18th December 2014
Venture Capital firm Ariadne Capital’s chief executive Julie Meyer says her firm is on a journey towards establishing the gold standard for financing entrepreneurship in Europe. Despite being US born, the outspoken and media friendly investor believes that this requires an understanding of Europe’s strengths in contrast to many VCs this side of the Atlantic which either try to mimic Silicon Valley or at least sell out to them.
The analysis of the European technological ecosystem has changed over the course of the firm’s 15 year history. Meyer’s current thinking is that established businesses need to convert themselves into platforms and host new start up businesses – or in more Biblical language that David should no longer try and slay Goliath but work with him or, at least, take advantage of his strengths. The offer to potential investors is that the Ariadne invests early in the life of a business with around £500,000 at the point of ‘minimum viable product’ before developing it over 18 months to attract later stage investors. All this is long before the firms list, if they ever do. To mark those 15 years, Mindful Money put a series of questions to Julie Meyer about Ariadne, her investment ethos, and how things have changed over the last 15 years.
Mindful Money: Why did you found Ariadne Capital?
Julie Meyer: “When I sold my previous business, I felt that I had not been able to do all I wanted to with it. The opportunity to create a gold standard for the financing of entrepreneurship in Europe was a significant one. European venture capital firms are trying to imitate American ones rather than thinking distinctively around the unique opportunity here in Europe. There is a different set of assets and opportunities in Europe. If your daughter is good at ballet, you don’t encourage her to pay football. You encourage her to do the stuff she is good at.
“You have to be aware and alive to the opportunity. I feel that I am doing that. After I sold my last business, I was offered the chance to become a partner at different venture capital firms, but I thought I could do it better. It is really important because in Europe, we have such a high quality of entrepreneurs and the market is 450 million people. I saw the market opportunity. That is why I set it up.”
Mindful Money: What have been the high and lows over the 15 years of Ariadne Capital?
Julie Meyer: “For me 2009 was a hideous year. I could have chosen to scale down the business. We lost some money, having made a lot in 2008. I had a choice of a high low and a low road, but I decided to build the fund and build up Entrepreneur Country. (This is a networked community of entrepreneurs across the globe including events and the book Welcome to entrepreneur country). I decided to put my money where my mouth was seeing the financial crisis as another opportunity to double down on my vision. The need is even greater after the downturn.
“There are also the portfolio successes like Skype and Monitise and Zopa and Beatthatquote selling to Google. The founder of Beatthatquote said that he hoped to sell it for £8m to £10m, but he thought we could get him £12m and we got him £37.7m sterling. To help someone make the kind of money is amazing.”
Mindful Money: What are the characteristics you are looking for in an entrepreneur?
Julie Meyer: “It is the level of ambition and the drive of the entrepreneur. There is a certain kind of private investing in tech ventures at the small end where people put £25,000 in here or there – a little software company, something bubbling around in the quote unquote IT industry. But I don’t operate that way. Entrepreneurs who are attracted to us think we have a big vision.
“They think: “She saw a system level issue of a problem and she is building a system level solution and is not daunted by the fact it is going to be hard work.” That is why they come to me and that is why I am attracted to them. We tend to meet each other based on the size of the ambition. There are big problems out there which need big entrepreneurs to solve them”.
Mindful Money: Why should investors be interested in the Ariadne fund?
Julie Meyer: “There is a big market need for what we do. I think you have to get in earlier and earlier. You can’t wait till the companies are listed. There are businesses like Pinterest and Tesla, which are private companies worth tens of billions of dollars. They aren’t going to go public. If you wait to be a retail investor in stocks on the market, you will wait a very long time and you might only get the bad ones. You have to invest in a fund like Ariadne to get in early enough. With our process, we grab them early after they have a minimum viable product, the MVP. Working with them to de-risk them is really tough stuff.
“This year I had to become interim managing director of one of our portfolio companies and I wasn’t expecting to have to do that, this time last year. It changed my 2014. You have to be on it. You have to have a fund manager who is willing to step in and find a solution when things go wrong, and to not simply say “we let that company go with £2m of value gone”. The early stage space is a very different than later stage fund management or financial engineering”.
Mindful Money: What is the journey for a company you invest in?
Julie Meyer: “It is really an 18 month journey where we initially put in about £0.5m sterling. The operating model is that we turn the business model into reality, when you go to market, moving from something that is an assumption to reality. You get the evidence of what the model is in reality. That is what we help them do.”
“By the time we go through that 12 or 18 month period, we significantly de-risk the firm and we set up what we refer to as a positive architecture. It is ready to be invested in by a later stage investor who can put a significant amount of cash behind the business. An example is what happened with Quill, a content development platform, where we put in £0.5m and 12 months later, Smedvig Capital, which usually never go in this early, put in £5m at double the valuation. The company is fully funded and it has doubled our money. The company has a fantastic group of people who are helping it succeed.”
Mindful Money: Has does an idea translate into business success?
Julie Meyer: “Every entrepreneur, everyone, not just the good ones have some insight into consumer behaviour. It could be about the smoothies we drink or the way we use a smart phone. We have to turn that insight into consumer behaviour into a product. If they have a product, a start up is then really a revenue generating algorithm – they have to explain how the product is going to make money, how it is viable.
“It doesn’t have to be consumers paying. It could be making money from providing that product to consumers where the corporate is paying for access to the consumer data. A lot of what we do is investing in consumer data plays which are remapping the consumer value chain. We might be investing in digital technologies that are transforming publishing, transforming data, transforming banks and insurers. The people using the products might be consumers – the people paying for them might be another group. The start up needs to demonstrate that their insight has market traction. Not that there is a need but market demand. A lot of people fail to understand the difference. Market demand means there is someone willing to pay for it.”
Mindful Money: You have invested in a firm, Bitx, working in the Bitcoin space. Some might say that is not mainstream, but almost Wild West.
Julie Meyer: “The people who are in the Wild West are out West. They may think Bitcoin is going to create an entirely new financial order. I think these things tend to be additive. We didn’t stop listening to the radio because of TV. Bitcoin is not challenge the pound sterling any time soon, but it is definitely a reaction to the ongoing scandals and lack of transparency in the financial services industry which has not cleaned itself up yet. There is a move to “trustless trust”, where people say: “nobody trusts anybody, but I will take transparency instead”.
“That is why we put 250k into the firm. We thought we had found the best entrepreneur in the world. This is real vision. We co-invest with Barry Silbert, the founder of SecondMarket and Carol Realini, the founder of four tech start-ups.
“The Bitx thesis is that the banks will have to get into the game. It is an insight into consumer behaviour. It is a revenue generating algorithm. It is not going to receive €50m to build a highway. It is going to have to find a highway and do deals with banks and others who use it. We felt we could add value on that front because we knew a lot of people in the FinTech industry”.
Mindful Money: What about Made Television? Is local TV not a declining area?
“We like these industries where everyone has written them off. People have been saying local TV is not going to happen. Yet it is part of a local eco system where 80 per cent of your spend is spent locally in local businesses. The businesses like to advertise locally, but they don’t have a digital solution. But Made Television is providing a local digital solution to the local business community and the local consumer and is revitalising that whole ecosystem of local spend. We looked at the area and said the reason it hasn’t happened is it hasn’t had the right solution. We found somebody who had secured licences for local television across the country. The consumer insight is that people want to watch great content and that businesses will advertise if you give them access to the local consumer.”
Mindful Money: “You say that firms need to look at performing a judo throw to take on big concerns by using their own model to compete with them. How does this work?
Julie Meyer: “I get so tired of everyone worshipping Google or being afraid of them. The way to deal with Google is to look at their model. They say they organise the world’s information but they do more than that – they organise the economics of the world’s information. Our data is being used to drive a $100bn dollar market capitalisation. They are giving people free search and nobody is challenging them on this point. Their Achilles heel is they don’t give an economic value to the use of our consumer data. If a collective did give an economic upside to our data, it would be pretty difficult for them to come back at that.
“The judo move is to use the energy of their own business model to outdo them. It bothers me that the discussion we are having with Google right now is that we are all teenagers reacting against the parent. We are all upset with our parents telling us what to do, when actually we have the moral high ground, if we give value to the consumer data. The discussion is vapid and superficial, a case of reaction and response. Google are laughing at the world. There is a smarter thing we could do, if we got our act together.”
Mindful Money: You say start up firms don’t need to be destructive, but to look for ideas that benefit the whole ecosystem. How does that work?
“When I set up Ariadne Capital, we were still coming out of the Dot.com boom. David wanted to kill Goliath. Then we had this wilderness period in 2001, 2002. We caught some successes like Skype. But from 2000 to 2008, we shifted from derivative technologies taking advantage of the Big Bang of destruction that followed the development of the micro-processor in the 1970s to now, where the corporate are establishing a new common fence. My company has to play on both sides. The corporate are going to become platforms, the Davids are very important, but need the scale of the corporate platforms. I couldn’t just invest in the Davids. I also had to advise the corporates on how to become platforms. In 2009, I could either have flown off to Italy or rethought the whole approach to what was going on.”
Mindful Money: You believe that Government is being disrupted too?
“I look in vain for evidence that Governments spend our money wisely or that government is not being disrupted. The 25 year olds who work at Ariadne Capital, I don’t think they understand that they work until July 30th to pay for government. In their 30s, with mortgages and families, they are going to be a lot less willing to do that and will understand that government is really a proxy for collective action that can be delivered more effectively in a shared economy, local, tech-enabled.
“The distinction between the market and public services is dying. It is not just that I believe this or am hoping this. It is my observation. I do think government is being disrupted, Scotland, UKIP’s rise, the EU referendum. People are saying this is not working for me. It is the same as say Bitcoin in financial services. People don’t buy government as transparent. No amount of cleaning it up is going to make them feel good about it.”
Mindful Money: Where are the tech hot spots in Europe?
Julie Meyer: “I have just written an article on why Poland matters. You have to look for parts of the world where people have everything to gain, and people are really motivated and understand the relationship between freedom and free enterprise. I was blown away by Poland. You could point to hotspots like Berlin or to Israel, but you meet amazing people wherever you go, if you pay attention. There is a whole continent of entrepreneurs out there, amazing entrepreneurs that are not being serviced very well. Servicing is the point. We send all of our portfolio companies, progress reports on Friday afternoons. There is not another VC out there that does that, because they don’t view the entrepreneur as their customer, because it is the insurance company that gave them their money. They think that the entrepreneur isn’t their customer and is replaceable. We fundamentally believe that society needs to be built around entrepreneurs.”
Mindful Money: So what do the next 15 years hold?
Julie Meyer: “We have backed seven explosive growth companies and I would like to put a zero beside that and make it 70 in the next 15 years. We want to establish the gold standard for the financing of entrepreneurship. I believe that we will do that and we are doing. It is a process and a journey. Europe is about enabling technologies, not disruptive ones and it is very different from Silicon Valley which is about disrupting things. The digital disruption is happening here but it is a question of how we respond to it and extend and embrace the system. That is different from ripping up the system. It may be the difference between a later born child and the eldest child. You should always play to your strengths. Silicon Valley does not have to worry about capital efficiency because there is just so much capital. You should play to your strengths. We don’t systematically create entrepreneurs that have the ability to raise billions of dollars or pounds to tell a consumer story. The sales and marketing led entrepreneurs don’t come here or at least they go to Silicon Valley. Here we are about enabling. We will play to the strengths of Europe not Palo Alto. There is a big swathe of Europe’s venture capital which is not only mimicking Palo Alto, but making money for Palo Alto. It is backing European entrepreneurs but then selling them off to Palo Alto. We are building a sustainable value platform with Entrepreneur Country in Europe.”