Founder and CEO of Ariadne Capital will be in Luxembourg to explain the key to successful ICT innovative company.

Investing in new technology is a risky business. Succeeding in investment is event harder. Julie Meyer, as the CEO of Ariadne Capital, has a long track record in this very field. From her point of view, “your success is tied to your ability to understand and partner with your natural allies in the market and how to create growth in a network world.” Based on this principle, she details five different departure points.

Firstly, “there is a fundamental network-orientation to all business and life today that goes much further than just the Facebook phenomenon.” In other words, any new business must focus on ways to create value through relationships, not through a hierarchical and linear process. Secondly, technology is now a consumer driven market. It is at home that people discover new services and new products, and tend to bring them to the office, forcing the IT department to adopt them. Skype, iPhones, iPads are some of the best examples of this trend. Third main point, “Internet is a disruptive technology. Just as the printing press was a few centuries ago. Or just like the microprocessor was in the 1970s.” What is happening today is that “social and economic institutions are embedding the disruptive technology of the web in our lives.” The dotcom bust of 2000, the telecoms downturn of 2001 and the financial crisis of 2008 didn’t change anything: broadband and mobile technologies continued to penetrate our lives. In other words, the tools are here, it is time to find how to use them. Fourth point: don’t underestimate the network and exponential effect of technologies. Things go faster now: “It took 89 years for the fixed line telephone to achieve an adoption of 150 million users, but only 38 years for the television to get to the same point. The mobile phone achieved this in 14 years, the iPod in seven, and Facebook in five.”

Last but not least, departure points. “There are five stages of company development, and strong norms for milestones achieved for valuations expectations.” Everything starts with the concept, that Julie Meyer calls the “dinner party stage.” This is the ideas-time, at a dinner with friends, and nothing is made beyond talking. Then, there is the “product or consumer behaviour insight.” It’s time for a beta product. The success depends on the insight the entrepreneur has of consumer expectations. Third stage, the “business model validation.” How can you make money with your product or service? Insight might be good, but if no money comes to finance your development, you will be in trouble. Fourth stage, “scaling on the back of corporate partnerships, app stores or innate virality of application.” In other words, you must use existing networks to gain your clients. Venture Capitalists (VCs) won’t give money to acquire customers. They must be found using the existing app stores, social networks like Facebook, or SaaS providers, like Salesforce.com. And fifth, there is the “exit or sustainability” stage. It is reached after 10 to 15 years of growth, “typically when companies become so cash positive that they are simply sustainable.” It might be time, then, for the entrepreneur to get acquired for strategic reasons, or go public.

Building ecosystem

Based on these principles, Julie Meyer observes what made technology companies successful over the past 20 years. “In the 1980s and 90s, they created alliances and early ecosystems. They attempted to create lock-in through hardware/software tie-ups like Wintel – the Microsoft/Window and Intel’s long-running dominance of the PC space.” Being interoperable, they were a de facto standard, with developers joining the dominant place, where their applications would get traction. Many tried then to beat this alliance, but failed. “One good example is IBM, Apple and Motorola in the Power PC alliance in the early 1990’s. The PowerPC alliance failed because of the dominant standard of Wintel. New OEM’s wouldn’t adopt a new chip or system without the assurance of the software developer community following.” This ecosystem rule applied to other ICT sectors: “Lotus and Sun Microsystems created other niche ecosystems. QualComm did the same in the semiconductor arena, and has been one of the most effective ecosystems ever created in the technology and telecoms worlds. Many tech firms’ 15 minutes of fame were tied intricably to how well they built and locked in their ecosystems.”

What those successes show, is that a company can build a dominant position through standards and compatibility… if not an effective monopolistic positions, if you refer to Wintel. In today’s world, “the behemoths are Apple, Amazon, Google, and Facebook.” Julie Meyer underlines that they have achieved their dominance because of several factors: “They understand that consumers are adopting their products and services – not enterprises – even if ultimately the consumers import their phones and tablets into the office. More importantly though, they are winning because they are organising the economics of the markets and industries in which they operate.” If, on first sight, Steve Jobs’ legacy seems to be the design and beauty of Apple’s products, on the business side, he and his team “took on two industries where innovation was stifled in the early part of this century – music and mobile carriers.” In other words, large companies were dictating the economics, and Apple cut a different set of economics for these industries. “He cut in the little guy, and reworked the business model for the industry, with Apple winning as a result.”

Same analysis for Google: “Google say that they organise the world’s information. Actually, they do a lot more than that. They organise the economics of the world’s information.” By using our data – anonymously aggregated – they have built a set of economics for the search and advertising transaction, and give no consumer any economic benefit for the use of their personal data. “They have organised the business model to their exclusive benefit. While they cut those who advertise in and the advertisers, the lion’s share of the profits goes to Google.” What would be a threat for Google? “It would be if another party came along and cut a different, more inclusive set of economics for the advertising transaction.”

What are the next big players? In fact, they don’t have to be big or in the limelight. Julie Meyer gives an example. “We met Alastair Lukies, the founder and CEO of Monitise, then part of the Morse Group in March 2004.” Alastair had a vision for building the ecosystem of mobile money, and as Julie Meyers says, “we were open to the idea that it might work. This despite a competitor’s demise at the same time – that of SimPay which had been favourably seen in the market.” What is Monitise? The company enables the consumer to access his banking from his mobile phone – agnostic on all levels to bank, carrier, and device. “This is – I would argue – the most natural way of checking your balance, transferring funds, remitting cash – not interim services like PayPal Mobile, or cash cards.” What seduced Ariadne Capital is that “Monitise was not attempting to disrupt the banks, but to enable them. Lukies helped the banks get into the world of mobile money. His partnerships with VocaPay in the United Kingdom, where Monitise originated, gave him a rail into the banks’ systems. From there, he was able to get any mobile banking transaction to be treated as ‘just another ATM transaction’ – a piece of both technology and business brilliance.” Getting back to the ecosystem idea, “while many of Monitise’s peer group focused on selling software to banks, Monitise built the tracks for a mobile banking ecosystem. Lukies thought long-term – very long-term. He dared to believe that he could create an industry.”

What are the results so far? “Monitise power more than 250 financial institutions, and every 20 seconds, a Monitise service is used by someone in the world. VISA has backed Monitise four times, and other institutions such as Standard Chartered Bank, PCCW, Flemings and Co have also become shareholders.” The success behind the Monitise’s market capitalisation - now north of $400 million – is due to the fact that “they are growing the industry, not just extracting value from it.” Sitting in the middle of each transaction, taking a cut of the transaction’s value, the network effects of the ecosystem mean that there is a growing significant disadvantage to being outside the Monitise network.

Turning ecosystem into money

The idea of this “Ecosystem Economics” is that the winners of any industry are “the companies who build the business model for the industry so that all of the parties in the transaction can participate in the economic upside.” Going back to the five stages of company development, Julie Meyers explains, “many of the start-ups who are building enabling technologies will be funded by the venture capital community and will offer applications which consumers want.” The entrepreneurs behind these initiatives often have an insight into their vertical industry and consumer behaviour. “They understand this fundamental network-orientation or world of multiple-dependencies in which they’ll have to get any deal done to take their company to market.” These insights help them overcome the asymmetrical nature of their position versus the established industry.

A smart move for these established players is to identify and secure the coming digital revenues. A good way is to partner with smaller, high-growth firms rather than innovating internally. “But this doesn’t mean, necessarily, that these established firms, or Goliaths, need to buy the digital enablers, although many times they do.” For Julie Meyer, “Goliath sometimes feels that he can choose the moment he engages with digital business models. We’ve seen companies die from this fatal delay – such as Borders, many newspaper groups, car companies, fashion retailers, record labels and telecoms firms. There was a lot of amazement when LinkedIn went public earlier in 2011 at a $10 billion valuation. And yet why should we be amazed?” The company had a transformational insight into consumer behaviour: everyone is always looking for new opportunities or a job. Instead of being active, and sending dozens of CVs to a recruitment company, they passively promote themselves through LinkedIn. “They clearly understood that the world had ‘gone network’, and they made it all the way through the five stages of company development.” This way of growing is not an easy way. “For people who have never worked in a start-up, they may not realise how fraught they are with near death experiences. At many stages along the way, LinkedIn, Monitise, Apple or Google – in the very early days – could have been squashed like a mosquito on the sidewalk.” They just took advantage of Goliath’s syndrome, tending to underestimate David. “When LinkedIn makes it to its IPO, part of the premium is a Darwinian ‘fittest survive’ premium for having crossed the finish line into sustainability.”

All these rules have a meaning for whoever wants to build a firm. Being Goliath or David is not the question. Finding whose interest it is that you succeed is the right one. “There are always natural allies for your success, but you may have to think laterally, and find the adjacent, non-obvious players for your game of chess.” Companies have to not only find their natural allies, but they also need to organise a set of economics for the transaction in their industry, if they want to become dominant. “This may come in a variety of ways. Companies can share investment into building an ecosystem and the exploitation of that. If they keep the customer top of mind, and focus on growing the pie as opposed to defending existing revenue, they have a good chance of winning.”

And what’s coming next? “The next decade will see the emergence of new business ecosystems in smart cities, mobile money, digital health and broadcast media and entertainment. Europe and the UK, who have had many fewer ecosystems in the technology world than the US, have a unique opportunity to pull ahead through business model design and implementation.” And, once again, start-ups are the organisations that can build this development. “Start-ups, or ‘Digital Davids’ as I prefer to call them, create the growth in the network orientated world that we live in. They leverage the distribution of ‘Goliath’ established enterprises. Sometimes they get big themselves, and other times, they are acquired. As they develop, their strategic value grows. Their financial value is low at the outset but because their understanding of growth in a network-oriented world, they can be acquired for a high value due to the strategic value they have.”

No industry protected

No industry should feel protected from disruption: “I believe that all industries are being remade with digital business models. They are transforming all industries into ecosystems with the consumer, instead of the supplier, at their core. Ecosystems have multiple stakeholders, and the companies, which organise the business model for the ecosystem, will win in the wider market.” And, as a VC, that’s exactly what she is looking for: “these ‘operating system’ like companies who ‘operate’ the market.” Some sectors may simply not yet have found their new solutions. But things change: “In the construction and property worlds, there was a lagging effect for many years. As an example, however, there are smart city ecosystems, which are emerging. As an example, LivingPlanIT is one of the new digital enablers in this ecosystem. Whether the larger construction companies, and networking companies like Cisco will change their business model remains to be seen. They may just work with LivingPlanIT.”

And, as a VC, she and Ariadne Capital have a role to play: “I think investing has a lot of parallels to raising children. I would rather raise my own children instead of stepchildren, and I can say that, as I am a stepchild. I’d rather help children grow up and not make mistakes than to take on the mistakes that someone has already made. Said another way, I’d rather get in early and help to avoid the pitfalls than undo the damage made by building a start-up incorrectly.” The “Ecosystem Economics” – a trademark – is the company’s investment framework, described as “a horizontal pair of glasses for looking at the market.” This tool is supposed to enable a clear analysis of the different stages, and what should be made next: “Companies should go public when they have the ability to manage themselves in the public markets. This can consume an enormous amount of time, and there are many good reasons to avoid this. One of the main reasons why companies want to go public is to achieve an exit to earn some liquidity. Later stage investors are providing this these days, so the landscape is changing.”

A conclusion? “Europe has a choice. It can either back its digital industrialists with the capital of Europe, or 1] they will go elsewhere to be backed, 2] they will not thrive, or 3] the digital industrialists of other regions will colonise Europe.” And Luxembourg has a role in this landscape… “Luxembourg entrepreneurs matter. There are smart, disciplined, hard-working people everywhere. No region or nationality has a corner on the market of building global leading firms.”

 

Biography - The network

Julie founded Ariadne Capital in August 2000 to create a new model for the financing of entrepreneurship in Europe and the UK – “Entrepreneurs Backing Entrepreneurs”. She created the founding Investor Partnership of 58 leading entrepreneurs and business builders who are Ariadne’s core shareholders. She has led the investments and/or advisory mandates with BeatThatQuote, Espotting, Monitise, SpinVox, and Zopa. In 1998, she founded First Tuesday, the network of entrepreneurs, which many credit for igniting the Internet generation in Europe. It was sold in July 2000 for $50 million in cash and shares. She has been named one of INSEAD’s Top 50 Alumni, Ernst & Young Entrepreneur of the Year, World Economic Forum Global Leader of Tomorrow, TIME Magazine Digital 50, one of Wired’s 100, one of London’s 1000 Most Influential People (Evening Standard) and one of the Top 30 Most Influential Women in Europe. 

paperJam Business Club - VC trends in the ICT industry

The Internet and new online services are reshaping the rules of many economic sectors, breaking and reinventing the old-fashioned business models. These changes are often introduced by start-ups, created and developed with funding provided by venture capitalists. Julie Meyer will share her views on current trendsin the world of technology investments. What are the key ideas of the moment? Which markets and types of services attract investment today? What arethe most relevant strategic positionsto successfully develop a business ina digital world? How demanding are VCs in today’s economy? Have the upheavals and uncertainties of recent months closed some markets? Have new opportunities appeared?

Keynote Speaker, Thursday January 12, from 12:00 to 14:00. More information on www.club.paperjam.lu.