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Beers & Innovation:UK Start-Up Culture

The inaugural night of the series on 9th February 2006 chaired by Tom Coates of Yahoo! saw entrepreneurs and innovators from Skype and Last.fm talk about their first-hand experiences of the UK, US and European technology start-up scenes...

BEERS & INNOVATION 1: UK START-UP CULTURE

The inaugural night of the series on 9th February 2006 chaired by Tom Coates of Yahoo! saw entrepreneurs and innovators from Skype and Last.fm talk about their first-hand experiences of the UK, US and European technology start-up scenes...

Report by Deirdre Molloy

[Register and post your own comments on this report below...]

As chair for the evening, Tom Coates recapped on why Beers & Innovation had been organised – to look at what is happening now in the UK start-up space and explore why there are no world-class businesses.

In order to understand what it takes to succeed – and what challenges we face – representatives from two of Europe’s most innovative and successful start-ups were present to speak about their experiences.

Matt Ogle – Senior Web Architect, Last.fm

Matt, who is Canadian, came in place of Richard Jones (founder of Audioscrobbler who merged with Last.fm in 2005). He described Last.fm as part of the social music revolution which has been driven by the fact that there is so much music available online but no real path to find what you want. They aim to be a social network around music.

Last.fm was founded by a German and an Austrian. It started with a record label and then they began to develop a website for the label. In order to solve the problem of how users find the music that they like, they introduced a ratings system where users could give a thumbs up or down to tracks.

Audioscrobbler was founded by Richard in the UK, evolving out of his studies at Southampton University. It's a plug-in to your online music player that tells you more about your music habits and tastes than you might otherwise know or realise. After one year the two ventures started talking to each other. Audioscrobbler’s origins were humble – when Richard first moved to London he lived and worked in a friend’s flat, sleeping in a tent on the roof outside the office.

Growing the long tail of social music from a UK base...

Matt described the Audioscrobbler plug-in as “myware” – it monitors and logs what you listen to. He joined in 2004, which is when Audioscrobbler really started listening to their users, through ‘shout boxes’, wikis for artists, and recommendations areas that change weekly. They’ve also turned the Long Tail of music into an interface dubbed "obscuromatic".

Now Last.fm is a team of 12 staff with 1.3 million registered users (as of February 2006). 20-25% of these are active users and new registrations were running at the rate of 5,000 per day in February. They have a small amount of private investment and a fair amount of advertising-generated income (some of this is internally-targeted advertising), plus deals with some of the record labels.

They had considered moving to Berlin due to start-up costs in London but are young enough not to be scared by the challenges. Bandwidth was initially provided by a friend and they stayed in London because it’s a magnet to talented people from around the world – good people end up here, so there’s no problem recruiting staff. In turn, the music industry is huge here. Tom Coates observed that Europeans' don’t make much, but it’s a great place for recruitment – especially for large American companies.

Saul Klein – Vice President of Marketing, Skype

Saul recapped his primary business ventures to date. In 1994 he developed and launched the Electronic Telegraph, then he went to Ogilvy where he worked on the Guinness account. Most of the cool stuff was happening in Boston and San Francisco so he went off to work at a start-up called Firefly (which came out of the MIT Media lab) – there were 4 staff on the team.

Firefly were backed by Softbank, and Saul also had dealings with Atlas Ventures. Firefly sold to Microsoft and Saul moved to Redmond. At this time Internet Explorer 3 had just been released and Microsoft were in the middle of the Netscape wrangle. While he was at Microsoft they bought Link Exchange.

Negotiating the investment landscape

Acquiring companies can be a tricky experience, so Saul moved to New York to become an angel investor in start-ups. The city has an amazing talent pool but the tie to finance and business is not as good as in Boston or San Francisco.

He then returned to the UK and started online DVD rental service Video Island (who’s consumer brand name is Screen Select) with West-coast-style VC backing in 2002. There’s a big difference between being a close observer and doing it yourself for the first time, Saul stressed. The good thing was that with Screen Select, people pay every month for the service. Compared with Firefly, there was a clear business model. By February 2006 they had 220 staff and 200,000 paying subscribers.

There are now (Feb 2006) four of five great VCs in the UK, Saul reckoned, two being Index Ventures (who back FON), and Benchmark (backing Betfair). Accel and Atlas are the other VC’s that have the best experience to back internet ventures. But it's hard to get backing with no real business model – Video Island has paying subscribers in its favour.

Saul said “the lights went on” when he installed Skype. He thought that Skype was one of the first start-ups partly-founded in the UK that had potential to be a global internet brand, but as founder and CEO of Video Island, he wanted to make sure his company was in the best possible position before he moved on.

Do we have any homegrown advantages?

Tom Coates asked Saul and Matt about the differences between here and the US, commenting that the UK tends to be more UK-focused in terms of the business and market for companies. Are there any advantages, he wondered, to being based in the UK and how do we play to our strengths?

Making a successful business in the retail/ecommerce sector is very hard, especially in terms of fulfilment, Saul reflected. But media needs to be more local. Communications or search businesses are horizontal and can be more international. Skype looked to Asia before it looked to North America – but it’s now 6 weeks since Skype was acquired by eBay.

Matt observed that being non-American can be an advantage in terms of trust. To an extent ‘Cool Britannia’ still holds true. Saul added that there’s also amazing engineering and technology talent in Estonia (Skype’s HQ), and amazing business and tech talent in Eastern Europe and Scandinavia. Silicon Valley talent, on the other hand, is very expensive and you can’t keep secrets over there.

VC plus points versus bootstrapping

Alfie Dennen of Moblog UK asked about the benefits of VC funding. Saul said that you have to be ready. Video Island was a seed investment. Other investments he has been involved in – Mind Candy and Pleasure Cards – have benefitted from not having VC funding too early. The VC should be spoken to 6-12 months earlier, because they give you excellent feedback. There’s a lot of benefits to be had from not having a lot of funding early on, and the VCs can be your best critics.

Matt said that their angel investors had similar mindsets to them so they were able to grow more organically. He also praised affiliate programmes as excellent as they have enabled Last.fm’s growth. It’s easy to waste money but hard to spend it wisely, Saul commented, citing Gizmondo’s burning through £2-3 million. But people also have to have an appetite for uncertainty, he stressed. Matt added that Ad Sense has also given them the ability to bootstrap themselves up to the level where greater expansion and investment is possible.

Google Adsense does provide revenue building blocks that you can leverage, as for example iTunes does, Saul observed. However, you need to know where your money is coming from. Skype has a more peripheral model; it sells avatars, ringtones, etc. It’s not whether the user visits but whether they return and with Skype they do – that’s the value for advertisers.

The UK start-up scene

So where are the other start-ups, asked Tom. The VC’s are out there and they want to invest and want more entrepreneurs, Saul replied. Silicon Valley is now into 7th or 8th generation of talent, he in the UK its only 2nd generation. He cited the Million Dollar Homepage – created by a British student in his bedroom. The bubble bursting created an acceptance of failure in the US but acceptance of failure is the biggest barrier in the UK.

Tom commented that £30,000 gets a start-up up and running. Mike Butcher of mbites and tbites.com said the UK is very negative and facing in the wrong direction; we need to be looking east to Eastern Europe and Asia. There’s a massive amount of talent in Eastern Europe and Scandinavia, but Adsense pays in dollars. And we need to start talking about things other than web – what about our mobile superiority to the US? Saul reckoned London is a good place to have a management team but there’s no need to base your whole business there. An option is remote working – working with people you never see.

Government support & innovation clusters

Talk then turned to the role of government. Saul Klein said their role was zero. The BBC is a negative presence, he said. It takes talent out of the market and cannibalises media. The BBC creates a service industry around itself and is quite narrow. Matt Locke, Head of Innovation at BBC New Media countered that the BBC can and will be a much better supporter of innovation.

Nico MacDonald explained that the BBC is working a lot with innovation. He also flagged up the regional clusters – Cambridge has biotech, Bristol and the M4 corridor has aeronautics, Rolls Royce and a lot of mobile innovation and R&D.

Matt Locke spoke of the BBC Innovation Labs which provide money and time to develop ideas. Of 170 new ideas submitted, the BBC are taking forward 29 in the Labs – they want partners to talk to them.

Language barriers & the stigma of failure

Is the English language a help or a hindrance – or is that just an excuse Tom wondered. English makes us more permeable to US services, for example MySpace’s first external base is going to be the UK. Compare that with Cyworld which is huge in Korea – but how much scope do they have to expand? Alfie Dennen of Moblog UK commented that it’s better to build local communities and drill down.

Saul explained that 70% of Skype users do not have English as their first language. An interesting question was raised as to whether part of the reason for its global success is that Skype doesn’t have a cultural tone; that it’s non-monolithic? Matt said that Last.fm does localisation whereby they filter the social content / words in multiple languages in order to get more adoption in different countries, but the data-set gets a bit skewed due to software not having so much data or music from other languages.

The issue of business education was raised and the point was reiterated by Saul that you need to be prepared in business education to fail and fail often. It will often take 5-10 attempts to find a good business model.

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See the original EVENT PAGE

Read the Beers & Innovation blog

Book for Beers & Innovation 4: RSS Frontiers - September 14 2005
Book for Beers & Innovation 5: Smart Textiles & Technology - October 17 2006

About Saul Klein::
Saul recently joined Skype as VP of Marketing after several years as CEO of online DVD service Video Island (dedicated to bringing unlimited DVD rentals to a mass-market) which he also co-founded. Video Island delivers this through its brand ScreenSelect.co.uk, distributed in partnerships with the likes of Boots, Dixons, Comet, Currys and Toys’r’Us, as well as via white label partnerships for national brands including MSN, Tesco, ITV and EasyGroup. In January 2000 Saul established TAG, an international management advisory network whose recent UK investments include Pleasurecards and Perplexcity. Formerly Group Program Manager for Web Platform Services at Microsoft, from 1992-1994 he developed and co-founded The Electronic Telegraph. To generate a large reader database, Saul founded Fantasy Football - one of the 1990's most successful marketing tools.

About Matt Ogle:
Matt is a Canadian web developer who was worked in London since 2004. He is currently busy fomenting the social music revolution over at Last.fm. Matt is the creator of the Streetprint Engine, an open-source CMS for sharing and archiving printed ephemera, for which he received his MA in English Literature and Computing Science from the University of Alberta (Canada) in 2004. Since joining Last.fm in early 2005, Matt has helped guide the merger of Audioscrobber.com and Last.fm, and shaped many of the site's user-facing recommendation, communication, and music discovery features. He plays keyboards in the company band.

About Tom Coates::
Tom is a designer and creative technologist who has recently joined a technology strategy and innovation group inside Yahoo! after two years of heading up a small R&D team for the BBC (exploring future media distribution / navigation and social software). He's also developed a geocoded discussion forum with UpMyStreet.com, and has worked with Time Out and emap. He runs a weird online community at www.barbelith.com and a well-known and dumb-award-winning weblog at plasticbag.org.