Skype and Kazaa founder Niklas Zennstrom became famous building free Web services with scores of users and little revenue. As an investor, he shuns such ventures to buy stakes in startups with clearer business plans.
Zennstrom, 46, started his venture-capital firm Atomico in 2006 and now travels the world searching for young companies that tap into the rising popularity of smartphones and Internet shopping. He focuses on profit potential after realizing with his Kazaa video and music-sharing venture a decade ago that even a product that has 60 million users can fail as a business idea.
“It’s extremely hard to build a company with a product that everyone loves, is free and has no business model, and then to innovate a business model,” Zennstrom said in an interview in Istanbul where London-based Atomico was meeting local entrepreneurs last month. “I did that with Kazaa, had half a billion downloads but that wasn’t a sustainable business.”
Zennstrom’s investments, which include an online-payment system and the maker of the Angry Birds game, reveal how a former risk-taking entrepreneur has taken a more realistic approach to online businesses during the decade that followed the dot-com boom and bust. His method contrasts with many Silicon Valley venture funds that are more willing to make early-stage investments in popular services such as Instagram even before user gains have translated into revenue streams.
“As an investor, what we’re not looking for is ’oh this is a cool app,’ it’s ’is this something that can become a big business,’” Zennstrom said. “You need to find those that can become real businesses.”
While Kazaa failed as a business -- it faced lawsuits, was forced to pay compensation to record labels and later became inactive -- Zennstrom’s Skype Web-calling venture was more successful. Zennstrom and co-founder Janus Friis sold it in 2005 to online-auctions provider EBay Inc. for an eventual $3.1 billion. Later, a consortium that included Zennstrom bought Skype back, and sold it to Microsoft Corp. in 2011 for $8.5 billion cash.
These days, Zennstrom hunts down technology startups on the cusp of global success, seeking companies with a valuable brand, market foothold and product that’s difficult to replicate. Atomico has invested in Stockholm-based Internet-payment provider Klarna, Rovio Entertainment Oy, the Finnish maker of the Angry Birds mobile game, and Internet sales site Fab.com.
Booming smartphone sales and surging growth in e-commerce are the driving forces behind many of his investments. Zennstrom has set up Atomico offices in Sao Paulo, Beijing, Istanbul and Tokyo to better sniff out up-and-comers.
Klarna, the Swedish provider of e-commerce payment systems backed by private-equity firms Sequoia Capital, General Atlantic and Atomico, was cash-flow positive from almost its start in 2005 and expects to handle more than 2.3 billion euros ($3 billion) in transactions through e-stores this year, co-founder Sebastian Siemiatkowski said in an interview in Stockholm.
“We have doubled our turnover with profitability every year,” Siemiatkowski said. “Next country for expansion is Austria, and we hope to expand our business into more new countries in 2013.”
Atomico also has stakes in Wrapp, which allows friends to give and redeem gift cards using a mobile device and whose investors include LinkedIn Corp. co-founder Reid Hoffman, and Rdio, which allows users to download, play and share music on mobile phones.
In February, Atomico invested in Brazil’s Restorando, an online reservation platform that lists about 800 restaurants in Brazil and Argentina. In December, Atomico invested 350,000 euros in Denmark’s Ge.tt, a file-transfer service.
Zennstrom declined to disclose the rate of return Atomico has made on its investments in its first six years. Last.fm, backed by Atomico, was sold to CBS Corp. for $280 million in 2007, while gaming social-network Playfire was sold to Green Man Gaming and Canada’s Hootsuite Media Inc. bought Seesmic, a service that lets users manage multiple online accounts, this year.
Zennstrom encourages his companies to reach global scale as quickly as possible to fend off rivals stealing business ideas.
“As an entrepreneur, if you’re the originator, you need to be faster than ever,” he said. “When we look at investing, we always think about ’how defensible is this, how likely is it that somebody is going to copy this’. E-commerce tends to be something easy to copy because it’s execution.”
Six months after the debut of Fab.com, a flash-deal site for designer goods, a similar site called Bamarang opened for business in Germany, the U.K., France, Australia and Brazil, also offering discounts on designer goods. Bamarang’s founders, German brothers Oliver, Marc and Alexander Samwer, have also duplicated sites such as those of Airbnb Inc., EHarmony.com Inc. and Pinterest.
Still, in victory to Zennstrom’s judgment, Bamarang was shut down a few months ago, while Fab.com has kept expanding.
Rovio, meanwhile, has moved beyond simply making one of the most popular mobile games and now sells toys, clothing and even has helped build Angry Birds-themed playgrounds. The merchandise helps the company to boost its visibility, while also being a major source of revenue.
“There are more and more great opportunities in the tech sector,” Zennstrom said. “The type of companies we’re looking for are those with a business model built in.”