Focus: Return of the dotcom kids
http://business.timesonline.co.uk/article/0,,9063-1869308_2,00.html
Clickmango founder Toby Rowland has just won a £23m vote of confidence for his Midas Player games site. Dragons' Den judge Doug Richard says this shows a new appetite for risk since Skype's $4bn deal with Ebay. But do British venture capitalists have the cash to back ideas or will the Americans pounce first? Paul Durman reports
When
Toby Rowland began raising money for a new internet firm in early 2003,
he found it tough going. "People were actually laughing down the phone
when we said, yes, it's an internet start-up in the games area. A lot
of people would not take my call."
Rowland, now 36, was no novice. The son of Tiny Rowland, the late tycoon famous for his battles with Harrods boss Mohamed al-Fayed, Toby had previously run Clickmango, one of the most high-profile firms during Britain's short-lived dotcom boom in 1999 and 2000. Even though that was unsuccessful, he bounced back with Udate.com, the online dating service sold for $150m (£86m) in April 2003.
Now he was seeking backing for Midas Player, a site that would allow players to challenge online rivals to games of skill for money.
"It was very, very difficult to raise funds," said Rowland. "In America, there was more wealth created during the internet boom. People were a little bit hardier about investing during the difficult years. In Europe, there was not very much wealth created, and so people were warier in 2003. They had lost money and felt foolish."
With help from Mel Morris, the serial entrepreneur behind Udate, Rowland and his business partner Riccardo Zacconi raised enough from angel investors to get Midas Player started, formally launching the site in June 2004.
A year later, the fast-growing Midas Player wanted to raise more money to continue its international expansion. This time, the reception Rowland received from potential investors could scarcely have been more different.
Two months ago, Midas Player received €34m (£23m) from Apax Partners and Index Ventures - a huge sum for a first round of institutional investment in a fledgling business. "It's a great deal," said Rowland. "We could have raised more than that. We got quite tired of the process."
For many in the venture-capital industry, Midas Player's successful fundraising points to a new appetite for investing in risky technology start-ups.
Doug Richard, the Californian technology entrepreneur who returns to BBC television on Tuesday as one of the Dragons' Den judges, said: "This is the biggest series-A round (of funding) since I don't know how long. This is a classic American West Coast play, but it's happening in the UK."
In other words, it's a bold, high-risk move into a sector that still has everything to prove. Think Amazon, think Ebay, think Google. Richard said: "It's competitive. There's no defensive position. It's a great Californian deal carried out in Europe. The point is, deals are happening that would not have happened a year ago."
Richard, who now runs Library House, a Cambridge firm that crunches information on the venture-capital industry, was struck by the fact that the Midas Player deal was led by Apax. "Apax is making public claims that it has moved out of venture investing, and yet it is making a big, honking investment in this."
It helped that Midas Player is now facilitating 25m games a month, and has been profitable since January.
Richard, who set up the Cambridge Angels group when he arrived in Britain, said: "I am seeing angel investors spending amazing amounts of money right now. There is something going on here."
WHAT has changed? A more buoyant stock market has certainly helped, as has the fading of memories from the ugly aftermath of the dotcom bubble.
But Richard said investors and entrepreneurs had been given enormous hope by Ebay's recent purchase of Skype in a deal that valued the internet telephony company at up to $4 billion. "The Skype deal was quite galvanising," he said.
Run from London, Skype managed to attract more than 50m users in only two years of operation. Although Skype's revenues to date have been modest - $7m last year - the willingness of Ebay to pay such a handsome price has made many technology investors rethink their ideas of what is possible.
Skype had to overcome enormous scepticism at first. Julie Meyer, founder of First Tuesday, the dotcom networking business, now runs Ariadne Capital, which acted as an adviser to Skype. She said Skype founder Niklas Zennstrom couldn't get funded and was treated as "a bandit" because of his previous involvement with Kazaa, the music-downloading firm.
"Those guys really had an impact," she said. "Niklas is a fascinating person. He's got another big company in him."
The sale to Ebay represented a huge triumph for Skype's backers, led by Index Ventures and the American firm Draper Fisher Jurvetson.
"Index has made its entire fund on one investment," said Richard. "That galvanises investment. I bet they are willing to take all sorts of risks."
At Index's office in London, Danny Rimer, general partner, said: "The Skype deal with Ebay probably has had repercussions in terms of entrepreneurialism, not only in Britain but across Europe. It's had the effect of providing confidence to entrepreneurs to really go after big opportunities."
Despite limited resources, Skype quickly managed to establish itself as the global leader in an important technology - voice over internet protocol - which is set to replace traditional telephony. In the past, many British technology investors have preferred to address small niche opportunities, rather than chase big consumer markets where the competition and the risks are much greater.
Rimer said: "Skype has demonstrated that you really can build a global opportunity right here in Europe's backyard."
Having raised another €300m fund earlier this year, Index is looking to back more teams "that we believe have found a technological advantage that will totally disrupt the traditional economics of a market or a business".
AND it's not just Skype. Graham O'Keeffe, senior partner at Atlas Venture, said the new mood of optimism reflected a revival of confidence in consumer internet businesses.
The growth of companies such as Party Gaming, the online gambling group, is an example of this. But the most important success is that of Google and its advertising-funded business model. O'Keeffe also pointed to the arrival of third-generation mobile-phone services. Many firms are looking to develop services that could flourish on the 3G mobile internet.
O'Keeffe said: "We've got to a point where you can have a device with a colour screen, a good Opera (internet) browser and a high-speed connection. Apart from the keyboard, it's a much more PC-like experience. The people who have figured that out are the Americans."
Benchmark Capital, the American firm best known for backing Ebay, has been investing in a number of European consumer internet businesses, including Video Island, a DVD rental firm; Betfair, a gambling exchange; Figleaves, a lingerie company; and Newbay, which provides mobile blogging and content-sharing software.
George Coelho, a general partner at Benchmark, said: "We're busier than ever. We are just overwhelmed by the good stuff to look at in consumer technology. We're investing (in consumer businesses) because they worked for us in California. Consumers always buy through thick or thin. They are buying something that adds to the quality of their life. That's what I call selling hope. Those are the best businesses - people always buy something to make themselves happier.
"We are lucky to be in Europe doing this because everyone in America is chasing them."
AND here perhaps is the problem with this resurgence of optimism. Too many of the investors aiming to capitalise on it are not British or European.
In recent years, many specialist investment firms have found it easier to make money by using their funds to buy struggling mature businesses and turn them round than to chase riskier start-ups. While the private-equity firms have grown hugely, the pool of true venture capital has stagnated.
John Bernstein, a director of Advent International, said: "The pure venture end of the market has decreased in the past few years. A lot of the older venture funds have moved away from doing first-round deals to doing later (stage) deals."
Apax and 3i are two of the most important firms that have increased their emphasis on buyouts.
Richard said: "There's going to be a rather rude awakening. There's a very small group of venture capitalists who are making (early stage) investments. There are very few who have fresh funds.
"When it becomes clear that there is a lot of investable stuff here ... the best opportunities are going to be taken from funds from elsewhere, a lot of it by aggressive American funds.
"There's no line of capital from the homegrown guys. There's not enough money in the British market among the British venture capitalists."
The matchmaker
JULIE MEYER came to prominence six years ago as the founder of First Tuesday, the monthly party where budding dotcom entrepreneurs could meet the money men to back their dreams.
Now running Ariadne Capital, Meyer still has one of the best contact books in the business. 'We really know the best entrepreneurs,' she said. Ariadne's supporters include the likes of Sabeer Bhatia, founder of Hotmail.
Encouraged by the surge in activity this year, Meyer hopes that some of the new tech firms will improve on Europe's dismal record for commercialising innovation.
Ariadne helped Skype, the internet telephony firm, with some of the early partnerships that put it on the road to receiving a $4 billion (£2.3 billion) cheque from Ebay.
She is also working with Zopa, the British firm that hopes to be the 'Ebay of lending', matching people who have money with people who want to borrow it.
Other clients include Otodio, which is working on converting newspaper text into audio, and Translution, which is developing a system to translate e-mails into foreign languages. Meyer said: 'In 10 years' time, if I send my friends in China an e-mail, they are going to receive it in Mandarin or Cantonese. If I want to listen to The Sunday Times rather than read it, I will be able to.'
Meyer plans shortly to start raising Ariadne's own investment fund to add to the informal pool provided by her firm's friends.