Bloody but Unbowed

Ola Lauritzson's startup ran out of gas. Here are the lessons to be learned

His university classmates in Stockholm still remember Ola Lauritzson as the guy who wore a coat and tie to class while the others were decked out in grunge. And it was the fresh-faced Lauritzson, president of the Young Shareholders' Assn., who was first in line to hobnob with Sweden's captains of finance and industry when they called on Stockholm's elite School of Economics. Lauritzson had a plan. In the spring of 1998, the 24-year-old set out to revolutionize European finance through the Internet. He just needed a few million dollars. For that, he cold-called the financiers he had been cultivating and gave many of them their first dot-com pitch. His vision sold. Within a year and a half, Lauritzson raised $12 million to piece together his dream. It was an Internet service called EPO.com, which he hoped would become synonymous with "electronic public offerings." The goal was to reach out to tens of millions of new investors, bypassing the Old-Boy networks that had long locked up capital in Europe, to allow regular folks to buy shares in initial public offerings. The Internet service also would allow them to invest across borders--still a rarity in Europe.

Living on airplanes and a diet of junk food, Lauritzson crisscrossed the Continent getting regulatory approvals and signing up prospective IPOs. "It was a land grab," he recalls. He sprinted--but not fast enough. In mid-2000, the markets turned chilly. In December, his $12 million spent and venture investors in flight, he sold EPO to a well-funded British rival, EO.

New order. Today, the once high-flying CEO has become an employee of the British company, a manager of marketing. As Lauritzson's former rivals revamp the operations he raced at such cost to establish in Stockholm, Paris, and three other European cities, he has time to ponder a decade of lessons crammed into a frantic two years. The clearest one, perhaps, is that upstarts should sidestep battles with Old Economy titans. In his drive to create an electronic investment bank, says his new employer, EO CEO John St. John, "Ola was holding a huge sign up to the whole financial world: I'm trying to destroy your livelihood." That's not the kind of message the Establishment likes to see. In the end, the financial powers prevailed over Sweden's Internet interloper.

The lessons extend far beyond a 26-year-old's advanced degree in hard knocks. Indeed, Lauritzson's travails provide keys for deciphering Europe's Internet economy--and debunk many of the myths that led to the ephemeral burst of dot-com euphoria. For starters, while the Net promised to transcend Europe's national boundaries, Lauritzson was smashing into them time and again. Getting regulatory approval in each market took weeks, even months. Europe's borders, in effect, stretch high into cyberspace.

And how about the notion that small, tech-savvy markets such as Sweden could produce an e-business elite that would storm the Continent? That myth crumbled as well. In the dot-com desolation of Stockholm, it's all too clear how illusory the notion was. Of the estimated 1,000 Swedish Internet startups gobbling up investment capital just a year ago, nearly half have shut their doors or sold out.

As Lauritzson learned, rich markets with deeper pools of capital provide safer harbors in stormy times. That's why so many Swedish entrepreneurs have found refuge in Europe's biggest Net economies--Britain and Germany. Even Sweden's marquee Net flops--fashion e-tailer boo.com and music seller Boxman.com--moved from Stockholm to London as they waged their losing battles to survive. "I see more of my Swedish friends here than in Stockholm," Lauritzson says, reaching for a plate of sliced tuna at a sushi shop in London's Soho district.

Boy wonder. Gloom aside, Lauritzson's adventure also debunks the current wisdom that Europe's Net economy was merely a digital mirage. True, for many students, B2C now means "Back to Consulting." Yet Lauritzson and thousands like him who jumped into the Net economy are sticking it out, working at survivor companies. More important, the Net bubble provided a generation with a chance to do something nearly unprecedented in Europe: launch a company as a young person. Many of these entrepreneurs will be back, smarter and more focused, to take on the next stage of Europe's high-tech advance.

Lauritzson, for one, didn't need the Net economy for his launch as an entrepreneur. He'd been at it more than half his life. As a 9-year-old in the southern Swedish town of Helsingborg, he started a company to collect recyclable cans--and had the gumption to sell shares in the ragtag outfit to neighbors. Lauritzson soon saw that the several hundred dollars he picked up from investors would produce scant returns in the can business. He invested the funds in the stock market, turned a profit, and distributed the proceeds to shareholders.

Later, in high school, Lauritzson went international. Ordering rain ponchos from Hong Kong, he customized them with logos for schools, rock bands, and small companies and sold them in Sweden. The project went awry when he lost track of a shipment in a Shanghai warehouse, wiping out most of his profits. "My big mistake was doing it all from Sweden," Lauritzson says. "I should have traveled to China."

That taught him to think big. Indeed, big thoughts took root in 1995, when, as a 21-year-old, he read about Spring Street Brewery Co. Spring Street founder Andrew D. Klein raised $1.6 million by reaching out to retail investors through their pokey 9,600-baud modems. That experience provided the spark for Wit Capital Corp., the online investment bank Klein founded in 1996. In Stockholm, Lauritzson sat down to write a master's thesis on the Internet in capital markets--and developed it into a business plan.

In the spring of 1998, when Lauritzson began raising funds for EPO.com, Europe's Internet was in diapers--at least two years behind the U.S. And the rush of capital that briefly transformed Stockholm into a Nordic clone of Silicon Valley was a year and a half away. "It was still Old Economy," he recalls.

Warp speed. But Lauritzson believed those Old Economy types could be wooed with the right pitch. He aimed at the very top of Sweden's Establishment: Bjurn Sprangare, who once headed Sweden's largest insurer and now works for the King of Sweden, serving as governor of the 400-year-old Royal Palace perched at the edge of Stockholm's historic center. "[Lauritzson] was a persuasive young man," Sprangare says. "He still is." After one lunch with Lauritzson, Sprangare bought a small share and provided an entree into Sweden's business elite. Lauritzson tapped Sprangare's contacts for a quick $2 million in friends-and-family funding. Money in hand, he hired three staffers, rented office space, and set to work developing systems for Internet IPOs.

Lauritzson's vision extended far beyond establishing a successful dot-com company. EPO.com, he believed, was going to be a revolutionary force in Europe--giving birth to a broad equity culture. European IPOs have long been cozy affairs limited to select groups of insiders. Last year, retail investors gained access to a measly 10% of Europe's $200 billion market for initial public offerings--barely one quarter of the rate in the U.S. And few Europeans have a chance to invest in IPOs outside their home markets. This limits opportunities for investors and handicaps European startups. After all, Silicon Valley highfliers such as Cisco Systems Inc. (CSCO ) and Yahoo! Inc. (YHOO ) likely wouldn't have grown as rapidly without access to funds outside of California. The fractured IPO market boxed in generations of startups and "kept Europe down," says Roel Pieper, who oversees the European operations of New York-based Insight Capital Partners. "But when these national markets go Continental, watch out."

Investors wanted in on these new markets. If Europe was years behind America, dot-com backers had a chance to stake out early positions for the Continent's cyber-Gold Rush. It was just a question of finding the next Amazon.com and Yahoo. And where better to start than Sweden? The country had more Net surfers per capita than the U.S. and was a leader in what looked like the next great Internet frontier: wireless. Venture-capital groups ranging from Japan's Softbank to Bernard Arnault's Europ@web rushed into Stockholm, showering money on such outfits as boo.com, Boxman.com, and a constellation of wireless Web startups.

The tables had turned. Forget chasing Sprangare's contacts. Lauritzson now was receiving cold calls as investors clamored for a piece of EPO. In January, 2000, he accepted $10 million in financing from a consortium including Credit Lyonnais, BancBoston Capital's venture division, and a unit of Arnault's group.

The key was to move quickly. Even while writing his thesis, Lauritzson knew he would need to set up investment banking operations in all the major markets. But these administrative chores proved to be complex and time-consuming. Getting government approval to sell stock consumed eight months in Britain alone. What's more, he needed a computer system to send out prospectuses, take orders, and complete secure online transactions. "At this point, the priority was speed, marketing, and technology," he says. Money was the least of his concerns.

Even as Lauritzson raced to build the company, EPO was making its push into Europe's exploding IPO market. In 2000, EPO acquired 80,000 retail customers--investors eager to receive online prospectuses and a chance to buy shares of the upstarts. And EPO, while it never became the end-to-end investment bank that Lauritzson envisioned, eventually had a hand in 33 IPOs. Toon Bouton, CEO of Swedish recruiter Jobline International, recalls meeting with EPO about an offering as tech markets were plunging in September. The decline didn't appear to faze Lauritzson and his colleagues. In fact, they sometimes got so excited about the IPO that Bouton had to cut short the discussions. "But then they got back to earth, they stuck to the plans and were very professional." The result: Jobline raised $83 million, $3 million more than expected in a rough market.

Still, EPO barely earned back a fraction of Lauritzson's investment. He declines to release results, but sources close to the company say it was on track for revenues in the low millions, mostly from customer commissions. What business EPO had was largely in its Nordic stronghold.

Competition was growing in burlier markets to the south. Racing ahead in Germany was VEM--a German acronym for "Virtual Offering Firm." It was handling retail offerings for dozens of companies listing in the Neuer Markt, Europe's hottest bourse at the time. America's Wit Capital, Lauritzson's original inspiration, also was planning a push into Europe. And investment banks such as Goldman Sachs (GS ) and Merrill Lynch (MER ) were exploring partnerships for selling IPOs to Europe's online investors. Although the online IPO market reached only $500 million in 2000, or 0.25% of Europe's offerings, "it was in everybody's plans," says a banker at Goldman.

Lauritzson moved into large, high-ceilinged quarters at Riddargatan 17, a former optics factory in downtown Stockholm. He hired Andersen Consulting, now Accenture, to build his Internet exchange system. Andersen put a 20-person team on the job, creating a system that could easily handle the kind of business volumes Lauritzson dreamed of. But the work cost EPO a precious $2.5 million. "If we had that money, we could have moved into Spain," Lauritzson says.

Early on, his plan was to enter all the key markets within a year. This turned Lauritzson into a dot-com nomad. At least once a week, he would wake at 3:30 a.m., catch a predawn flight from Stockholm to London, work a marathon day in Britain, and return to Sweden at 2 a.m. He made similar treks to France, Italy, and Spain--and gained nine kilos from eating junk food on the run.

White hot. His biggest challenge was Germany, Europe's leading market. Without a powerful position there, he had little hope of prevailing as Europe's online IPO heavyweight. He decided that he lacked the time to build German operations from scratch and pushed instead to merge with market leader VEM. Last March, Lauritzson flew to Munich and sat down for talks with 31-year-old Andy Beyer, who had founded VEM just as Lauritzson was launching EPO.

Fueled by the white-hot Neuer Markt, Beyer was on track to earn revenues of $3.2 million in 2000, and had built his company into a larger operation than EPO. Lauritzson convinced Beyer that EPO needed Germany and that VEM couldn't last long without the rest of Europe. On Apr. 18, the two announced a merger agreement. Surprisingly, it would leave Lauritzson as CEO, though EPO shareholders would control only 42% of the combined company. VEM consented to the arrangement when EPO's prospects looked rosy, but Beyer's board soon had misgivings. "It was the issue of who would be in control," Beyer says.

That issue loomed larger as the Internet economy started to swoon. The first warning sign on the Continent came from boo.com, which had spent lavishly to become the most recognizable dot-com brand in Europe. After burning through $120 million in 16 months, boo.com on May 17 declared bankruptcy. At that point, the equation turned. Money mattered again, and dot-coms shifted their focus from eyeballs to burn rates. Equally worrisome, a tumble in the markets threatened to reduce the flood of IPOs to a trickle, slamming EPO's revenue. Lauritzson rushed to cut expenses, pulling back from Spain and slowing down in France.

Meanwhile, a deep-pocketed rival was taking shape in London in a glass-walled office just half a block from Piccadilly Circus. There, a group of seasoned investment bankers became the nucleus of EO. The group was led by John St. John, a former co-head of global equities at Lehman Brothers (LEH ), along with colleagues from Dresdner Kleinwort Wasserstein, Morgan Stanley (MWD ), and BNP Paribas. When EO opened its doors on June 1, its bash drew a Who's Who of British finance and politics, including then-Cabinet member Peter Mandelson.

While Lauritzson was attempting to build an empire on vision and technology, EO benefited from stronger links to money. In addition to its web of connections and friendships in London's financial district, the City, the British company received backing from venture capitalists NewMedia Spark PLC, lodged in the same building. Spark was heading into the downturn with a comfortable $100 million in cash. And the VC group knew a bit about the electronic IPO market. It had offered funding to Lauritzson in 1999--but he already was negotiating with others. "I didn't need it at the time," Lauritzson says.

Money talks. St. John, who jumped from Lehman Bros. to EO in the spring of 2000, could see that investors already were fleeing from business-to-consumer dot-coms. He carefully steered in the other direction. Instead of becoming an online investment bank, threatening to snatch customers and deals from the incumbents, EO would simply sell a service: It was to be an online bridge between investment banks and retail brokers. Within months, St. John's bet seemed to pay off as EO signed partnerships with UBS Warburg, Barclays Bank, and Charles Schwab (SCH ).

Lauritzson now says that his new colleagues overstate the contrast between their model and his. "It was more a difference in marketing," he says. EO's far bigger advantage boiled down to cash--something St. John doesn't contest. EO was swimming in it; Lauritzson wasn't even wading. In November, after months of haggling, VEM in Munich called off the merger with EPO. The two companies, it now seems clear, had radically different views of the deal. VEM's Beyer regarded it all along as a takeover by the German company--one in which the Swedes refused to cede control. EPO board member Sprangare says the company wasted precious time trying to patch differences that were irreconcilable. The breakup spooked Lauritzson's venture investors, who abandoned him in December with only a few days of funding left. This news traveled fast to the glass house in London, where EO had just received a fresh $15 million in funding from its backers--enough to carry it for 18 months.

Except for money, Lauritzson had nearly everything EO lacked: organization, government permits, some 80,000 customers, and a $2.5 million trading system. But without investor support, his negotiating position was weak. "We offered him what we thought was a fair price," St. John says with a smile, "and he accepted." The terms of the stock-for-stock deal are confidential, but sources close to EO say that Lauritzson and fellow EPO investors are left with only a sliver of EO.

Don't cry for Lauritzson. He holds shares in EO, which he expects will pay off richly when Europe's IPO market recovers. And he admits he's already mulling new plans, probably still focused on finance and the Internet, but this time launched from London. This Swede, after all, is a serial entrepreneur. That's a new breed in Europe. And like the rest of his class, Lauritzson is emerging smarter than ever from the dot-com crash--and battle-hardened too. He'll be back.

By Stephen Baker

Contributing: Ariane Sains in Stockholm and Emilie King in Paris

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