Topic: Europe’s Plan to Beat Silicon Valley at Its Own Game (Read 99 times)

Have they discovered the secret recipe to tech innovation - harnessing a greater variation in ethnic and gender based diversity.

WIRED spoke with Skype cofounder Niklas Zennström about why the burgeoning European startup scene is poised to lead the technological revolution.

SKYPE WAS ARGUABLY the first breakout European tech company. Nearly two decades after its creation, cofounder Niklas Zennström reflects on the growth of the European ecosystem, posits that combining profit and purpose is critical—and explains why Europe is set to beat Silicon Valley at its own game.

Niklas Zennström is so calm when describing moments of intense upheaval that you suspect the “Zen” in his surname is there for a reason. WIRED met the founder of venture capital firm Atomico in the company’s new HQ in Fitzrovia—offices Zennström designed himself. They are the first in the UK to achieve net-zero certification; the boardroom is climate-controlled, with temperatures designed around the individual needs of the company’s workforce. With solid oak floors, Moroccan tiles, vintage furniture, and carefully placed wool rugs, it’s a space designed to soothe and inspire.

Zennström recalls a morning in 2003 when he and his wife, Catherine, left their London apartment and six people showed up on their doorstep, one on a motorcycle. They were lawyers from the music industry pursuing him for lawsuits against his peer-to-peer file-sharing startup, Kazaa. “I tried to run,” he says mildly, as if describing catching a bus, “but sadly was not in the same shape I am now, so they served me.”

He shares similar adventures with a wry smile and slight shrug of his shoulders—like when his parents sheltered US soldiers fleeing the Vietnam draft during his childhood or when he had a back door built into his office to escape unwanted visitors while at Skype, the pioneering VOIP startup he founded with Janus Friis in 2003.

Atomico’s new London HQ is in The Gaslight, a 15,000-square-foot Art Deco building that was refitted and modernized by Bluebottle Architecture and Design.

During our conversation, it becomes clear that one topic particularly irks him: people who ought to know better wildly underestimating the European startup scene.

He’s still annoyed about an extract from a book by journalist Sebastian Mallaby that was published in the Financial Times in February 2022. The article said Europe “has been slow to develop tech unicorns. Can Silicon Valley’s creativity and cash spark a winning streak?” It cited a San Francisco-based VC making “an especially contrarian wager” in 2019 when he bet that Europe, “the perpetual continent of yesterday, was on the verge of a technology take-off.”

“It’s like they think we’re a weird, primitive people,” he sighs, frustrated. “When we look at the early-stage funding rounds last year, the US had 35 percent of the global share and Europe had 33 percent,” he says. “There was a time when there were accelerators in Europe just copying US companies, but that’s long gone. There’s real innovation all over the continent.”

And he’s got the data to back his argument. According to Atomico’s annual State of European Tech report in 2021, Europe recorded a record $100 billion in capital invested and 98 new unicorns (privately held startups with a valuation over $1 billion), bringing their total to 321. At the end of 2020, Europe had 115 VC-backed unicorns. Less than one year later, that number grew to 202. As of March 31, 2022, PitchBook records 607 active unicorns in the US—with the growth rate roughly equal.

Zennström, one of the original European-founder-turned-investor figures, is responsible—directly and indirectly—for a significant chunk of this growth. In fact, that’s precisely why he founded Atomico. He hopes to rally the continent to fund and support founders who can lead the new era of tech and return to the old internet dream of making the world a better place.

“Where Europe is leading compared to the US is in ESG (Environmental, Social and Governance) and climate strategy,” he explains. “Young talent today wants to make money but also wants to have a purpose. Europe has a competitive advantage here because the ecosystem is younger, and the whole ecosystem is fundable. The US ecosystem has so many entrenched players and so much capital it is harder for them to reinvent themselves. Sixteen percent of capital invested in European tech in 2021 went to purpose-driven companies, compared to around 10 percent in North America. I believe European founders are uniquely positioned to lead this technological revolution.”

It’s tempting to see Zennström’s success and open-minded attitude as rooted in his Swedish DNA. The country still boasts the highest tech investment per capita in Europe, and Stockholm, Zennström’s hometown, has the most unicorns per capita of any European city.

“Sweden punches above its weight for a few reasons, but social mobility is a really, really important one,” he says. “Companies are started by founders, individuals who have talent, drive, and ambition. The environment either helps them to be successful or pushes them down. When I was going to school, everyone went to the same schools, the state schools, so we all mixed and knew each other, regardless of wealth. There were no private schools. It has changed, but the private schools are limited as to how much they can charge, so they are still accessible. University education is free, so people who are talented and coming from different social backgrounds can all go. If you’re ambitious and are hungry you can do it.”

His own family were almost hippies—his grandfather was a successful industrialist, while his father was a painter who ended up as an art teacher and his mom taught in the textiles department at the University of Uppsala. Some of Zennström’s earliest memories were of political demonstrations. His parents wanted him and his sister to do well, but he found his friends’ parents in their suits, ties, and Volvos too well groomed. “I felt I was different,” he smiles. “So I always wanted to beat the system and show them I was better—but on my own terms and in a different way.”

He did that—but almost by accident. Zennström worked his way through university, where he fell in love with computers. After graduating, he started working for Swedish telecoms pioneer Tele2, where he set up dial-up internet services in Denmark and the Netherlands. By then, the dotcom boom was making millionaires left, right, and center, and he felt trapped. He began to worry he’d missed his chance.

“At the end of ’99 I decided to fly with Janus Friis, who was much younger and more daring,” he says carefully. “We were excited by what Napster was doing—because it was decentralized—so we thought we’d focus on people sharing digital media. We started to raise money in Amsterdam, but it wasn’t successful. Although there were a few angel investors, the venture capital environment was not developed.”

This was the first time, but not the last, that Europe’s weak funding structure would slow his plans. He and Friis, backed by their own money and supported by Catherine—to whom, Zennström notes regularly, he owes much of his career—recruited a bunch of Estonian programmers they struggled to pay. Finally, in the late summer of 2000, they launched Kazaa, insisting users not deploy it to exchange music while they negotiated with record labels to operate legally. Discussions in Europe started positively, but then they headed to the US and hit trouble fast.

In 2001, the company lawyers had arranged a meeting with RIAA and MPAA—big teams of lawyers flying in from the East Coast to meet in their lawyers’ office in Beverly Hills on a Friday. On that Wednesday, they found an internal memo leaked from the organizations they were supposed to meet that called them “Public Enemy No 1 operating offshore.” The memo said “it was imperative to make an example of us,” he recalls with a slight smile.

“Instead of going to the meeting, we were driving around and around while the lawyers were doing their thing. Later in the evening, when we went to our lawyers’ office, we switched clothes with two lawyers on their team to avoid being served. After that, we moved from one shady motel to another, night by night, paying in cash until we bought tickets at the airport an hour before we departed, as we were sure they were tracking our credit cards.”

Zennström and Friis sold Kazaa for a loan note of €600,000 at the end of 2001 (about $600,000 by today’s exchange rates). Then, in 2003, using Kazaa’s P2P backend, they founded Skype, an app that allowed users to make a call by directly connecting with each other. But the early days of Skype seemed to reveal something unexpected—that European VCs were not interested in innovation.

“We got turned down by everyone,” he says simply. “We wanted to disrupt the global telephone network with this peer-to-peer technology, and that’s a big ask. A lot of them had been burnt by the dotcom crash. The model they preferred was to take something that worked in the US and do it in a local market.” He pauses and smiles. “Of course, we were also involved in a massive, billion-dollar litigation …”

Nevertheless, Skype would soon become one of the first European startups to challenge the hegemony of American internet giants in the early 2000s. Zennström faced a crucial decision when, in 2004, one of the big Sandhill Road VCs offered to fund the company, but only if it moved to the US. “At that point, we had already built up a world-class team in Tallinn, London, and Stockholm, and I did not want to leave my team,” he explains. “We knew then that we were committed to building Skype as a globally successful technology company based out of Europe.” He declined the offer.

One year later, Skype went on to become a unicorn—eight years before venture capitalist Aileen Lee coined the term—after being sold to eBay for $2.6 billion. It was the world’s largest tech M&A since the dotcom crash and dwarfed eBay’s $1.5 billion acquisition of PayPal in 2002.

All of this led to Zennström’s next move—to disrupt venture capital with the launch of Atomico in 2006. European VCs weren’t taking risks. Founders were coming to him and asking for advice. VC funds were inviting him onto their boards to make themselves look good. “Meanwhile, the only place in the world that had a functioning tech ecosystem was Silicon Valley—and I like being contrary and breaking monopolies, so we set out to break the US VC tech monopoly with Atomico,” he says.

For a time, no one was interested in investing in funds raised by European VCs “because they all thought if you are in venture, you need to be in the US.” But his attitude was underpinned by a famous quote from Albert Einstein: “Those who have the privilege to know have the duty to act, and in that action are the seeds of new knowledge.”

Once again, Zennström was right. Today, Atomico has invested in 23 European unicorns, including Klarna, MessageBird, Supercell, and Lilium. “Atomico works more in line with the US way of VCs offering a lot of operational support, not just checks,” explains Robert Vis, founder and CEO of MessageBird. “They helped with PR, with hiring—there were times when they were in my office three times a week when we were scaling. Niklas brought that philosophy to Europe, and it had a remarkable impact for me as founder. He’s focused on driving the business forward, staying independent, and is a supportive investor in that sense. He’s been through it, so even though he’s not on our board, I still consult him on founder-type stuff.”

Daniel Wiegand, a cofounder of unicorn eVTOL jet company Lilium, recalls the initial pitch, where Zennström asked expert witnesses from companies like Tesla to join the meeting, followed by a weekend away where the two got to know each other and their respective companies in greater depth. Atomico was the company’s second investor in 2016 and has reinvested in every round, while Zennström remained on the board after the firm achieved unicorn status in 2020 and went public in September 2021.

“He wants to be sure the companies are aligned,” explains Wiegand. “He focuses a lot on diversity, ESG, and company culture in general. He’s not loud, he watches and analyzes—but once he speaks, he’s always spot on. His founding of Atomico was an incredible moment for the European scene. We would not be where we are without him.”

Interestingly, many from Zennström’s former team at Skype have followed similar paths: Friis and Ahti Heinla are now behind robot firm Starship Technologies; Taavet Hinrikus, Skype’s first employee and founder of TransferWise (now Wise), has just launched a new fund for tech founders called Plural; Eileen Burbidge, Skype’s former director of product, launched early-stage London VC firm Passion Capital; and Saul Klein founded early-stage and seed VC fund LocalGlobe.

Zennström’s former team has proved so influential that in 2019 Forbes dubbed them the Skype Mafia. In a head-to-head with the PayPal Mafia of Peter Thiel, Elon Musk, Max Levchin, Ken Howery, and Co., Forbes said the Skype Mafia was “interested in building a thriving European tech ecosystem,” while the PayPal Mafia was “merely interested in making each other rich in a small, exclusive club.”

Zennström enjoys this comparison and sums up his approach: “I’m from Europe. This is where I live, and we can do better than this.”

The materials, finishes, and furnishings added to the building were all selected for their high circular economy value.

According to Zennström, the history of European technology can be broken down into three themed decades—foundation, monetization, and the forthcoming mobilization.

“Skype showed what was possible for Europe, and the continent had its first globally successful entrepreneurial role models, paving the way for more in the future, as success breeds success,” he explains. “Between 2003 and 2013, 153 European unicorn companies were founded, creating thousands of jobs.”

The monetization decade that followed “saw VCs, once the fuel for funding breakthrough innovations, become focused on supporting software companies, some of which has made our lives vastly cheaper and easier. In the process, we also built some problematic tech with a much less positive impact on the world, like Big Tech and social media.”

Globally, VCs and technology companies became addicted to wealth creation, he believes, at the expense of innovation and purpose. “More VC money, more technology companies, more well-paid jobs, and more experienced operators—but governments, finance, and corporations have failed to solve the problems that really matter,” he says.

This heralds, if Atomico has anything to do with it, Europe’s forthcoming mobilization decade—where technology should be a positive force and play a role in fixing the problems of climate, inequality, food production, health, energy, transportation, and sustainable manufacturing through innovation. “Venture capital was founded on funding breakthrough innovations that moved humanity forward from semiconductors to vaccination,” Zennström explains. “In the next decade, we will be facing bigger challenges than ever before. In Europe, there is hope. Governments are too slow. Technology has to regain its central role in improving society. We can’t afford to waste time.”

When it comes to his personal belief that “profit and purpose are mutually reinforcing, not mutually exclusive,” he thinks Europe, rather than the US, is where the vanguard of the mobilization decade is to be found. He’s already backed Vay and Lilium in the clean transportation sector, Infarm and Upside Foods in sustainable food production, and PsiQuantum in quantum computing, and he is searching out a new generation of companies looking at health, microreactors, and hydrogen fusion.

“Sectors like transportation, aviation, food production, and construction materials are starting to be transformed by technology,” he says. “But equally important is that to take advantage of this, you need more and more talent from more diverse backgrounds.”

Atomico’s approach to diversity—from the company’s hiring strategy to baking diversity into term sheets—didn’t arrive overnight. “We had such a blind spot to that for many years,” he admits. “We had pictures with our founders, and my wife pointed out that most of them were white men. So, we set some objectives both for our own team and our portfolio to invest in diverse founders.”

Carolina Brochado, a partner at private equity firm EQT, worked at Atomico in 2012 and says that although the company didn’t offer maternity leave until she had to take it herself, she sensed a huge shift as that happened. Reshma Sohoni—a managing partner at Seedcamp—also credits Zennström with housing her and Seedcamp when they had no money and no office. “I was an Indian American woman starting a fund, and in the US I would have been met with a clubby tech-bro culture, but Niklas—and to be fair, the UK—has always been more cosmopolitan.”

Today, Atomico’s investment team and partners are split in a 45/55 female-to-male ratio. For the past four years, Atomico has run an angels program, recruiting 12 individuals, mainly founders, from eight countries in the first year, and giving them $100,000 each to write early-stage checks. By 2022, these angels—a mix of new recruits and old hands, were 50 percent female and 50 percent non-white.

Laura Connell, the company’s newest partner, joined from Marcho Partners because of this new approach. “Atomico is putting its money where its mouth is,” she explains. “Attracting and keeping better people makes them more appealing to the best founders who come from anywhere. Companies that have greater diversity do better—there’s cognitive diversity, not just physical. We are in the midst of a basic generational transition—younger people do fundamentally care about diversity and being mission-driven.”

“If you want proof of the value of diversity, think how many startups were founded by first- or second-generation immigrants,” Zennström says. “It’s important that we have a lot of female investors because it happens more organically that female investors find female founders, and female founders are more comfortable speaking to female investors. It’s really hard when a company gets bigger—over 200 people—to fix the diversity problem. If the first 50 people are men, it’s intimidating for the first female engineer. We need to front-load this much earlier.”

European tech’s future, he argues, lies in tracking down the outliers, encouraging new role models from diverse backgrounds to prosper, reinvesting in Europe, and inspiring the next generation—and the next, and the next after that.

“Unicorn companies are coming from all over Europe, rather than having US-style tech capitals,” he says. “You want to have diverse locations, diverse people, and make sure that the value is coming back to the European economy. We need to encourage entrepreneurs from the north of England who don’t think they stand a chance. That’s how you build companies with purpose, not just profit—we need to ensure the two are mutually reinforcing.”

“We need founders who want to solve the problems that matter, VCs to fund things that matter, and LPs to challenge those laggard VCs to step up,” he says. “VCs should dedicate a portion of our funds to breakthrough innovations solving world problems at scale and remember that we are funding the creation of the jobs your children and grandchildren will do. I have never been as hopeful as I am now about the potential of technology, and I have never been as motivated by the urgency we all face to find and fund it.”


https://www.wired.com/story/europe-beat-silicon-valley-startups/