A venture capitalist’s European mission

Saul Klein hunches over a laptop in the living room of a small, wooden house on the frozen outskirts of Tallinn, Estonia. He’s fiddling with the machine, trying to connect with California using Skype internet telephony. The two-bedroom home doubles as the headquarters of Erply, a start-up run by five fresh-faced, twentysomething Estonians who two years ago hit upon the idea of selling business software cheaply over the internet. Klein, a partner at Index Ventures, one of Europe’s leading technology venture capital firms, had arrived in Tallinn the previous night to meet – face to face at last after five months of communication by phone, e-mail and internet chat – Kristjan Hiiemaa, the leader of the five. Hiiemaa, who started his first business while a student at Tallinn University, launched Erply 18 months ago. Two-thousand businesses are already using the service, although only 700 are at present paying for it. Hiiemaa wants the support of Index Ventures to expand.

Hiiemaa’s team, all loyally dressed in Erply-branded jumpers, are tapping away on laptops and answering customer calls, seated at second-hand, Soviet-era wood desks in the house’s hallway and kitchen. Klein is focused on a different country, a different continent. The Skype call has gone through, and on the other end is Satish Dharmaraj, a partner at Redpoint Ventures, one of Silicon Valley’s biggest venture capital firms. It’s 4pm here in Tallinn, 6am in Palo Alto, and Dharmaraj is finally (thinks Klein) starting his working day.

“This company is going to do for SAP [the world’s biggest provider of business-management software] what Skype did for telecom,” Klein says to Dharmaraj, who is alert despite the early hour. Skype was also developed in Estonia, a point of pride for the small country, as the company became a global phenomenon, with more than 521 million users. In 2005, the then three-year-old group was sold to Ebay for $2.6bn.

That’s the way Klein thinks – or at least the way he talks: start-up X will be the Skype of software. Company Y will be Europe’s Apple. Group Z is Google meets Ebay. He’s like a book agent – with a lot more money to hand. This morning, for example, Redpoint and Index – which are jointly leading a first round of investment in Erply – have wired $2m into Hiiemaa’s bank account. The sum is peanuts to both VC firms, which each manage billions of dollars on behalf of their investors, but it will let Erply hire a team in London and Silicon Valley and market the service in Europe and the US.

But Klein is not here simply as sugar daddy; he is also keen to play the role of liaison to a network of investors, prospective acquirers, new customers and partners – and, before that, of mentor. After the Skype call, Klein wants to see Erply’s data. He wants details about which companies are downloading Erply software, the revenue per user and rates of customer churn – or the proportion of people that stop using the service each month. “You have to practise what you preach,” he tells Hiiemaa, referring to the fact that Erply’s software gathers all these details in an instant for the team to access; Klein is now part of the team.

One reason Hiiemaa is reluctant to talk data is the collection method his company uses. While his software gathers the information automatically, he admits to Klein that all new customer data is entered into their filing system by hand. This does not impress Klein. “[That’s] hard when you have 2,000 customers,” he says. “It is going to be really hard when you have 200,000.”

Hiiemaa insists: “It is a small problem.”

Klein frowns. This is more often than not the dynamic: Klein the indulgent schoolmaster, steadily pushing his student to perform better; Hiiemaa chastened but trying to please, often appearing to ponder deeply what his teacher is explaining.

Klein would never play a schoolmaster on stage, his boyish face and bright eyes more those of the student maths whiz, enlivened by a particularly tricky equation, than any disillusioned educator. But he knows these roles well from his time working at the centre of technology start-ups and VC – Silicon Valley. Born in Johannesburg and schooled in the UK, he moved to the US in 1995 and had his first taste of tech start-up culture as brand and strategy head of Firefly Network, a software company that developed what was at the time a groundbreaking online music-recommendation system.

He relocated to Seattle when Microsoft acquired Firefly in 1998. There he saw the extent of what the world’s most successful technology start-up (at that time) could achieve. “It’s funny, but working inside Microsoft, you feel that anything is possible,” Klein says, adding that it was hard to see the animosity the world’s largest software company attracted when you were working within the corporation.

The impression you get of Klein is that he enjoys being a global citizen, as well versed in the ways of Silicon Valley as he is in the economic emergence of Baltic states. Although he has an English passion for football (the family photo above his desk is of his children in Arsenal shirts), Klein’s passion for technology and start-ups is much more American. The fact that he happily agrees to lay his work-life bare to a British journalist for a week shows a level of trust and openness more common in New World nations than in Europe.

And sitting in on the meetings with the Erply team, I can’t help but feel Klein has some trouble understanding the glass-half-empty view of many Europeans. He turns again to his laptop and calls up the website of Salesforce.com, a US start-up that pioneered the delivery of software through the internet and that Erply is trying to ape. It started trading barely 11 years ago and now has a market capitalisation of $9.6bn. “Look at the revenue ramp,” Klein says, tapping on the computer screen. “That is what we should be aiming for.”

Hiiemaa looks up from his notes. “We are 10 years late,” he says.

Venture capital activity in the EU is still tiny compared with that in the US. In 2009, there were 918 deals worth $4.5bn across Europe; during the same period, there were 4,390 deals worth $21.4bn in the US. One of the big problems in Europe is getting people in different countries, or even different towns, to co-operate. London has not one but several clusters of technology start-ups, dotted around the city. But these often work in complete isolation from the group of start-ups based in Cambridge, a 45-minute train ride away.

Index was set up in Geneva in 1992 by Giuseppe Zocco, a former consultant at McKinsey, and Neil Rimer, who previously worked at Montgomery Securities, a US west coast investment bank that has since been acquired. Klein joined in February 2007. Index focuses on investing in what it calls “disruptive” information technology and life sciences businesses in Europe, Israel and the US. With more than €1.5bn under management, Index differentiates itself from the Silicon Valley VC firms by the fact that it was started in Europe, giving it a better understanding than its American peers of the way the continental start-up community operates.

In Tallinn, as we drive to dinner with Hiiemaa, Klein puts forward the idea of a staff stock options scheme, explaining that it will help secure the loyalty of his team by sharing the rewards of any eventual success. “At Google, even the receptionist earned enough to buy her own house,” he says. Hiiemaa, a quiet but determined individual, replies that he is more worried about giving his developers decent salaries, lest they choose instead to go and work for Skype, whose 600 jobs are among the most sought-after for the city’s computer science graduates.

Klein would like Erply to be as big as Salesforce.com in a few years. There is a reason why venture capitalists have to have such grand ambitions, he explains on the EasyJet flight home the next day. “Out of 30 investments, maybe two or three will work. That means we have to be outrageously ambitious about each company we invest in. One of them will win the World Cup. My job is to get them all to kick the ball at the goal.”

The London office of Index Ventures, tucked between the luxury clothing shops of Mayfair, could not be more different from Erply’s makeshift HQ. The first thing you see as you exit the lift into the reception are a couple of Apple computers and a row of fridges, stuffed with soft drinks freely available to staff and visitors. Ahead are three glass-walled meeting rooms, which are in almost constant use. Visitors arrive from New York, Geneva and Silicon Valley, all toting Apples of their own – containers for sales projections and customer data. Every one of the companies Klein introduces to me has a Klein-assigned moniker, either “the First Direct of travel”, “the Wikipedia of photos” or “the Amazon of selling glasses online”.

At the start of every week, Klein sits round a table with his Index colleagues to discuss potential new investments. “Monday is my only predictable day,” he says. The rest of the time he is out and about, trying to prod and nurture his investments – and field the calls from entrepreneurial hopefuls, seeking an hour of his time to pitch their big idea. “I could have meetings with a new company every hour,” Klein says. “Half the battle is to make sure you have enough time for the companies you are working with.”

He also travels extensively. The previous week, Klein was speaking at a conference in Brussels celebrating European entrepreneurship and innovation. Next Monday, he will be in Barcelona to oversee Seedcamp, a pan-European programme he set up three years ago to give a significant boost to very-early-stage businesses. Klein’s goal is to foster the ambitions of budding entrepreneurs from Dublin to Zagreb, so that they think as big as their counterparts in the US. He has talked about a desire to be part of the first “Google for Europe”.

There is no excuse, he says, for European start-ups not being as big in terms of market capitalisation and reach as their American counterparts. “Europe has great start-ups and fantastic entrepreneurs, who are trying to imagine and reimagine enormous industries,” he says. “But we should forget about how to compete with the US, and we should start thinking about how we can learn to play well with them.”

Klein also travels several times a year to Israel, where he oversees a couple of other Index investments, although he admits that he has cut down on his visits recently so that he does not neglect his family responsibilities – he’s the father of two young children. “The other guys at Index will fly to Silicon Valley a couple of times a month,” he says. “I now limit myself to three or four times a year.”

Although entrepreneurship is in Klein’s blood – his uncle co-founded Getty Images, the picture library – it was not his first choice of career. In 1992, after graduating from Cambridge with a degree in English literature, Klein persuaded The Daily Telegraph to take him on as an unpaid assistant on the news desk. He enjoyed the buzz of the newsroom but became frustrated with what he saw as a lack of opportunity to progress; at the time, the media industry was in recession. Klein’s father, Robin, himself a serial entrepreneur, encouraged his son to move to the commercial side of the paper. It proved to be a road-to-Damascus experience. “Dad helped me see that writing was not the only way to express your creativity,” Klein says.

“Within a few weeks of joining the commercial team, we had launched Fantasy Football, and it was being played by hundreds of thousands of people every day. That’s a lot more than would have read any article I could have written.”

Klein also helped launch The Electronic Telegraph, the first national newspaper in the world, and only the second daily title, to publish online, after California’s San Jose Mercury. “A lot of the value you hope to bring [to start-ups] is the fact that you have been involved in companies that have gone from zero to 500 people in two years,” Klein says.

“Nobody would ask you why [in America], they would ask you how. I want to bring that Silicon Valley mindset to Europe.”

Klein returned to the UK in 2002. He married in London because it was nearer his fiancée, who was living in South Africa at the time. “It was a great opportunity with all the early-stage companies in Europe,” Klein says, and he was eager to be blooded with a start-up of his own. Inspired by the success in the US of Netflix, an online DVD rental business, he set up a similar venture in the UK, called Video Island.

As sometimes happens with good ideas, a couple of other people had set up similar ventures. After competing for a time, three businesses merged to create Lovefilm, now Europe’s largest online DVD rental company, with more than a million UK users. Klein remained as chief executive until it became “obvious” that the business needed a new leader, to take it beyond the start-up phase. He then moved to Skype to run its marketing and e-commerce operation, and stayed until the company was bought by Ebay. By then, he knew the Index team well – they had invested in Lovefilm – and was happy to re-enter the VC world from the side of the investors. (As well as his role at Index, Klein is now a partner, alongside his father, at The Accelerator Group, an investment and advisory company for early-stage internet services businesses and online retailers – although Klein dislikes the term “dotcom” or “new media business” to describe his investments. “Tesco is an internet business now,” he explains.)

Back in London, Klein is meeting another of his investments, AlertMe, a British start-up whose gadgets enable people to communicate with their domestic appliances through the internet. The company has gone through several iterations since it was launched in 2006 by Pilgrim Beart, a technologist who built games consoles for Atari in California before returning to the UK to set up on his own in Cambridge. The initial plan was to sell the tool as a security device, alerting users on their mobile phones of home break-ins. This has since been superseded, however, by the idea of using AlertMe’s kit as an energy-saving tool, capable of turning down radiators and switching off white goods remotely.

“This is going to be the Apple of energy efficiency,” Klein says.

Beart has taken a step back from day-to-day running of the business and AlertMe has recently appointed a new chief executive in the form of Mary Turner, the Malaysian-born former head of Tiscali UK. She has been with the company for barely a month, but she has already set up a London office, using serviced premises in the West End. Her personality fills the room where we are meeting at Index to discuss campaigns and commercial partnerships with retailers and electricity suppliers.

It is increasingly apparent that a lot of Klein’s value in such investments is the contacts on his BlackBerry phone. He reels off a list of entrepreneurs who AlertMe’s team can tap for ideas about building their business. “I am going to introduce you to Kristian at Playfish,” he says, referring to a former investment of Index, since sold to the US computer games company Electronic Arts. “You should also compare yourself with LastFM.”

Turner is worried about the tensions between her London team and Cambridge – a common theme. Skype was said to have had similar tensions between its Estonian developers and its London headquarters. It is clearly a frustration to Klein, who, having been won over by the ultra-positive culture of Silicon Valley, cannot understand why even one city, London, cannot harness all its creative talents to foster more top-notch start-ups.

It’s a stumbling block typified in his mind by Imperial College in South Kensington, an institution of equal standing with the finest technology universities in the world, but which has yet to nurture the scale of start-ups that have come out of bodies such as Stanford University in California or the Massachusetts Institute of Technology. Imperial is closer to Index’s offices in Mayfair than Stanford to the VC firms in Silicon Valley. It also has the City. “That is like having Wall Street in Palo Alto,” Klein says. “Then there is the creative talent from the design schools, like the Royal College of Art, the London College of Fashion and Central St Martins. That should be world-beating.”

Imperial College started its own programme to foster start-ups three years ago. It recently made the news when one of its participants, Min-Kyu Choi, who had also studied at the Royal College of Art, won a design of the year award for a folding three-pin British plug.

Still, Klein grumbles that Imperial lacks the entrepreneurial spirit of the best US universities. “We came to them with the offer of partnering on Seedcamp,” he says. “We could have been an incubator for their students to start up the next Google, but all they were interested in was getting paid for the rooms we used.”

But, Mark Howard, a spokesman for the college, said individual participants on its incubator programme had gone on to raise £1m from VC firms. “We are active in this field but we are following a different model [to Seedcamp],” he said.

The next morning we meet Glasses Direct, another Index investment. When the company started trading in 2004, founder Jamie Murray Wells’s big selling point was that he could offer people a pair of frames online for £15, around one-tenth of the price charged by its main competitors, Boots and Specsavers. By the time Index invested, in 2007, the average amount Glasses Direct customers spent each time they shopped with the company was £35; it is now £98. The holy grail, Klein explains, is to get this figure to £120, at which point the new management has promised a celebratory barbecue for all of Glasses Direct’s staff.

Klein has called a meeting with the company’s chief financial officer, Howard Bryant, to discuss how to address the issue of revenue lost by people who come to Glasses Direct’s website but move on before completing an order. The fact that this has been highlighted as an issue at all is testament to Klein’s obsession with analysing company data for ways to improve the bottom line. “People always look at how much money they make,” Klein says. “They don’t look at how much money they don’t make.”

Glasses Direct’s offices are in a renovated former warehouse set back from Oxford Street. Only half the young executives around the board table are wearing glasses. Apple Macbooks are opened, a box of popcorn placed in the middle of the table and the meeting begins. “At a certain point we should be able to kick Specsavers left, right and centre just because of the information we have about our customers,” Klein says.

He then takes up this theme that Glasses Direct is not really an internet retailer, even though the vast majority of its sales are online. “Just think about how First Direct operates,” he says. “It is not a web service, it is not a phone service, it is not a mobile phone service. It is a service that ensures whatever channel you use you get excellent customer service.” Klein notes that many customers are filling a shopping cart with frames but then stop before the sale because they balk at the final cost. He suggests putting the estimated final bill earlier in the process to counter this “sticker shock”.

Klein also suggests spending money on more telephone sales staff, noting that orders over the phone are on average larger than internet purchases. “It is not even a cost,” he says. “You’ve seen the numbers.” Actions are proposed and the logistics, IT and marketing heads sitting round the table take notes.

Walking back from Glasses Direct to the Index offices, an energised Klein enthuses about the company. “The biggest challenge in this business is persuading people to buy glasses on the internet,” he says. “At Boots, they would have hired McKinsey to do the work and maybe 18 months later they would have had the first test of something. We talked about this two weeks ago and they will now be implementing stuff within the next two weeks.”

Klein clearly has not given up on the chance to create the European Google. But he is also not willing to miss a trick if other opportunities arise elsewhere in the world. To this end, his next meeting is with Tony Bernstein, the London representative of the Technion, Israel’s Institute of Technology in Haifa. “Israel produced more Nasdaq-quoted technology companies in the past 20 years than the whole of western Europe,” Klein says as we sit down. He then confides in me: he will soon be moving his family to Israel, to spend a year trying to understand what makes this tiny nation such a source of great entrepreneurs. For Klein, his dream of European start-up glory will be out of sight for a time, if not out of mind.

During the meeting, Bernstein explains that the Technion is looking at fostering links with Imperial College, to try to tap the British university’s entrepreneurial talent. “If you were doing something with Imperial, what would you practically do?” Klein asks.

“To be honest, this is new to us,” Bernstein replies.

“Don’t worry,” Klein says, a flash of cynicism momentarily darkening the visage of the inveterate optimist. “It would be new to Imperial, too.”

Jonathan Moules is the FT’s enterprise correspondent

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