

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Well, there are a few cases of larger VCs creating funds in China and India and now

AccelBrazil maybe . . .has been very active in the Eastern Europe. They have done Russia, Finland, Turkey . . . Are you talking about Accel UK or US? There is a different Accel group that operates in Europe. With the exception of a few larger funds that have the wherewithal to actually create hundred-million-dollar funds, very few people who operate funds out of the Valley do international deals, or maybe they do a few UK-based deals.

Was going international something you wanted to do immediately? We always had the ambition to do some amount of international stuff. Maybe it’s because I had a family relationship in Japan and I had some interest in connecting with people in maybe India and China and other places. I met the Seedcamp folks when I was doing stuff with Founders Fund. So there was always a desire to have the international component be some part of what we do, but we sort of fell into doing a much more substantial effort around the international stuff. I’d like to think that everything was “top-down strategy,” but obviously it’s been bottom- up counterpunching in relationship to opportunity. It just became very apparent that there was a lot of potential internationally. If you were able to deal with the overhead costs, you could actually get into some very interesting deals, and it was quite a substantial differentiation from other funds. Particularly at the incubator level and seed level – nobody else is really trying to do what we are doing. So we are either crazy or we are brilliant. We decided we didn’t want to try to compete with YC20 in their own back yard at being the most geeky, engineering, tech-focused incubator, although we do some of that. So our points of differentiation were around design, around marketing, around international, maybe to some extent around women. There are a lot of angles we took to see how we can be both different and complementary to other funds.

How much of your portfolio, roughly, is international right now? I’d say, somewhere around 20%, plus or minus. That’s obviously a growing percentage. It started out as, probably, 60% Valley, 30% rest of the US and 10%

Y-Combinator, a highly successful, technology-oriented Silicon Valley accellerator 20

333 THE EUROPEAN STARTUP REVOLUTION international. Now I’d say it’s more like 50-25-25 and probably on its way to 30- 30-30 or maybe 50-50. Certainly, as we started to have more of a focus and people on the ground in Brazil, Mexico and India and maybe in the future in China and South-East Asia, I think we will be creating affiliated fund vehicles for specific regions. That’ll allow us to do more in each of those regions and take more risks but still kind of maintain the feeder structure into the main fund that fits our investment profile. So, yeah, we are really bullish about that! We think there’s just lots of reasons to be doing international stuff! It’s not as hard as most people seem to think, although it is hard. And, yeah, I think that the relationships that we built in the Valley are very advantageous to us internationally. Contrary to expectations – most people think that we’re scattered or disadvantaged doing the international stuff – we actually think that it’s a very focused and strategic process where we can provide access to the Valley and access to platform companies that are really essential to most of those international geographies.

Great! We’ll see. I don’t know if it will all work, but we throw a bunch of stuff against the wall, and a few things stick.

One last question before I let you go. Metrics? You are crazy about metrics and measuring. Do you measure your own performance, the performance of the fund? Do you have any stats you’d want to share? We are certainly trying! I don’t know how much I’m supposed to disclose, but our first fund looks like it’s working. We are up more than 50% after 2 years with the first fund. That’s mostly unrealized gains, so it’s still subject to whether other investors downstream and their evaluations are accurate, whether those companies do get to an exit. But we’ve been able to prove that our model has at least the potential for working. We’ve been able to identify winners that I think are performing well. So, yeah, we do try and apply a lot of metrics to our philosophy. We try to operate in the same way that we give advice to people, so we operate on

Youan iterative market process . . . yourselves! We market ourselves very well! I think that is one thing probably no one will argue about — that we do a good job of marketing ourselves. And, yeah, we’ve

334 19. 500 Startups • Dave McClure been fortunate. We got into some good stuff and made some early bets on things like AngelList and in other areas where we really felt like those were a lot of the changes that were driving the industry. We try to learn a lot from the YC model and the Techstars model and maybe other folks like First Round and SV Angel. So we’re trying to integrate the best approaches that we think are useful, and we try to create and synthesize some new stuff that we are doing. We run our own compared to the average VC. conferences . . . I think those all give us a little bit of a differentiated approach

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Skype call, September 2015

By the time of our update call, 500 Startups had grown significantly, raising more capital, investing in more and more startups and establishing operations and partnerships all over the world. Autumn of 2015 was a particularly intensive time for the company’s European expansion. The first step in this process was opening a London office, the Distro Dojo (translated from “geek speak” – an educational program focusing on startups’ market access, or distribution, strategy and execution). Next came the launch of a “pre-accelerator” program in Oslo, Norway. The third step was the expansion of the European team with new investment partners covering Germany, Turkey, Israel and Eastern Europe. Soon afterward, the company announced the formation of a fifteen-million-dollar “micro fund” to invest in Turkish startups.

Dave, let’s start this update with a snapshot of where 500 Startups is at this point in time. Three global funds so far, the last one 85 million, and then the smallish funds in various countries like Thailand, Korea, Japan, Latin America and Southeast Asia. And now you are looking to raise a growth fund at two hundred million and you have a ten million “Mobile Collective”? Well, we’re actually raising Fund 4 for two hundred million, and we’re thinking about raising a Growth Fund and it might be two hundred million, but I haven’t really filed for that yet. Fund 4 is going to be two hundred million.

How is that going? We really just got started, literally in the last thirty days. There are at least four or five big leads that look promising. We’re trying to get our first closing done before the end of the year, and hopefully it’ll be at least fifty million, but we’ll see.

Good luck with that! Thank you.

How are you guys different and how you are the same as you were three years ago when we talked in Zagreb? What’s changed for 500 in the meantime? Well, we’re certainly bigger. The team is now probably about ninety people. Our main presence is in California. We have San Francisco and Mountain View offices, which run our accelerator programs, two programs each per year, so probably

336 19. 500 Startups • Dave McClure about 120 to 150 companies go through those programs every year. We have a lot more people now internationally, so we probably have close to a third of our team outside the US, spread across maybe seventeen or eighteen countries.

I saw the whole series of announcements in Europe, first in London and then Norway, and now recently Philip Moehring and other people in Europe. Philip is still working part time at AngelList and part time for us. But we have London and Berlin covered now, and we have Erhan in Turkey, and Diana will be based in California, covering Eastern Europe and Israel. Adam is in Tel Aviv covering Israel, we have a partner in Bahrain and the Middle East, and we’ll probably add a few folks somewhere next year: I’m guessing probably Egypt and Saudi or Dubai, but I’m not quite sure yet. So we’re kind of across most of the place except Africa, and in a year or two we’re probably going to be in Africa as well. So a lot more folks are doing investment, a lot more folks are helping us with a bunch of things. I guess one of the big new pieces we have is the distro team which does customer acquisition consulting – there are about thirteen or fourteen people on that team. We’re just getting started with an M&A group, but we’ve only got one person on that team right now, and we’re probably going to grow that to five to ten people next year. In the future I’ll think you’ll see we have large main funds that we use for a lot of different things. We’ll have the seed-stage investments that happen in the US and internationally. We’ll have a bunch of microfunds that’ll be geographically focused but probably in the near feature also vertically focused. The mobile fund is the first of those, but in the future we might have a sales fund, an e-commerce fund or a fintech fund or something like that. The idea is to really just be helping to bring more investors to the team and helping them to create their own small funds that may be ten to thirty million in size, then co-invest with them out of the main fund, particularly on the investments that are working. The distro team will help our companies with growing their customers’ channels and strategies, and the M&A team will help with exits and next-round financing. We’re trying to create a full stack – a full service VC model operating at the accelerator and seed stage. In the future, we might also do a pre-accelerator. We’re actually kind of doing that right now in a couple of different test markets. We’re trying to address VC by geography, by stage, by vertical, at least for a lot of the US and emerging markets.

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Except for growing and expanding and all these new people, have you substantially changed or restructured your strategy over the past few years, or is this just a continuation of what you were doing and just getting bigger and better all the time? It hasn’t really changed in my opinion. Maybe slight changes in check size and certainly more reach. But we’re still probably averaging about a hundred thousand dollars on a first check. Slightly larger on a second and a third check but not dramatically so. We’ll probably do between one hundred and five hundred thousand on a second, and sometimes a third check might go up to a million, but again, we’ll probably play a minority investor role in institutional rounds. In general, we’re not leading on series A or B; we’re participating selectively. We’re really not even leading on series seed, except that sometimes we’re the first check and sometimes we set terms, but usually, we’re not the biggest investor. Other than that, we haven’t really changed dramatically, although the distro team and the M&A team are kind of significant pieces. We’re doing a lot more marketing and events. We’ve dialled back on the Geeks On A Plane stuff a little bit because we’re kind of all over the place physically, so we don’t need as much travel as we used to. I do a lot of travel, I guess, but otherwise, we’re in the territories that we used to travel to. We don’t need to travel there; we’re already there.

You can tell that your web site wasn’t designed by you. Ha ha! I think I’ll take that as a compliment!

Yes, of course. So how has this changed your job? How is your job different today with the new structure and all this growth? I’m generally not doing as much on the investment side as I used to. Investments are coming through me, but I tend to hand off a lot more. Most of my focus is on fundraising and hiring and, to loosely term it, “strategy,” I guess. I kind of view myself more as the CEO of the company rather than a VC. In a lot of ways we’re closer to being a startup than a VC, but we still have aspects of both. I guess I’m trying to figure out if I can run a company of a 100 people or if I’d better fire myself and find someone else to do that! I’m pretty good at being the marketing mouthpiece for the company; I’m not always the best manager, so we may restructure a little bit and have sort of an internal COO structure, with other people managing – investment team people – and I may act more as a coach or a mentor rather than being a boss to anybody.

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So you’ve managed to hack your way into the VC space? (We talked about that the first time we met.) I would still say we’re sort of 20–50% accelerator and 20–50% VC, you know, and the rest of what we’re doing is startup-related consulting services. There’s probably going to be in the future, I would say, a strong media focus to what we’re doing. Another piece that hasn’t quite launched yet is a TV show we’re launching on the SyFy network later this month. Actually, in about two weeks. We’re starting this six-episode pilot on the SyFy network that sort of tracks companies as they go through the accelerator. I don’t know if that’s going to become a business for us, or

The other big thing that we’re doing more – we just started this year – is doing whether it’s just a one-time, sort of, marketing shtick . . . we’ll see. more investor education. We taught a class at Stanford, about two weeks, 35 people, targeting folks who might run an accelerator or might run a seed fund or might be a corporate VC or manage their family office. I think we’re going to try to expand, to do more of that in the future, as well.

How is your relationship with your corporate partners? Techstars is doing partnerships with a lot of corporations such as Microsoft, Nike, HSBC . . . Have you looked into partnering more closely with corporations and helping them with innovation and startup relations? To some extent. We definitely have a lot of corporate investors in our funds. Maybe half of our capital is coming from corporations of some sort. Our relationship is pretty different to what Techstars is doing. Techstars is mostly, from my understanding, charging cash for running accelerator programs on behalf of corporate entities.

That’s a pretty good description, as far as I know. I don’t know if those corporates are also investing capital; they may be doing that. We’re generally not running our accelerators based on what corporations want to do. We’re running our accelerator and making our investments based on what we think will make money. Where there’s overlap with existing corporate, you know, vertical interests or strategy, then we certainly wouldn’t mind taking their money to invest in our funds or working with them on co-investments or maybe some sort of M&A partnerships. But we’re primarily an equity-focused, returns-focused organization. I think Techstars is sort of becoming more a consulting service for corporations. That’s neither good nor bad. It’s just different.

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We’re kind of picky about which corporations we work with. Some corporations are just sponsors for us, and that might be a little bit different. We do have those are product sponsorships and education related for our startups. Yeah, I sponsorships from companies like Amazon, Rackspace, Mailchimp . . . A lot of guess that’s kind of how we differentiate.

Are there any corporations that you want to mention as examples that aren’t listed on your web site? That you are working with in a way you think is very productive? We have a pretty good relationship with some telcos. SingTel in Singapore, True trying to figure out, looking for innovation that’s coming over the horizon, and Telecom in Thailand, DoCoMo in Japan . . . There are clearly things that telcos are maybe we partner or co-invest in companies that are doing that. So we kind of help them with a little bit of that; occasionally, we help them with some of their accelerator programs, with the curriculum. There are probably a few other types of companies where we have relationships like that, but we’re still taking a look and figuring out what we want to do there. We’ve started a few things with governments that I think are interesting – with the Malaysian government, with the Taiwanese government, with the Korean relationship there. Maybe with the Jordanian or the Bahrain governments. government . . . We’re actually talking to Kazakhstan; we’ll see if we have a What things are you working on with governments? It’s really around designing startup ecosystems. That may involve a lot of education and community resources, or mentoring, it may involve setting up funds, some of which we run, some of which other people run. It might involve helping non-profit organizations that are run by some of those governments with their curriculum and strategy. In Malaysia, there’s a program called “Magic” that is run, actually by a woman who is a former 500 founder. They do a lot of education and community resources for Malaysian startups and actually for Southeast Asian startups in Malaysia. We work closely with them on a lot of our distro and education programs. In Taiwan, we’ve been helping to bring some companies to Taiwan to learn about the areas of interest they have, like manufacturing support or education. In Kazakhstan, we’re talking to them about putting together for the country micro funds that might be in different verticals and really helping train the people running accelerator programs for those micro funds. So the more we

340 19. 500 Startups • Dave McClure expand our reach, the more we’re realizing that our mission is not just on the entrepreneurial side. It is as much as on the investor side and sometimes on the corporate or the government or even on the academic side. But in general, the mission is enabling access to capital. That’s not just for startups; it’s for investors, as well.

You have this really global overview and footprint. From your perspective, are there any trends in startup ecosystems worldwide that you’ve seen developing over the past few years? How have things been changing, especially in some countries or markets or places that are outside the US? Well, I would still say that we have a lot of work to do. Most ecosystems are not very mature. Even when they are active, sometimes they are not mature in ways that could be more sustainable. In general, there are a lot of accelerator programs which are not sustainable; they run on sponsorships and grants. They only have one or two or three years of funding; if they are run as a for-profit enterprise, there are very few of them that I think are going to be sustainable for more than three or five years. That’s actually what you usually need to have returns come out. There’s still a lot of early-stage capital that doesn’t exist in most geographies. Capital tends to fill in from the top down, so the biggest funds get started first. Even though there are a lot of accelerators, I guess that’s the one exception to that rule. Mostly, you see ecosystems started with private equity first and then large venture and then smaller venture and then sort of seed stage – which is kind of the opposite of the way that you’d like it to develop to be helpful for the startups! So you end up missing quite a bit of seed-stage capital and series A capital until you’ve had bigger successes in those markets. I think that presents a real problem, so we’ve been trying to figure out ways that we could hack liquidity or come up with some financial engineering to make it easier for those organizations to operate. Or for those ecosystems to operate. One way to do that is by combining real estate and startup investments in a way that tries to create a more hedged product. A lot of investors are familiar with real estate, but they’re not very familiar with startups. Real estate may be risky, but it’s usually not going to dramatically change in value overnight. Startups tend to fail completely or win, so you have a kind of binary outcome for startups. Usually most of your investments fail, a few succeed and a very tiny few succeed really well, and real estate pretty much falls and rises but doesn’t go to zero completely and doesn’t quintuple in value.

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There are various other liquidity services, whether those are IPO markets or active M&A markets or other synthetic secondary markets or systems. Most of those don’t really exist in most places. So it’s really very hard for a lot of investors to get their money back in short order, even if their investments are doing well. A lot of the time, their capital gets locked up for, you know, five to ten years. And that just makes it really hard to get a lot of these ecosystems off the ground. We’re still working on it. Everybody seems to think that accelerators are all the rage and that those are the solutions for every ecosystem’s problems. I think that is pretty naïve and wrong. An active number of small microfunds is probably more what’s required and probably the missing piece. But it’s really all the way up the stack, having an accelerator and active angel investment market and having multiple microfunds, having multiple series A and B funds and then having exit markets and secondary markets and IPO markets. And so I really would suggest that we’re still in our infancy in terms of understanding that and still in our infancy building that. There’s probably another decade, or two decades, of work in most markets, even most developed markets, to build that out. But it’s interesting work, and that’s kind of where we’re headed.

Is there any particular country, or maybe one or two countries in your recent experience – primarily I’m referring to emerging markets – that’s doing things significantly better than others, where the government is smarter than the competition? I think Singapore clearly, and Malaysia clearly, and maybe Southeast Asia overall, although I’m going to say there’s still a lot of work to be done in the bigger markets of Indonesia, Thailand, the Philippines and Vietnam. I guess for some reason it seems to be easier to make change happen in smaller countries. Singapore’s been particularly very thoughtful. It’s a small country, a small market, they have to rely on the larger markets that they’re involved with. Chile is doing some interesting stuff, but again, it’s kind of a small market. I don’t know that they’ve actually done as much with helping with downstream capital availability. For whatever reason, Southeast Asia has had a quite an influx of foreign VCs from Japan, Korea and China that have helped to develop that ecosystem quite considerably. I’d love to point out China as an example of a developed market that’s doing great in startups, but I would actually say that they are kind of fucked up in a lot of ways!

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but I think it’s problematic in how involved the government is in propping that up. Particularly the recent blow-up in the stock market . . . it’s not really a blow-up, There’s just a lot of money running around China in the private markets. Private companies are way overvalued in a lot of cases, so I think there’s a lot more that can be done there. London and Europe are starting to get a little bit more mature. There is a lot more seed-stage, micro-fund capital. They are building funds between ten and a hundred million – there is a lot more happening there. New York is an interesting ecosystem that I think is doing well, LA is probably coming up. India has a lot of positive things that have happened in the last year-and-a-half, but I would still say there’s a long way to go there. Turkey and Brazil have both had some pretty positive things at different times, but Brazil has a lot of challenges in the macro picture that may be overshadowing the startup scene. Turkey’s had pretty good adoption of credit cards and online payments, which has helped develop their markets, but still, again, they need more VC firms and more small VC firms. the shining story. They have their shit together, or at least they’re headed in the I could go on at length, but like I said . . . Singapore and Southeast Asia are probably right direction. London – and Europe in general, I think – is possibly headed in the right direction, but is still fragmented.

Back to 500 Startups – out of the recent exits that you’ve had, what are the more prominent, or the ones that you see as the most successful ones? We’ve had six exits that are over a hundred million, and we’ve probably had fifty or sixty that are below a hundred million, but our best companies probably are still private. The three unicorns in the portfolio are Twilio, Credit Karma and GrabTaxi. There are probably about thirty companies that are valued over a hundred million but not quite yet a billion. And there are probably two or three hundred companies that are valued below a hundred million and growing and having potential. Credit Karma is probably valued around three-and-a-half billion right now, and Twilio around a billion, and I think GrabTaxi is maybe a billion and a half – I’m not quite sure. Those are probably our biggest performing companies. A couple of our accelerator companies are getting to over a hundred million in value, and our multiples on those are probably bigger than some of the unicorns that I’ve mentioned.

What is the typical or average stake in the biggest companies, the unicorns and the hundred million ones?

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Pretty small. For a lot of those companies, we were investors at later stages. I invested in Credit Karma and Twilio when I was still at Founders Fund. We came in at the series B price, effectively, for both of those companies. In our accelerator companies, we typically own five to seven percent. In seed-stage investments, it’s more like one to three percent. For some of those big win,s we have even less than one percent. I’d love to own more, but we came in later.

What are the significant next steps for 500? You are going to obviously continue to grow and probably create more of the smaller funds. You mentioned the fourth global fund and then also a growth fund. Given all that, how you are going to change, going forward? Well it’s not necessarily a lot of change other than more of everything. We definitely plan to scale our investment team, as well as the other teams. I wouldn’t be surprised if, in the next few years, we’re operating twenty to fifty of these micro-funds both geographically and vertically. We’ll probably continue to raise main funds that are in the hundreds of millions of dollars and maybe in the future even in the billions of dollars. We’ll probably start doing this growth or late-stage vehicle I think sometime next year. That will really be targeting investments in our companies that are probably over a hundred million in value in series C or later, the top five or seven percent of our portfolio. In the past, we have had that pro rata agreement and not used it; it wasn’t really within the budget or in the strategy of our main funds, but I think in the future we’ll have the capital and the access to do late-stage investments out of a different vehicle, providing terms for the LPs (limited partners) who want access at that stage. We even might get into doing more of the micro, pre-accelerator business. I think at the moment we’d probably prefer that the rest of the ecosystem do that work, and we might come in selectively and help some of those companies, but we’ll see about that. On the services side, I would say there’s just a ton of things that we’re looking at doing in the future, but right now it’s around distribution, the customer acquisition side, and we’ll probably grow the M&A business. In the future I can see recruiting; I can see co-working or real estate. We’re just looking at all of our startups and what their needs are on the services side and where there’s a commonality of need. We’ll probably start looking at ways that we can recapture some of their spends on the services side with companies and services functions that we deliver ourselves.

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The commonalities of everything we’re doing are that we’re doing a lot of investments, we’re doing a lot of services and we’re trying to improve the overall ecosystems. We have a very large community, a very large network, we’re doing a lot of education. Continuing conferences and events and marketing will be part of that. In the long term, I really don’t know how big, how we’ll be able to manage our growth, but we fully intend to be the largest VC firm in the world. Right now, we’re there in terms of people and in terms of the number of companies, but we might also be the biggest in terms of assets in the future. It may sound ambitious, but we’ve done OK in the last five years, and who knows what we can do in the next five to ten years!

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20 Deezer, Plizy, StreamNation Jonathan Benassaya THE EUROPEAN STARTUP REVOLUTION

A long time ago, in a kingdom beyond seven mountains, there lived a people who had limited Internet access. Broadband, particularly mobile and wireless broadband, was limited, and the way to enjoy digital music was to download it to your device and listen on that device. In those ancient days, one company, one device and one piece of software ruled digital music. Some people are still old enough to remember that that company was called Apple, the device was called the iPod and the software was called iTunes. Sic transit gloria mundi. With increasingly plentiful broadband connectivity, often of the wireless variety, downloading music to create a “local library” of albums and songs has become a thing of the past. We stream music from the cloud these days. The companies leading the streaming music revolution are not from Silicon Valley or Cupertino or, indeed, from the US. They are European startups: SoundCloud (Chapter 18 in this book), Spotify and Deezer. When Deezer co-founder Jonathan Benassaya and I had our first conversation, in December of 2012, he had long before been, as he put it, “divorced” from his former partners, with whom he had created the company in 2006 and launched it in 2007. They called it “Blogmusik” at the time. By 2012, Jonathan was living and working in Silicon Valley. His new project was Plizy. Here – according to the pitch – was a single platform where you could find all the online multimedia you needed. No more searching for your favorite movies and albums through Netflix, Amazon, YouTube and other sites – you would find everything in one place, on Plizy. Our followup conversation took place in October of 2014. By then, Plizy had “pivoted” – changed its strategy and business model. The new project was called StreamNation, and it is the topic of the second part of this chapter.

348 20. Deezer, Plizy, StreamNation • Jonathan Benassaya

Skype call, December 2012

I want to start our discussion with Plizy. Congratulations on this latest round of funding! I’ve known Fred Destin for some time, and I know he doesn’t actually make very many investments; he is very selective. So I think that’s even more of an accomplishment! I hope so! The field we are addressing is interesting, but obviously there are a lot of companies, because nobody owns the field.

And obviously Fred has some experience with online video already, with Dailymotion and Cedric Tournay. Yeah.

How long have you known Fred, and how long have you discussed the deal? Just roughly, no details of course. I’ve known him since my last venture in China, so 2006. And he was interested in the in-game advertising area, which was really hot in 2006. We had good discussions then, but we decided not to move forward. On Deezer, he sent me a term sheet to which I said no.

Probably not many people have said no to a term sheet for Fred! When you have the chance to have different term sheets on the table, then you have

I think we talked only ninety minutes. the luxury to choose. And on Plizy . . . On Plizy it has been pretty straightforward. Where does the name Plizy come from? Pleasure and lazy, or pleasure and easy.

Pleasure, easy, OK . . . To be honest, I looked into it a little bit. I get the feeling what it’s about, but I can’t say I completely understand the whole concept. Could you explain it in just a few sentences? Yeah. First, Plizy is mainly targeting the US market. The issue that we are addressing is mainly in the US, where you have dozens of streaming services. You have a very strong streaming offer, but the content is fragmented in so many different services that, at the end of the day, when you just want to watch something interesting, you have to go trough all those services one by one and check if something is

349 THE EUROPEAN STARTUP REVOLUTION available or not. What we do on Plizy is we aggregate all the content into one simple interface with content coming from Youtube, iTunes, NetFlix, HBO Go, Hulu etc. And then we offer you a unique place to browse all the different services, search and get recommendations based on the service that you’ve activated. So in the end, it’s a smart aggregation of all the streaming services available in the US. And it offers you a unique interface to get access to all of the content available online.

OK, so I want to watch a TV show. I don’t really care which platform or channel it’s on. I just want to watch that particular show. And you guys will help me find the show whether it’s on this platform or that one? Yeah. If you have “Friends” on NetFlix, there is a probability that you will have the content available on NetFlix, but for the last season, you might have to go to iTunes. So we create a unique database where the main point is not the service, it’s the content itself, and then we map the web based on where the content is available. And obviously it changes all the time. For instance, a movie could be available on NetFlix, and then the day after that on HBO Go, and the day after that on iTunes.

I see. It’s completely clear to me. It’s interesting that with Deezer, you had a service that was available more or less everywhere except the US. Yes.

And with Plizy it’s kind of the other way around. Yes.

How do you make money? Plizy is part of a company called Milestone project, and Milestone project’s goal is to produce different products around video. For now, Plizy is our aggregation and recommendation layer. We are working on some other products. Always around video. We are building a very interesting platform, based on top of Amazon, where you have a lot of different technologies. This platform could be easily used by different types of services. So, for instance, for video recommendation and aggregation, we have Plizy. If we want to work on another video service, then it’s really easy to use our API. Now we are working on other different services around videos. We believe that there are a lot of things to do around videos, and we want to keep iterating and shipping new products, to continue our search for

350 20. Deezer, Plizy, StreamNation • Jonathan Benassaya a product which will be a hit. So we have much to do. Plizy is not oriented to revenue generation. There are some other products that we will release next year that will be much more oriented towards that. Plizy is much more an intelligence layer on the ecosystem of products we will ship in the future.

You also have started an incubator, is that correct? Milestone factory? Milestone factory is something I started in France and stopped when I moved to and he is watching cartoons on the TV set. the US. And . . . Give me one second. This is my older son, I just prepared a bottle OK, so he is into videos? That’s easy, if my daughter wakes up, then I will have to take off. She is three

Wow,weeks congratulations! old, so . . . Thank you.

It sounds like you’re in the middle of launching two very exciting projects at the same time. Yeah.

OK, so Jonathan, back to Plizy itself, can you maybe elaborate a little bit on the relationship between Plizy and the Milestone project? OK, it is a discovery engine and a platform. But presumably, there is a revenue model in there somewhere, right? The Milestone Project owns Plizy, meaning that Milestone Project is the name of the corporation, and one of the products that Milestone Project would ship. And the fundrasing is for Milestone Project, not just Plizy.

OK. want to subscribe to NetFlix, or Hulu Plus through Plizy, there will be fees that And the revenue on Plizy is mainly . . . You have affiliate revenues, so if you Plizy would receive. We see also a huge number of people contacting us, mainly people distributing or looking for distribution of independent movies, so not the blockbusters. Those guys like any platform where they can distribute content online easily. So, at some point, we might also offer a distribution channel for professionals looking for distribution . . . Another distribution channel for the content. 351 THE EUROPEAN STARTUP REVOLUTION

This reminds me a little bit of GetJar – do you know GetJar? Of course I know GetJar.

Ilja Laurs is the founder of GetJar – I also interviewed him for this series. I think there is some kind of analogy because that’s also a platform for distribution, just not for distributing video, but mobile apps, but it’s also an independent platform, and apparently doing really, really well. Yeah.

Do you guys know each other? Do you have any kind of relationship? We met, we met together once in Monaco, for the Monaco Media Forum. But we don’t have a permanent relationship.

OK, well it kind of occurred to me as a somewhat similar strategy . . . So what do you want to do – in a broader sense – with the overall platform? We believe that, as I said, the video market has never been really addressed beyond streaming. The last big evolution on this market has been YouTube and more recently NetFlix, and NetFlix is mainly in the US. We believe that the fragmentation of content and fragmentation of devices creates a lot of opportunities for people to discover and access their favourite content on any device. When you see the fragmentation of the video consumption across linear programming through broadcasting, cable TV, on-demand content through YouTube, iTunes, NetFlix consumption towards a mix of everything. And at the end – where the user will and all the other services . . . And UGC content – you see an evolution of content watch all this content and discover all this content – we make the bet that there will be a limited number of platforms that will be able to simplify and streamline access to all content on all devices. This is what we are trying to achieve.

I see, I see. How much do you think the various licensing issues among the content owners will be an obstacle for your project? And how much do you think that that would be something you can use as an advantage, if you solve it, and a problem for your competitors, potentially? Well, you know, licensing is not really the main issue in this project as we don’t target any licensing deals. You can see that in this market, there are already a lot of players distributing content either over IP, through their services, or on demand through YouTube. We believe that, at some point in the future, there will be a

352 20. Deezer, Plizy, StreamNation • Jonathan Benassaya revolution in the relationship between the content owner and the end user. And this revolution will be going direct to the consumer. At some point in the future, there is no reason for them to use any middleman if they can own the relationship with the end user. And if Plizy could be this platform, Plizy or any other product from Milestone Project, if we can be this platform, then that’s a win.

So, in that sense, you think that actually NetFlix and Hulu and others that are acting as middle men would lose out if this plays out this way. NetFlix has already started to see a very strong contraction of their catalogue. NetFlix started as a DVD-by-email company that became a movie-streaming service, and now if you go to NetFlix, you will see that the movie catalogue is really poor, so now they are a TV-show-streaming company. And when it comes to TV shows, you know that Hulu is owned by the owners of the content themselves.

Yes. It creates a kind of tension in the market. If you see the stock price of NetFlix, people are concerned about that. So I really don’t know; I hope that NetFlix will be able to continue to invest. You can see that they’ve started to diversify, to multiply their investment in content production. I think they are trying to vertically integrate the business, so we’ll see if it’s working or not.

OK, now, let’s just move to Deezer for a little while. The whole story about going to China and coming back – it’s really an amazing, amazing story which will be made probably into a movie one day. But I don’t want to push you on those details that you’ve already shared several times in different interviews. There are a few things that I was really intrigued about concerning Deezer. It was started, I think, in 2006, 2007, yes? The project started under a website called DotMusic.net in 2006. It was started by my co-founder Daniel Morelli, and he started it as a side project while he was working on another startup.

Clearly, Deezer manages to handle a lot of the issues about the licensing of music. As a customer, I can find a huge amount of music, but still there are some gaps. I’ve looked for some albums . . . maybe they are not there. So, how did you work out the relationship with content owners in the early stages of the service?

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The music industry is a thirty-five-billion-dollar industry. The video industry is a three-hundred-billion-dollar industry. So, when you talk to the music industry, more accessible for music than for videos, and for only one reason. There are no the order of magnitude compared to the video industry . . . the content is maybe windows in music. I think that if there was windowing in the music industry, there might be more revenues to generate. But the way the market is structured right now, I think it’s not something that the market can do. Anyway, how we managed launched Deezer when the music industry was trying to pass an anti-piracy law to do that . . . I would say that we had very good timing launching Deezer. We in France. So the timing was perfect, and I think it was exactly the same as Spotify in Sweden. The government and the music industry were putting a lot of pressure on all those guys.

This is the HADOPI law? Yes. At some point there was some discussion, but the government was afraid to do something, to remove something from users, without having a legal solution. So I leveraged this situation in order to maximize our chances for success. And we’ve been able to sign deals the with the major labels in France, and thanks to that, they’ve been able to communicate with the government, saying “Look, you can pass the law. We have now a legal alternative to piracy!” And since the very first press release we did about Deezer, we have always positioned the company as the best tool to fight piracy. The fact that we positioned the company in this way put us in a very, very good position to strike deals. I’m not saying that it was easy. The music industry is a very tough negotiator, but we tried, and I think we succeeded. The problem is that the music industry is fragmented across so many independent labels. It’s a very time-consuming effort to just get access to all the labels . . . we had four major labels. Now we have three. And then you have a zillion albums. And then you have also some limitations. For instance, then, they didn’t allow on-demand, ad-supported streaming. Or the digital rights for a specific country are owned by another label. So it’s a real nightmare, I have to tell you. The music – the management of music rights is a real nightmare. I don’t know if it’s accurate right now. I think the way royalties are calculated is maybe not very, very accurate based on the figures that people get because the rights are spread among so many different rights holders that, by the end of the day, you may find yourself

354 20. Deezer, Plizy, StreamNation • Jonathan Benassaya with a band that is available in France but not in the UK, with publishing rights with a company in France and another in the UK. So it’s a very complicated area.

Do you think this complication in itself is a part of a reason, generating somehow all the problems and issues the music industry has – I mean, with piracy and the RIAA, the legal fight against single moms and all the scandals that are surrounding that? What do you mean? You mean Deezer is helping with that?

No, no, no, I’m just wondering whether the complexity of the legal arrange- ments that you have been describing is part of the reason why there are so many problems with getting music online, apart from Deezer? Obviously, when people are accustomed to getting access to the content they want, if they don’t find it the legal way, they will get access to it the illegal way.

Yes. Obviously, the main challenge with piracy is that it’s super easy, you have the file on your computer, and you can do whatever you want, whenever you want, and it’s rights holders is an issue, and I don’t see that as the main factor to decrease piracy. free, so . . . I don’t think that the fact that the rights are spread amongst different But if you see the figures, the music industry is really stable in terms of volume. In some countries, the digital market has overtaken the physical market, which achieved something amazing with Deezer and Spotify and all the other streaming is . . . I mean . . . which is the best indicator of the future of this industry. I think we services in that we’ve helped this market to evolve into a digital market, which is much more interesting for the future of the music industry than the physical market. It’s less expensive to go to market, and it’s much more rich in terms of experience. You can add many things; you can add so many things attached to a music file; you can attach a video; you can attach metadata; you can do a lot of things. Now streaming, what is very important is that streaming is an access- based model, it’s not an ownership-based model. The problem is that we live in the world – especially countries that are not as developed as France, the UK, Germany

The penetration is not so high. And second, the culture of access is not there yet. and the US – we live in the world where Deezer, bandwidth, broadband is not . . . So people don’t see the benefit of accessing the content whenever they want. I think there is a lot of education needed in those markets, and I think that this is

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Deezer’s strategy right now. Going after all the markets, but not the US. Because they believe that, if they can educate the market and prove the benefits of the access model as opposed to the ownership model, then they will win! So piracy is important, but piracy is an ownership-based model, and Deezer and Spotify are access-based models. There will always be people fighting for ownership, always.

One thing that strikes me about Deezer is that you guys became sustainable and profitable, or at least cashflow positive, pretty early in the project cycle, is that correct? Yeah, that’s correct.

Was it still the same model as today – a single, basically flat fee or at least two very simple models? You pay seven Euros and then you get all you can eat . . . was that the case at that time as well? We were profitable very early on. We were not focused on international markets. We focused on revenue generation, and understanding our model, and trying to negotiate the best deals with the music industry. The main issue with the music industry is that, when you want to break an artist, you need some marketing expenses. We were bringing to the market a unique platform for them to communicate to the artist, and this was a part of the negotiation. So the types of deals that we had were very, very interesting.

Can you maybe explain that a little bit more? What kinds of deals, and why were they so interesting? And were they interesting to the content owners, to the labels, or to the musicians themselves, or to both? One of the issues with this model is that it costs a lot of money. On the other hand, million unique visitors. This is a huge communication channel for those guys, and if you can offer something in exchange . . . For instance, let’s say you have ten if they are not on this one, they may lose the core of their audience. So what do you do? You offer something for x, and I offer something else for y. So, in difference, we don’t pay you x, we pay you x minus y. And you try to maximize y, so that x minus y is very low, so that you can make a profit. You see what I mean?

Yeah. When you say that you didn’t focus on international markets, does that mean that the early development of the company was primarily in France? I left the company in November 2010 as a chairman, and we were just in France. France was where we had the on-demand, ad-supported model and the subscription-

356 20. Deezer, Plizy, StreamNation • Jonathan Benassaya based model. In the rest of the world, we had something much more like Pandora, pre-programmed web radios. And for some independent artists, we had some international deals. So that was it. The big expansion had been through Orange. We did a distribution deal with Orange, which has been one of the key milestones of the company, where we have been able to bundle Deezer to all data based plans of Orange, and it has been kind of a “vacuum” for premium subscribers.

This is Orange just in France? Or internationally? We started in France, and after that the deal was to expand, market by market, and I don’t know all the other markets where we are with Orange. But we’ve following the Orange strategy. So now we are with Orange in the UK, in Holland . . . moved to Germany, to Belgium, now we are in seventy or ninety countries.

Wow! There’s one major point I still want to address . . . It’s fairly unusual that someone leaves a project like Deezer in the huge expansion stage. Can you comment on your transition from Deezer to Plizy? That’s a very interesting question you ask. Yes, it’s not usual to see that kind of situation happening. The main reason was the divorce between me and my partners. The reason why we had this divorce was mainly because there was misalignment in the strategy. For my partners, being the strongest on one market was more important than being number four worldwide, while for me, the market was much more outside France. So we always fought about that, and at some point there was a divorce between them and me. That’s all.

I think it’s interesting. I believe that in Europe, generally we have this problem of many successful companies going for the home market . . . It’s sad to see that. It’s something that I can understand. As soon as you’ve reached the first position in your market, if you need to reach out to other markets, it could be stressful, and it brings a lot of fear for your investors. And I understand the position sometimes. However, we have a lack of big exits, a lack of a history of startups going international and making good returns for their investors. Europe has always been following the US in a lot of things, but in the end, there are not a lot of big companies coming from Europe and making a big success here in the US. Spotify is one.

But it was really hard for them and took them a long, long time.

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that Daniel Ek succeeded in choosing the right partners. There are not a lot of VCs Yeah . . . in the end, their investors were willing and followed those guys, so I think in the world, especially in Europe, who are able to follow this guy with his huge ambition and plan to conquer the world. He picked the right guys. In the end you need to pick the right partners. Unfortunately, I picked some, and maybe not the right ones. Shakil Khan, the right hand of Daniel Ek, left the company one or two

Maybe you and I are not understanding very well the European market. Maybe years ago because he was exhausted by this industry. A lot of people are leaving . . . the European market is full of individual startups that master only one country. Maybe this is a dream, to see the European market taking over the world. Maybe it’s just too American, I don’t know.

When I talked to Fred Destin, we discussed how many European companies have really become huge brand names in the world. We talked about this before Spotify became big . . . We were kind of able to mention Skype and maybe Airbus, a few things like that. Fred said – you know he’s Belgian – he said, “Try to name five famous Belgians!” so we joked a little bit about this problem. But European high tech and startups obviously have a lot of issues – do you think that’s changing at all? I see a lot of dynamism, especially in Germany and in the UK. And maybe things will change, maybe things will change. But I think that we have to stay pragmatic and observe.

Are these the main reasons that motivated you too to move to the US? I was looking for a country, a place where, if you want to change the world, people are not thinking that you’re crazy. That was my main motivation. I wanted to move somewhere where you were free to think you could change the world and people would believe you.

And you didn’t feel that France or anywhere else in Europe was the right environment for that kind of thinking? I spent three very exhausting years in France, and I was looking for some fresh air.

I can understand that. Divorce is never a happy ending. I left Deezer with all my shares, which is perfect, so . . . I have a strange taste in my mouth when I think about this. From a financial 358 20. Deezer, Plizy, StreamNation • Jonathan Benassaya point of view, I put this company on the right path, and as of right now they’ve been able to succeed, and they’ve signed the deal with the Orange, which has changed the face of the company. I was instrumental in doing that, and that’s the good part of this.

I will be following the story of Plizy very closely because it’s just starting. I’m looking at some numbers here – it says that you are now aggregating more than five hundred fifty thousand movies? Yeah.

That’s cool! Are there any numbers in terms of users, growth or any other metrics that you’d care to share regarding Plizy? It’s obviously your main project right now. Right now, the good thing is that we’ve been featured in the app store, so we’ve seen a huge increase in downloads. We are targeting people who are consuming a lot of streaming online, and based on that, the figures are very interesting, but we are just at the very beginning. It’s been three weeks – four weeks right now – and we’ve already pushed two updates. So we are at the observation phase right now. I cannot give you any figures because there won’t be any context for them.

Sure, I understand. What about Android? The issue with Android is that people don’t use it. I mean, they don’t install apps, they don’t know how to install apps and they don’t watch videos. And all the video services that we are addressing are not present on Android. It’s a very fragmented environment – you have a different version of the OS, different versions of screen resolution, so in the end, if you want to create a nice experience, you need to create an experience by creating one for the least powerful system and the lowest resolution, and so you create something which is not amazing.

So, until the foreseeable future, you’re sticking with iOS? We are monitoring closely the Kindle Fire, because those guys are doing a very good job, and that’s the only Android tablet that has an interesting market share. For the rest, I think it would be a lot of money invested with not a lot of return.

Well, I have a Nexus 7. I’m really happy with it, just to let you know. Yeah, but tell me if I’m wrong, they sold only a few hundred thousand?

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Well . . . I don’t want to go into the numbers, just to tell you that I’m really happy about it. Yeah, we have someone in the office that has one, and it’s a great product. The problem is that the industry is selling one tablet per second on Android, and people sell fifty iPads per second.

Obviously, that’s something you need to track. One last question: how has the move from France to the US been for you personally, for the family, as far as you want to discuss it? like I’m a nobody, so it’s interesting and sometimes fulfilling. And from a family Personally . . . I mean, professionally, it’s been a new start. Nobody knows me. It’s social life is something that you create step by step, but the standard of living is standpoint, I would say that it’s a big change. You need to find new friends . . . A perfect. You can see that people are way less stressed than in France, and it’s a pleasure to live here.

That’s interesting, because sometimes you hear the opposite. You hear about Americans coming to Europe to continue their entrepreneurial career and find that the quality of life is sometimes better in Europe. Probably depends on the person and the location. Well, you know, in San Francisco I think the values are maybe different. It’s always a pleasure to arrive in the store and someone says “Good morning, how are you doing?” And it’s also always a pleasure when people want to help you when you need some help. You can approach a city or government official and say “Look, I have a problem, can you help me?” And people will say, “Sure, how can I help you?” In France, you can say “I need some help.” and people will let you know that it’s almost time to close the office and they have something else to do.

It sounds very familiar, coming from Croatia! So it’s refreshing to see that. Maybe it’s only this way in Silicon Valley. I haven’t had the time to travel too much.

Jonathan, thanks so much for your time! Thanks Ivo.

360 20. Deezer, Plizy, StreamNation • Jonathan Benassaya

Skype call, October 2014

As I mentioned in my introduction to this chapter, by the fall of 2014, Jonathan, with the backing of his investors, was building a new project. Essentially, Plizy had not succeeded. The new model was very easy to explain. Many of us have films and music stored on various “media players,” hard disks and other devices in our homes. Once on the road, on holiday, vacation or business, that “stuff” is inaccessible. Imagine if you could store all of it – regardless of whether “it” meant personal videos, downloaded music (legally downloaded, of course) or films purchased online – imagine, then, that you could store all of that in a “personal cloud,” with the ability to access it from any device, wherever you are, and share it with one person at a time. That’s Jonathan’s vision for StreamNation, and I must admit, it’s a compelling one.

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Jonathan Benassaya – Skype call, October 2014

The last time we spoke, in January of 2013, we talked a lot about Deezer, but we also talked about Plizy. In the meantime, you pivoted and rebranded Plizy as StreamNation. I’d just like to hear a little bit about that pivot and then more about how StreamNation is doing. Plizy was a project which was dedicated to consumers, helping consumers access the content they want, when they want. We were solving a problem, which was the fragmentation of content across different spaces, and we were helping them get access to the content. The model of Plizy was based on hardware, something that you were installing at home, that you were connecting to the set-top box and to WiFi. The system was able to figure out, based on the recommendation engine, what was the right content for you and retrieve it from the right place. I don’t know if you remember, but by the end of 2012, Google released Chromecast.

Yes. The problem was that our business model was 100% based on the hardware, because if you start to ask Netflix and Hulu and Amazon for a couple of cents on each transaction, each song or video played, you can’t build a business on top of that. I mean, it’s not like back in the days of the beginning of the web when people were making millions just in affiliate fees. So I decided to do the pivot, and StreamNation actually was born from an internal project that was being developed at Plizy, which was the cloud DVR. Before doing the pivot, I took some days off because – you know – when you work on a project so hard and you need to make a big decision, it’s better to make that big decision with a fresh mind.

Of course. … instead of being too much into it and not being able to really see the big picture. So I took a few days off, and we went to the Caribbean. I left with a GoPro. My son was two years old at the time, and it was his first time learning how to swim, so obviously I have some great videos of my son Adam learning how to swim in the swimming pool, and this content was intended for my mom. When I came back to Menlo Park, where I live, I tried to share it with my parents. I tried Dropbox,

362 20. Deezer, Plizy, StreamNation • Jonathan Benassaya and found out that after two minutes Dropbox would stop the streaming, not to mention that the quality of the streaming was really, really, really bad. I tried all the other services – Flickr, Google Drive and everything. They are not really made for videos. And so I asked my guys if it was possible to take this cloud DVR project and try to apply it to my content, being able to approve the content, convert the content into many formats and stream it to my mom’s computer without her having to download anything, with great quality. We started doing that, and we shared the MVP with a couple of friends, who shared with their

Itfriends . . . all makes perfect sense. And so we shared that with some friends, and we found out that I was not the only one having problems with my video. And I did photos – because with videos you are also doing some photos – and we had our MVP. We released that to private beta in June 2013.

How long did you take to develop the MVP? Six months. It was a hard time because we changed the team. I mean, we had kept just a very small core. We were four engineers. We let go the rest of the team – it was a very tough time.

How many people were with you before you let them go? We were twelve. We moved from twelve to five – four engineers and me. And then we started to build StreamNation. We released the MVP in private beta, and we started to iterate on the product.

What was your relationship with your Plizy investors at that point? Before I left for the Carribean I called my investors and I said, “Look, with all this information in mind, Plizy as it is, is an unviable project. I need to take a step back and have a board meeting with you in two weeks with a couple of solutions. One of those solutions will be that we shut down the company and I give you back the money that I have in the bank account.”

And this was with Fred Destin? Fred Destin and some other investors.

OK.

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At the board meeting, I presented this project, and Fred said, “Let’s go for it!” I was very proud to have Fred say during the board meeting, “Jonathan this is normal, this happens, we believe in you and this seems to be a nice idea and let’s dig a little bit and will see where it goes.”

That’s great! Yeah, it was! You know, I think in those moments, transparency and resilience are the two qualities that investors are looking for in a CEO. Don’t give up, show them that you are working on solutions and that, no matter what, you will never give up! That’s really, I think, what makes the difference. So we did StreamNation, and we were in private beta in June 2013, and after different iterations we started to understand that people are using StreamNation as their new digital library. They were uploading photos and videos, but they were also uploading movies and TV shows and all that big media that clogged our hard drives, that are never accessible when we want it! You want to get access to them from time to time, and you don’t want them in your hard drive sitting in your office or at your home. People started to upload those types of media and, like in the Deezer days, instead of saying “no,” I started to sit down with our lawyers to find ways to let people do that and to offer a protective environment without creating a piracy environment. We’ve created something that is called “the borrow,” like in the real world. You remember when we used to have DVDs, Blu-rays and CDs, and we were lending them to our friends?

Yeah. So, we’ve recreated the borrowing, which relies on three very simple things. First, you have to be friends on StreamNation, so there is an actual connection. I need to invite you, you need to accept me. Second, there is only one friend who can stream content at a time, so there is no multiplying the streams at the same time, and there is no possibility to download the content.

And this was still private beta at that time? Yes.

How many people were using it then, at that stage? I think it was between ten and fifteen thousand.

That’s a pretty sizable number for a private beta . . .

364 20. Deezer, Plizy, StreamNation • Jonathan Benassaya

Yeah – we played the same game as Dropbox. You enter the beta, and you get 10 Gb for free; if you want more, you need to bring your friends, you know, it was that type of mechanism. In November 2013 we did a public beta, and we saw people were uploading more than 400 gigabytes of content. So we saw very strong growth, and today we are at 110 thousand users and it’s growing. Right now we are at ten percent growth rate, month over month, which is not too much because we’re building our own cloud so we need to manage the resources.

So the back-end, the servers and the infrastructure, is all your own? Yes.

You are not using Rackspace or Amazon or anything like that?

Today, consumers store their own content on their hard drives, right? No, because if you go to those platforms . . . Let’s talk about the business model. Yes. If you’re tech savvy and you have a NAS at home with two or three terabytes, we are talking about an investment of maybe 500 euros for maybe four to five years. Then, if your business model doesn’t affect people, and they feel as if having a cloud service is the same as having a hard drive at home, in spite of all the pluses that the cloud can provide, then it’s not working. Because they will still use hard drives.

OK. So, if you want to offer very affordable and competitive cloud storage, you need to offer it at a price that is very close to the hard drive. That is what we did, and that is why we work on our own cloud. It’s for that specific reason, in order to be able to build at a very cheap production rate per terabyte, so we would be able to offer a very cheap storage solution for consumers.

Considering the numbers that you have now, did you need any additional investment into the infrastructure? We invested in one petabyte of storage three months ago, and so far it’s growing steadily, so I think by the end of the year we are going to invest in another petabyte. The good thing is that, when you add storage, it means that you have more subscribers, so it’s a good business.

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So this is where we are, and so far, so good. The team is now 10 in San Francisco, and I have to tell you that we are super excited! We are working on version 3 of the product, and we feel like we are completely reinventing the digital library, which is something that’s been completely forgotten since of the beginning of the digital age.

It sounds very exciting! Some of the comments on various blogs when you guys were starting out were that you were going to have a huge amount of trouble from the video and music labels, the content owners, the RIAA, Hollywood etc. with their lawyers. Have you had those issues, or were you able to work it out with them proactively? That type of comment is completely normal.

Yeah, of course. And because they don’t know me, they don’t know that Deezer was the very first service that legalized on-demand, ad-supported music streaming, way before Spotify.

To be fair, several of the writers said, “We have to keep in mind that Jonathan Benassaya is a co-founder of Deezer, so he has a lot of experience with this.” To tell you the truth, we had no issues. We had no issues for a couple of reasons. First, because the service has been designed in a way that is way more restrictive than Google Drive and Dropbox, which makes the service way more defensible have to tell you also that the content industry is now very interested in our model. than any other cloud storage service. That’s the first point. The second point . . . I We are actively discussing it with them, because don’t forget that, if people can create their own library online, then maybe there is a business opportunity for them. So we’ve never had any issues, and actually we have a very good relationship with the entire value chain, and it’s going well, it’s going well for the reasons that I have mentioned. First, we don’t have a position in the company which says, “Fuck you, content owners!” We are completely following the rules. And second, we are completely open minded, and we believe that, if the project is executed in the right way, there is also a business opportunity for them.

That all sounds really cool.

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I mean, I don’t know if it’s cool, but it reminds me of the early days of Deezer.

OK. So, some good memories! Well, good memories and some challenges, but it’s not exactly the same. If you related to the model of selling DVDs and Blu-rays. The big problem of the movie take, for instance, the movie industry . . . the movie industry has a big problem. It’s industry is that it’s trying to convert people by persuading them to purchase content, to purchase digital content, but on the other hand, they don’t offer people the flexibility that you can have when you purchase a Blu-ray. When you purchase a Blu-ray, you can put it in any Blu-ray player, and it will work. When you have a Blu-ray, you have a piece of something that you can show off, that represents a piece of you. Owning content in a digital world means nothing. It’s limited to only one type of format. It’s not visible; it’s not shareable. It’s the most closed experience. Owning means in a certain way showing off. So if you own and you can’t show off, what is the point of owning? In StreamNation, we bring back those variables that were key in content ownership, like universal access. You can launch StreamNation on iOS, on Android, on the web. You can stream on Chromecast, you can stream on AirPlay. You can share with your friends, and pretty soon we are going to have a public profile where you will be able to show off your library and people will be able to comment on your library, etc. All these things are pretty good and positive for them (the media industry) to consider an evolution of the ownership model, which is what they need. Because the ownership model in the digital world is not really taking off.

Are you planning or have you been thinking about a TV-specific app, like a StreamNation app for the Panasonic Viera TV that I have in my living room? That is the next key focus of the company after version 3. We will not go to the brands; we will go to media players like ROKu. I think that we will open up to other brands in the future. But obviously, to close the loop, you need to go to the TV set.

What is version 3? Version 3 is a completely new design. It’s the result of all the feedback and different iterations we’ve made. It’s a product improvement more than a product, not a

367 THE EUROPEAN STARTUP REVOLUTION conclusion, but a summary of all the feedback that we’ve had. We are really data driven, and this is just an iteration based on data and feedback.

When do you expect to launch this? V3?

Yeah. When it’s ready.

OK. Roughly? Before the end of the year.

368 21 Business Model Generation Alexander Osterwalder THE EUROPEAN STARTUP REVOLUTION

Alexander Osterwalder – Alex, as everyone calls him – is a very different entrepreneur than most in this book. Like Victor Henning and his co-founders at Mendeley,21 his academic career very much defined his entrepreneurial career. So much so that his PhD thesis, distributed and widely shared online, was his first “go to market strategy” – the only such case I know of! In one of his keynote presentations at a Seedcamp event in Ljubljana, Fred Destin22 called Steve Blank, Eric Ries and Alex Osterwalder the “Father, Son and Holy Spirit” of lean startup methodology. Alex’s huge contribution to the methodology first came through the mega-bestseller he co-wrote with his mentor, Yves Pigneur – “Business Model Generation”. The story of how they crowdsourced and crowdfunded the book, ultimately leading to more than five hundred thousand copies sold, is a fascinating one, and Alex tells it vividly in our conversation in the first part of this chapter. That talk happened in January 2013 – a time when Alex was beginning to put his theories into practice – “eating his own dog food,” as the Americans would say. He had founded a startup called Strategyzer along with two co-founders, one of whom was the designer of the Business Model Generation book.

See Chapter 16 with Victor Henning. 21 See Chapter 4 with Fred Destin. 22

370 21. Business Model Generation • Alexander Osterwalder

Skype call, January 2013

Alex, I’d like to start our chat with your early career. What you were doing before your PhD work? I studied first political science and then business.

You also worked as an entrepreneur in banking? While I was doing my master’s, I was already working as an entrepreneur. I mean – that was the internet period, right?

OK. So, with a friend, I started a company called Netfinance. It was the first venture that we did – it was about advising people on how to use the internet to do investments. After my PhD, first I went to Thailand to help build up a global not- for-profit.

The Constellation. Correct. And then when I came back with my family, together with another friend, we built a consultancy that was helping private banks in Switzerland with strategy and innovation. That was after the PhD but before the book.

How did the first one turn out – the Netfinance project? stuff. To be honest, we didn’t really have a goal of building a big company then Well . . . when you are young, totally naive and not very experienced, you just try – it was just fun, you know, we were just playing around and then at one point we realised this wouldn’t be a very big business, so we just stopped. When we did that, it was more about the experience than actually really seriously thinking about building a company. So while I was an entrepreneur, we didn’t have big ambitions with that particular company.

How did you get from a PhD to five hundred thousand customers? I was always fascinated with business, so when I did my PhD, that was actually an opportunity to figure out how companies work, so I was working on business models. After that, when I left I wanted hands-on experience because I always liked this intersection between theory, concepts and practice. So I went to Thailand to help build this not-for-profit, it was actually to help build the business model for

371 THE EUROPEAN STARTUP REVOLUTION the organization. I continued to blog about business model innovation throughout that period, so more and more people started to invite me to give a talk. I put stuff online, I started using Slideshare, I just tried to spread my ideas. It was almost more for my personal thinking process because I was always interested in business models. I continued to write and think, and I got some traction. People started to download the PhD, which is pretty rare for dissertations, and I just got more and more invitations. So, during that period, first I was helping to build the not-for- for my business model work, and then at one point I realised I had enough interest profit and then helping to build this consultancy . . . I got more and more traction to be able to earn enough money to feed my family, so I could focus 100% on the book. What happened then is that I went back to Yves Pigneur. I always had a good contact with him – he was my PhD supervisor. And I told him, “Let’s finally write this book that we always wanted to write!” It happened actually in a workshop in Amsterdam, where this idea of the book came up. That was with Patrick van der Pijl, who now has his own business model consultancy. And we did it! We did it in a different way, and we tried to mobilize the people who were already using our work. Since we had people using our work, we said “Hey – let’s not just write a theoretical or conceptual thing, a book that’s far removed from practitioners. Let’s integrate them into our work!” So we co-created the book, and that was the start. That gave it the first traction; this co-creation, you know, everybody had their name in the book. That really moved the needle at the beginning, and then, once we had a certain success, we sold the publishing rights to Wiley and the book took off. The interesting thing in this whole story is that we always tried to do things differently, we always tried to differentiate and we always tried to do the right thing rather than just what people were already doing. Typically, business different people publish business books like that is very simple: because we books . . . most people find business books boring, too long, too much text. Why always used to do it that way, even though many people know it’s broken. Since we weren’t with a publisher, we could do whatever we wanted. So we tried to do what we thought was right. Particularly Yves and me. We said, “Let’s write a book or create a book that we would want to buy.” So we created a business model book that nobody made for us. So we just made what we thought we would love to buy. At the same time, we tried to make it for a large audience, and I think that was what gave us success. That’s exactly what were trying to do for the business model tools that we we’re building, like the iPad app and Strategyzer. We tried to build

372 21. Business Model Generation • Alexander Osterwalder what we would’ve bought ourselves. There was no good tool to sketch business models, to throw in the numbers, to do customer development, so that is what we are doing with our company. The important thing is that you never try to get held back by what has been done until today, how people do things. No, you’ve got to think, “What is the right thing to do?” – not how the others do it. So, rather than look to the right and to the left, figure out what people need!

When you first discussed the book, how large a fan base did you have? Well, it was not huge, maybe a couple thousand that were following my blog, so it was not phenomenal. I was never some kind of “star blogger”. What counts more is the quality of the people. At that point, there were people who were really passionate about business models, and I would say that, of those thousand that were following my blog, there were maybe 20 who were extremely passionate about business models, and a couple hundred who were interested. We could connect with those, and we could bring those on board. What was missing then was a community of practitioners who would discuss business models. I think there were such communities around entrepreneurship already, but not in particular around business models. So that was what we created, and that was part of our value proposition: “Hey, join us to help write the book and you can connect with others, and you can connect with the authors!”

How much did they have to pay to join? At the very beginning they paid 24 dollars. That was the entry point, and they would get their name in the book, they would be able to participate, and they would get the book for half price. That was the initial deal, and then at the end we gave them the book for free. But what we did that was special is that we saw people signing up very quickly, so we said “Let’s raise the price and see what will happen.” So we raised the price 50% every couple of weeks – from 24 we went to 36 and we went up and we went up and people still continued to join, which is really funny, because when you raise the price, usually the demand should go back a lot. Well, it turns out that this made the whole thing even more exclusive and that people thought, “Hey, If I don’t sign up now, it’ll get even more expensive!”

What was the last price for the last group of people? What did you end up with? When we sent the book to the printer, I don’t remember what price we’d reached, but we said, “Hey, the book is done, it’s designed, you can’t contribute anymore.”

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But we said, “This is your last chance to get your name in.” We asked for 250 dollars, and about three people still joined just to get their name in the book. It wasn’t a huge amount of money, but given that I had no money at that time – I have enough money to produce this kind of book. A book like this, a visual book, had used part of my pension fund, I got a small loan of my father . . . We didn’t without even paying the authors, costs you a quarter million dollars! Because you have design, you have visuals, you have four-color printing, you know, when you have no money, a quarter of a million is quite a bit.

How many different business models for the book itself did you think about or consider? You often talk about not hanging on to one particular model, but testing and looking at various models, for your book and your project, how many different models did you look at with your partner? We prototyped many different ones, probably around four to eight, but we seriously tested one to start with. So we prototyped several. We had, you know, a personalized book where you could put your book together online, we had a lot of crazy stuff, but the one that we tested was a book sponsored by corporations. discovered then that it was 2008, and no company would want to put money in a What was really fun, you know, was thinking about customer development . . . We book by two unknown authors. So that sponsoring model fell apart, which is the reason why we went to co-creation and co-financing.

So, if the sponsoring model had worked out, you would actually have gone on without co-creation and co-financing? I think we might have done the co-creation, maybe not the co-financing. If we had had the sponsors, the book would probably look differently, and maybe the whole thing might have taken a whole different path. So I do think that we would’ve done the co-creation because we were very fascinated about that. We might not have done the co-financing – you don’t know, right? Depending on different things, you might take one path or another.

Let’s look at what you are doing today. Obviously, you are speaking and teaching, but you also have your startup with apps. I have two things I’m doing. One is very short term and one is medium to long term. Yes – the speaking has taken off like crazy, I get to do a lot of keynotes around the know, world, I get to do workshops in corporations, which is a lot of fun . . . but, you 374 21. Business Model Generation • Alexander Osterwalder it takes time, and I never wanted to build up a consulting company. I didn’t want to hire people who could do that together with me, going into corporations and consulting. So what we did is something I’m more passionate about. Alan Smith, the designer of the book, is my co-founder, and we brought a third co-founder on board. It’s a software startup that aims to build the tools that support managers and entrepreneurs to build better businesses. We are starting out with business models because that’s what we are known for, and that’s the process we know, but we are aiming further to strategy in general. I think business design tools do not exist enough in business. And when I say, “business design tools,” I mean conceptual tools like the Business Model Canvas or the Value Proposition Canvas which we just brought out – software-based tools. To give you an analogy: no architect who builds large buildings would not use computer-aided design. They still use sketches, but they also use computer-aided design. You don’t build large stuff without computer-aided design – yet in business, we are still sitting around the table and we do a little bit of “Bla bla bla” and we don’t use tools that much. We don’t use business tools, and we don’t use computer aided design enough. We use a lot of data stuff when it’s quantitative, but we don’t use other business design tools. We want to change that, and we are already seeing a lot of traction with the iPad app and Strategyzer. People are changing, and they are using more tools. I’m launching a business design summit – I don’t know if you’ve seen that?

Yeah, in Berlin. Yeah, that is exactly the reason: because we want people to use more business design tools. That’s our passion!

Just briefly, what is exactly the difference between the iPad app and the Strategyzer web? The iPad app, if you want, has been a bit of a prototype for us to see if people would use software-based tools for business design. So, yeah, 30 thousand people bought the app and another 15 thousand stole the app! Many people are excited about this. We created Strategyzer because it’s easier to be collaborative. It’s a larger platform. Strategyzer is for us the next step – it’s the step that allows us to reach a larger audience and add more features that we can experiment with. Strategyzer is collaborative, whereas the iPad app is individual. You get teams who collaborate on business models in Strategyzer, you get consultants who do this for different clients. We are expanding Strategyzer into new tools like the Value Proposition Canvas, segmentation and so on.

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From a technical point of view, Strategyzer is obviously web based. Are you considering native apps for the iPad, Android, etc.? What technical approach are you taking to make this accessible to as many people as you need or want? platforms at this stage is not the smartest thing we can do. So we said, ”OK, the You get caught up by the reality of technology very quickly . . . Using multiple iPad app works very well, and people like it, but we are not going to make the iPad app collaborative. We are not going to experiment with a lot of features on the iPad app because then we couldn’t do the same thing on the web. So right to support multiple platforms at the same time is a recipe for disaster. We will now, we are focusing mainly on the web, and we are not doing Android . . . Trying definitely want to integrate more platforms later – in particular, we will want to reintegrate Strategyzer with the iPad app as soon as we have sufficient size and sufficient users. Multiplatform is not as easy as it looks. You need to have a pretty large team. I mean, if you’re Evernote, if you have millions of users, then you have a substantial staff and it’s doable. For us, at this stage, it wouldn’t be very smart.

How large is your organization? It’s difficult to say. We had been outsourcing development to collaborators before we brought it in-house – probably now we are floating between 5 and 10.

A pretty tight shop. Oh, yeah, but it’s the early stage. I mean, this is a year old, we are 100% self- financed, so we didn’t want to go too fast. I mean, I didn’t want to bring 30 or 50 people on board before knowing that I can really scale this – it’s customer development, right? It’s two approaches: one is when you think you have a great vision, and you bring people on board very quickly, but you risk a lot. The other is when you want to prove first that you have a sustainable business model and then you bring on people.

Why do I have feeling that you won’t have a lot of trouble finding investors once you decide to bring them in? Well, I agree with you – the reason is simply because we have a couple of things that the others don’t have. We have five hundred thousand readers of the book around the world, we have many more downloads of the Business Model Canvas, we have an excellent brand . . . I meet large companies every day – 3M, P&G . . . – 376 21. Business Model Generation • Alexander Osterwalder the doors are open, so that’s not a problem. We have a lot of things that work, but I think the execution is the part that is the biggest challenge for us. So who knows when we’ll bring money on board. Right now, it’s not our biggest concern.

Still, maybe an option one day? Oh, for sure. You don’t want to be naive about these things. When you want to scale quickly, you need a lot of money, so that is an option for sure.

Alex, you mentioned large companies that you work with. Are there any situations where you work also with small companies or startups? I try to work with startups all the time because there is a lot of inspiration coming out of startups. I speak at a lot of conferences for free where startups are present, entrepreneurship. I’m starting to work with a small team that does incubation in I work with selected startups . . . I’m very interested in this whole field of social Africa. I think what’s really exciting is that they can work without the constraints of large companies. On the other hand, they obviously don’t have access to the same kind of skills and resources of large companies, but they can be more disruptive. It’s a little bit like us with the book. We had nobody telling us what to do, so you can do the right thing! In large companies it’s a bit tougher, because when you really want to start something disruptive or totally different from the core business, even if it might build the future, it’s still very hard to do, because you have political infights, you have budgets, everybody has their own agenda, you don’t have the space to experiment, failure is not an option in large companies. So I really, really try to have a balance between startups and large companies.

You meet with companies in very different industries. Are there are any industry segments or any business areas where you’ve seen, let’s say, unusually interesting applications of your work? What I have seen over the last year or so which is more exciting is that more people are using the Canvas in investment and acquisition. One of the early adopters has used it in investments for a very long time, but now I see more widespread use of acquisitions, looking at acquisitions. Last week I went to four countries and I visited fifteen companies to figure out how they use the Canvas. One of the large companies uses the Canvas to understand their customers, and I found that this is a B2B business, and this is very, very interesting. So in B2B, in business to business,

377 THE EUROPEAN STARTUP REVOLUTION it’s very, very interesting to study the business models of your customers to figure out how you can help them build a better business.

Do you see a lot of companies using the Canvas collaboratively with their customers? That’s a bit rarer. Some have explored new projects with customers – not just one customer, but often in network situations. You can have four companies coming together trying to figure out what it is that we can build together, and then they would each sketch out their own Canvas and see how that fits together. But otherwise, it’s still pretty rare that people bring in customers. It’s not a lack of interest – some are doing it, but very shyly. It’s not something that is widespread. We need to go to the next level, take one step forward and find new concepts that help show how to best integrate several Canvases into one, not in one organisation, but in one value-creating network.

Your name comes up in conjunction with Steve Blank. Obviously, you guys know each other very well. Have you ever considered working together in a more integrated fashion? In other words, you and he teaming up on your project or on your startup, or you on his, or anything like that? Yeah, we meet all the time. in fact, I’m visiting him in two weeks and we’re doing some thinking together on how large companies can do corporate entrepreneurship. One of the most interesting topics for large companies these days is how to do corporate entrepreneurship, so we are working on that together.

OK, but not necessarily on the Strategyzer project? Not right now. He has so much experience. I obviously learn a lot from him all the the moment. time . . . We really want to push the boundaries in terms of business concepts at What are some of the next steps for you? You have a conference later in the year, but beyond that, how are things going to develop for you in the next couple of years?

I’ve reduced that a lot. What I’m really focused on is how to get managers and Interesting question . . . who knows? Speaking is actually less of a priority, and entrepreneurs to use business design more – in particular software based tools. That’s what I’m really interested in. I’m focusing a lot on my own company,

378 21. Business Model Generation • Alexander Osterwalder together with the founders. That’s what we are really excited about. And then, you know, if this does became a success and I do have some more free time, which I don’t think will happen in the next two years, I want to focus more on innovation of the entrepreneurship process in Africa. That’s what I’m excited about in the longer term. In the shorter term, we are focusing on our startup. We really want to bring business design in the enterprise application space a step forward.

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Followup: email conversation, August 2015.

As I was finishing this book in the summer of 2015, I reached out to Alex (via email) to hear how things were developing with his various projects. In the meantime, Alex had published a new book – “Value Proposition Design” – with three co-authors, Yves Pigneur, Greg Bernarda and Alan Smith, and designed by Trish Papadakos. Strategyzer – both the products and the company – was growing and developing into a successful company. Alex shared his perspective of how things had been developing, where they were headed in the future and how he was balancing his various roles of writer, teacher, consultant and company co-founder.

Two-and-a-half years – since our last conversation – is a lot of time in business and technology. In the meantime, you’ve published another book. Was the writing and publishing process for Value Proposition Design similar to what you did with the first book (crowdsourcing) or was it a more traditional writing process? Like with the first book we tested every piece of content for Value Proposition Design with potential readers. This time, however, we handpicked 100 business professionals as pre-readers. We also got a lot more systematic with testing, since the Lean Startup approach is an integral part of the new book. For example, the title was the result of a rigorous testing process of several different alternatives. We built landing pages and launched LinkedIn ads to gather data and select the best performing title.

Presumably, Wiley was more than happy to sign you up for publishing after the massive success of Business Model Generation? You bet. They now understand the value of visual and practical business books in landscape format a lot more than before our first book. In fact, our editor told us that we did everything that’s not supposed to be done in business book publishing with our first book. I believe that’s exactly why we succeeded.

How has Strategyzer evolved as a startup? You talked earlier about not wanting to raise funding or scale too fast before you’re sure about the model.

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You’ve had enough time to verify the model –have you scaled the project, or do you plan to? How about external funding? Strategyzer is evolving pretty much as planned. Strategy and (Business Model) Innovation software is a new market that has to be built first before we can conquer it. We started in 2010 with a thirty-dollar iPad app that sold over 100,000 times. That was our first small test to figure out if there was even a potential market. Then we extended our approach towards testing a three-hundred-dollar SaaS app that added collaboration and other professional features. This allowed us to continue learning with what we call the prosumer market. Since 2014 we’ve been focused on the enterprise market and have conquered clients such as MasterCard and Colgate. It’s still a young market that requires a lot of education.

Any KPI’s on Strategyzer you’d care to share? Revenues? Growth rate? # of users? Strategyzer has doubled its platform revenues every year since the launch. That’s pretty good for a new market that still has to be built. However, we’re not satisfied with that. We estimate breakthrough growth to happen at the end of 2015.

According to the web site, you are now a team of twenty – that’s a nice size but not very huge. Will that be growing? We’re a pretty scalable SaaS company and serve a lot of customers with few employees. However, we do plan to hire more aggressively at the end of 2015. We’re a Swiss company at heart, so we’re pretty careful before we scale. Premature scaling is one of the main reasons companies go out of business.

How much of your time is devoted to building Strategyzer as a company vs. your speaking, consulting and other service-oriented engagements? I spend 80% of my time focusing on Strategyzer, which includes thinking and writing about practical strategy and innovation tools. I minimize my speaking and only take on consulting when the project helps me learn how to improve our Strategyzer platform.

At a presentation several years ago, Fred Destin called Steve Blank, Eric Ries and yourself the “Father, Son and Holy Spirit of Lean Startup.” Have you heard this mentioned before, and do you know if it’s Fred’s phrase or if he was quoting someone else?

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Yes, I’ve heard that. Flattering! Personally, I believe we will need to weave together as many practical business tools as possible to become really good at designing outstanding organizations. For example, we integrated Clayton Christensen’s and Tony Ulwick’s jobs-to-be-done concept in Value Proposition Design. In both books, we integrate Kim & Mauborgne’s Blue Ocean Strategy tools. And recently, we developed the Culture Map together with Dave Gray. I think we’re just at the very beginning of a new business tool era.

Back to the main topic . . . I can see from the web that Strategyzer is not simply a “product” company but is very actively promoting its services, both online learning as well as live training sessions, corporate as well as public Master Classes (Munich, London etc.). How much of the revenue is currently coming from products vs. services, and how do you see that evolving over time? Our goal is clearly the software platform, which already outperforms service revenues by far. Our online training programs and SaaS app are far more scalable and work really well for large corporations with operations around the world.

Being Swiss, I’m sure you’re a methodical guy who plans ahead carefully but who also has no lack of ambition. So what do you have in plan for yourself personally as well as for Strategyzer as a company over the next three to five years? I’m in Silicon Valley far too often to not have big goals. At Strategyzer we intend to build the “SAP of Strategy.” In other words, we plan to do to strategy and innovation what SAP, the German software giant, has done to operations in the greatest companies of the world. Who knows, maybe we’ll acquire SAP in 10 years!

382 22 Fon Martin Varsavsky THE EUROPEAN STARTUP REVOLUTION

In 1984, Martin was an MBA student at New York’s Columbia University. Like many of his peers, he applied for a job at a bank. At around the same time, he and a few of his partners decided it might make sense to buy a derelict industrial building in New York, refurbish it and rent it out as office space. They put up some of their own money – Martin’s contribution was $25,000 – and applied for a 12-million-dollar loan at the same bank where he was applying for a $40,000-a-year job. As it turns out, he didn’t get the job, but his loan application went through. The monthly rent checks from that building brought in $250,000 each year until the building was sold in 2012 for over $60 million. His next venture was in pharmaceuticals. He founded Medicorp Sciences with two distinguished Argentinian scientists, Claudio Cuello and Nobel prize winner César Milstein. The company was an early leader in developing AIDS and HIV products and closed down a few years ago due to the economic crisis. Varsavsky then turned to telecommunications and the Internet, where he would start several companies. The sector remains his main focus area today. The first of these was Viatel, an early pioneer in phone callback services and later in building a pan-European optic fibre network. Viatel went from a $200,000 seed investment to a $1.2 billion company eight years later, when Varsavsky sold his 20% stake. Viatel was followed by Jazztel, the second largest telco in Spain, and then EINSTEINet AG – a failed attempt to bring cloud computing to German businesses back in 1998 – “my thirty-million-dollar black eye”, as he calls it in his blog. After that came Spain’s second largest Internet content company, Ya.com, founded in 1999 with $38 million and sold, at the height of the dot-com craze, for $550 million to T-Online. Martin’s focus today is on bringing WiFi to millions of people throughout the world. His vehicle to do this is Fon. Fon makes WiFi devices that enable customers to share their WiFi with others through various plans and modes of operation. I first interviewed Martin in September of 2010. Because of some idiotic technical mistake of my own, I didn’t record our conversation but nevertheless kept some notes. We talked again in January of 2013 – this time I was more careful, so that interview is the one presented in this chapter. Back in 2010, Fon was just emerging from “three agonizing years” and starting to get real traction. At the time of this writing, it is developing into a huge success story.

384 22. Fon • Martin Varsavsky

In parallel with his business ventures, Martin Varsavsky is a very active “social entrepreneur”, as he defines it. Through his Varsavsky Foundation and in in partnership with other businesses and governments, he has helped to bring computers, internet connectivity and high-quality educational content to tens of thousands of students and teachers in his native Argentina and neighboring Chile. He also sits on the Board of Trustees of the Clinton Foundation and on the board of Instituto de Empresa in Spain (IE). Teaching entrepreneurship is especially important to Varsavsky. He taught at IE for many years and was a visiting professor at his alma mater, Columbia, when we had our second conversation. For those readers who are interested in finding out more and following Martin’s work, he is a prolific and insightful blogger (martinvarsavsky. net) on a broad range of topics.

Martin, congratulations on Fon. It seems to be doing fantastic! The last time we talked was back in 2010. I think you had 1.8 million users at the time, and now you’re up to 12 million. Yes – now it’s doing so very nicely, especially in Europe and Japan. I’m spending this year in the States getting it launched in America.

When do you hope to launch there?

We’re close, I hope that by June we’ll have one. We’re trying to make the same type of partnerships we have in Europe or Asia . . . Great. How many people are now in the Fon organization? A hundred and fifty.

That’s a pretty lean organization covering twelve million customers? Yeah, it’s very small, very efficient.

Fon actually had a pretty hard time between 2007 and 2010? Yes. In the beginning WiFi was not as universally used as today. It was mostly laptops and netbooks – there wasn’t enough demand. Then WiFi became part of almost everyone’s pocket, and that’s when we really took off.

Did you relocate to New York specifically because of Fon, or were there other reasons?

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It was to launch Fon, but there was another reason: They invited me to teach entrepreneurship at Columbia University.

Does that mean you’re not teaching at IE Barcelona anymore? I’m a visiting professor at Columbia this year. I’m a professor at Instituto de Empresa, or IE. And I am visiting professor for this year here. Also, I was invited to teach at NYU Stern Business School, so I teach on Wednesdays, and I’ll be teaching in the morning at NYU and in the afternoon at Columbia. So I kind of have a side career as a professor. I saw an opportunity to develop it nicely this year in the States. So the relocation was a combination of launching Fon and teaching.

So it doesn’t have a lot to do with the situation overall in Spain, the economic crisis? The economic crisis in Spain is disappointing for the whole country, but it’s actually pretty good, if you’re a company that’s doing really well, for hiring. When you hire, you’re giving people an opportunity they don’t have, and they are grateful. So we are actually hiring around four engineers a month in Spain. We opened another office in Bilbao, so we have one in Madrid, one in Bilbao. We actually grew in Spain, but the crisis is of course terrible for a lot of people in Spain. Just, fortunately, not for us. Another company that I started in Spain, Jazztel, has been having its best years, and the stock is at an all-time high because Jazztel is a cheaper and better alternative to Telefónica. When things were going well in Spain, people didn’t appreciate the savings as much, but now everybody is tuned into savings and living on a budget.

Presumably you’re still a significant shareholder in Jazztel? No, I left the company 2004. I have a few shares, but very little. It was a company that I started and built, and I was just using it as an example that not all companies are doing badly in Spain. Well, the most successful company in Spain, Inditex, they mean, the third richest man in the world – ahead of everyone else that you can own ZARA . . . Last year Mr. Ortega became the third richest man in the world. I think of except Carlos Slim and Bill Gates! In the middle of the crisis, with a company in Spain!

Martin, the last time we spoke we commented a little bit on the phone industry, on Nokia and HTC and Android. There’s a specific angle that I really

386 22. Fon • Martin Varsavsky wanted to comment on. Of course, Microsoft and Nokia are partners, but they are also doing very differently. Nokia has huge problems, but Microsoft is very profitable and has great revenues. Nevertheless, Microsoft stock has been pretty stagnant for like ten years. And I have a little theory . . . My theory is that the people sitting on the boards of both companies are very conservative and unwilling to support strategic changes. It seems to me that this is a core reason for the very different problems of each company. Do you think that makes any sense? Well, Nokia and Microsoft are doing very, very differently. Microsoft is a super- profitable company whose stock is stagnant because the profits don’t grow. They are incredibly profitable at a stable level, which is kind of what people are thinking is beginning to happen to Apple. Apple is incredibly profitable, but from the last quarter of 2011 to the last quarter of 2012 their earnings stayed at thirteen billion. And that’s why its stock went from seven hundred and something to four hundred and fifty because people thought, “Here comes another Microsoft, another company that is super profitable, but profits are not growing anymore.” Nokia is a company on the brink of disaster – a company that could very well go bankrupt in the next two years – which hasn’t found a new way to make money. They used to have great ways of making money and then chose the wrong operating system, which is Windows 8, Windows Phone, which nobody is using, and based their products on the least-performing product of Microsoft. So it’s a very different story.

Yes, I agree. But nevertheless, you could say that Microsoft has lost the leading position and is trying to reclaim it. It’s been overtaken in many areas by Apple and Google and Facebook. Microsoft’s revenues are still the same old same old, Office and Windows and the server business. So, in that sense, I have a feeling that the way the board is structured in Microsoft and Ballmer on top is simply keeping Microsoft away from realizing the huge investment they are making into research. It’s not the board. Success is hard to come by. If you look at the history of Microsoft, they made it on a couple of products – Windows and Office. The story of Google is very similar, Google has an incredible amount of concentration of earnings on search and advertising. What these companies do is they get an incredible cash cow from a product that went very well. It’s so hard to get a product that works well in general, and then they try and try and try and try in search of new things.

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In the case of Microsoft, they tried the Xbox and all these other things you can think of, and now they are trying to make their own tablets and they are trying . . . genius is hard to come by. It’s not that they are not trying to innovate . . . it’s not the board – It’s just that Ok, fair enough. Martin, a couple of comments on Telefónica. I guess they are a kind of arch competitor of Jazztel, is that correct? Yes, or the other way around.

I wanted to ask if you had any comments on Telefónica’s network of incubators, Wayra? Yeah, I know them well. And I like what they’re doing, it’s one of the best initiatives of Telefónica. I’ve been to Wayra in Madrid, and they’re doing a phenomenal job. I was pretty impressed, very impressed with Wayra.

I’m really glad to hear that because, although I just met them very briefly, it looked like they were doing a really good job with that. And they’re now expanding throughout Europe. Yes, it’s a great, great initiative! I know the people who run it, and I helped them along with the people who run Telefónica, and Wayra is really a great initiative. with it. Jazztel is a rival, but I haven’t managed Jazztel in so many years . . . I get You are involved with the Clinton Global Initiative, and on your blog you often comment on politics and policy and about meeting prime minister candidates in Spain. This in not really typical for entrepreneurs. Entrepreneurs usually shy away from politics and policy, except for maybe a small minority. Do you think there is a lack of involvement on the part of company founders and other entrepreneurs in terms of political discussions? Most entrepreneurs shy away from politics for two reasons. One is that they’re not interested, and the other one is even when they are, they are afraid of pissing off some of their customers. Your customers are always going to have political affiliations. A person like Michael Dell would never share his politics because he wants everyone to buy Dell computers. If he starts speaking about politics, he is bound to antagonize maybe half of his customers, right? If he’s a Republican, if he’s a

Democrat . . . I’m friends with him, so I know. It’s not that he doesn’t have political 388 22. Fon • Martin Varsavsky views – it’s that it makes sense, if you’re Michael Dell, not to share them. But in my case, I have always thought that my consumers are sophisticated enough to distinguish my products from my views and say, “Well, I may not agree with and his views on the Middle East, but I’m going to share my WiFi anyway!” But I know that my views have caused me trouble in the past. And my views, for example, on what was happening in Spain, and generally being critical of the governments of Spain – that cost me a great deal in Jazztel. Often what I do is not ideal, but I just have this interest in sharing my views and engaging in constructive debate with people, and I guess I’ve done well enough in life to go on doing this and live with the consequences.

Can you tell me a little bit more about your involvement with the Clinton initiative, and specifically, aside from the conference itself, what exactly your activities there are? I’ve been involved in the Clinton Foundation since it started. I was involved in the construction of the library, the presidential library, and two things I was involved with were the Clinton Global Initiative and the presidential library. I was helping with that.

Besides going to the Clinton conference, what is the policy platform that’s most interesting to you, where you are most active in terms of public policy issues? Is it just your blog and speaking your mind . . . ? Of course, you have the foundations that you have created. There is educ.ar, which is about improving education in Argentina and Chile, and Safe Democracy, which is my foundation out of Spain, which organized a very large event on terrorism in 2005 and a series of conferences. I’m also involved through teaching and the academic world. It’s another way to give back. I donate my salary as a professor to the university, and I’m engaged with entrepreneurship, and I do think that entrepreneurship is what’s going to save a lot of countries. Europe is a lot for entrepreneurship . . . I do whatever I can for entrepreneurship because I especially in dire need of good entrepreneurship, so I have been centering a lot of my activities about promoting and teaching entrepreneurship.

In terms of your future plans, do you think you’ll be focusing on Fon in terms of your business activities? Obviously, it’s got a long way to grow, but are there any new initiatives popping around in your head, some new startup?

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No, I’m very focused on Fon.

Are there going to be some new strategic developments at Fon into areas you haven’t explored yet, or is it just going to be more telcos and more customers? Well, we want to expand the model we have in Japan to the rest of the world. In Japan, we don’t make money by selling passes on the network to those who don’t share, but we make money by selling offloading of smartphone data to WiFi, and charge per gigabyte to the carriers. We want to extend that offloading more. Like,

That’shalf of theamazing! iPhone traffic of Japan goes trough Fon . . . Yeah, yeah, it’s very good! So we want to evolve into that model, where the WiFi is always open, smart phones automatically connect to it, and in Japan we have a modification on iOS that allows a seamless transition between mobile and WiFi, and we want to continue doing that around the world with Fon devices offloading as much as they can and alleviating congestion in networks, and then getting paid per gigabyte of offloaded data by the mobile operators. That’s the model that we want to take to the rest of the world.

That sounds great, but how did you manage to get the modification into the iOS?! Yeah, that was difficult, it’s because there are so many Fon customers in Japan.

So you were able to actually work that out with Apple? Yes.

That sounds pretty incredible. Yeah, yeah, it was. Now we’re trying to get the same all over the world.

Fantastic. Have you had any new rounds of financing for Fon? I know Google was an early investor . . . Yeah, we have Google; we have Microsoft because Skype is owned by Microsoft; and we have Atomico, Index, Sequoia, BT, DT, and MTS of Russia. We have a very good group of partners and we’ve been cash-flow positive for three years now. So we finance ourselves.

390 22. Fon • Martin Varsavsky

That’s great, so no new funding rounds in the foreseeable future? Well, not for now, no.

Thank you for the interview. Thank you, Ivo.

Update: August 2015

Fon has by now reached more than seventeen million subscribers. The most recent Fon partnership, in April 2015., has been with Vodafone, covering (finally!) Spain and Italy – to quote from Martin’s blog “a country that I love and have had close ties to since my youth”. In June of 2015 Martin steppted down as CEO of Fon and named as his successor the longtime COO of the company, Alex Puregger. Martin is now focusing on Prelude Fertility, a new company that is working on a number of technologies that will enable people to have healthy babies any time in their lives.

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23 Techstars London Jon Bradford THE EUROPEAN STARTUP REVOLUTION

Serial entrepreneurs such as Martin Varsavsky or Morten Lund start multiple companies during their careers. Jon Bradford helps kickstart entrepreneurial ecosystems. Over the course of time roughly covered by this book, from 2009 until 2015, Jon has cofounded, worked with, advised and mentored startup programs throughout Europe, many of them in Eastern and Southeastern Europe: Poland, Estonia, Lithuania, Bulgaria, Russia – the list goes on. He has been a good friend and valuable advisor and mentor in the startup program I cofounded with three friends in 2012 in Zagreb – the Zagreb Entrepreneurship Incubator, or ZIP (www.ZIPZg.com). Founders in Zagreb and Croatia have had the opportunity to learn from Jon on several occasions. This chapter is an edited version of one of those conversations. On one of his visits to Zagreb in March of 2013, I sat down with Jon at one of ZIP’s events, “Startup Wednesday”. With an audience of a hundred or so curious participants, we talked about his career, tech and startups in Europe. A few months later, Jon and I had a series of email exchanges with a few other friends: Robin Wauters, Roxanne Varza, Alex Barrera and Adrian McShane. A new media venture was born out of those emails: Tech.eu, Europe’s premier online publication covering technology, startups and investment on our native continent. Jon was instrumental in transforming Tech.eu from a nice idea to a real, operating business, including – but certainly not limited to – his key role in motivating a group of angel investors to fund the fledgling operation.

394 23. Techstars London • Jon Bradford

Jon, you’ve started – or participated in starting – twelve, thirteen startup programs or accelerators across Europe?

OK,Thirteen. so more But thanI don’t twelve like saying and less thirteen, than so . . .fourteen startup programs? Yes.

Why, and which ones? program, was so helpful to me. I felt like I’d been given an open source licence and Why? Because I’m nuts! Actually . . . David Cohen, who helped me set up my first I had to give it away for free to somebody else. I just couldn’t give it away once – I had to give it away twelve or thirteen times. So I helped set up FounderFuel in Montreal, the Difference Engine, which was my original program, Springboard, Oxygen, Rockstar in Amsterdam, GammaRebels in Poland, Startup Wise guys in Estonia, where I’m a partner, Startup Highway in Lithuania, Eleven in Bulgaria,

That’sTexDrive enough. in Moscow . . . I’ve missed one, Christ. Is that enough? So, why did I do it exactly? To change things in a way that would make a real impact. I’d seen what it had done in the places where it shouldn’t have worked. The very first program I ran, and you really will have to look this up in Wikipedia, is somewhere called Middlesbrough. It’s like the end of the world when it comes to digital innovation.

It’s in the middle of something? No, it’s at end of the world somewhere. And we ran a program – I ran this program shouldn’t listen to me because I’m full of BS. I ran this damn program in a place in Middlesbrough and that’s the reason why people listen to me . . . and they called Middlesbrough, which was the digital arse end of nowhere. We had nine teams, and of those nine teams, four still operate today; that was three years ago. Two of them have raised over a 100 million pounds, and two of them are generating cash flow. One is currently based in the Valley and one is still in Newcastle. And I had this reaction from people, like, “You did what?! Where? How?” What I actually

395 THE EUROPEAN STARTUP REVOLUTION discovered is that you didn’t have to have Dennis Crowley as a mentor or Dick Costolo. You just need people who are entrepreneurial and a wish to help. Because entrepreneurs are all about seeking out an opportunity and actually executing on it. It does help, clearly, to have experience in digital businesses if you are doing stuff on the web, but at the end of the day, business is business. And that’s what we discovered in the North East of England. What you didn’t need to have is massive resources. You just needed smart people, willing to give up their time and help the next generation of entrepreneurs. And it’s their decision whether they give it, and it’s the entrepreneur’s decision to accept it. And we created this zone – no different from your ZIP program in Zagreb – that was a neutral zone for the benefit of startups. And it worked. And actually that is the reason. If I had done the very first program, when I did it, in London, I would probably never have helped anybody else. People would’ve just said we did it because we are in London. But because we did it, as I just described, at the end of the world, other people came to me and said, “You did it in at the end of the world – you can help somewhere else.” I mean it genuinely does make an impact. It’s good for startups, it’s good for investors, it’s good for mentors, its’ good for so many other different parts. And this is the problem that people struggle with accelerators. You can’t just put it down to “Do you make money out of it?” The reality is, if you put a pound or a euro in and you get a pound or a euro out, actually you create so much other value from running the program that it’s worthwhile doing. The word that we use is additive. It’s massively additive. I think of what I did previously as a startup, and actually, what I do today is a startup. So there is the weird part – when does the startup stop being a startup? Google still think of themselves as a startup – really? So why I did my startup was, I ended up with a job, which, fortunately enough for me, paid enough of my bills and I needed to do it only three days a week. It gave me enough capacity in the other two days of the week to start to create a runway for what was the original program that I ran, which was called the Difference Engine. The Difference Engine was funded entirely by the public sector, and it took me almost twelve months to get it off the ground. So these things do not necessary happen very quickly. Ironically, when I finished the Difference Engine, essentially the budget got cut because it was public money and the UK conservative government came in and killed a whole bunch of programs, including mine – which was actually the best thing that could’ve ever happened! The private sector and a whole bunch

396 23. Techstars London • Jon Bradford of business angels came to me and said, “We like what you do. Can we help and support you in doing the next thing?” That took another six to nine months to get off the ground while I was still running the Difference Engine. From my own personal experience, it’s not necessary to stop what you’re doing and jump into something else. I’m not saying you shouldn’t do that, but I think in the world of startups today, you can run things in parallel and actually de-risk what you do for a period of time. There would actually be a point when we have to jump out, but I don’t think it’s a binary thing. I think that the way people work today is much more “shades of gray” in terms of the ability to mix and match.

One of the things that we’ve seen in ZIP with our teams is that most of the teams are either students or people working in other companies that are also doing this as much as they can. On one hand I have to agree with you, you can do it in parallel but up to a degree. Yeah.

But then we are starting to see it as a problem. All of the teams are really great, but we have some teams in particular that have some traction, and they could really start pushing this forward, but they are really hesitant to leave their jobs and get into this full time. So we are trying to kick them as much as we can. But it’s definitely going to be an issue. One of the reasons that I did the accelerator is that I saw that happening. What we needed to do is put a little bit of money in, just to allow people to leave their work. allow you to jump in, or you have to find some way to actually create a little bit of a You can’t just suddenly . . . either you have to have built up a little bit of money to runway. So the money that we give to the teams is, essentially, “You’ve got enough money for 90 days – how brave do you feel?” So, yeah, that is one of the reasons why I did what I did, because I saw that problem. Actually, one of the reasons why the US market is the way it is, is that you can get fired tomorrow. And when you get fired in the US, it’s not about the money – it’s about your health care. The idea of actually having your health care removed almost overnight scares the shit out of people. So they are prepared to run their own business and feel like they control their day-to-day existence, rather than have some random person come down at any point and fire them overnight. There’s another weird thing here. How large is the population of Croatia?

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4.5 million.

4.5 million people into all entrepreneurs. The country would explode! Within any 4.5 million. So 4.5 million . . . the biggest disaster you could have is actually turning

But the other part of this is the fact that not everybody has to be the entrepreneur. organization, you essentially typically have the founders who are entrepreneurs . . . However, one of the things that I would actually think about is – would you work for a startup? Even if you aren’t ready to do your own startup. Are there other people that are doing startups that you could help support or give up time for? We talked about this, and I’m sorry, sometimes I sound like a stuck record – I call this “muscle memory”: it’s good to repeat things and see other people make their mistakes. Put yourself in the position where you can see and learn about what things you can do in a startup; you don’t have to be the entrepreneur, but that does not mean that you can’t be part of a startup. In terms of funding, there is one thing people often forget before the usual “3 Fs” (friends, family and fools) – it’s called “customers”. There is a risk that you walk away from any of these conversations and think that the way you build a business is through venture funding. Venture funding represents an extremely small part of the overall ecosystem for starting your business. The people that actually get out and actually start a business and sell to customers represent the majority of all businesses that exist across the world today. Interestingly, my investors are all angel investors, but I’m guessing, from the top of my head, that 75 to 80 percent of them have never raised venture funding. And the reason why they are investing in what I do is because they have a bucket load of money, and that’s because they have never had to give up way too much equity to venture capitalists. As a context for that, because that really freaks people out: how big a percentage of a venture- funded business do you think the founders eventually end up with? How big a stake, on average, do you think the founders end up with at the exit of a successful venture-funded business? It’s 10–15%! If you imagine you have a really successful exit from a VC-funded business, it’s like a hundred million dollars. Ten percent of a hundred million dollars. The VCs have walked away with 90 million and the founders with 10. Now imagine there are five founders – that is two million dollars for probably about five to seven years of work. It’s actually a really small percentage. Now to emphasize that, if you think about Google or about Facebook, which are both considered to be massively successful IPO’s . . . At Google, the two founders had 18% of the business together. 398 23. Techstars London • Jon Bradford

And that was after hitting home runs the whole way through. Even Zuck, when he floated Facebook, ended up with 26. He ended up only with 26% and he hit home run after home run after home run. So, coming back to my entrepreneurs – they’ve all got really successful businesses that they opened which also generated lots of cash, and they don’t know what to bloody do with the money. Seriously. We have a lot of entrepreneurs that have money in the bank and they genuinely have no idea, and that’s why they are pushing money back into the system. Where I’m coming from is, venture funding is not the only way to go about this. And if you start with the notion that “I start a business and then I start looking for venture capital,” you are completely in the wrong place.

If you needed to choose one of the projects that you have been involved in as the biggest success and one that you think is the biggest failure, what would they be? is a team in the Czech Republic. It’s not quite there, but it really has potential. It’s Springboard has only being running, really, a couple of years . . . The biggest success the most boring business in the world – API management – and it’s called Apiary. io. Actually, Esther Dyson is one of the investors. They’ve only done a seed round, and they are just about to do an A round. They are growing at 100% per month, and it’s the fastest growing platform for APIs in the world today. And they are based in Prague. What is interesting about those guys is that they actually did a hackathon and came out at the back end of it. They came out first – it was one of those world wide hackathon things. They came to us with what was basically just an idea. We don’t ordinarily take people that say, “I have an idea,” but they had such a good team! Essentially, there was Jakub, who is a developer, and there was Jan, he was the designer. They had known each other at each other and kind of know what the other was thinking, which also meant since they were five years old. And it was just like . . . it was weird. They could look that, when they were pissed off at each other, they knew that too. So they just didn’t get into conversations – they had kind of done the all arguments.

They can get into a fight without even saying a word. Yeah. And that was more instinctive when I met the guys. I thought, “There is something about these guys.” It’s also a trick that VCs play on our Demo Days; which is a really clever trick. They go around . . . 399 THE EUROPEAN STARTUP REVOLUTION

Don’t reveal it! No, no, this is a great trick. Essentially, the VCs go around the room with the 10 teams, and they say, “Apart from you – and you’re awesome – who is the other best team in the room?” Because if you sat in a room with the other teams for like 13 weeks, you really get to understand the dynamics of the people. Everybody in that class basically said, “Jakub, Apiary!” teams that ended up at Startup Bootcamp. I thought, “What did they see in that As for my biggest missed opportunity . . .Well, there’s a few. . . I passed on a few and I didn’t?!” So Seedcamp, too. There’s a business called Bluefields, which I rejected, and in six months they got into Seedcamp and 500 Startups and then went on to Vegas.

What do they do? It has something to do with football. There’s a lot of things that I pass on because I just don’t understand it. It’s not because they haven’t explained it well. As I described to someone the other day – don’t come and pitch me on a fashion startup. Look at me! All I wear is swag. I buy jeans every 6 months, so don’t pitch me your fashion startup. I just don’t get it! It’s not because it’s not a good idea; I just don’t understand it. I should stand in a shop, take pictures of clothes and I send it to people? I get into the shop and I try to get out as fast as I can! That’s actually another thing to think about, not just for me, but other VCs and the angels. Some VCs and angels just have certain topics they prefer. And they can get really passionate. I get really horny when people talk to me about B2B. B2B to me is bloody sexy! business. They pitched it to another accelerator – I won’t say who. They started out I saw this team yesterday . . . It was originally a B2C product in the ticketing saying, “We’re doing this B2B ticketing system for venues.” Then they essentially decided not to do it, and they went to accelerator and the accelerator completely threw a wobbly and basically said, “Why have you changed it? We don’t want to do this!” They changed back to a B2B solution because the problem is actually not selling the tickets to their customers. There are more problems around ticketing in venues, because venues kind of own the tickets, but then they have to give the tickets away to people. Actually, tickets are weird, because they are actually real cash. They said, “There is a real problem in our space,” and they pitched me, and I was like, “Oh my God, can I have you in Techstars London?!”

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There is such a lot of opportunity in B2B, and it creates money almost immediately, so yeah, my things are B2B. I listen to other things, but it just so unsexy. Actually, I’ll tell you about another really unsexy business. The URL is studentreadinglists. com – what do you think they do? Student reading lists! Essentially they have the

The problem is, librarians have a problem because they have to get a reading list most profoundly stupid . . . actually you could clone it here, it’d be good to clone! of lectures. Then they have to somehow distribute it to students. So they have effectively created a platform for that to happen. So essentially, the students go on, and they say, “I want one of those, one of those, one of those. Here are my credit card details. Buy me the books.” On affiliate fees alone at Cambridge University for one course for one term, they made 3,000 pounds. If you imagine rolling that could do group buying and get a discount and give some of the money back. But out term by term . . . and then you can roll it out in other interesting ways. We actually, the really long-term value of this is that you know the students, you know the university, you know the courses they are in, you know their real address, you know the credit card details of somebody who’s eighteen. Imagine how that can increase in ultimate value over the next 20 years as you follow that person through. And it’s called studentreadinglists.com.

How does your selection process work, first for Springboard and now for Techstars? We’ve changed the selection process in the last 30 days. We put all the names in a big tombola and we pull out 10 teams, because we only select lucky names. Which actually had them really confused in America. They said “Really? That is what you do?!” They didn’t get the irony. I don’t think it’s going to change a lot. My selection criteria is very similar to the US in this order: We try to find really smart people, and one of the key questions I use is “tell me something interesting about yourself” And if you say, “I’ve got great grades, 10 A-levels” (or whatever they call it here), that doesn’t do much. I’m looking for personality. I can look at your LinkedIn and find out everything you’ve ever done in your life that’s really boring; I want to see things that actually set you out. And the really weird part about entrepreneurs is that you’ve got to learn to boast a little bit! You have to find a way to say “I’ve done some really awesome thing and I’m not being shy about telling somebody about it!” So – we are looking for really smart people. We are looking for really smart teams. People apply to my program and say, “I’ve got a mate and

401 THE EUROPEAN STARTUP REVOLUTION he is a rocket scientist. I’ve got this other guy and I know him from meeting in the prefer to have a team that has worked together for a period of time even if they’re pub and he is really smart, as well. I got this other guy . . .” I hate that! I actually not all rocket scientists. Because actually, the weird part is that I’m looking for really smart people, but the value of having a really strong team build something is really, really valuable. And that is actually probably the biggest thing that fails in these accelerators. That happens at Techstars, it happens in Springboard: one of our teams explodes. Not literally – but there is a point during the program when they go, “I hate you, I never want to see you ever again in my life!” – and you prefer that not to be the day before Demo Day. It gets complicated: “Yeah, we started what have you done today? I’m interested in not what it is, but the fact that you’ve with 10 teams and . . . we miss one.” The third thing that I look at is commitment: done it. An accelerator program is only three months and guess what – at the end of the three months, you are on your own! Not quite, but essentially it gets pretty shitty after that. It probably will take you three to six months to raise additional money to keep going. And I want to have people that are dedicated and committed to their startup. And the way I look at that is to see, what you have done up to this point? I also think about the fact what we accelerate the things that you are doing. We don’t create. We just make things that you are already doing happen faster. The last one is the idea. Seriously, that is the order that we do. Historically, in Springboard, that is the order in which the application proceeds. In some cases I just get to the bottom; I don’t even look at the idea. Because they are just not the right team, they’re not set up the right way. The idea splits itself up into two parts. The first one is – is it an interesting problem or opportunity? I instinctively look at that and go, “That’s kind of interesting, I never thought of that but that is a really interesting problem!” And the second one is, is it a big enough market that, if the first thing you come up with isn’t going big enough market to look at other opportunities in that sector? Because more to work, there’s enough scope to kind of . . . I hate the word “pivot”, but . . . is it a often than not, it’s the team that does the interesting stuff, and the idea is almost secondary. You have a passion in music, and it’s going to be in the music sector or something along those lines, but having the ability to flex. Does that answer your question?

Yeah.

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So people, people, people. And also – ambition! The final one which is implicit in all of this: we want to help people who have global ambition and really want to break a few rules. We’re there to help and support the complete nutters in the room that you know what a wingman is? Friday nights, you get dressed, you go out to pick want to do something completely mad and crazy . . . apart from the “Wingman”. Do like Uber for women. I’ll pay you 25 Euros to come out with me on a Friday night up some women and you are on your own. And you say, “I need a wingman.” So . . . so I can pick up women. Get paid or get laid, it’s your choice. Don’t pitch me that, please! The guy pitched me last week, and I was like, “Oh my God!” and he is sitting and explaining it’s like Uber for women. What kind of retard do you have to be that you have to pay somebody to be your mate on a Friday night?!

Does it have traction?

I have no idea . . . I think somebody pointed it out, could you not just have used the Jon,money what to get is thelaid typicalanyway? ratio, Might how be more many guaranteed . . . applications do you typically have in Springboard programs? What is the statistical probability of getting in? Less than about three to five percent. The program keeps changing around, and the numbers change, but we usually have three to four hundred applications, of which we pick ten. Half of the applications are just rubbish. It’s a relatively small number, but one of the things that we will be doing in Techstars is, for people who apply to Techstars London, if they don’t get into our program we are going to try to push them into other programs around Europe.

So, mathematically, if somebody applies for 20 to 30 programs in Europe, the chances are they’ll get into one.

Oh, yeah! Seriously, there are so many programs . . . Don’t you worry about people personally believe that, if you are willing to get on a plane and go somewhere, there saying, “Oh, there are too many accelerators.” If somebody wants to help you . . . I are opportunities. I think about it like this: “This might be the worst idea in the world, but somebody is going to give me 90 days of cash just to try.” It’s better to try than not to try at all. That is the only thing that I encourage people to do! You are also likely to find out really quickly if you are going to be an entrepreneur or not. You don’t want to be on your death bed thinking about what might have been. Thinking, “Should I have done that, should I not have?” Actually, the weird part is that my

403 THE EUROPEAN STARTUP REVOLUTION mantra is that I want everybody to become completely unemployable at the end of the program! That would actually be great, imagine if you could have everybody in ZIP just never want to work for somebody else again. If that is the only objective that you had – creating a work force of people who just want to start their own businesses. I don’t get into this “entrepreneur” stuff. I don’t get into “startups”. It’s just about creating what you want to do in your business. Sometimes it will turn into Google, sometimes it won’t. But working for yourself is just such a phenomenally great thing to do – Being able to control your own existence. The average age of a successful entrepreneur in Europe today is 39. You don’t have to be 21. You can do it at any point. I didn’t do it until I was 39, when I started my first business. And I think it makes you a better entrepreneur.

You can still try when you are 21. Oh, you can. And I actually encourage it! There is also something really interesting that’s going to happen in the UK – a really interesting program targeting students to potentially go to the UK and start businesses. But you didn’t get it from me!

What’s your take on the current investment climate – there’s been a lot of debate around the so-called “Series A Crunch”. Has anybody heard about the Series A crunch in Croatia? Has anybody had a problem with the “crunch” in Croatia? The thing you have to be really careful about is that all of the tech press today is based in the Valley. And everything that you read is based upon what happens in the Valley. TechCrunch, pardon my French, don’t give a shit about what happens in Croatia. TechCrunch don’t know what happens in the UK.

Apart from Mike Butcher.

“crunch” – I think it’s just hard. And a lot of the noise that comes out of the press Apart from Mike Butcher . . . Getting to a Series A is hard. I don’t think there’s a comes out of San Francisco but does not come out of the rest of the world. I still believe that good ideas get funded. My argument is the other way around: maybe there are just too many stupid startups that have been funded, particularly in the US, that should never have been funded. I love Eric Ries, I think he’s just great, but Eric Ries means my granny could do a startup today, based on lean methodology.

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So in Croatia and the region we’re not worrying about the Series A problem just yet. Hopefully, we’ll have a number of startups worrying about it some time soon. It would be a nice problem to have! I’m absolutely encouraging everyone to read Brad Feld’s new book about building startup communities. The emphasis is on the entrepreneurs. If you look to your government or your universities to do this stuff, it will never happen. Your responsibility is to take ownership and do what you want to do. Communities are the people, not the things and not the spaces – it’s actually everybody coming together and really wanting to make a change!

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24 Huddle, SoftTech VC Andy McLoughlin THE EUROPEAN STARTUP REVOLUTION

Some of the companies in this book are very well known to the general public. Soundcloud, Deezer, Last.fm, Clash of Clans (Supercell), Top Eleven (Nordeus) – these and many others are brands familiar to millions of users worldwide. On the other hand, some of the entrepreneurs in the book have built businesses around products and services targeted at business users, such as Skimlinks and Zemanta. Huddle falls into this latter category. Unless your company is a customer, chances are you’ve never heard of the company built by Alastair Mitchell and Andy McLoughlin. Hundreds of thousands of companies worldwide, however, rely on Huddle to keep their business moving along. Explaining what exactly it is that Huddle does can be somewhat frustrating. I know this because of my professional experience. “Collaboration software,” “workflow solutions,” “business process management” – each term sounds even more vague and confusing than the other. Once you implement this type of software (or service) in your organization, however, you will have a very clear idea of what it’s for and the huge business advantages it can offer. This appeal was not lost on one organization that isn’t usually involved in startup environments – the United States Central Intelligence Agency, or “CIA,” as it’s usually called. It turns out that the CIA has a venture investment organization called In-Q- Tel which decided to invest in Huddle. I spoke with Andy McLoughlin about these and other topics in 2013. When we connected again in 2015, I was very interested to hear how things were going for Huddle and for Andy personally.

408 24. Huddle, SoftTech VC • Andy McLoughlin

Skype call – April 2013

Hi Andy! Congratulations on the fantastic stuff you’ve done with Huddle. It’s obviously doing really, really well. Let’s start out with some numbers. You’ve mentioned elsewhere that you were at about two hundred people at the end of last year. Have you passed that? No, no. The plan is to be at about that number by the end of this year, so we’re currently about 160 people.

OK. And I see you’re pretty spread out. Besides London and the Valley, you also have people in New York and Washington, right? Yes. Right now we have a presence in Washington, but that’s really being served out of New York, so we have three key offices, which are London, San Francisco and New York.

You’re working with both the UK and US governments, so I’m guessing that the Washington presence is related to your cooperation with the US government? That’s right, yeah! Where we stand with the US government is that we launched our service for the US government in the last month or so, and in our last round we raised part of it from In-Q-Tel. In-Q-Tel is coloquially known as the venture arm of the CIA, backed by the CIA, the Department of Homeland Security and other security services. Their remit is to invest in technology which would be useful for the secret services, specifically for the US government.

So, in other words, everybody that is using Huddle is now really, really worried? Well, no...

I’m just kidding! very similar with what we’ve done for the UK government. We haven’t actually Yeah . . . The instance we have for those guys is a completely separate service. It’s instance of Huddle for the UK government and the public cloud version for formally announced the US government one yet . . . right now, we have a private everybody else.

OK. I’m sure conspiracy theories abound.

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you, with both the UK government and what we’re doing with the US government, Umm, yeah! I mean, somebody made that joke a while ago . . . To be honest with we don’t actually have access to their databases. What we are doing is simply supplying them with an instance of Huddle that they run themselves, and at the same time, they don’t have access to our data centers, either.

So . . . It’s basically like selling a private, on-premise instance of Huddle; it’s just that it’s being sold to the government.

What are some of the other key metrics that you consider as being central to your business and would be willing to share? The other main metric we talk about is just the number of businesses on the platform. Right now, Huddle has about 100,000 companies who are using the Huddle platform to share and colaborate.

Anything else? Is the number of the companies your main metric? Or is there some usage . . . It is. The number of companies is a fairly good proxy for the number of users, and then for the amount of usage. The last time I looked at these metrics in detail was probably quite a while ago, when we were raising the last round. At that time, half of the content stored on the Huddle platform had been stored in the six months prior to that. What we’re saying is, there is huge acceleration in both the revenue that the company is making, as well as the amount of content and activity going on on the platform.

So, in terms of growth, what does that mean in month-over-month or quarter-over-quarter? What is the main time frame that you measure your growth by? Are you doubling, tripling . . . ? The company in terms of revenue will more than double this year. We are putting a lot of our focus on mid-market enterprises – that is going to grow by a factor of four or five this year. Growth is really good, really steady. I think it’s great for a company of our age to be seen with growth in triple digits.

Absolutely. How does that reflect on your profitability in the short term? Are you profitable, have you broken even . . . Related to your investment and your runway?

410 24. Huddle, SoftTech VC • Andy McLoughlin

Every time the company has come around raising capital, we’ve been at break even. When you are in a high-growth technology business who’s raised a significant amount of capital from a venture capital firm, if you are running at break even or even running at profit, you are probably doing it wrong. In order to get to the levels of revenue and the levels of growth that the VCs expect to see, your spending needs to be greater than your revenue, at least in the short and medium term. I think that, as long as you can see revenue growing well and as long as you can see a path to profitability, that’s good enough.

This is a pretty basic question, but I need to ask it anyway: what is your basic revenue structure? Is it per seat, per company? It’s per seat. Like a lot of SaaS businesses, we started off with a freemium, per- company model where you bought it and it was a flat cost to your company. It was really all about making sure you have your product / market / pricing fit correct. We found that businesses that were best suited to Huddle were bigger companies. You know, because of the support we provided and because of the complexity of the content managenent and the workflow. Small companies could get by with a tool which was cheaper, and what we found was that it was the bigger companies who really connected with Huddle, and bigger companies expect to buy software in a different way than small companies. So what we did was, we moved away from the freemium “bronze to gold” model to a per-user / per-month pricing model. Which meant that it’s still very scalable: a small company can buy Huddle and not pay too much, but then it allows us to scale out when we are selling thousands and thousands of seats.

Is it a relatively simple structure? I assume you have different price ranges for smaller ones, bigger ones . . . just very briefly? We are actually going to be announcing a new pricing structure in the next month or so. Currently, it’s pretty simple: it’s $20 per user, per month, and we can provide discounts on scale or elsewhere if we need to. The pricing we are going to be announcing will actually allow us to be even more flexible when we’re dealing with very small companies.

OK. But currently, it’s really very simple – aside from the discounts and the volume, it’s essentially a single price per user per month model. Correct.

And, hopefully, you’re not going to make it more complicated?

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No, no, no. It’s going to stay simple.

OK, great! When you talk about seeing that larger enterprises, the bigger, more complex companies, are a more natural fit, I’m guessing that this isn’t something that you started out with, by design? I’m assuming it’s something that evolved over time? It is.

When you were starting out back in 2006, 2007, were you saying, “Oh, we’re gonna build this for the large companies in the Fortune 500”? I think we always knew it was going to be a tool which would be attractive to larger businesses – we just didn’t know how much larger. The very small end of SMEs has traditionally been pretty well served by web / SaaS companies, while there haven’t been great services in the mid-market and upwards. What we found was that it’s pretty hard to sell into the enterprise from day one. You need to have relevant customers; you need to have good case studies. Frankly, having small businesses on the platform is a great way to validate what you’re building. We saw it as part of the journey. What happened was that we kind of got dragged up into the bigger businesses pretty quickly –within a few months of going live, we had some huge businesses using Huddle, all of whom wanted slightly more flexible means to pay than just a credit card, or were looking for a licensing model that was going to fit better with their business. Also, the government kind of came out of nowhere. We didn’t build Huddle initially to cater to government. Neither Alistair or myself or anyone else had any real experience selling into government, but what we found very quickly was that the tool that we built was actually a great fit for government users, primarily because so much of the work that government does is across the firewall. Each government department is almost like their own mini company: they each have their own IT, they have their own firewall, they probably have their own SharePoint instance.

A mini fiefdom. Exactly. That’s right! What we found was that, as soon as they needed to collaborate with another government department, they couldn’t use their SharePoint because it doesn’t work outside the firewall, and they couldn’t use e-mail because email is just, you know, a great communication tool but a terrible collaboration tool. We’ve all been in that position where you need to share a document with ten people, you send it by email, you get ten versions back and you spend the next three days trying to get the damn thing together.

412 24. Huddle, SoftTech VC • Andy McLoughlin

Yeah! So, for them, a tool which kind of had all of the version control and auditing of something like SharePoint but which was available in the cloud and could be spun up in seconds rather than days was actually really attractive. So it happened really quickly, we got this great base of usage inside government, which has just grown and grown and grown! The government is now probably the second or third largest vertical we’re selling into.

What are the first two? I’d say that marketing, brands and advertising is probably still the largest. The activities they are doing there are generally very similar. If you’re an agency, you’re using it to collaborate with different customers, and if you’re a brand, you’re using it to collaborate with your different agencies. What’s really nice is we see this kind of network effect where an agency will be using it with a bunch of their clients, they invite one of their clients into it and the client says “Hey, this is kind of cool! We should be using this to work with our PR ageny in a different country or with an agency that produces video content!” Then the company becomes a client, and they spin out their work to other agencies, and they don’t need to worry about different usernames and passwords and different URLs because it’s a kind of multitenant, SaaS solution – they see everything in one place.

Quite often in enterprise scenarios in large companies and government situations there is a technology provider such as Microsoft or SAP or even Salesforce.com – whoever – and then often there are partners, companies that are specialists in doing the implementation on the ground. That collides slightly with the cloud model, so how do you work that out? I mean, do you have a consulting practice, or do you have partners that do that, or do you rely on the end users having their own teams implementing Huddle? You know, it really depends on the customer. Some customers, especially the very small guys, they just want to pick it up and get going with it. We’ve built Huddle to be pretty simple – any user can get up and run with it pretty quickly. Larger companies, when they are looking for best practices, when they want to get a large number of people up and running, they engage our customer success team. This is very similar to Salesforce’s “customer for life” team. The CS guys, their entire role is to get the customer up and running. They understand best practices, they can help users get the software installed if they need to install anything, they can help users with any questions they have and they can really promote usage within the

413 THE EUROPEAN STARTUP REVOLUTION business. Frankly, for us, the more usage we see in a business, the more successful the company will be, and the better the lifetime value of that customer for us.

So you are primarily creating the consulting or services capacity within the company itself. You aren’t creating an ecosystem of resellers and implementation partners – that doesn’t seem to be your primary focus. We have a partner ecosystem. These partners could be anything from strategic partners, like Salesforce, to partners who are integrating Huddle into their platform – some examples there would be RightSignature, Fileboard, Quickoffice or Office,2 where guys who have great apps hook them into other storage ecosystems. Then we have partners who are doing consultancy, who are doing referrals – those are our commercial partners. So, we do have partners who do that, and they get involved with the customers they bring to us. In government especially, we actually have a partner in the UK who can help and assist with rollouts as well. We really just want to help the customers to be successful, so if they want to use the partners to help them with the rollout, that’s fine. If they want us to do it, that’s fine as well. If they want to do it themselves, that’s great too.

Just a quick question about the physical deployment. I would guess you have multiple data centers – are there customers that want to have Huddle on premise? We get asked about this reasonably often, as you’d expect. We feel that in 99.9% of cases, the Huddle cloud is more than adequate for customer usage. We have great security. We’ve invested huge amounts of money and time in stuff like ISO 270001 compliance, encryption, a strong SSL between the client and server, and various other bits and pieces. Where we will consider on-prem deployments is where there are really enough users to really warrant that. Government is a great example of that, where you can see a path to tens or hundreds of thousands of users from one single service. The large banks might be another case, where they simply can’t deploy stuff on the public cloud because of regulation issues. I’d like to keep as many of our customers on the public cloud as possible, but I think you have to be realistic and know that there are going to be times when you can’t do that. We’re open to having these kinds of conversations, but the public cloud for us is where we really want to try and drive most of our customers.

Tell me a little bit about how you and Ali work together. With most of the companies that I’ve talked to there is usually a founder, one person that is driving the company. It’s not always the case – I spoke with the guys from

414 24. Huddle, SoftTech VC • Andy McLoughlin

Prezi a couple of months ago, and they have three founders that work together closely. In Sound Cloud there are Alex and Eric . . . You guys started together from the beginning; you decided early on that you would both invest personally in the early stage in equal amounts. How does that work today? Are you based in the same place? Give me an overview of how you two work together. Sure. In the very early days the responsibility split out quite easily, Alastair was the commercial and operations guy, responsible for driving sales, customer service and marketing, and I looked after product and technology, everything on that side of the house. Now, as we’ve grown the team around us, we’ve been able to become a bit more specialized. We hired a CTO who looks after technology and a product director who looks after products. In 2010, I moved out to the US to begin to grow our US presence, getting Huddle known, and to build a team out here as well. Alastair stayed in the UK, managing the operations there, and I came out to the new frontier to get set up here. I was still overseeing the product strategy, partners and alliances because most of them were based here on the West Coast, and Alastair was running the shop in the UK. Our VCs had always said that they wanted both founders on the ground, on the West Coast, simply because, if we eventually sell, it’s probably going to be here – if we eventually float, it’s probably going to be in the US market, and, frankly, if you’re building a big global business, this is really the center of the Earth for the type of thing that we are doing. Alastair made the move out here at the end of December. So now both founders are here, we have our CMO out here, our VP of sales is based in London, our CTO is based in London, our Product Director is based in London. The outward-facing end of the business is now in San Francisco, with London acting as the engine room. What that’s meant is that we’ve again had to shift the roles a little bit, so I no longer have to be the “senior man in the office” in San Francisco – Ali can do a lot of that stuff as well. We’re kind of feeling our way a little bit now, given he’s only been out here for about three months, learning how the roles work. I still have a huge focus on product and technology. I need to bridge the gap between the commercial team here in San Francisco and the product guys, the technology guys in London. I still own all of our alliances and partnerships. Ali and I work very closely together on building out the profile, meeting investors should we wish to raise another round, meeting with the banks if at some point we are in the UK. we should decide to go public . . . Just trying to become as well known in the US as

415 THE EUROPEAN STARTUP REVOLUTION

How far do you feel that you’ve come along in that sense? Huddle and both of you are really a shining example for everyone in the European high-tech community. Do you feel that Huddle as a brand is as established in the US as you’d like it to be? How far along are you on that path? No way. Huddle in the US today is probably a lot like Huddle was in UK several years ago. People in our industry know us pretty well, we’re pretty well known by VCs, but if you stopped the man in the street, even in the general startup industry, and said “Huddle” – he might know the name, but he probably wouldn’t know exactly what we do. Our aim to be as well known out here as we are in the UK and Europe, so that when people say “Huddle” out here, they’ll say exactly the same thing: that we’re a shining example of how startups can really perform well. We’ve still got some way until we get to that, but we’re certainly on the right track. We’ve been making terrific hires in the last few months. We hired our CMO, Chris Boorman. He was the CMO of Informatica, which is a big, publicly traded software company. Our VP sales, Simon, ran the UK and Ireland operation for Salesforce up until recently. I think that we now have the team to really achieve those goals.

And I’m sure you were able to help Ali pick an apartment and neighbourhood in San Francisco? This is another point where we’re a little bit different. My girlfriend and I, we’re both city people; we like doing all the stuff that being in the city affords. You know – going to great bars and restaurants, seeing our friends. Ali has a young family with two kids. He always wanted to live by the water, so he has ended up living in the North Bay in a place called Tiburon, which is absolutely beautiful. It’s gorgeous, he has this amazing view from his garden which is straight on the water, you can hear seals barking in the morning, but it’s a bit of a trek to get back to San Francisco, and if he misses the ferry at eight o’clock, then he has to get a very expensive cab ride home, while I can stay up till all hours and be home in ten minutes from almost anywhere in the city.

But neither of you are in the Valley? No, neither of us are in the Valley. Although Ali is geographically farther away, his

Francisco. Most of our staff live in San Francisco. There has been a big change in existence is more similar to living in the Valley . . . Our office is in the middle of San the last three years where most of the hot startups on the West Coast are based in San Francisco rather in Silicon Valley.

416 24. Huddle, SoftTech VC • Andy McLoughlin

Assume you are talking to a hot startup that’s really found a fantastic niche, a disruptive technology, and they’re based either out of London, or maybe Berlin, or maybe even Tallin, and these guys are doing really, really well and they are in a dilemma . . . do they need to move to the States, do they need to immediately go the Valley, and should they even target the US as their primary market? Or maybe they’re thinking about Asia, India and China and those markets. The question for startups that I keep encountering over and over again is, is it almost a necessity to go to the States? I get to speak to a lot of different startups on exactly this topic. I’ve invested in a lot of European companies – I think I’ve made some nineteen angel investments now – and I think about fourteen of them are European companies. This is something that I talk about a lot with them: do they need to be here, and if they do, where in the US they should come to. I think for a lot of companies, being in the US is a bit like a badge of honour. You know, they don’t really know why they need it, but they think they do.

Everybody says they do! My advice to them is, just be very very frank with yourself. Do you actually need to be out here? Because not every company does. If you’re building a broad consumer technology or a broad enterprise technology, then this is the best place in the world to be because this is where the great companies are. I think, though, if you’re building a technology for specific markets, so if you’re building technology for the music industry, or the fashion industry, or the finance industry, then San Francisco certainly isn’t the best place, because those industries don’t really exist here right now. If you’re focused on the Asian market, then no, I don’t think you need to be here at all. And more people do seem to realize that adding an extra office doesn’t make things twice as hard, it makes things ten times as hard. Because all of the communication which seems to happen so easily when you’re all in one space – you really have to work at it. And so, you have to have a damned good reason for even considering opening a second space. And if you do have a good reason to do it, then make sure that you’re doing it in the right place.

Back to the question of your team. In terms of the percentage of people, are you like half-and-half US/UK, or are most of the people in the UK, and you just have yourself and Ali and a small minority of key people in California?

417 THE EUROPEAN STARTUP REVOLUTION

We have about two-thirds of our people based in London. All of our operations, finance and HR is based there. Our engineering and product is based there, our European sales and European account management is based there. In the US we simply split it down by geography. So East Coast sales are based in New York, and West Coast and Central sales, business development, strategy and US account management and the founder team is based in San Francisco. So, like I described it before, San Francisco is a kind of outward facing face of the company because this is where the founders are, and the engine room of the business is in London.

Tell me about your investors in terms of how they came together? Obviously, for each new round you’ve had the previous investors participate. Eden was in all three rounds, Matrix came in at the B and also the C round . . . Can you comment at least briefly on the various funds that are your partners, what was the relationship, and what was the process – particularly for the last round, which was obviously the biggest one? The very first round we raised, we met with a lot of London VCs. Eden was a reasonably young firm with a big vision. We fit well in their portfolio. They didn’t really have a portfolio at that time, so there was no worry about competition. They have been great supporters all the way through. When we were raising the B round they made a lot of introductions to a lot of different VCs. And what we’ve seen is, over the last two years and as this market has become super hot, there has been a lot of investment in a lot of companies who are directly competitive with Huddle. Matrix Partners was one of probably four or five US VCs that we had a term sheet from, and I think they were probably the last company we met, but the first to give us a term sheet. We were really impressed by how quickly they moved and how honest they were. Josh Hannah, who is the partner from Matrix, is just an absolute legend – really smart, really gets our business, really supportive. When we raised the C round, that was driven by the contacts that Josh had. Companies that he enjoys working with, companies that he sits on the board of fantastic that aren’t invested significantly in competitive businesses. He told us, other businesses with . . . He has a hit list of probably ten VCs that we think are “You guys meet them, go and see what you think and let us know.” So we met them. Some we liked, some we didn’t like. We felt the same way about Jafco, who led the C round, as we did about Matrix and Eden. They were a really solid firm with a great portfolio, and really, really just got what we were trying to build. We also took money from DAG, and DAG is a really interesting fund. They have a follow model. They have seven or eight VCs that they will follow – they see them as being

418 24. Huddle, SoftTech VC • Andy McLoughlin the seven or eight best VCs in the world. Matrix is one of those firms, and if Matrix has invested, then DAG will generally take a very strong look at investing in the follow round. We took money from In-Q-Tel as well because of the government connection. And finally, we took money from a guy named Subrah Iyar. Subrah is the founder and CEO of WebEx, who were acquired by Cisco. Subrah likes our business. He sees a lot of similarities between Huddle and where he wants to take WebEx, and so it’s been great having him on board as well. A super nice guy, really well connected; he’s on the phone whenever we want him.

There’s one or two more points I want to address, particularly about your personal angel investment work. You mentioned quite a number of different projects. How do you select them? How do they approach you? If somebody wants to pitch Andy McLoughlin, who has so much on his plate every day . . . How do you go about looking at investments and projects for your angel investments? It’s become refined over time. At the very beginning, it was really guys I knew, who I thought were top rate, who were building really interesting businesses. I love the idea of Europeans coming to the States and really doing well, with maybe a few of them going back in the future and helping others. What we don’t see enough of are European entrepreneurs putting money back into the ecosystem the same way you see it out here on the West Coast. In the UK, it’s reasonably rare for an entrepreneur who’s had a great exit or made many along the way to really support other businesses. They make their money, they buy a big house and then you never see them again. What I’ve been trying to do is really foster that circle, which just doesn’t exist right now. I love looking at European businesses because there is so much potential. They can run really lean, they can get a lot done on not so much cash compared to the US. I’d say it costs twice as much, if not more, to run here as it does in another country. I like startups who have a sound operation somewhere in Europe but want to expand over here, and who have a good reason to expand over here as well. Pipedrive is a great example. A terrific business, a great product. They’re doing it out of Tallinn, but they realized that their biggest market would be the US. Now they have somebody on the ground, and they’re beginning to grow their operations over here. We’ve seen these guys grow – they’re just growing at a crazy rate!

Well, the Estonians are a pretty incredible bunch; there are many hot companies coming out of there.

419 THE EUROPEAN STARTUP REVOLUTION

Yeah, absolutely. What I look for is a completely fresh approach. Investing isn’t a purely altruistic process. I’ve got to see a gain in it for me, so that means a price which is reasonable. One of the things about Silicon Valley is that the valuations are just ridiculous. European companies that can come out with a valuation which more accurately reflects the stage that the business is in is always very appealing. A great product, something which really excites me, something which I can see myself using, or Huddle using, is really good because I can road test it, or get the guys to road test it. I like to look at projects which either have the potential to go all the way – could this be a business which is worth a billion dollars? – or a business in a space which hot enough that there is potential for it to be acquired for a significant amount in the not-too-distant future.

In one of your interviews with Ali, he mentioned Huddle becoming a 500-million-dollar business, which to me is an interesting number because usually people talk either about a hundred-million-dollar business or a billion-dollar business. What are the next steps for Huddle a few years down the road? What are your key initiatives? Do you see Huddle really becoming a billion-dollar business or going on the stock exchange? Just a few words about the future . . . business accelerating at a pace that’s becoming incredibly hot. Now we absolutely That interview was probably given a couple of years ago . . . What we’ve seen is our see that this is a business that will be worth a billion dollars. The challenge for us is figuring out how quickly can we get there. Over the next year or two or three, our challenge is to continue to grow in a scaleable way. Building a business to be bought is a very risky game. Building a sustainable business with long-term value for the investors and the customers is really the best way to go, and we’ll continue to try and execute on that. A SaaS business has to be doing about a hundred million dollars a year in revenue in order to be able to IPO. When you look at the growth rate that we’re on right now and that we’re predicting, although it seems like a long way away, it doesn’t really seem like a long way away because we don’t have to grow that many years in order to get to that point.

OK, so how long, how far away?

Oh God . . . I don’t know that I’d even like to say it! Two years, maybe three.

420 24. Huddle, SoftTech VC • Andy McLoughlin

Skype call, September 2015

By September of 2015, changes were afoot at Huddle. The company had raised more than fifty million dollars in its latest financing round in December of 2014, bringing total investment to almost ninety million dollars. Andy and Alastair, along with the company’s board of directors, had decided to bring in a new CEO: Silicon Valley veteran Morten Brøgger. Alastair, who had been the CEO, took on the role of president and chief marketing officer, while Andy decided to cross over to what is often referred to as “the dark side.” He joined one of Silicon Valley’s most highly respected early-stage investment firms, SoftTech VC. Regardless of these changes in management, Huddle was doing very well when Andy and I had a follow-up conversation, commenting on the company’s perspectives as well as on what kept Andy excited and motivated in his new role as a venture capitalist in the heart of Silicon Valley, on the other side of the world from his native England.

How’s life been for you in your new role as VC? Life has been great! It’s been six months now. I have made four investments, two of which are public and two of which I still can’t talk about. It’s been really busy, but I love every single minute of it. The team is great; we get to see a bunch of really awesome companies; I’m learning a lot. The fact that we’re in San Francisco

Timeis great . . . flies I’mwhen having you aare really, having really fun! great time! Exactly! When you love what you do, it doesn’t really feel like work. At times I may be working longer hours than I was back at Huddle because my days tend to start at the same time, but I may not be home until 10 pm because there’s something on in the evening. It just doesn’t really feel like working the same way.

Tell me a little bit about hiring Morten Brøgger, your current CEO at Huddle. This was an outside hire – he wasn’t with the company before that. When Ali23 and I were talking about this in Q3 of last year (2014), about what we wanted to do, I decided I wanted to do something else. After raising the Series

Alastair Mitchell, Andy’s co-founder; at the time of this writing, President and Chief Marketing Officer23 at Huddle.

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D24 we started making a bunch of top-level hires, and my role was becoming much more strictly defined in terms of doing business development and strategy, which is fine, but it’s not really what I wanted to do. I wanted to get involved with product,

I wanted to get involved in sales and partner strategy . . . I was considering either You’vemaybe startinginvested something in more than else . . . 35 I’ve companies. been doing a lot of angel investing . . . One of my options was to move over to the investment side. Ali was CEO from day one, but what he really wanted to do was to get more involved in the marketing side. He’s such a good storyteller, he’s such a good face and voice of the company. He wanted to spend more time doing that. One of the most important things that any entrepreneur can do is to know what we are good at and know where we should be augmenting the team. What we realized was that having a very strong sales- and execution-focused leader was what we really, really needed. That person really had to be able to have control over the entire company and help set product strategy based on what customers needed in order to do more million- dollar deals. That’s where the idea came from. We talked to the board about this, and the board were supportive, so we started looking for candidates. We met Morten via our network in Europe, and we both really liked him.

Did you hire any head-hunting companies? We did use head-hunting companies, but this actually came through the network, so it was a relatively cheap hire (laughs).

With Morten running the place and Ali still there and you on the board . . . Obviously, it was a change in the management structure, so how has that worked out? It was good to have a breath of fresh air, a new perspective. Ali and I had been running this for eight years; you become quite set in some of your thinking, so having somebody come in and challenge the status quo was great. When I step back I guess that was probably just a little bit sad for some of the team that had been around for a long time. But the team understood that I wanted to do

Huddle raised 51 million dollars in December of 2014, bringing the total investment to $90 million.24

422 24. Huddle, SoftTech VC • Andy McLoughlin something else, and investing was probably a better fit for me. They’ve dealt with the change in a way that I’d expect from a mature team. They may have been a bit sad to see me leave, but they took it in their stride, and the business continues to run absolutely fine.

In startups, it’s a very common theme that the founder or founders stay on for really quite a long time, or in some cases, forever . . . Yeah, with Alastair there, we’ve got that continuation. He is really “Mr Huddle”. He has no intention of going anywhere else, and he really loves being there, being a part of the business. I feel a little bit like I can get my cake and eat it. I get to remain on the board, I’m still a major shareholder, I get to spend time with the team every week or two. I’ve got them all coming over to my house for the End of Summer party next week, but I also get to do what has really become my first love, which is working on investing in and helping very early-stage companies.

How much of your time is now actually spent on Huddle itself? I still do maybe two or three hours a week, talking to the team, answering emails. A lot of it now is more board oversight – making sure that they are doing what I think is sensible. I’m trying to act as a non-executive board director. I’m not an exec, and I can’t force them to do anything my way. It’s kind of a long path towards making the right decision. What’s nice is you get a lot of perspective from working with a lot of other companies, and you see what works really well in other businesses. I’ve been on the board of Pipedrive for about a year and a half now, and it’s been really great to see a very different business with a very different customer base. It’s still SaaS, still B2B, but much more SMB vs. enterprise. It’s been very interesting to see how, you know, how they’ve gone about thinking about product, thinking about growth and thinking about marketing. I think there’s a lot that both of these businesses can learn from each other.

Let’s talk about just a few stats from Huddle. How many people, what is the growth rate? When we talked back in 2013, you had about 100,000 organizations as customers. How much has that number changed? What are some of the key metrics at Huddle that we talked about earlier, and how have they changed in the meantime? To be honest, I’m not totally on top of where we are with the customer count these days. In terms of headcount it must be like 180, 190 people now. Growth is still

423 THE EUROPEAN STARTUP REVOLUTION really solid, the aim is to be at 100% year-on-year growth. We’re slightly shy of that, but not too far off. It’s a good, solid, fast-growing, mature business now. I’d love to say that we’re a 20% month-on-month grower, but when you get to tens of millions of dollars in revenue, that’s pretty hard to keep up.

Your last investment was end of last year, right? The big round? That’s right, yes. We took about fifty million dollars. The idea is that we don’t need to raise again for some time. Given the macroeconomic climate, everyone is in agreement that we should treat this as probably the last money that we need to go into the business. If we want to raise more and we have the opportunity to, then that’s great, but we want to build this to be pretty much self-supporting now.

Have you become cash-flow positive, or break-even? No, no, not yet. That’s one of the reasons why you take on funding, it allows you to run faster than you would otherwise.

What are the four deals that you’ve done as a VC, at least the ones you can talk about? So yeah, the two that are public – one is OnboardIQ, which is an applicant-tracking and worker-management tool for on-demand workers. It’s been published pretty widely that, I think by 2025, 40% of the workers in the US are going to be contract and not permanent staff. These could be Uber drivers, they could be people different from the way that you hire a software engineer, and currently all of the working in retail, they could be cleaners . . . The way these people are hired is very APS (applicant tracking systems) are designed for hiring full-time workers. Now, the really interesting question is, How do you tailor that process for on-demand workers? One of the companies they work with has a presence across the country, in different cities and markets, and why that’s interesting is because in different cities they will have slightly different processes, so having a very flexible system that makes it very easy to onboard dozens of workers a week, or dozens of workers a day – or even hundreds of workers a day – is absolutely key, so I’m super excited about those guys. We invested in OnboardIQ in April; they went through the latest Y Combinator batch and were one of the very hot companies that came out of that. They went on to raise another one and a half million dollars, and so now we’re expecting them to get to a Series A probably by the middle of next year.

I’m leading on is B2B and SaaS. This business is in the development tools space. The second business is . . . Everything I’m looking at is B2B and SaaS; everything

424 24. Huddle, SoftTech VC • Andy McLoughlin

It’s called LaunchDarkly, it’s a platform to help software teams build and release better software faster. One of the key things I really love investing in is putting the power of the big boys into everybody else’s hands. Now, everybody from Google to LinkedIn to Facebook to Twitter has built a platform that allows them to soft- launch, dark launch new features inside apps, and then turn them on for a small number of users. In the SaaS space, you launch a feature and you want to try it out with just one customer. You need a way to turn this feature on for this customer but not for everybody else. You want to be able test how it’s working, measure and turn it off if you need to, or begin to bring more people into it. On the consumer side – and this is something that Facebook has been doing very well for a long time – is launching new features saying “We want to test this out with maybe 5% of the users in North America for the next 48 hours and see how it works.” Up until reach scale build their own versions of this, but it’s always crap. now . . . We built a very crappy version of this at Huddle, and software teams that Teams should be building their own product, they shouldn’t be building the infrastructure to help them do that. This is all about putting that power into everybody’s hands. And what’s great is that the customers they have – unfortunatelly, I can’t really name names right now – go from being small startups to teams with thousands of developers, because what LaunchDarkly has built is so much better than what these teams have in house. I have another couple of investments which I can’t talk too much about. One is in the personal finance space, and one is in the sales operations space.

Personal finance doesn’t sound like B2B SaaS. Well, this is personal finance provided through companies. It’s kind of in the same vein as Zenefits or ZenPayroll.

At SoftTech, is this your specialty area? Is this the type of project you usually take on? Yeah. We have three investing partners right now. We look at four main areas. The first one is B2B and Saas, which is where I focus. We look at connected devices and 25 and the fund, we were the first investors in Fitbit in 2008, and we’ve been very close to the team since then. We’ve been hardware . . . As you might know, Jeff

Jeff Clavier, Founder and Managing Partner of SoftTech VC. 25

425 THE EUROPEAN STARTUP REVOLUTION lucky enough to have access to a lot of other really great hardware deals, and so we got a lot of experience investing in connected homes, quantified self and other slightly “out there” hardware apps and platforms, and that’s the second area. The third one is marketplaces – B2B and B2C. And then the fourth area is media and monetization. Jeff has spent a lot of time looking at hardware and marketplaces, and Stephie26 focuses on marketplaces and media.

How many deals do you look at over a period of time, and how many do you end up investing in? I imagine we’ll probably do between 17 and 20 deals this year. We’ll see – either through receiving a pitch deck or meeting the companies getting on a Skype call – we’ll probably see between one and two thousand. Obviously, we’d like to see more, but what I’ve learned is that the scarcest resource we have is not cash or funds, it’s time. You need to divide your time between meeting new companies and helping your existing businesses. One of the things we pride ourselves on, and one of the reasons why I loved this fund when I first got to know them more, is that a big part of this is not just finding companies, it’s supporting them and staying very close. As an angel investor, it’s something I always wanted to make sure I did with the companies I worked with. It wasn’t just an investment, it was an investment in time as well. And then the third part is the operational stuff of running the fund, working with other VCs, the people you co-invest with, the micro VCs and then the later-stage VCs that we work with down the line.

How far do you venture outside of the Valley and SF? in Utah recently. One thing I would say, though, is that we have a huge number of We do deals in New York, we have some stuff in Canada . . . I was looking at a deal companies where the founder is European. We have a Croatian founder, Matija27

I know Matija very well! . . . That’s the kind of business I’m really excited about! I haven’t spent a lot of time with them yet, but I’ll get to know more about it in the next year or so. We have founders

Stephanie Palmeri, Principal at SoftTech VC. 26

27 Matija Kopić, founder and CEO of Farmeron. 426 24. Huddle, SoftTech VC • Andy McLoughlin from the UK, from France and Germany, we have Israeli founders, founders from India and the Far East, we have a lot of female founders as well, probably more than almost any other fund that I can think of. That’s not necessarily because we’re going out of our way to fund diverse teams, but we’re probably way more open to the idea than maybe some other funds are.

How likely is it that you would take a meeting with somebody that just sent you a cold email, outside of your network contacts? It’s certainly more unlikely than if it came via a trusted contact. We receive so dozens of emails and cold pitches a day. There are times, though, that we see many pitches . . . Jeff in particular, everybody knows him, so he must receive stuff which is compelling! If you look at the numbers, however, the companies that we’ve invested in, most of them, probably 95%, probably came via trusted connections where we’ve been introduced to them. That’s not to say we wouldn’t look at something that comes in cold. There are lots of great companies that may not have that trusted network in order to get to us. It just means we know that when it comes from someone that we trust, the quality bar will be higher. People’s reputation is the most valuable thing, and people aren’t going to burn that on making crappy introductions.

Are you going to be spending regular time on visits to London? Yes! My plan is to be there probably twice or three times a year. I was there in March for about ten days, and I’ll be there in December for ten days. We’re very, very open to invest in European teams. The nice thing is that most companies we talked to that are building any kind of broad consumer or broad SaaS model that isn’t tied to a particular industry really want to be based in San Francisco.

Back to Huddle for a moment . . . Is there any major strategic change or any new direction in terms of how the company is developing? What we’ve seen over the last four or five years has been no massive strategic change, but definitely a tightening in the strategy, a tightening in the industries that we want to serve and the size of the businesses that we want to go after. The real focus now is on three or four industries: governments, professional services

We want to do some stuff in healthcare and something in construction. That’s – tax, audit, consulting . . . really no different from where we were maybe a couple of years ago, it’s just

427 THE EUROPEAN STARTUP REVOLUTION that we’ve had a few other industries on the periphery. What we’ve seen is that, by getting better at and tighter with the businesses that we want to serve, we can build better software for them and tell a better story. We can really become industry experts in that space.

428 25 Nordeus Branko Milutinović THE EUROPEAN STARTUP REVOLUTION

Building a successful, profitable startup is really, really hard. The media – including this book – focus on the ones that made it, while those that have tried and failed – for whatever reason – don’t get that much attention. Building a success story without external funding is even harder. It’s been done, but the teams and companies that have created great businesses without having to deal with venture capital investors, term sheets, cap tables, lawyers, up-and-down funding rounds . . . they are very few and very far apart. Now add to that equation building a successful company, without funding, and doing it in a city far, far away from the European technology metropolises which offer so much support – funding, co-working spaces, mentorship, accelerator programs. Branko Milutinović and his team at Nordeus have done just that. Their fantasy football game, Top Eleven, became cashflow positive a month after launching. Soon afterwards, they overtook mighty Electronic Arts and their competing game, FIFA, to claim the number one spot on the market. Nordeus’ Belgrade headquarters, where Branko and I spoke for the first part of this chapter, could be any tech company in Palo Alto, London, Barcelona, Stockholm or Seoul. The familiar buzz of talented developers obsessed with building new versions of an incredibly popular product; the rooms overflowing with sports paraphernalia, skis, bicycles, bean bags; the obligatory foosball sets . . . In April 2013, when we met in his office, Nordeus had just recently signed up a superstar football celebrity, coach Jose Mourinho, to be the “face,” or brand ambassador, of the game. With more than a hundred employees at the time, the company had job ads for thirty open positions.

430 25. Nordeus • Branko Milutinović

Live interview at Nordeus headquarters in Belgrade, April 2013

Hi, Branko. Let’s start with a quote from one of your previous interviews. You said you hoped Nordeus would become “The Zynga of Europe”.

That’sHm . . . I’mwhat not it really says insure the I putinterview . . . it that way. This was a few years ago, when Zynga was very successful. So – do you still want to be the Zynga of Europe? We never really wanted to be “like Zynga”, our whole corporate philosophy is completely different. However, we certainly want to be one of the leading gaming companies. We might be one of the leaders in mobile, in Web, but our goal is to be one of the global leaders in gaming overall.

How large is your team now? We have around 100 people.

100? I’ve counted some 30 job openings for new hires on your web site. You have 30 positions open at any given point in time? Pretty much.

So how fast are you growing? We grew our team by 200% in 2012, from 35 to 100.

So you’re going to have 300 people by the end of 2013? No. Not that we couldn’t – there’s a lot of engineering talent in Belgrade and Serbia. We limit our growth by what the culture and efficiency of our team can handle. That means that, once we feel the culture and efficiency are starting to suffer after taking in a batch of new people, we slow down for a couple of months until we’re back up to speed on both of those key points. Then we take in a new batch.

So it’s more of a step function than linear growth? Yeah, you could say that.

What are some of the organizational management processes you use, and how have those changed today as compared to when there were 10–15 people at Nordeus?

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One of the things we were lucky to get right starting out was setting up all of the key processes – career development, product development, business development etc. – so they support scaling from day one.

Didn’t that slow you down when you were still small?

English. Even when we were 5, 10 or 30 people who all spoke Serbian. Well, probably, somewhat . . . I’ll give you an example. Everything we do, we do in So English is spoken in the company, all day? Well, not necessarily spoken in the hallways or in meetings. However, anything that’s written down – code, knowledge base, any document, anything digital – is in English and has been from day one. Another example, career development. Everything is set up so a new hire can learn quickly, advance quickly, start making decisions and taking responsibility very soon and start helping to develop other people very soon. It might have looked a bit weird with 10 people, but it turned out to be a life saver later on. Obviously, some things needed changing and fine tuning over time, but overall, we’re in a great position with those structures now. Everything is very transparent. In terms of structure, we do have some sort of hierarchy, but it’s more a combination of matrix and flat than a pyramid. So it’s pretty cool. Could it scale to 5,000 people? Maybe not, but we don’t need that anyway.

You met your two co-founders while you were working together at Microsoft in Denmark, isn’t that right? Did you know each other before that? Oh, sure. Ivan and I are old friends. We went to high school and university together. We also knew Milan from before. Ivan and I went to Denmark together. Milan is about a year younger, so he went there half a year later. We all stayed there for two years.

So when did you start thinking about Nordeus? We had been talking and thinking about doing something like this for a long time. We developed a great 3D game for our graduation project at the university. At one point, we needed to make some money, so we went to work at Microsoft.

What did you do there, specifically?

432 25. Nordeus • Branko Milutinović

I was building developer tools for Microsoft’s Dynamics AX ERP system. Ivan was part of the Dynamics NAV core tools team, and Milan was also in the AX core team, working on tools and infrastructure.

How did Nordeus get started? In the very early days, we started building Top Eleven before there were even smartphones – we started out with Symbian. Then Facebook came along. We saw the enormous impact of Facebook and got on board from day one. We simply realised this was a platform we had to use, no question about it. So, the number one point that got us started was realising the potential of Facebook. There were also some personal issues which triggered our decision to pack up and come home to Belgrade.

Did you start working on Top Eleven while you were still in Denmark? No. We came home and started developing the game.

How long did it take you to develop and launch? It took us well over a year. That meant a year of living on whatever savings we had, keeping our costs to a bare minimum. We didn’t go anywhere, we didn’t see anyone, we just worked our asses off 24/7/365.

Just the three of you? The three of us were the only ones who were all in from day one. People came and went, you know how it is in the early days of a startup. We contracted some pieces out which didn’t turn out very well. Anyway, after five or six months, things started to take shape, you could see where it was going and the first people came on board, who are in some of the key positions in the company today. So the core team was in place by the time of the launch. We were profitable three weeks after the launch. Now we were in a position to offer people a perspective that started to make some sense. Our core team were hand-picked friends, mostly from our university days. We knew both their professional capacity and what they were like as people, so we knew we could rely on them 100%. That core Nordeus team from the early days is what made us who we are today. Of course, everyone else that came on board in the meantime played an important part, but the backbone of the company is that core team.

When did you launch? May 2010.

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A year later, in the summer of 2011, you surpassed EA’s “FIFA” to become the number one football game in the world? Yeah. Measured by DAU (daily active users), probably even sooner.

So you hit number one a year after launching. Yes. Top Eleven now has around 4 million daily active users (DAU) and more than 10 monthly (MAU).28

Congratulations! I guess we’re one of the top 10 online games overall, and we definitely are in the sports category.

When you were building the product, did you use lean startup and minimum viable product methodologies? Had you read Steve Blank and Eric Ries at the time? Well, we took an engineering approach. Try this, try that, learn along the way. It’s not like we didn’t know anything. We knew a lot about software development because we had worked at Microsoft. Whatever people may say or write about Microsoft, from a perspective of expertise and processes, realistically, they probably contributed more than any other company to what IT is today. I can’t stress enough how much our Microsoft experience and what we learned there helped us in developing our own product. Back to your original question – yeah, we knew about some of that stuff, but we also used a lot of our own intuition and common sense. I’ve never read a business book or a startup book from the first page to the last, but I’ve picked up bits and pieces along the way.

So the key to success is not reading books? Well, that depends. I’ve really read a lot of books in my life, various ones, when I had some more time, but I think the key is focusing, using your brain and not necessarily doing what someone somewhere wrote or said you should do. Each project and situation is different and unique. But don’t get me wrong – books and education are super important to the company – everyone needs to learn and work on personal development.

Numbers at time of interview, April 2013. 28

434 25. Nordeus • Branko Milutinović

What does your organizational structure actually look like? You mentioned a flat, matrix organization. Yeah, kind of hybrid. We’ve defined a set of disciplines. Software development and game design go under the product development discipline. On the non-product development side, we have very strong human resource management, strong business development and very strong marketing. Community management is an important part of our marketing. When a group of new hires join us, we take five to ten of them, and I usually do the “New Employee Session One”. We go for an hour, hour-and-a-half, and we cover just the things you’re asking about. Nordeus has all the key disciplines in-house – everything that’s necessary to be doing what we’re doing. We don’t have a publisher, so we really do everything ourselves, including customer support in ten main languages. There are eight people in that team who were either born or grew up in Germany, France, Spain, Italy etc. – so we have all the major languages in house except for Chinese. That’s one of the reasons why our Facebook fan page is by far the most popular, with the most fans and activity, in this part of the world. We’ve got more than six million and-a-half or so. fans. By comparison, Novak Djoković, who is a global sports icon, has two, two- So once you have six million people there speaking ten languages, you’ve got to give them something to do. You’ve got to keep creating prize games, competitions, motivate them to share and discuss among themselves. Our employees have their roles within our key disciplines; they have a clear vision for their careers, and the matrix organization enables them to collaborate and communicate with their colleagues. Take the fellow who does community management, writing for those

Onesix million guy does Facebook that?! fans . . .Managing six million Facebook fans?!

OneYeah . . . busy guy! I mentioned the matrix setup. So this guy will work with the customer support team. They will be in touch with the customers, so they’ll know details of what’s going on where – for example, there might be a super important game in Argentina – and alert him to use that fact on Facebook. That guy will have someone he

435 THE EUROPEAN STARTUP REVOLUTION formally reports to, someone who manages his career development, but everyone he works and cooperates with will have a say on his work evaluation, and vice versa. Teamwork is incredibly important here. No one can be a “lone expert” at Nordeus, sitting in a corner somewhere on their own and working by themselves. That’s why everything is in a matrix. We have quarterly performance reviews, and everyone can have an input on the people they work with. Formally, yes, there’s a hierarchy, but all decisions are made through teamwork. There are four of us in the top management of the company – we probably make two or three percent of our decisions on our own. Whoever has something to contribute has an insight on a topic and participates in decision-making.

Sounds like “self-management” from socialist Yugoslavia! We’re a very communist company in many ways, you’re right. I think we’ve found the sweet spot where it works very well for us, something between capitalism and self-management.

The best of both worlds? Right!

Try to explain what’s different about Top Eleven to someone who isn’t a gamer. What drives your success – it probably isn’t just marketing, right? Marketing is the least of it.

Just kidding! We were able to build future-proof stuff early on, and the technological bets we made paid off. We set up some concepts in the early stage, and we implemented them. Then we set up the next set of concepts and implemented those as well. Now, I don’t know if our competition set up those same concepts, but they sure as hell haven’t implemented them. For example, we built a real synchronized multiplay platform which no one had at the time when we started, and it enables a new dimension of gaming. We also invested a lot into scalability so we wouldn’t have to worry about what’s going to happen if a lot – a lot – of people come in and play. Look at Sim City – they still can’t handle their workload after all this time, I keep having problems when I want to play that. Top Eleven runs on 200 high-end dedicated machines today, where all of the processors, all of the cores are up and running non-stop.

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Where is this? It’s in England, on the British Telecom backbone. The technical infrastructure was designed from the start to be very robust. Top Eleven was the first truly cross- platform game in the world, meaning that you can play on your PC and continue later on your smartphone, tablet, whatever. That’s a feature many games still don’t have today, while we had it immediately when we launched.

What kind of underlying technology did you need to develop to enable that? paid to concurrent process execution and security – all of these enable our client It’s hard to explain quickly . . . The basic platform, the protocols, the attention we applications, regardless of the device they’re running on, to continue the session seamlessly. My phone knows what my laptop was doing.

What about the UX? Well, obviously, the UX is different on different devices. However, we tried to make the overall experience as similar as we could, taking that into account. The major functionalities are consistent across devices.

You have native iOS and Android apps, right? What about tablet-specific versions. That’s right, native for the iPhone and Android phones. We don’t have tablet- specific yet, but that’s going to change soon. However, the phone versions work pretty well on the tablets, anyway. Another advantage we have is that our platform enables lots of changes and rapid development, so that, when our design team can let their imagination run wild in ways which many of our competitors can’t, when they think of something, the dev environment allows us to build that.

How much does all of this have to do with your being based where you are, in Belgrade? What are the main advantages and drawbacks for Nordeus of being here instead of a major tech hub like London or the Valley? Well, obviously, capital is almost non-existent here. Our approach from the start was to bootstrap – simply because we didn’t even want to deal with the issue of raising funding for a gaming startup in Belgrade. Perhaps we could have done it – we had our network of international contacts even back then – but we said, “No”. Bootstrapping was a strategic decision from day one. We figured we’d give it a go with whatever money we had. We wanted to use it through launch, leaving, maybe, a little something for initial marketing and then

437 THE EUROPEAN STARTUP REVOLUTION see how things would work out. We were really lucky that it worked out well. If it hadn’t, we would have looked for investment, we probably wouldn’t have sacrificed the whole project for the sake of bootstrapping. with relevant industry experience. Access to people with the right business Other major problems when building a company in this region . . . Access to people mindset, people who are in tune with the way businesses are built and managed in the global mainstream – all of those are hard to find. Furthermore, Serbia, Croatia, all of the countries in the region, in fact, have a ton of stupid administrative, bureaucratic obstacles to starting and building high-growth companies. I’d say that’s about it regarding problems. None of them are so tough that you can’t solve them; otherwise, we wouldn’t be where we are today.

On the positive side, clearly we in the region are able to find talent at a lower cost than in London or New York? people often think. We’re not talking about orders of magnitude. One advantage of Well, yeah . . . That’s true to a certain degree, but the difference isn’t as dramatic as working with our local talented developers which I see as being more important than the cost advantage is the passion and dedication people bring to their work. The level of dedication and commitment is much higher than it would be in a rich country, where there are so many opportunities to get a nice, cushy, well-paid job. - ample. The system here has so many obstacles for winners – but in sports, you can There is a certain mentality here . . . Look at our sports players, there’s a good ex win by competing directly against other athletes. I feel it’s easier for us, being in Belgrade, to recruit talented people to Nordeus who are really going to fight to win! The engineering talent is also excellent. Obviously, we’re a small country, Serbia has seven million people; the whole region has 20 compared to 300 million in the US, but in percentage terms, in terms of the quality of the engineering talent, we’re in a good place. If we had gone to New York when we started this, even if we had stayed in Copenhagen, where we were practically locals, I wouldn’t have known 20 people from high school or university, I wouldn’t have known who they were privately or how they worked professionally. Here, we were able to build our core team knowing exactly how hard we could rely on our friends when the going got rough or when we all needed to put in a lot of hard work to scale the company. It’s completely different from “professional” hiring, where you put an ad in the paper,

438 25. Nordeus • Branko Milutinović someone walks into an interview and you’re trying to figure out how honest or dishonest they are while talking to them for the first time.

So we might say you guys are different because you built your team relying heavily on your circle of friends? Exactly.

Now, if you happened to be born in Copenhagen, you would have had your circle of friends there. Absolutely. Coming back to Belgrade was important for us because this is where we’re from.

Let’s talk about platforms. You’re probably best known for your success on Facebook, but you’re not a Facebook game – you have Web, mobile etc. What is the distribution of users across these platforms? We’re growing on all platforms but our growth is fastest on mobile. It’s been our major platform for some time now in terms of growth and revenue. Facebook gets more exposure but mobile is at least as important, if not more important.

How about the Web? Well, basically, Facebook is our Web presence. We do have a dedicated Web site which brings in maybe ten percent of our traffic, but Facebook is key to our desktop presence, and it’s going to continue to be very important for us. We have a very close relationship and partnership with Facebook. They are also pushing into mobile, so all of that works well together. So, revenue wise, mobile is number one. In terms of users, not yet, but it’s getting there. I guess roughly new user registration is now the same on mobile and on the Web.

The revenue model is in-app purchasing? Yes.

How about in-app advertising? We don’t have that yet. We could if we wanted to. User experience is the number one priority for us. You could say that’s a big differentiator between us and the competition. The Top Eleven philosophy and the Nordeus philosophy is that anyone can play for free and they will always be able to play for free, as much as they want.

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Now, of course, we need revenues and growth, so we need to understand what it is that our players will spend money on and feel good while doing it. But we don’t make anyone do anything. There are no mechanisms like, “bring in a million friends or you have to pay five bucks” or “you’ve played for five minutes today, that’s it, now pay if you want to play more.” Our players can play as much as they want to, for free, and that’s not going to change.

What do all these players spend their money on? Everything that Abramovich spends his money on in the real world. They buy better players, expand their stadiums, better managers, doctors, support teams. It’s pretty closely mapped to the real world, we try to make it a 1:1 mapping. Abramovich invested in Chelsea, taking it in two years from mediocrity to a club that wins world titles every two years. This is exactly what you can do in Top Eleven. On the other hand, if you don’t invest and spend money or resources, you don’t create a Liverpool or an Arsenal, but you can still play and have fun. That’s what Top Eleven is all about. The UX, the overall experience and game play drive revenues mostly through in-app purchasing. Having said that, I need to also stress that we have some great partnerships as well, so some of our revenue comes from advertising. These are carefully selected partnerships. For example, in Turkey these days, you buy a bottle of Pepsi and there’s a Top Eleven code in the bottle cap.

You’ve signed a partnership deal with BWin – what’s that all about? We’re launching a completely new game with BWin. It’s going to be a sports betting game – no gambling, no real money, just a game around sports betting.

So it’s a completely new product, no relation to Top Eleven? Yes, yes, a totally different product. There are some similarities – the target demographic is very similar. The idea is to give sports betting a social perspective. experience where people have fun together and don’t waste their money and ruin I say Borussia is going to win, you say it isn’t . . . We want to enable a betting their families.

What about the revenue model? It’s going to be based on progress, on being competitive and beating your friends. But it’s really not gambling.

In the next few years, how much are you going to concentrate on Top Eleven vs. new products and diversification?

440 25. Nordeus • Branko Milutinović

Actually, we’re already becoming diversified, only it doesn’t show yet because the new stuff hasn’t been launched. New products are being developed, and we’ll start launching them some time during the summer. When the new stuff hits the market, we’ll be officially diversified with the key metrics – users, revenue etc. What that structure will look like obviously depends on the success of the new products. We certainly don’t want to be a single product company. However, Top Eleven isn’t going to lose any of its focus or momentum. We have a large team on it and a product roadmap going three to four years into the future. We’ve really always had a three- to four-year roadmap, ever since the early days of the company. So, as the market changes and new ideas come into the pipeline, that roadmap keeps getting extended on a rolling basis, with the same time horizon. I can see Top Eleven being built, expanded and growing five, six, and ten years from today.

Have you ever had a major, serious pivot?

Sure,Not really, but notyou’ve in terms never of ahad business a situation pivot. Things where, always after, change, say, halfof course . . . a year of development, you realize you’re going in the wrong direction and have to make a 45-degree turn? You basically hit the nail on the head on day one? Yes. The business model, the core technology, the processes in place – all of these have changed and evolved over time, but we’ve never had to completely rethink any of them, and as far as I can see, we won’t need to in the foreseeable future. In the past couple of months, we’ve made some changes in the direction and the technology which I believe put us a few steps ahead of the others. We’re able to see what’s coming and prepare for that better than others.

A lot of the things you’re doing remind me of another very successful gaming company – do you know the guys at Supercell? Absolutely! If you asked me which company is the most similar to Nordeus, that’s the one I’d name. I’ve known Ilkka29 for a long time. We used to be more successful than they are; now it seems to be the other way around. Even the number of people is similar – Milan and I were having lunch with Ilkka just recently, chatting about where each company is at the moment. “We have 95 people,” we told him, and he replied “Well – so do we!”

Ilkka Paananen, founder and CEO of Supercell. 29

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We’re quite similar – the philosophy, the core technology – very, very similar companies. And we’re not in the same segment, so we’re not competitors, just friends, which is great! gaming. With the new wave of gaming apps for mobile devices as well as Facebook Now that you mentioned Ilkka . . . It’s interesting how Europe is really dominant in games, Europe is really, really leading the rest of the world.

That’s a really interesting and very important insight, I wasn’t aware of that! Yeah, besides us and Super, there’s King.com, where one of the co-founders, Riccardo Zacconi, is an Italian from Rome and the company itself is based in Stockholm and London. Then Wooga, a German company; of course, Rovio from Finland; Social Point in Barcelona; Wargaming from Belarus. Another interesting thing is that the founders of these companies are all really, really great guys. So if you take these and a couple of other European gaming companies and you compare it, very honestly, with our US competitors, Europe is way ahead. The European mentality is really interesting. It feels like our moment has really arrived. The scene is quite bipolar now, divided into two blocks, if you look at the personal relationship, exchange of ideas and initiatives and other things. The European core is really keeping close together, helping each other, and there’s a very, very nice and healthy atmosphere.

You mentioned you have all the major languages in your customer service team except for Chinese. What’s your view of the Asian market opportunity for Nordeus? We see it as an amazing opportunity!

What’s your current presence there? Almost none. It’s a fantastic opportunity. There’s huge potential for Top Eleven and the stuff we’re building now in Asia – not just China, but Japan, Korea and other markets. Actually, let me correct that statement – we’re really strong in Southeast Asia. Top Eleven is one of the top gross revenue games – usually at number 2 or 3 or 5 – in Thailand, Malaysia, Indonesia, Singapore, Vietnam. So China, Japan and Korea are the major opportunities. That’s super important for us, but we can’t do everything at once. Focus is extremely important for us as a company. We can’t have 100 goals at once. We have to prioritise – the time for these markets will come. When it does, I hope we’re going to be really successful there as well, but it hasn’t arrived yet.

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Any idea of when that might happen? I think we’re going to start some things around Japan in 2013.

When you say “some things,” what does that actually mean? What are some key activities when you’re going into a market like Japan? First of all, you need to do a very serious analysis of what gaming is in Japan, how it works. We’ve done some of that already.

How do you do that analysis? Do your people travel to Japan? Not necessarily. We have contacts; we research which products are popular already. We need a lot of analysis and a really good plan and definitely native speakers. A simple translation won’t cut it – we have to see what level of deeper localisation is needed, what the best marketing strategy is, what kinds of monetisation work, complex, but it requires focus and resources, which are currently in other areas. legal and regulatory issues . . . there’s quite a bit of work to do. Nothing super As far as you’re willing to share, can we talk about sharing equity with your key people? That’s not easily done in our region. It’s not part of the culture here. Even the laws don’t really enable that the way it can be done in other countries. Nevertheless, we do have a model which is fairly similar to the way it usually works. In Nordeus, however, everything has to be earned. We’re a bit different in that sense. In some companies you can count on shares just by being there – that’s not our philosophy.

You probably have metrics which you use to measure who has earned what and how much? Absolutely. We take career development very seriously, since we built the company around people from day one. People are all Nordeus has, that’s it. Sure we have users – they can be here today and leave two days later, it’s a very volatile category we’re dealing with. Of course, we have a product, but that’s only time and money which these people have invested into it. So, really, people are all we have, and that’s the first thing I tell new hires at Session One when they come in. Therefore, everything is set up to keep them highly motivated, to progress in their careers, have new challenges. We track all of this through semi-annual and annual performance reviews. There’s a fairly complex matrix system of team feedback, reviews using clearly established metrics, which then determine salaries, end-of-year bonuses and, finally, what you asked about regarding equity sharing. So, yeah, we certainly have metrics.

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Would you be willing to comment on financial results? Well, it’s all public information, but I prefer not to talk about it so much because then the media focus just on that.

I promise I won’t focus just on that! We really prefer to highlight other things about the company. We were the best employer in Serbia in 2012. The salaries, workplace, benefits, everything is really great. No one has ever left Nordeus in spite of all the LinkedIn offers from recruiters from EA, Zynga, Google and others. They come in with an acquisition offer, then when we say we’re not interested they start systematically approaching our people, like “Hey, you want to run our New York studio?” – that’s the kind of offers they get, and they are always turned down. similar fees, taxes etc., our revenue in 2012 was about 30 million dollars. Now back to your question on revenue . . . When you deduct Facebook, Apple and How about profits? We have a healthy profit margin of roughly 50%. All of the profits are reinvested back into the business, which gives us a strong position for the future without raising a funding round. Our basic philosophy is that we want to be independent, so we can make high-risk decisions if we want to, based on our own financial resources. If Top Eleven was, say, prohibited in the whole world tomorrow, or if Facebook disappeared or something similar happened, we want to be able to invest an equal amount of energy and creativity in something just as cool for many, many years ahead, which is why you would normally raise a funding round.

The Slovenian company Hermes Softlab – later acquired by the Serbian company Comtrade – once had 600 engineers in its heyday. They were very proud of the fact that many of their people came from all over the world – the US, Spain, Asia, wherever – to work in Slovenia. Aside from the native speakers in customer service whom you mentioned, how many other people working in Nordeus have come from abroad – say, some guy or girl comes to Belgrade from France to work at a top gaming company? origin. There’s a French-speaking girl who was born in Paris, graduated at the Well . . . even the native speakers are mostly “our people,” from Serbia or of Serbian

Serbian, and lived in Paris all of her life, but wanted to see what it’s like living in Sorbonne and did a Master’s thesis, but her name is Suzana Ignjatović, she speaks

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Belgrade. We have a few people who don’t know Serbian, they’re really not from here, but very few – four at this point in time. That number’s going to grow, since we’re setting up offices abroad. We have a small partner relations office in San Francisco, and we’re opening a marketing and customer relations office in Dublin. More people will come to Belgrade, as well, that have nothing to do with Belgrade or, say, Zagreb. When we go to GDC and give a keynote speech or other presentations, there’s a lot of interest to come work for us. We’re much better known globally than at home. A lot of people want to work in gaming. That’s really great! However, these people that apply for jobs here are often not that much better than local people who apply. The girls and guys who have substantial experience and are better than local applicants don’t apply that much.

Not yet. Right, not yet. That too will change over time. We are definitely building an international company which is proud of where we’re from. Having said that, we really see the world, the global market, as our natural habitat. If you’d spend some time here with us, in the office, you’d see there’s really a global culture present throughout. Our team is really young, and we’re really, really progressive.

Clearly you don’t have the dilemma of “Should we relocate the company to the Valley?” No, absolutely not. Here’s a little anecdote. We’ve been approached many times by Tier 1 investors. Every major fund you know of has spent a lot of time with us, and we’ve had discussions and they kept saying, “You’re going to have to move to London or San Francisco,” and we kept saying, “No, we don’t want to and we don’t need to.” Then later, when they would give up trying, we remained really good friends with all of them, and when we’d meet up, they’d congratulate us on how well things are going. And they would say, kind of off the record, “You know, we did our best to get you to move, but staying in Belgrade was your best move, honestly!”

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Skype call, September 2015

By the time of our second conversation, in September 2015, Nordeus was firing on all cylinders. All of the metrics were “up and to the right,” as financial analysts like to put it. Customer support was now provided in more than thirty languages (it had been ten two years ago). There were fourteen million Facebook fans, and that “one busy guy” managing them finally had a team of colleagues to help him. Most importantly, however, Nordeus was working very, very hard to escape the trap that many gaming companies fear – becoming a one-hit wonder. Belgrade wasn’t the only office any more – teams in London and Skoplje (Macedonia), as well as at the Belgrade headquarters, were feverishly creating new gaming products.

Hey Branko – what’s up with Nordeus lately? Congratulations on celebrating a hundred million users – I guess that was back in May, right? We actually passed one hundred million a bit sooner than we announced it. We wanted to wait for our fifth birthday to make that announcement. By now, we’re past one hundred and twenty million!

So you’re still growing quickly? Top Eleven as a product isn’t growing as fast as before, but it’s growing at a steady rate. Nordeus is growing as a company. As for Top Eleven, it’s not easy to continue growing that fast once you’ve become this big, once you’ve reached a certain size. Facebook isn’t growing as fast as it used to.

The last time we talked, your Belgrade office was the only one. In the meantime, I see you’ve opened offices in Dublin and in Skoplje, Macedonia? We also have offices in London and San Francisco.

Are the offices in the UK, Ireland and California just sales and business development, as with many other startups, or do you have any development teams there? London is just product development.

You hired all of the programmers you could find in Serbia, so you had to set up a dev team in London? That’s about right! (laughs)

446 25. Nordeus • Branko Milutinović

Why London? People are pretty expensive there. They are more expensive than anywhere else, but it’s also the biggest talent pool. The largest concentration of gaming developers are in the UK and Scandinavia, but I’d say the UK is even bigger than Scandinavia. So, on the one hand, there is a lot, a lot of talent, and on the other hand, all of our partners, such as Google and Facebook, are based in London, so that was also important when we thought about opening an office.

How many people do you have in London? We have thirteen at the moment. We started six months ago, and we will be growing that team gradually. We’re very careful about hiring. You know: hire slow, fire fast.

Is someone from your core management team running that? Yes, one of my colleagues here in Belgrade is overseeing it, but we have a manager in London managing the team directly. It’s a guy who we worked with for a long time while he was at Facebook.

So you’re strong enough to hire people away from Zuckerberg? We’re doing really well now. We’ll be stealing some superstars from some very well-known companies.

That’s great! What’s going on in Skoplje? We’re trying to replicate the Belgrade experience there. We’ve brought a group of highly talented local people on board. They haven’t had a chance to really prove their worth on a global scale, and we want to give them that opportunity. They are building their own product, a new game, and we’ll see how that works out.

So, a new product for Nordeus! Yes!

What’s your process in determining whether a new product is market ready? I spoke with Ilkka Paananen just a few days ago, and he talked in detail about Supercell’s testing and validation process. Our process is very similar to theirs.

So you do internal testing within the company first?

447 THE EUROPEAN STARTUP REVOLUTION

Yes. The first step is a team demo, then a company alpha test, then an external beta test and then a soft launch.

Where do you do your external testing? I know Supercell always tests in Canada, sometimes adding Australia as well. Our external testing is with a closed group of test customers. The soft launch is

Soopen; just we like use Supercell. the markets that are most similar to the US – Canada, Australia . . . Yes.

I know it’s too early to share details, but I’ll go ahead and guess that the new product is still based on sports? In fact, we’re going to have several new products this year and next year. I can only say that one of them is going to be racing. Car racing is the fastest thing in sports.

So some of these new products are being developed in London, some in Belgrade and some in Skoplje? One each in London and Skoplje and several in Belgrade.

How many people are on the Nordeus team now? A hundred and seventy.

Are there any developers in Belgrade that aren’t working at Nordeus? We’ll see! (laughs)

What are the next steps? Making sure Top Eleven keeps growing and developing new products? You know the famous triangle – innovation, sustainability and optimization. We don’t do optimization –that doesn’t make any sense for us – so we’re focused on innovation and sustainability. Top Eleven is of course super important, since it’s the only successful product we have, and it’s bringing in our revenue. We’re investing a lot in Top Eleven, and we’re investing even more in innovation, in the new games. So those are the next steps – diversifying our portfolio and risks through innovation. Our goal has always been the same – developing talent inside the company and continuing to bring in the best new, talented people.

What’s the expected timing for the new games? Anything due in 2015, or is everything scheduled for next year?

448 25. Nordeus • Branko Milutinović

We should be doing the soft launch of at least one, maybe two, games this year. As I mentioned before, in Australia and Canada. That takes a few months, and then, depending on how it goes, we might have a full release early in 2016. We’ll see what happens. You can never really know ahead of time. And then a few more also in 2016.

How about the San Francisco office? Right now that’s all about keeping our finger on the pulse of what’s happening in the Valley and having a marketing presence in the US. At this point, we don’t see a need for much more than that. With the current balance of power in the gaming industry, Europe is the place to be. Europe is stronger than the US in mobile gaming.

The same goes for music streaming. That’s right.

The last time we spoke, you talked about your careful planning process to enter the Japanese market. How did that go? How is Asia doing as a market for your products? Japan didn’t work out well. We’ll see what happens with the new games. But first they have to succeed outside of Asia, in other markets. Top Eleven didn’t really make it in Japan and Korea. There are many reasons why that happened, but most importantly, we didn’t focus enough. The reason we didn’t focus enough is that the ROI wouldn’t meet our expectations. It’s just not the type of game that can have the results we want in those markets. China, however, is interesting. We are strong in China and it’s going well. Top Eleven is among the leading four or five sports games in China.

Are the other leading games international or domestic, Chinese? They are all domestic. I believe Top Eleven is the most successful international game in China. I’m not completely sure about that, but I think that it’s either us or FIFA. We and FIFA are the most successful globally, of course.

You have a localized version in China? Yes, both traditional and simplified characters.

Is anyone on the management team dedicated specifically to managing China? No.

449 THE EUROPEAN STARTUP REVOLUTION

So it’s only localization and development? Yes, for now. We’ll see, in the future, as the market grows and new games come out, whether we’ll need to invest in a dedicated team. Our people are working on China now, but they aren’t dedicated strictly to that market.

Is this the first time you’re building new products, aside from Top Eleven, or have you already had attempts which didn’t succeed? We’ve certainly had an attempt before. It was a soft launch of a betting game which didn’t work out. We learned a lot about what not to do on that one! So a lot of what we’re doing now is based on the lessons we learned there.

Now you’re armed with lots of new knowledge! it that way! (laughs) Well . . . we certainly picked up a lot of knowledge from that project, let’s just put I hope the tuition for that school wasn’t too expensive.

HaveWell . . . you no. had But any we lostchanges a lot of in time, the management and that’s the mostteam valuable since we resource last spoke? we have. Any departures or significant arrivals in the core team? I’m not sure exactly how long ago it was when we talked.

You explained to me then how the core management team were actually your close friends who came on board early in the development of the company.

YouNo, no mentioned one has left . . . that It’syou very, “hire very slow, rare fire that fast.” anyone So leavesI guess Nordeus. that means you’ve fired at least someone? Yeah, well, when I said, “no one leaves,” I meant “leaves on their own.” Yeah, there were occasions when we fired someone in management, but not in the strategic, is leading our business development. He’s the one that brought in Mourinho30 top management of the company. It’s still more or less the same team. Nikola Čavić and has launched a few other things which you’ll see in the months and years

Jose Mourinho, the famous football coach, is a brand ambassador for Top Eleven. 30

450 25. Nordeus • Branko Milutinović ahead. We have Clive Downie on our Advisory Board. He’s probably one of the most highly respected executives in the mobile gaming industry. He doesn’t work with us full time, but he’s part of the management structure. We’re planning some spectacular hires pretty soon. You’ll be the first to hear about it!

451

26 TransferWise Taavet Hinrikus THE EUROPEAN STARTUP REVOLUTION

Many a company has been created from the proverbial enterpreneur’s burning desire to scratch an itch. Kristo Käärmann and Taavet Hinrikus had an itch to scratch – they felt they were getting ripped off by banks when sending money back and forth between England and their native Estonia. Bank charges are something most people take for granted. There’s nothing you can do about it, it’s a normal cost of doing business, etc. But Kristo and Taavet felt there actually was something they could do about it. They could start a company – TransferWise – which would enable people to transfer money back and forth with a drastically lower charge – up to ten times lower, in fact. When they presented the idea at Seedcamp Week London in September 2011, they had a very simple tag line: “We take money from bankers and give it back to you!” There were 300 people in the room, most of them wealthy investors who usually clap respectfully after the teams deliver their pitches. This time the room exploded with applause! Stealing from bankers (more precisely, providing a competing service at a far lower price) – now there’s a marketing slogan that’s really hard to beat! There were only a handful of people on that early TransferWise team. Taavet had been Skype’s first employee. Kristo’s background was as a consultant at PricewaterhouseCoopers and Deloitte. As it turned out, many, many people were willing to let TransferWise help them scratch that banking itch. The company has since grown to more than four hundred people. Along the way, the team has raised more than ninety million dollars in funding from a group of investors that includes global business celebrities such as Sir Richard Branson, Peter Thiel and Max Levchin (both among the co-founders of PayPal) and many, many others.

454 26. TransferWise • Taavet Hinrikus

Skype call, February 2015

Hi, Taavet. Sometimes you refer to TransferWise as “the little company.” You guys are probably one of the best capitalized little companies in Europe, aren’t you? getting started. Today, we have around 2% market share in the UK. There’s no Yeah . . . Well, when I think about what we are trying to achieve, we’re only just reason to sit down and relax.

Absolutely. How many people are in TransferWise now? 400.

You probably remember Seedcamp Week, September 2011? Brightly!

That was the first time we met, actually. And it was just two of you then, I guess?

So,Probably it’s been more. an interestingIt was me, Kristo, ride in Bogdan, past three-and-a-half Trene, Eva . . . years. When you guys came to Seedcamp in 2011. you had had a previous exit from Skype, and you were already an angel investor, so I’m guessing that the fifty-thousand-euro- seed investment from Seedcamp was not your primary motivation to apply. We didn’t come to Seedcamp to raise money, as you know. That was the last thing on our agenda.

What were the real reasons? We are in the business of building a brand and trust. Getting a tiny bit of legitimacy behind us was important, so having the Seedcamp stamp was good, and it helped us by giving us credibility and legitimacy. The second thing is that it was helpful to get someone on your side before you go into your fundraising discussions. Because Seedcamp is well plugged in and they know what is happening on the markets, having them on our side as we went into our first fundraise was helpful because you can always discuss things with them and get feedback – this is okay, this is not okay, this is normal or not normal, is somebody trying to screw us and so on. It was helpful to plug Kristo into the tech scene. He came from the finance and insurance and consulting world, so I think it was useful to throw him in there. Also, the discussions we had with Seedcampers and mentors definitely helped us

455 THE EUROPEAN STARTUP REVOLUTION shape the product and get some feedback. There are many ways of doing that, but doing it in a concentrated manner, in one go was helpful – you know. How much did it accelerate us? One day or one year? The truth is somewhere in between.

Your first round was very soon after that, in the Spring of 2012. Yeah, the round was actually closed at the end of 2011; we just took our time to announce it. So yes, we did the fundraise just following Seedcamp and put together a great consortium of investors. Thinking about it now, I can say that it was a little bit like – “we want some help in the US, we want some banking people, group of people with lots of different skills who we could turn to. we want people who have disrupted finance before . . . ” We put together a diverse Do you mean people that are now part of your team or advisors or . . . ? Angels. The round was led by IA Ventures from New York. We got Index involved because they are strong in London. We had David Yu, ex-CEO of Betfair, Errol Damelin, founder of Wonga, Micky Malka, a California-based investor in lots of financial services and Max Levchin.31 We figured that would give us enough fintech exposure. Also, a couple of close people we’d worked with before. We made sure we filled a certain amount of boxes that would give us a wide area of support around the world and in different areas if we needed it.

Were these people valuable to you primarily in the marketing, business development side of things, and how much input did they have into the product development itself? You know, we never know when they might be valuable, even from now on towards the future. So far, they have been valuable in various ways: helping us talk through our product strategy, introducing us to financial institutions, introducing us to people to hire, helping us interview. So they’ve been helpful in all kinds of different ways.

One of the reasons I’m asking is that, as far as I can tell, at least from the outside, you guys had a very clear idea of the type of product that you wanted to build from day one. And I haven’t seen, at least from what I could see, a lot of pivoting in these three-and-a-half years, while many other companies kind of figured it out along the way and did some changes. It seems to me

Max Levchin is the former CTO of PayPal 31

456 26. TransferWise • Taavet Hinrikus that your vision was pretty straightforward from the beginning and that you’re just executing on that as you go on. You are right. As you know, we haven’t really changed the idea that we are building. It’s been very much the same idea. We’ve just got better and better at extending it in various ways. The core idea stayed the same. Everything else around it has improved a lot. There are lots of people who have been invaluable with their advice throughout the years, and not all of them have been investors. I’ve had, and will continue to have, some mentoring discussions with different people who are providing incredibly valuable advice.

You’ve grown hugely over the past couple of years. Not just in terms of the amount of money that you process but also in terms of the team. Often you find in management books the question about challenges people encounter when going from a five-person organization to 400. Obviously, you’ve seen a lot of that in Skype, in your previous career, so how has that been for Kristo and yourself, and what have been some of the key obstacles or challenges or problems that you’ve faced that you maybe weren’t expecting? Or has it all just been smooth sailing from day one? It depends on your definition of “smooth sailing.” I would say it’s been sailing in waters where you know there is a storm outside, but you’re keeping a safe distance from the storm. You need to go side by side with the storm. If you make a mistake and get into the storm, it’s going to be pretty bad, and yet, if you turn too far away, it’s going to take you way too long a time to get to where you want to go. That’s kind of key – you need to be to a certain degree living on the edge. Otherwise, you’re never going to get there. A startup is a race against time. Your only goal is to grow into a large and sustainable business. If you don’t do it, somebody else will, so you’ve got to run for your life.

Who are your main competitors at this stage? The Citibanks and HSBCs of the world.

It seems to me that they are not even structurally positioned to be able to compete with you guys. Not yet, but they will be in five years’ time. If we slow down, someone else will take over. I honestly don’t know who that someone else would be today because

457 THE EUROPEAN STARTUP REVOLUTION

I’m not worried about anyone else who is on the market, but if we were to slow down and stumble, I’m sure there would be people who would eagerly pick up where we left off.

Obviously. You guys have an office in New York? Yes.

The reason I’m asking is that a number of other startups that I’ve spoken with, especially European ones, have found that they don’t necessarily have to move to the US, but very often, sooner or later, especially at this stage of development and funding, they open up not just an office but a very substantial kind of “second headquarters” and the founder starts spending just as much time in the US as they spend in Europe or globally. So, when you say you are opening an office, are any of you guys, I mean Kristo or yourself, planning to start spending a major amount of time there? We actually have one of our early employees who has been running marketing as our GM in the US. Having someone who knows how to control the company, having someone who knows what we are doing, how to do things, having someone who has 100% of our trust is super important. It’s very hard to get that in one person.

Back to funding – the amount you’ve raised is really substantial.32 Aside from saying, “We need to fund our marketing, extend our team,” what were some of the key things that you were able to do after the last round which you had not been able to do before that? I don’t know how to answer this question because nothing really has changed. We are continuing to do exactly the same things as in the past three years, and we are doing more and more of them. We knew that if we wanted to keep on doing more and accelerating, we would need more funding. That’s why, in that sense, literally nothing has changed at all.

Well, one thing that has been quite visible is your marketing and advertising. Suddenly, you could see TransferWise advertisements on the metro, in public spaces . . . You’ve done very fun and dynamic advertising campaigns.

At the time of our conversation, TransferWise had raised ninety million dollars of investment, with32 the largest round, fifty eight million, closing just a few weeks before our talk.

458 26. TransferWise • Taavet Hinrikus

Yeah, I agree, but that’s also been growing step by step. We had the start-up campaign where we had Branson take part, almost 2 years ago now. Then we did some funny stuff in Estonia, which was more for recruiting purposes. We were having some fun with Skype there. That’s been kind of growing, and when we see things working, that gives us more confidence to think bigger about the next thing. So, when we see what works, we just continue doing more of it. We will also have a little outdoor campaign in New York. We are learning what works, we’re doubling down on things that work and we are continuing to experiment as much as we can to keep on learning.

When you do online advertising, you can go very deep with data, you can figure out the clicks that work and Facebook ads etc., etc., whereas with outdoor- and broadcast-type campaigns, how easy is it to figure out what works, based on data? It is much harder, but still there is quite a lot of data outside that you can tap into in various ways, like with the outdoor stuff in the UK. We feel pretty good about being able to measure it by looking at differences in time and different geographic locations, asking your customers, there are a lot of data points which you can then put together and make quite a bit of sense of the world around you.

Have you thought about emerging markets – Turkey, Russia, China, Asia? Not yet – next year! The sweet spot markets for us are the sending markets, countries or even cities with a high expat population. The UK is great. Australia, I’m sure it will be great. The US has a large immigrant population, great as well. In Europe the next step is Berlin, Paris, Barcelona – they are going to be great cities for us. Will Bavaria be great for us in Germany? I know much less about that. But my gut says probably slightly less exciting than Berlin.

There are many Croatians and Southern Europeans in Munich! Yes!

How about your team? I guess your dev team is in Estonia. No. Our dev team isn’t in Estonia – it’s in London, and we have some in Ukraine as well. We will also have a dev team in the US.

I see. I think it’s important that your dev team is to close to your customers. There’s a certain kind of talent which you have more of or less of in Estonia or the UK, and

459 THE EUROPEAN STARTUP REVOLUTION you need to adjust based on that. Having a team in the US means our team would be close to the customers there.

Tell me a little bit about the tech infrastructure of your system. What are you based on, what are some main technologies that you are running to be able to scale this whole thing as it grows? We have a Java-based platform. We use a Java stack. and it works well for us.

Is this based on somebody’s cloud infrastructure, or do you host your own stuff, the servers? We host our own stuff. But I don’t think that question is incredibly important or relevant. If you are in a different business where you need hundreds of servers, then it starts becoming relevant. To build a little bank, you don’t need that much infrastructure. So whether you host it yourself or put it in the cloud, it doesn’t really matter.

Even when you start scaling up to larger amounts of customers and transactions? Hardware has become really powerful. You can process millions of transactions a day on one machine. But also, to be honest, I’m pretty far away from that world.

You have a couple of very, very famous investors – Branson, Peter Thiel, Max Levchin . . . How important has that been for you in terms of branding and marketing, having such well-known partners on board? Well, I rather thought about it as who are the best investors for our company. Who are the people who we could learn the most from, and who would be the most helpful in terms of us building the company. That’s been the criterion for choosing them, rather than who is more famous. We make sure we have the smartest people who we think will help us most.

So in other words, Peter Thiel is valuable to you not so much because he’s very famous, but because of the stuff he knows. Absolutely. The discussions we’ve had with Peter are incredibly insightful and challenging.

And now you have your first US-based board member. Well, Roger Ehrenbert has been on our board for three-and-a-half years. He has always been based in the US.

460 26. TransferWise • Taavet Hinrikus

Hm . . . some misinformation on my part, sorry. It may be interesting to note that we were the first investment that Andreessen Horowitz made outside of the US.

Is it still largely Kristo and yourself running the company? Correct and incorrect.

Well, that’s what it says on your website.

Yes!Oh, our web site . . . Do we have a website? We’ve been building a strong leadership team. Our engineering lead is from PayPal and EBay, our Ops VP was CFO at Estonian Air and was at SwedBank before that, our

Hownew Finance important Director is it goingis from to Google . . . be for you we’re when strengthening you’re building the team up allthis the team time. to have US people on it as, you know, related to your entering the US market? Do you mean US people or people who are based in the US?

I don’t know, either one. I do believe strongly that you need to be close to your customers, so we need to have people on the ground in the US. Whether they are American or they have been living there, I don’t really care.

Okay. Having people in the UK who know about the market is also very helpful. The UK is going to be a major market for us. In general, you want to build your team with a view on diversity. A diverse group of people with diverse experience will be the best to navigate building the company over the long term.

Aside from scaling and growing . . . I know the term ‘’vision’’ is maybe overrated, but nevertheless, how do you and Kristo see this developing over the next two or three years? I guess we could say we started building a global company out of a European company. We are building a global financial services company. Money transfers is an incredibly large area, and there is still so much for us to do here. As I was mentioning earlier today, we have around 2% market share in the UK, we won’t stop until we have 10–15% in the UK. And similarly in other markets.

461 THE EUROPEAN STARTUP REVOLUTION

When do you think that might happen? The 10–15%? Based on your current growth, expected investments ... I don’t know. I don’t have an answer to that. We have a pretty good goal for the team in terms of where we want to be about three years from today.

Can you describe that? I can’t disclose the goal. It’s an audacious, large number that we all believe we can hit. It’s a long term, numeric goal, yet it’s a bit scary for us as well!

What are the key indicators that you are tracking? Financial value of the transactions, market share? It’s users and transactions.

Okay. So, how many users do you have today?

Okay.I don’t think we’ve ever disclosed it, so . . . we’ll have to keep it that way for now. But our customers are now transferring over £500million every month with us – that means they’re saving more than £22m each month. We’ve put close to a hundred million pounds of bank fees back in our customers’ pockets!

Yeah, I remember the huge applause you got at Seedcamp three-and-a-half years ago, when you talked about the numbers that you’re taking away from bankers! Yeah, I did, but I think now the number’s like 50 times bigger.

What’s your current growth rate? I think I saw 15-20% monthly growth mentioned in the media. Yes, that’s right.

Do you see the company expanding from the product you have now into other types of financial services? Money transfer will keep us busy for a while. There’s so much to do here that it would be foolish of us to think about other things.

462 27 Rimac Automobili Mate Rimac THE EUROPEAN STARTUP REVOLUTION

I was more than a bit sceptical during the short drive from Zagreb to the small town of Sveta Nedelja (meaning ‘Holy Sunday’ – you can see that Croatians love their weekends) to meet Mate Rimac and check out the highly unusual story I had read. Apparently this twenty-four-year-old guy was building an electric supercar in a garage. Or something like that. It was the spring of 2012. I had read a few very short newspaper articles about Mate during the past few months. They said something about his team exhibiting a million-dollar (or euro – I wasn’t quite sure) car a few months earlier at the prestigious Frankfurt motor show. There was talk of a wealthy Middle Eastern buyer or perhaps even an investor. My old friend Google wasn’t of much help in researching and preparing for our conversation. I was writing for The Kernel at the time – surely this would be an interesting story . . . if only it checked out to be real. When we got in touch over email, Mate was wary. Croatian journalists had misreported on the project before, and he didn’t want anything to do with the local press. I assured him, although I lived in Zagreb, that I was writing in English, for an international technology publication. The Kernel had just launched a few months earlier and wouldn’t get caught in “a sea of troubles” until much later. We ended up talking for two and a half hours. Mate took me for a short spin around Sveta Nedelja in the company’s legendary “test mule” – a car that used to be a bright green BMW. Only the original BMW body remained – everything inside had been ripped out, the motor replaced by successive electric motor prototypes. The chassis and mechanics were also custom designed, in-house, to withstand the enormous power and force generated by the electric engine. In the three and a half short years from that first conversation to the writing of this chapter, many things have changed. Mate is now very much a media celebrity in Croatia and abroad. More importantly, Rimac Automobili has grown from a small garage-like outfit with 15 people, struggling to make it by doing engineering work for other manufacturers, to a funded, fast-growing company with more than 130 talented engineers, busily building supercars, electric bicycles and other pioneering vehicles and components. It’s been a real pleasure and privilege to be able to watch this incredible success story unfold from a first-row seat, reporting on it and sometimes lending a bit of a helping hand.

464 27. Rimac Automobili • Mate Rimac

Interview at Rimac Automobili headquarters, Sveta Nedelja, Croatia, May 2012

Mate – how did all this get started? I’ve always loved car racing. A few years ago, I was racing my BMW E30 M series around the track at Grobnik, near Rijeka (Croatia). There was a loud explosion, and the car stopped. When I opened the hood, there was a large, smoldering hole were the engine had been. It literally blew up! I decided then and there that I would never race a gasoline-powered car again. I would put an electric motor inside. I worked with one of Croatia’s best racing car mechanics and a small team. The electric motor we installed was definitely powerful. So powerful, in fact, that one mechanical part after another started breaking under stress. Whenever a piece broke, we would literally design and manufacture a replacement piece – and then the next part down the line would crack. Step by step, we ended up replacing everything inside that car except for the body. Today, the “little green cube” – as we like to call it – is formally registered as having been “Made in Croatia,” as a product of Rimac Automobili. It has standard, street-legal Zagreb license plates, and some of us drive it to work and back home from time to time.

How did you even get the idea? I understand you were an inventor even before this project? When I was in high school, I designed a special glove as a high school project. The glove was wired up and could be used as a replacement for a keyboard and mouse for computers. My high school mentor helped me to sign up for inventor competitions. We started winning them in Croatia and went on to international shows. I finally ended up with a gold medal from one of the most inventive countries in the world – Korea! I later designed a rear-view mirror that eliminated blind spots. An automotive company licensed that mirror, and I made enough money from that sale to buy the BMW.

How are you guys funded? My father’s company is in the real estate development business, so he was able to support me at the very beginning. We’re self-sufficient now. Our revenue comes

465 THE EUROPEAN STARTUP REVOLUTION from doing engineering projects on electric vehicles, components and drive trains for other companies. I can’t name names, but mostly they are smaller to medium- sized car companies that want to outsource part of their R&D to us.

What’s the story with these Middle Eastern investors I’ve read something about? A Croatian businessman working for a wealthy family in Abu Dhabi found out about us and approached us when we were already in the design stage for our Concept_One car. They wanted to buy two of them, thereby supporting us in our work and, obviously, owning two amazing electric supercars. We went ahead with developing and building the prototype based on those discussions. The discussions and the negotiations were tough, but were going well. However, when we were supposed to sign the contract, they hit us with one of those “just one more thing” moments. Explaining that we were physically too far away and that they wanted to be closer to the project as it developed, they requested we move to Abu Dhabi and continue our work there. Myself, my team and all of our resources. My family is from Livno, in Bosnia. People there can be quite stubborn once they make up their minds about something, and I’m as hard-headed as they come. I want to build this company in Croatia. I want my cars to be “Made in Croatia” and for Rimac Automobili to attract the most talented engineers and give them the opportunity to work on some world-class stuff here, in Sveta Nedelja near Zagreb. On a more practical level, our team here is small but very, very good. I didn’t think my crew would be very interested in moving to the Middle East, and I didn’t know if I could find equally good specialists even if I did agree to the move. So I decided to respectfully decline on that offer. I had long discussions with my father about what to do next, once the money we were really counting on had gone away. He was incredibly supportive, saw this project as a once-in-a-lifetime opportunity and encouraged us all to go on. Like I said, he provided some very important financial support in those early days. I parted with the potential investors in a very friendly and respectful way. We’re still in touch, they are following what we’re doing and we may have some good discussions further on down the road.

So now you want to build the fastest electric car in the world? It’s not just about building the fastest electric car. We want to build the best car in the world, period. From a purely engineering perspective, internal combustion engines

466 27. Rimac Automobili • Mate Rimac

mechanical infrastructure they require. An electric motor is far, far superior. are a disaster. They are inefficient, complicated . . . Not just the engines, but all of the We have not one, but four electric motors in our car – one for each wheel. If you look at the motor, you can see it’s not much larger than a watermelon. Nevertheless, it’s incredibly powerful. That’s the result of years and years of research and development. This is our fifth-generation engine. Our strategic goal, from a research standpoint, is to have each generation smaller, lighter and more powerful than the previous one. Once we develop the new generation, it goes into our beloved “little green cube,” the test mule that used to be a BMW and still looks like one. Keep in mind, though, that it’s fully licensed for normal road driving, with a license plate like any other car, and that the documentation for the car officially says “Made in Croatia.” But back to the engines. Like I said, each wheel has its own engine. Each wheel can thus be individually controlled by the on-board systems. That means we can control the handling of the car in a way that no other car manufacturer can do. This is one of the things which gives us a unique competitive advantage in the industry. Let’s get a bit more technical here. Each wheel is powered by a separate 12,000 rpm, 250kW liquid-cooled permanent magnet motor for an overall 1088 HP and 1600 Nm of torque. The car can go from 0 to 100 km/h in 2.8 seconds with a limited maximum speed of 305 km/h. Not too much to worry about in terms of charging – a full charge will go for 600 km and, with a properly set up 200 kw charging station (which you can surely afford after dishing out $1M for the car) you’ll be up and running in a mere 30 minutes.

I have to admit I’m not an automotive expert. I do know enough, however, to be perplexed by a range of 600 km on a single charge? It’s actually pretty simple. Most car manufacturers have to cut corners in design and materials to fit into a certain price range. With our target market and very high price, we actually didn’t need to compromise on the technology, the components or the materials.

I see you have some pretty big machines here in the workshop. Those are used for milling aluminum. In mass production manufacturing, parts are made in molds. We put a solid aluminum block in one of these machines and

467 THE EUROPEAN STARTUP REVOLUTION hook it up to a computer with a very precise CAD design. The machine then mills (some would say “carves”) the required part from that block. It might be a pedal, or a wheel. It’s expensive, but it’s a much more flexible, adaptable process.

So how much of this stuff, the car parts, do you make yourselves? Practically everything – from the motors and batteries to the body and chassis, all the way down to every little screw. We source a few very specialized components, such as tires and air bags, from outside suppliers. The windows are made by the Croatian (Italian-owned) company Lipik Glass – their customers include Bentley, Ferrari and Lamborghini.

There don’t seem to be any mechanical or analogue dials to tell the driver how fast she’s going. All of the instruments are digital touch screens. We’ve designed the whole infotainment system in-house. I was surprised to find a company on the other side of Zagreb, in Velika Gorica, which was able to manufacture it. All their other customers are international companies. They were just as surprised, when we approached them, to have such an interest from a domestic customer. Most of our competitors use fairly basic infotainment. We wanted the system to be as advanced as the car technology.

How will you support your customers? How much will it cost to set up a service and support network? Our cars need no regular service. There is no oil to change and very few moving parts. Of course, something may always go wrong – it’s a sophisticated machine. In that case, the owner hooks the car up to the Internet. We do online diagnostics, and if we can’t solve the problem by debugging a specific component – we flash the car.

You . . . flash it?! Yes.

I see . . . well . . . how many processors does the car have?

So,Let mebasically, think . . . this I’d sayis really about a300. high-powered distributed computer that just happens to have four wheels and a 3D infotainment system?

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You could put it that way… But in any case, there’s always the possibility that something mechanical might break down, which requires physical repair. In that case, we fly one of our people to wherever it might be that the problem happened and send the necessary part with them. Since the heaviest component of the car is 90 kilograms, it’s no big problem.

How about sales and marketing? You’re a small, unknown company in the middle of nowhere, from a country that hasn’t produced a single car in its history? We don’t expect sales to be a problem. We’ve been touring the high class automotive shows in London, Monaco, Villa d’Este and Moscow. Deep pocketed buyers are showing a lot of interest. It’s all early stage, and we understand that. The biggest problem we’re facing right now is growth capital. We plan to launch a new vehicle range every three years, with a price tag roughly half of the previous one. So – something in the range of $500K in 2017 and $250K in 2020. To do this, we need to go from this small manufacturing shop to a factory. Small, of course, but still a proper factory. That would mean that we would need and train generations of engineers and specialists in electric vehicle propulsion and design. Croatia would then become a global centre of excellence, and the impact of our work would go way beyond the pleasure our customers get from driving our cars.

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Update: Autumn 2015

As I said in the introduction to this chapter, three and a half years have passed from my first meeting with Mate until the writing of this update. It’s been a wild ride for Rimac Automobili, and they’ve faced more than one “game over” situation. At a critical point, the Croatian Bank for Reconstruction and Development (“HBOR” is the Croatian acronym) agreed to provide a bank loan with favourable conditions. It wasn’t a huge amount, but it was critical to the company’s survival at the time. Engineering work for third-party customers continued, and then Mate finally found his financial backers. The first of these was a second-generation Croatian, Frank Kanayet Yepes. Frank was born and raised in Colombia. We’ll learn more about him, and his support for Rimac, in the second part of this chapter. On the strength of Frank’s initial investment, Rimac Automobili were able to raise a funding round. In the meantime, Mate has claimed not one, but five Guinness World Records for electric automobiles – with the “little green cube” used for research and development.

How and when did these Guinness records happen? They are for different track lengths. The process of formally approving them takes an incredibly long time – almost two years, in our case, from the event itself to the approval. FIA (the global automobile association) and the Guinness organization have to coordinate and agree. But here they are! Five Guiness / FIA world records. I’ll be happy to sit back now and see who will break them so I can come back and reclaim them, not with the old green cube but with the Concept_One, of course!

Tell me about Frank Kanayet Yepes – how did you meet, and what’s his role in the process? Frank was born in Colombia. His career and his business was in the oil and energy sectors. He’s of Croatian origin, so he’s a huge fan of Croatia. He also loves racing cars, has his own Formula 1 car and a collection of other very fast cars.

When I spoke with Frank, he mentioned owning a Ferrari 599XX. You know I’m no car expert, I hadn’t even heard of that model. Only 33 have ever been built. You can’t even drive it on the road, only on dedicated race tracks certified by Ferrari. That’s an interesting value proposition if you consider that this Ferrari, like our Concept_One, costs roughly a million dollars.

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Frank is also one of the investors in the Formula E electric car championship, where our Concept_One has been selected as the director’s car. With a background and career built in the oil and energy business, Frank is now investing in clean energy, producing ethanol from the cassava plant. He is also the distributor for Ferrari and Maserati in his native Colombia. He remarried a few years ago and wanted his child to be born in Croatia. A Croatian diplomat (whom I don’t know) promised to help with the paperwork and the legal process under one condition – that he visit our company. That first meeting was interesting but inconclusive. It took him a couple of weeks of deciding and a lot of thinking, but he finally agreed to become a part of the Rimac and Formula E projects.

But his contribution wasn’t all you needed? Frank invested roughly a million dollars. That was far from our requirements, but it was a signal to other investors who were already interested. After a lot of meetings, discussions and negotiations, we managed to close a funding round of approximately ten million dollars. That finally gave us the capital we needed to properly set up production and testing. We had more interest from other investors, but we didn’t want to raise more money at that stage than we really needed. Money was coming not only from investors but also from customers.

By the way, Mate, since you’re a part of this amazing supercar ecosystem, which car do you own for everyday use? People often ask me that. Many are surprised when they hear that I don’t even own a car. I love cars, and that’s the reason I’m doing all of this. But currently I have other priorities. At the rate we’re expanding, I’d rather employ more people and purchase a CNC machine. So what do I drive? Now I’m driving my sister’s Škoda Fabia (a great little car, by the way). Sometimes I drive my girlfriend’s Mini or the blue Concept_One, which is always on tests or at events, so there isn’t much time for me to use it. We have a company BMW 535d wagon, which the guys need all the time, so I rarely drive it. Sometimes I don’t have any car available at all, which is also fine, since I love riding our Greyp electric bike.33

Greyp is a high-performance electric bicycle built by a subsidiary of Rimac Automobili 33

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I’ve driven very exciting cars – Ferrari, Koenigsegg Agera S, Pagani Huayra, Lykan it which nobody else touches. That’s the most annoying thing about not having my Hypersport . . . And I have to admit that I miss having my own car with my stuff in own car – I lose stuff all the time and have to carry things around with me. The last car I actually owned was a black BMW X6, which I sold back in 2012 to keep up with payroll. I don’t regret it for a second. I will have my very own Concept_One once the customer cars are delivered, but this will take some time. So I’ll buy myself a car one day, and it will be a good one. But now is not the time for that.

How many employees are there in Rimac Automobili now? We have more than 130 people, six of whom have joined us from abroad – Germany, Austria and Spain. I don’t count us Bosnians as foreigners (laughs).

How are sales of the Concept_One going? As you know, the supercars are really important to us, but aside from sales, their importance is also as technology test beds, showcases and marketing vehicles for our real business, which is technology solutions. We just got an order to develop and manufacture electric cars for a Chinese customer – 15 in the first batch and 100 in the next. We’re talking to more established companies to manufacture mid-volume series for them – several hundred per year. Compared with that, the eight Concept_Ones that are in the process of being produced are a very small, but also very, very important part of our business. We couldn’t be doing any of the other stuff if it wasn’t for the supercar.

How about the Greyp bikes – how is that going? We’ve shipped about a hundred of those bikes to customers in twenty countries. We’ll be ramping up production next year and introducing new models which will be produced in much larger series.

Tell me about your plans for future models? I can’t go into too many details. What I can tell you is that our next model is already at the design and development stage. Successive ones after that will gradually cost less, and we will manufacture bigger series. We’re still talking about vehicles costing several hundred thousand dollars – we definitely plan to stick to the high- performance category.

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How long before more than half of the cars on the world’s roads will be electric? The real question is when new models of mobility will become globally accepted and when decisions about purchasing “transportation products” will be made by companies, in a much more rational way than by individual consumers. I’m not calling them “cars” on purpose, because they will be very different from what we know as “cars” today.

How about autonomous, self-driving vehicles? It’ll take twenty or thirty years. But they will be nothing like what we’re used to today, and they won’t be owned by the users.

How about the long-term strategy for the company going forward? What’s the relationship – and the revenue mix – going to be between the cars and the broader technology business? We want to build the most advanced, best supercars in the world, showing the market the possibilities and being the best at that. Sticking to the ultra high end and high quality, launching a new model every two years. In technology, our goal is to be the leader in high-performance powertrains and a global centre of competence for electric drives and full vehicle development. Our vision is to have a piece of technology, developed here in Sveta Nedelja, in every kind of electric vehicle, from planes and boats to wheelchairs, cars and bikes.

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28 Iskon, MicroBlink, PhotoMath Damir Sabol THE EUROPEAN STARTUP REVOLUTION

Damir Sabol is one of Croatia’s most successful tech entrepreneurs. He founded Croatia’s first independent Internet service provider, Iskon, in the late 1990s. Backed by several investment rounds, Iskon pioneered many popular online services such as rich content portals, online chat, games and the ability to exchange large files. The company was acquired by Croatian Telecom, a subsidiary of Deutsche Telekom, in 2006, providing Damir with the financial resources needed for his next ventures. After a year or so of taking a rest from the crazy, stressful ride that was Iskon, Damir set out to create a service, called Racuni.hr, whereby bills issued by organizations such as utilities would “land”directly into consumers’ Internet banking applications, thus doing away with the need to type in bill payment information by hand. The project never properly caught on for several reasons. As an offshoot of Racuni.hr, however, Damir and his team moved into mobile banking technology. They created PhotoPay, a technology enabling customers to take a picture of a paper bill which would then automatically populate the appropriate fields in mobile banking apps. Rather than targeting consumers, the customers for this technology were banks, who would then build them into their various mobile banking apps. PhotoPay caught on, and is being used (September 2015) by sixteen banks in Holland, Germany, Austria, Croatia, Slovenia and other countries, with a total of more than five million end users. As a demonstration of the possible uses of their in-house optical character recognition and artificial intelligence know-how, the team built PhotoMath – an app which would “look” at a mathematical equation using the smartphone’s camera and not only instantly solve the equation but also show each step used to arrive at the solution. PhotoMath made it to the finals of TechCrunch Disrupt in London in 2014. The seemingly magical way it solved equations, plus the media attention, fueled its rise to the number one spot on Apple’s AppStore free apps category, unseating Facebook from that particular throne. To date, more than nineteen million users have downloaded it. At the beginning of the 2015 school year, PhotoMath was being actively used by more than four hundred thousand users each day. It’s still free, but the company – microBlink – is looking at various monetization strategies.

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Damir and I have been good friends ever since the Iskon days, when my company helped build Klik, at the time Croatia’s most popular web portal, which Iskon acquired soon after it was launched. In 2012, along with two other good friends, Mihovil Barančić and Saša Cvetojević, we founded ZIP (Zagrebački inkubator poduzetništva, or the “Zagreb Entrepreneurship Incubator”), the country’s leading startup accelerator. All four of us work with the ZIP teams on a pro bono basis, and Damir’s contribution as a mentor to our startups is incredibly valuable. On a warm summer evening in September 2015, Damir and I sat down at a cafe near ZIP to talk about his early life, what it was like building Iskon from scratch, learning about venture capital, PhotoPay and PhotoMath and where he and his crew are headed next.

Your entrepreneurial spirit goes back a few generations in your family, doesn’t it? My grandfather was a shoemaker. When I was a boy, I would accompany him to the market where he sold the shoes he made in his little shop with two assistants. When he was close to retirement, he would sell one or two pairs each weekend. Or nothing. But I recall a record day a while ago when he sold forty pairs! My grandmother on my father’s side wasn’t a very educated woman. She only finished four grades of elementary school. She too, however, had a mind for business. She would buy up large rolls of strong cloth, the kind you use to carry produce in bundles in the field or to the market. Then she would cut up the cloth into smaller pieces and sell them to households. You could call it a very simple form of retailing! So, yes, I learned early on from them, and from my parents, what it means to work hard, to create great products (such as the shoes my grandfather made) and to be very, very careful with your hard-earned money.

How did you get started with the ISP business? My first steps were as a system administrator with a network of regional NGOs called “Zamir.” This was in the mid-nineties, when many NGOs in Croatia and the countries coming out of ex-Yugoslavia needed a way to connect and communicate. The Internet wasn’t nearly as widespread and easily accessible as it was a few

477 THE EUROPEAN STARTUP REVOLUTION years later. Zamir created a BBS (“bulletin board system”) which people in the NGOs could use to set up forums, discussions and exchange messages.

Where was the system physically based? It was a strange environment. The main computer and equipment were in a dilapidated small house in the Old Town of Zagreb – basically a shed. At one point, water started pouring on the hardware from the flat above. We had a hard time explaining to the old man upstairs that he needed to fix his plumbing so it wouldn’t pour down on our vulnerable equipment!

Not quite the modern-day data center? Yeah, not even remotely similar.

So after a while, you realized that Internet connectivity might be interesting to businesses? My first contact with what we now know as “the Internet” was at FER34, the computing school of Zagreb University.

Mine too! I remember a colleague showing me a web page retrieved by NCSA Mosaic, with that animated globe in one corner of the screen. It was probably back in 1993 or 1994. That’s why the university is so important. It’s always an opportunity for young, talented kids to get in touch with the latest technology which they might not normally see outside of that environment.

Let’s go back to your transition from NGO to commercial ISP. Once I understood what was going on with the Internet, it was clear that this was something businesses would want. Croatian Telecom35 was the monopolist, and there was a clear opportunity to build something unique – a competitor to the “natural” monopoly that had been there – previously as “Croatian Post and Telecom” for longer than anyone could remember.

Faculty of Electical Engineering and Computer Science 34 Croatian Telecom was acquired by Deutsche Telekom in 1999. 35

478 28. Iskon, MicroBlink, PhotoMath • Damir Sabol

These were very, very early days however. I was just a guy with an idea. I wasn’t thinking about “conquest” – I just saw an opening, an opportunity to offer a competitive telecom service to business customers. I had several discussions with the board of Zamir, the NGO I was working for. We agreed that I could use the existing infrastructure as a base to launch the venture, in exchange for continuing to provide free services to the numerous regional NGOs that were part of the Zamir network.

I assume this is about the time you moved from that shed to a basement office in the Zagrepčanka business tower? How did you go about building the infrastructure for a telco, being just one guy in a basement? I went to the banks in search of a loan. Most of them looked at me like I was crazy, but one bank, “Kaptol banka,” which doesn’t exist any more, agreed to give me a loan. More specifically, they financed a leasing contract for me to purchase a key piece of equipment – a 56K modem server. I didn’t own a car at the time. This machine was worth about twenty-five thousand Deutschmarks – enough money to buy a decent car. I took out this loan, however, and bought the modem server. Not having a car, whenever I needed to connect a new business customer to the network, I would stuff the customer’s router in my backpack, hop on a tram or bus and install the equipment. After a while, as my team grew, one of my friends and first employees was able to help out with his ancient Lada.36 Our strategy then was to park the Lada around the corner from the customer’s office so they wouldn’t see the old heap we were arriving in – but it was still much, much better than carrying routers on trams and buses.

You probably had regulatory issues. I remember the late eighties and early nineties, when dealing in foreign currency and importing hardware and software was still limited to a handful of “accredited” state-owned companies. What was it like when you were setting up Iskon? It’s impossible to imagine, from today’s perspective, the administrative nightmare we had to deal with. All of the regulation was written on the assumption that there

The Lada was a Russian car built under license from Fiat. Ladas were robust and dependable but by no36 means “representative” if you wanted to project the image of a serious business.

479 THE EUROPEAN STARTUP REVOLUTION could only be one operator, ever, and of course this was the “national” operator – our arch-enemy. Starting a telco required a “concession.” Concessions, of course, are issued for limited resources, such as commercially managing highways or national treasures. What was the logic of “granting a concession“ for an unlimited resource like telecoms and bandwidth? There was no logic, of course, but the regulations were there anyway. When we were founding the company – Iskon – the regulation was pure Catch 22. If you wanted to establish a telco, you had to have a company registered for that particular service – providing telecommunication services. On the other hand, in order to be registered, you had to have a concession! As luck would have it, my father and I had registered a company some time before that. When we were filing for the company documents, I suggested that it might be a good idea to include telco services in the company’s registration documents. So, almost by chance, I already had a company with the necessary documentation to apply for the telco concession! If this sounds bizarre, that’s because it is, but that was the way it was in Croatia in the late nineties.

And things soon began to move pretty quickly after that? We signed up business customers one after another. An article in the IT magazine Mreža really helped a lot. Many companies had never even imagined that someone apart from Croatian Telecom could provide an Internet connectivity service. One of the customers we connected was a private investor, Gavin Sussman. He was an American who had done very well investing in Central and Eastern Europe. Croatian Telecom couldn’t connect him – he had moved his company to the outskirts of town. So my guys and I went there and set up a completely improvised, guerilla-type configuration involving multiple routers, but it worked. Gavin was excited about the opportunity to create an alternative telco to compete with the incumbent Croatian Telecom. We discussed this quite a bit and ended up agreeing on what was essentially a convertible loan of three hundred thousand dollars, to move the company forward. This was a huge risk for both of us. He was giving money to a guy he didn’t know very well – me – who had absolutely no collateral. I, on the other hand, was taking on a financial obligation which I had no way of returning if the business didn’t work out. So it was really a leap of faith on both sides.

That was the trigger for Iskon to really take off? It was also the time, around 2000, when my company helped build the Klik portal and you guys acquired it.

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Iskon then took off like crazy. The mere possibility of someone really confronting an established telco with competitive services caught everyone’s attention – customers, the media and of course investors. Klik was definitely an important step at that point, having become the most popular portal in Croatia. I found myself suddenly riding a rocket ship which I was completely unprepared for, in every way – from a business management perspective as well as personally. As a student, up until just a few months before that, my standard of living was really, really frugal. My parents had a mortgage to pay off. My sister was also a student, so they supported her and me with very, very little money. My monthly budget plan included, for example, timing for when I could afford to buy shampoo. Pizza, outside of the heavily subsidized student canteen, was a luxury I could afford once a year.

And then, all of a sudden, investors with expectations of rapid growth. Gavin facilitated a series of investment rounds. Within the space of a year or two, Iskon grew rapidly. We were able to offer more and better services, some of which we didn’t even expect to become popular. As an example, our engineers created a chat environment. I wouldn’t have guessed it, but our customers loved that feature and chatted like crazy all through the day and night! We went from a handful of people to a hundred and fifty in a very, very short time. Looking back now, I still don’t understand how we did that. Where did we find, in Croatia, a hundred and fifty people to join Iskon so quickly? Where? Where? I still ask myself that ... There were a few moments in time when we were literally on the brink of breaking and going bust. The most critical one was probably late in 2000. The dot-com bubble was literally in the process of bursting. Gavin had lined up a six-million- dollar investment round with Dresdner Kleinwort. If that deal had collapsed, we would have been finished. We had taken on a ton of debt to finance our rapid growth, and there was no way we could have paid it back without a new round of funding. We would have literally gone bankrupt! It didn’t collapse, however – in fact, it went through and we survived our biggest crisis. I was completely burned out, though. I had gone from a humble student’s existence to building a huge team, dealing with multiple investment rounds, fighting with the regulatory agencies and the mighty incumbent ... When Gavin and the board suggested I take a back seat, move from CEO to the Advisory Board and the company hire an outside CEO, I agreed.

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Didn’t you put up a fight? Iskon was your baby from the start. No, no. I agreed with the proposal immediately. Like I said, I had completely burned out and I needed a break. We brought in a very competent management board with a new CFO, and Iskon continued to grow.

Iskon grew over the next few years, and then you prepared for an IPO on the Zagreb Stock Exchange, right? Yes. A while later, I stepped back into the CEO position. Everything was prepared for the IPO, but of course the board was considering all of the possible options. Aside from the IPO, another option was an acquisition by the competition. By that time, Croatian Telecom had a new, very serious competitor in the mobile space – Vipnet, a subsidiary of Telekom Austria. Both of these operators were interested in buying us, which of course made the shareholders very happy. We all finally decided to accept the offer from our old nemesis, Croatian Telecom.

Wasn’t there a “detail” in the legal paperwork that was very important to you? There certainly was. The contracts and other documents were extensive and really difficult to analyse on your own, although by that time we had very good lawyers supporting us. The key issue you’re referring to is the so-called preferred dividend. To put it simply, this meant that the investors “imposed” a dividend on the company. If the annual operations were not profitable enough to pay out this dividend – and in a high-growth company they never are, since everything is reinvested into the growth – then the investors reserved the right to have this dividend calculated, with compound interest, for the duration of their investment. In this case it would be 8% per year – on top of what they would normally receive from the sale of the company. I insisted that this be removed from the investment agreement, even at the cost of agreeing to a lower valuation. The acquisition happened in May of 2006. Everything had been prepared for the IPO, but the Croatian Telecom offer turned out to be a better deal for the majority of the shareholders. My stake at the time was a bit more than ten percent, and the closing price was about fourteen million euros. Had I not taken the preferred dividend article out of the investment agreement, I would have been left with almost nothing. Our investors were also reasonable to allow that change.

Then you took some time off. I really needed it – not only me, but my family as well. I took a year to recover from the incredible, stressful ride. We built a house in Zagreb. I spent time with my

482 28. Iskon, MicroBlink, PhotoMath • Damir Sabol family and – of course – with the contractors and builders, who can make anyone’s life stressful, whether in Croatia or California.

What was the next step? I thought there was a huge opportunity in moving the payment of bills online. I was primarily thinking of bills that were issued on a large scale – utilities, phone bills, that kind of stuff. I gathered a team and invested in developing a solution.

It didn’t really work out though, did it? No, it didn’t. It was an idea ahead of its time.

I guess in the tech space we are always trying to implement stuff too early. I remember when my company, Perpetuum, tried to market enterprise-level document management solutions in Croatia in the mid-nineties. It seemed perfectly reasonable to us, and the solution totally made sense from a business perspective. The customers, however, were not interested at all. I’d say tech companies often feel that the customers “don’t get it” – i.e., they don’t understand the “brilliant” solutions we are offering them. Learning what customers really want and what makes sense for their business can be quite painful! Of course! Iterating on the bill payment idea, the team I had assembled gradually began building something else. This product eventually grew to what we offer today as PhotoPay. Basically, it lets you point your smartphone camera at a paper bill or invoice, after which the phone app will populate your mobile banking application with the proper payment data. In other words, you don’t have to type in the info you’ve received, all you need to do is point your camera at the invoice – however much you actually dislike paying bills!

What’s the business model for PhotoPay? We don’t sell or market PhotoPay to consumers. Our customers are banks – they integrate PhotoPay into their online and mobile banking solutions, and they pay us license fees. We currently have sixteen banks using PhotoPay. From some of the biggest banks in the Netherlands, Germany and Austria to many others in Croatia and Southeast Europe. More than five million people, customers of these banks, are using PhotoPay to pay their bills. Erste Bank in Croatia was actually our first customer. I pitched the idea to Igor

Strejček, a senior manager there. He was thrilled by the concept, but he gave us 483 THE EUROPEAN STARTUP REVOLUTION a really tough deadline for implementation. You know how developers love a challenge – we worked really hard, and a few months later the Erste mobile app, with our technology built in, was all over billboards in every Croatian city. That was a really strong validation for us, and PhotoPay continues to be an important source of revenue for MicroBlink. We’ve identified expertise in image processing and optical character recognition as a key, strategic capability that we need to develop further. We have seriously smart engineers on the team – several of them are doing their PhD’s in this area at the University of Zagreb’s Faculty of Electrical Engineering and Computing (FER). Cooperation with the Faculty on deep R&D is very important for us. Early on, PhotoPay used a third-party character recognition engine from a global leader in this space. In time, however, we were able to replace this with our own engine. The first consequence was that our margins improved significantly, because we didn’t have to pay high royalty rights any more. More importantly, we were able to apply the technology to more and different use cases. By now, it’s robust enough to enable fast and reliable recognition, for example, of personal documents such as ID cards and driver’s licenses. Our customers are, for example, some big car dealerships in the US, so car dealers don’t have to retype customer data. Also in America, some police departments use our software to instantly input driver’s information on the road. Another area that’s becoming very popular with startups is application signup.

So, you’re going to help us all finally get rid of those damn passwords! Not just yet. I’m talking of signing up to a service, like a newsletter or online application. People really, really hate filling in signup forms. If a startup or any other company can help customers fill in the signup form quickly, their customer conversion numbers can improve dramatically.

You really hit the media with PhotoMath, though. How did that get started? You mentioned at one point that it was actually a marketing excercise, to demonstrate the power of your technology. Something like that. I was helping my son with math, and it was really tedious and boring. I thought there must be some better way to do that. And then I thought – wait a second, I actually have a company that has technology that might be used to help me, and maybe a few other parents. I talked to my team, but we were deeply involved with other projects and couldn’t really justify getting into something new.

484 28. Iskon, MicroBlink, PhotoMath • Damir Sabol

As it happened, Microsoft had a contest around their App Campus program, which is intended to support startups to build products for the Windows Mobile platform. We applied to that contest with this idea and won twenty thousand euros for development. That was the initial trigger, and we built the first version of PhotoMath for Windows Phone around the middle of 2014. TechCrunch was organizing the TechCrunch Disrupt conference that October, and we decided to apply there. We knew we needed an iOS app for that. It was – again – a really, really tight deadline to develop the application. The app was approved on the Apple App Store literally a day before the conference. When we saw that things were going well with the jury, and that we might in fact get into the finals, we knew we had to completely reconfigure our server infrastructure. If we made it, we would be facing a ton of interest – and downloads – and if our servers couldn’t take the load, a lot of people would be very disappointed. It would be a disaster. So we worked like crazy to ramp up the scalability. Eventually, we got into the finals along with three other amazing startups. The winner that year was Crate.io – they have revolutionary technology for scaling up online, cloud-based database servers. The exposure we got from just getting into the finals, however, was beyond anything we could have imagined. Three days later, PhotoMath became the number one free app in the App Store! Imagine that! There are more than a million and a half applications in that store – and we were the most popular one. Before PhotoMath, the number one app was Facebook. And there we were – a tiny, unknown company from the middle of nowhere – beating the mighty Facebook.

PhotoMath is a free app. How did you feel looking at those download numbers and thinking “we could have had money in the bank”? You can just imagine! It was really tough deciding whether to put even a small price tag on the product or to keep it free. In the weeks after the launch, we literally had millions and millions of downloads. It didn’t take so long to reach ten million. Those “lost dollars” kept bouncing around in our heads! However, once we took a step back and thought about the whole thing, I’m sure we made the right decision. It would never have been even remotely as popular if it wasn’t free.

How many users do you have today? Since then, of course, we have also developed an Android version. Across all platforms, we have around nineteen million downloads and more than four

485 THE EUROPEAN STARTUP REVOLUTION million monthly active users. We actually hit the top of the App Store again, just a few days ago, since it’s the beginning of the school year.

PhotoMath has clearly long outpaced the initial idea of having a marketing vehicle for PhotoPay and your technology. It’s a global hit. Do you have any plans to finally monetize it? I know you and your team have been thinking about that a lot. That’s true. We first planned to start including ads in the application, but we decided not to. We will be very patient with monetization. Somebody smart said – it’s a marathon, not a sprint. Later on, we might consider some value-added versions or features which we might charge for, but that’s a bit further on down the road.

How large is your team now? We have fifteen full-time employees and another four or five contractors, so twenty people in total.

Do any of them have an equity stake? Some six or seven of them do. Over time, we plan to set up an equity sharing plan for everyone who is on board at this time. As you know, it’s really difficult to do this in a Croatian legal entity. By the way – this is one of the many things we need to change here in Croatia, in the regulatory environment, to make it easier to allocate and change the equity structure of companies in a way that’s totally simple in the US and the UK.

How about funding? I was fortunate enough to be able to fund the first stage of the company personally, based on my exit from Iskon. We reached profitability some time ago, so I don’t need to put any more of my own money into the operations. It’s not huge profitability, but we’re cash-flow positive. I’ve had numerous contacts and discussions with VCs about the next stage of the company. To be honest, we first need to figure out exactly what we want and where we want to take this whole project.

PhotoPay and PhotoMath are based on some common technology, but they are fundamentally different businesses. How do you plan to continue managing both of them at the same time?

486 28. Iskon, MicroBlink, PhotoMath • Damir Sabol

I know what you’re referring to. You know as well as I do that we keep pushing the younger startups in and around ZIP to focus, focus, focus. In the long term, these will clearly be two distinct businesses. For the time being, however, we haven’t yet reached the stage where we will get some “hired gun” managers to run one or both of the operations. But we will need to do something about it soon.

I guess the scalability –the growth potential – is different? That’s right. PhotoPay and related products and services, like the ID scanning and that kind of stuff, is a healthy B2B business with good growth prospects, but that growth potential isn’t exponential. It’s organic. We can build a very, very nice business around that. PhotoMath is a completely different story.

You have the potential for your product to touch every student on Earth, from elementary school all the way to university. Exactly. We’ve barely scratched the surface of opportunity. It’s not just math. It’s using your smartphone as a window, a lens that can take your textbook content and open it up, in a structured way, to an infinite universe of Internet knowledge. We’re pointing phones to math equations today. Tomorrow, we can point phones at, say, a vehicle repair manual, and the technician can automatically trigger a video explaining how to replace or fix that part. We can go into geography, history, programming – essentially, linking any book to a rich, structured world of multimedia and knowledge.

487

Acknowledgments

Writing a book is a lonely undertaking. Years ago, writers would stare at a blank piece of paper sticking out of a typewriter. We have computers today, but that blank screen still stares at you, motivating you to do the dishes, go for a bike ride, play Solitaire, go down the Facebook or Twitter rabbit holes – anything but work on your project. I’ve been lucky to have had the help and support of an amazing crew on this journey. The longest-standing members of that crew have been my transcribers, classifieds web site, under the “Radovi MD” working title. They have patiently and Dunja Odobašić Vacula and Mirjana Markić. I found them through a local online reliably taken all the audio interviews and responded with transcribed drafts of each chapter, which I then proceeded to edit until they were ready for the book. I’ve never met them in person but I really look forward to our meeting some time soon! Now that the book is coming to life, I can see that it’s only been the first stage of a fruitful collaboration. If anyone out there needs a first class team to transcribe your audio stuff into text – ping me and I’ll do the introduction. Alex Hoyt came to Croatia a long, long time ago – back in the eighties. A friend connected us when I told her I was looking for a copy editor (I actually didn’t know that particular expression at the time). When Alex and I first met over tea and coffee at the “Kolding” cafe in downtown Zagreb, we realized we shared some friends and some pretty wild parties from those crazy eighties. “You know” – Alex mentioned some time later – “when Anda first introduced us over email, she didn’t have a kid yet. Now she has two and you still haven’t finished your book!”. I’ve worked with my wife, Dada, on a zillion design projects over the years. Most were for my company, Perpetuum Mobile. Dada designed the logo for our startup accellerator in Zagreb, ZIP, as well as for Tech.eu. Her work on book contemporary writers. I love the cover she’s done for this book and I hope you covers includes a few for our dear friend Zoran Ferić, one of Croatia’s greatest share that admiration. Hrvoje Hafner has arguably been the biggest promotor of crowdfunding in Croatia. He and I received the noble titles of “Senior Advisors” when our friend – and my editor at Mreža (“Network”) magazine – Oleg Maštruko was crowdfunding his 489 THE EUROPEAN STARTUP REVOLUTION first book of amazing photographs called “Without People”. Besides helping with valuable advice, Hrvoje was kind enough to shoot the introductory video for my Indiegogo campaign. When I was considering printing options for the first printing, Amazon seemed like a reasonable default option. However, I got in touch with my friends Silva out that they could arrange printing in Croatia at very competitive rates and Tomanić Kiš and Franjo Kiš who run the ArTresor publishing house. It turned throw a key service into that package: layout for the print book and conversion / production of the e-book. It’s always a pleasure to work with professionals such as Silva and Franjo. Ever since I started this project, I knew the book would be self published. I count partnering on publishing with Tech.eu as “self publishing”, considering my relationship with that highly acclaimed publication! This approach means more control, potentially more money (we’ll have to see what happens there) but it also means thinking a lot about stuff which traditional publishers normally take care of – production, preparation, distribution, marketing etc. “APE – Author, Publisher, Entrepreneur” by Guy Kawasaki and Shawn Welch was a very valuable source of information about the ins, outs and economics of taking responsibility for your own publishing process. Where Kawasaki and Welsh provided the mechanics, another author provided the inspiration, vision and mindset much earlier, in 2009, just around the time the idea for this book was first “running around in my brain”. David Mathison was in Zagreb for a workshop about media in the age of the Internet. We talked a lot about where media is headed and what creative types should be doing, and David was kind enough to give me a signed copy of his book “Be The Media”. To any musician, filmmaker, author, photographer – any creative person who would like to know more about building their own brand and living from their creativity and talent, I say – make sure you’ve read David’s book. It seems fitting that I’m writing these paragraphs on November 29, 2015. Tech.eu, the online publication covering technology and startups in Europe in a long form, analytical, original content format, was born exactly two years ago, with Robin Wauters’ introductory piece about the publication itself and another in-depth article about Belgian 3-D printing company Materialise. My own piece about the startup ecosystem in Southeast Europe followed the very next day. The Tech.eu

490 Acknowledgments founding crew – Robin Wauters, Alejandro Barrera, Roxanne Varza, Jon Bradford and Adrian McShane – have been my teammates in exploring and reporting on the European tech and startup ecosystem and a constant source of support and inspiration. Another group of people who have been instrumental to my work with startups are my friends at ZIP, the Zagreb Entrepreneurship Incubator: Mihovil Barančić, It hasn’t been easy nurturing startups and motivating talented people here in Saša Cvetojević, Domagoj Delimar, Tihana Marelja, Damir Sabol and Petra Stojanov. Croatia, the youngest EU member state which is in many ways far, far removed from the great tech metropolises of Europe. Not easy, but with this gang it’s always a lot of fun! It’s really, really, really hard to build the kinds of successful companies featured in this book. Whether it shows from these interviews or not – and I hope it shows at least to some degree – the women and men who have founded them have had to work like crazy, face seemingly impossible odds and have a lot of luck. Once they are up to a certain level of what others perceive as “success”, everyone wants to get their attention, pitch them a new business or partnership idea, ask for their advice or get an interview. Their time is precious and I know that all too well. Some of the people in the book are good friends, some I know well enough to catch a glass of wine with when I’m in their city or when we meet at conferences, and others – most of them – I’ve only spoken with via Skype calls after lots of coordinating with their secrataries, for which the modern, politically correct expression is “P.A. (personal assistant)”. I’m very much indebted and very grateful to all the colleagues, team members, personal assistants and others who have helped to organize and coordinate these interviews. A very, very big “THANK YOU” goes to the entrepreneurs themselves. They took the time to step away from their very, very busy schedules and were willing to share their experiences and observations, not once but – in most cases – twice, for the original interviews and then the updates. I feel so privileged to have had the opportunity to “be the medium” – to paraphrase David Mathison – bringing these conversations to you, my readers. I look forward to more reporting on the work they and others are doing at Tech.eu and other publications. Finally – so much heartfelt gratitude to everyone who participated in the crowdfunding campaign. It was an exciting experience. Somewhere around the halfway

491 THE EUROPEAN STARTUP REVOLUTION point I was really, really worried that we wouldn’t reach our goal. Everything turned out more than OK in the end, however, with the campaign reaching not only the original goal but the stretch goal as well. Reaching the stretch goal means that 128 of these books will be on their way to high schools in Croatia. I don’t expect all of those books will find their ways to interested minds. Many, if not most, will lay dormant in the school libraries. Building startup ecosystems doesn’t mean trying to reach a broad, statistical audience. It means reaching out to a few exceptional, motivated indivuduals. On average, most startups fail. Most kids in high schools don’t read books about entrepreneurship. There’s a small chance, however, that some talented girl or guy in one of those schools might pick up a copy of “The European Startup Revolution”. In the book, they will read about some crazy people who have done crazy things and ended up creating a wonderful story for themselves, their co-founders, their investors and their customers, rising above the depressing macroeconomical statistics to become captains of a very rare kind of rocket ship – the successful European startup, ready to take on the world. To that girl, or boy, I say: “Hi. Welcome to the strange and exciting world of startups. There’s no going back now!” To all the people who have helped make this book happen, I say: “This child has now been infected with the startup virus. There is no known remedy. It’s your fault.” Thank you, friends!

492 Contributors who funded The European Startup Revolution

Highest level contribution – “IPO Baby“

Joe Schorge Andrei Tretyakov Nikolay Tretyakov

Limited Edition contributors

Mark Crandall Richard Fearn

IgorTaavet Gvozdenović Hinrikus Lukas & Petra, Node5 Mate Rimac Tomislav Šekerija Luc de Vos

(Note: at the time of the campaign, neither Taavet or Mate were aware that I was planning to include interviews with them in the book.)

Campaign contributors (ordered by date and time of contribution)

Christopher Robin Wauters Jüri Kaljundi Željko Marčec Marinko Radić Marko Kovač Dennis Puzak Benoit Lips Ivan Ilijašić Mislav Radić Darijan Kosić Stevica Kuharski Slavko Krajcar Ante Mandić Maxim Gurvits Nataša Djukanović Michal Slaski Matija Jerković Božidar Pavlović Tomasz Rudolf Patrick Bosteels Ivana Šoljan Aljoša Japundžić Damir Sabol Davor Runje Sasa Cvetojević Leen Segers Daria Mateljak Aldo Urem Edin Saračević Georgi Taskov Alejandro Barrera Hrvoje Bujas Jeff Lynn Stefano Tresca Sten Tamkivi Nikola Plejić Darko Vodopija Andrey Shtylenko Lars Ruckpaul Mihovil Barančić Alicia Navarro S Rakshit Adam Bird

Marko Misulić V J Bravery Ivan Podnar Armin Konjalić Vanja Ratković Augustin Jarak Helene Billaud Srđan Kovačević Ewelina Szalanska Kyryl Zlobenko Benjamin Constantini Deni Marić Vladko Fras Kristina Kardum Ozren Crnogorac Ira Vince Stephane Valorge Benjamin Alilović Dimitrios Kalavros Elizabeth Blumenthal Maria Adamian Gousiou Berislav Marszalek Kristina Davorin Ruševljan Petra Stojanov Philipp Moehring Marin Glibić Andrija Puškaš Marko Sever Stjepan Pavlek Andreas Rohr Ricardo Marvao Andrew K Mainhart Ben Rooney Blerim Sela Krešimir Petković R J Aalders Aleš Blatnik Marko Linke Barbara Jagodić Slade Tomislav Piasevoli Blaž Kos Tihana Ana Reljić Antonija Mršić Goran Radić Mile Skelin Gal Messinger Ivana Bilić Nebojsa Radović Slaven Sopić David Jakelić Erik Bovee Dušan Kalc Cica Gajić Denis Ristić Vladimir Vulić Danijel Artenjak Miloš Došen Ivan Majstorović Rait Ojasaar Vedran Miletić Tihana Marelja Hrvoje Stanišić Saša Stanković Jim Digby Lyuben Belov Darian Škarica Ivan Maglić Dragutin Vuković Davor Fanton Matej Rus Miloš Pugelj Balazs Szabo Silva Tomanić Kiš Ivica Vrsaljko Nensi Blažević Tomislav Capan Erik Bovee Predrag Lesić Damir Kolmanić Ruslan Fazlyev Dario Novaković Damir Filipović Vjeran Bušelić Brian King Krešimir Kos Patric Gresko Dragana Djermanović Živko Krstić Ivana Maršić Karlo Šmid Henry Chuks Marc Wesselink Marin Purgar Dražen Drnas Gregor Pichler Irina Scarlat IvanAnt Vučica e Sarjanović