The Ones That Got Away

Ask investors in Europe about hot Internet companies on their turf and one of the first you’ll hear about is Gaikai, which is testing a cloud technology that lets you play 3D video games over the Internet without downloading the programs.

Trouble is, the company is technically no longer European.  Co-founded by Irish gaming pioneer David Perry and launched in the Netherlands, it migrated to the US over the past year, taking a part of Europe’s future with it.

Perry had been designing video games in Silicon Valley since 1991, but he co-founded Gaikai in the Netherlands with some Dutch partners.  Cloud-based technology depends on access to servers all over the world which requires big money and Perry couldn’t find it  in Europe. US VCs were happy to step in.

“European VCs would come in and talk to you and it was always like, ‘Yes, this is very interesting,’ but they weren’t throwing checks at you,” says Perry. “In Europe, they take their time and meet but in the United States they feel like someone else is going to eat their lunch if they don’t act.”

 Perry and his partners set up a Delaware corporation late last year, and by year-end had raised 5 million dollars from Benchmark Capital in Menlo Park, California. “Then it was like dominoes falling,” he says. “Other people knew that (Benchmark’s) experts had done due diligence and thought ‘well, maybe I should be there too”.”

To date, Gaikai has raised more than 15 million dollars in backing from Benchmark and US venture firms TriplePoint Capital and Rustic Canyon Partners.

Gaikai is by no means the only young European company who got away. Frenchman Loic Le Meur, who together with wife Geraldine organizes Le Web, one of Europe’s most successful tech conferences, famously left France to start a Silicon Valley start-up called Seesmic because, he says, it was easier to raise money and create a global company in the US. The ranks of such companies are swelling. Once the entrepreneurs move their headquarters and raise money in America, their innovation is no longer associated in any way with Europe and whatever value they create benefits the US economy, rather than Europe’s.

“There are a number of successes such as Gaikai, Huddle, DailyBooth, Vistaprint, LogMeIn, Evernote, SpringSource, Unity Technologies and Zendesk which started on the continent but chose to emigrate to the US due to the scarcity of early-stage capital in Europe to support their ambitious growth targets,” says Hussein Kanji, a former investor at London-based Accel Partners. Kanji is teaming with a group of experienced entrepreneurs and investors to launch a new early stage fund in Europe that aims to ensure that fewer great young companies feel compelled to move away.

The recent launch of many new early stage and seed funds in Europe comes too late for Mikkel Asger Svane, who co-founded Zendesk in his native Denmark in 2007. The company, which makes software that allows the easy set up of online customer support desks, moved to San Francisco in 2009.

Zendesk’s customers today include Twitter, MSNBC.com, and SAP. But Svane says he’d be nowhere if he had stayed in Denmark. “It’s as close to impossible as it can possibly be to raise money for a technology start-up in Denmark,” he says. He reached that conclusion after American venture capitalists proactively reached out to him while he was fruitlessly pitching his ideas to Danish VCs.

“You don’t go to them; they come  to you,” he says of US venture capitalists.  “It starts with fishing and scouting: they call you up, get you into their data base. Eventually, they ask you to come see them.”

Within six months of answering the first e-mail from America Zendesk had secured enough financing to ratchet up the business and within a year he and his partners moved their operations to San Francisco.

Gaikai’s Perry cautions that raising US venture capital is not as easy as all that. ” In our last round Rustic Canyon brought in the chief marketing officer from Activision, which is this big video game developer,” he says. “She just kept pummeling us with questions and I remember leaving the room and asking myself  ‘what the hell was that?’  You’d never get that kind of grilling in Europe, but you also don’t get the same kind of prize.”

US VCs are clearly ready to make bigger bets.  As a professor at the University of Cambridge Ian Pratt helped the computer laboratory launch an open-source “virtual machine monitor” called Xen which makes it possible for different users to run their own operating systems on one piece of hardware.

 “We set up Xen at the university and in the summer of 2004 we started a company called XenSource to help enterprises use it,” he recalls. “We felt there was a lot of money in that field, but because what we were doing was based on open-source technology the European VC’s were slow to see that money could be made.”

 The American VCs, however, jumped on it.  “We just had to say, ‘We’re the folks who do Xen,’ and it opened a lot of doors,” Pratt says. “We made some calls and then got some official pitches and within the space of a few days we collected a number of term sheets.”  From then on almost all the funding the company raised was in the US. Pratt raised another 32 million dollars in two additional rounds.  The company was sold to Citrix Systems for 500 million dollars in 2007.

Pratt stresses that in other high-tech fields Cambridge VCs are as good as they get and says the university has done a credible job of attracting angel investors. “The university does a good job of hooking students and staff up with angels and providing them with office space,” he says.  “They did that for us as well but we were looking for six million dollars in our first round and that just wasn’t forthcoming.”

Rahul Vohra had a similar experience with Rapportive, the company he co-founded in Cambridge (The Rapportive team is pictured on Informilo’s home page.) The company’s technology scoops up all the information a person has filled out about themselves on social networking sites and integrates it into Gmail so users can instantly know who is in their inbox.

 “There is plenty of angel money in Cambridge,” says Vohra.  “You can find people willing to invest a few thousand so you can get off the ground but you need more than that to scale up fast, and that’s where it gets difficult.”

 Rapportive decided to apply for a spot at Mountain View, California company Y Combinator, which invests small sums of money in very early stage companies and mentors them.

 That application sparked a flurry of activity on social networking sites and Rapportive was inundated with new users. “We got like 10,000 new users in two hours,” says Vohra.  “One day after that we started getting calls from VCs.”

 In March of this year Vohra went to Silicon Valley for the first time.  “I needed to meet a lot of people in a short period of time and what struck me first was the willingness with which people would make introductions,” he says. Vohra says every meeting seemed to lead to five others. Within a few hours his week was full.

 “I remember getting to the end of the day on Friday, totally exhausted, and looking at one of my co-founders and saying, ‘Why the hell aren’t we building our company here?  Everyone we need to talk to is here’,” he says.  “He looked at me and said ‘I agree; let’s move’.” So they did.

 Zendesk’s chief executive says the atmosphere in the Valley is hard to replicate.”It’s not just about money and expertise,” he says.  “It’s about how you view the founders: in Silicon Valley, the investors are very focused on the founders and their ability and their emphasis is on helping the founders build their company, while in Europe the attitude is more ‘congratulations for having a good idea but now it’s time to let the big boys come in and do this right’.”

 That’s starting to change because European investors have seen too many good prospects slip through their fingers. As companies like Gaikai, Zendesk and Rapportive illustrate if European VCs aren’t willing to bet big on the best and brightest from their own countries their U.S. counterparts will.

This story appeared in a print publication Informilo produced in partnership with Raconteur Media, which was distributed at Le Web in Paris December 8 and 9. The print publication is a beta version of a quarterly  on innovation, entrepreneurship and venture capital that Informilo and Raconteur Media plan to produce in the Times in 2011.

Four who left Europe (and aren’t looking back)

Gaikai

Origins: Amsterdam, Netherlands

New Headquarters: Aliso Viejo, California

Sector: games, video and entertainment

Funding: $10 million raised, 95 % from US investors

Zendesk

Origins: Copenhagen, Denmark

New Headquarters: San Francisco

Sector: enterprise software

Funding: $6.5 million raised, 90% from US investors

XenSource

Origins: Founded in UK, moved to the US in 2007 after it was
acquired by Citrix Systems

New Headquarters: Ft. Lauderdale, Florida

Sector: Enterprise Software

Funding: $41 million, from US and Japanese investors, acquired by Citrix for $500M

Rapportive

Origins: Cambridge, England

New Headquarters: San Francisco, California

Sector: consumer web

Funding: 1 million dollars raised, 90 % from US investors

 

 

 

 

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