Skype Technologies' (EBAY ) brash European founders, Niklas Zennström and Janus Friius, had no product in 2003 when they pitched their business plan to Luxembourg venture fund Mangrove Capital Partners. Their idea was to attack a complacent global telecom industry with an ad-based service that offered free phone calls over the Internet--a plan that 20 venture capital groups already had rejected.
But Mangrove partners Mark Tluszcz (pronounced like Toulouse), Gérard Lopez, and Hans-Jürgen Schmitz were enthralled by the idea of wielding new technology to disrupt the economics of a trillion-dollar industry. And they weren't put off by a batch of U.S. lawsuits against Skype's founders related to their first startup, a music file-sharing startup similar to Napster (NAPS ). Mangrove's partners cut a check for seed funding of $130,000. "We like going against the odds," says Tluszcz.
That move catapulted Mangrove into the ranks of the world's top-performing VC companies. Skype's service took off like a rocket when it launched in 2004. Eighteen months later, following several rounds of additional funding, eBay Inc. (EBAY ) bought the company for $2.6 billion, netting Mangrove $180 million on a total $1.9 million investment.
By betting on Skype, Tluszcz and team proved that Europe can produce world-beating Internet startups and that investors who back them can make sensational returns. One reason for Mangrove's success may be its U.S.-style embrace of risk, pouring up to 70% of its funds into early-stage investments. Like all such funds, Mangrove expects 40% of its investments to fail, but that's O.K. as long as there's an occasional grand slam. "Mangrove has the right attitude," says Fergal Mullen, general partner at Highland Capital Partners in Lexington, Mass. "They are taking big bets with very disruptive technologies."
THE NEXT BIG THING
While most European VCs stick to their own national backyards, Mangrove canvasses the Continent for the best ideas. So where do they see the next winner? Tluszcz thinks real estate, which remains highly fragmented in Europe, looks especially promising.
Earlier this year, the group invested seed capital in Barcelona's Properazzi Ltd., a Net-based startup that aims to help consumers search for properties for sale and for rent from Lisbon to Moscow. French founder Yannick Laclau has developed software that searches property Web sites across Europe, translating data into numerous languages and displaying it on Properazzi's Web site. The ad-based business will launch in a few weeks with 1 million properties, creating a powerful search tool for the Continental market. "It's about bringing transparency to a very opaque business," says Tluszcz, who says users will be able to compare prices per square meter for properties across Europe.
Mangrove is also betting some of the biggest Net hits will come out of Eastern and Central Europe, where engineering and mathematical skills run deep. "We see Eastern European entrepreneurs as more fervently capitalist than Western Europeans," says Lopez. In January, Mangrove backed a Czech file-sharing company called AllPeers Ltd. that allows users to share large files such as photos easily via their browser, avoiding the tedium of uploading and downloading.
Mangrove is also backing Quintura, a Russian search-engine company. Working out of a drab former military compound surrounded by barbed wire, ex-Soviet scientists have developed a search engine based on the intuitive model of the brain's neural networks. Quintura says its approach can achieve better search results than both Google (GOOG ) and Yahoo! (YHOO ) The next Skype? It's a long shot, but most European VCs would have never even bothered to look.
By Gail Edmondson