Europe's Got Net Fever

Nick Denton didn't plan to leave his perfectly good job as technology correspondent for the Financial Times when he moved to California. But after sitting across from "one too many guys who were younger than me and having more fun," the 33-year-old former journalist simply couldn't help himself. After less than a year on the job, Denton wrote a business plan, ditched the FT and started banging on venture capitalists' doors for seed cash for his Internet start-up, Moreover.com--an online news service with offices in Britain. Angel investor Richard Tahta, Amazon.co.uk's strategic-development director, quickly came on board. During Denton's second meeting with British venture capitalist Christopher Spray of Atlas Venture, he nabbed more money in classic Sand Hill Road style--with a handshake over lunch, before either the business plan or the main course had been served. Once a month all three men can be spotted mingling in London at First Tuesday, the Internet-networking club Denton helped create. Denton and Julie Meyer, another First Tuesday founder, like to help the crowd along with a little icebreaker: the money wears a red dot, the talent wears green.

Subtle it's not. But in Europe's booming new Internet economy, subtlety is as tired as three-piece suits, salaries sans stock options and working for one company your whole life. Inspired by the incredible success of Silicon Valley, and lubricated by a huge new wave of venture capital from major investors on both continents, Europe's youngest and brightest are bringing the Wild West business mentality east, creating thousands of new Internet companies that cover every dot.com concept under the sun. Yes, it has taken Europe a few years to really embrace the Net. But the wave is rising, as not just small new companies but big established ones rethink their futures in technological terms. Throughout the Old World, more people are using more computers to spend more time than ever online.

Thank British Internet service provider (ISP) Dixon's Freeserve for the latter development. In Europe, unlike America, using the Net isn't cheap. Telcos charge by the minute for local phone calls, and ISPs typically charge another monthly fee to log customers onto the Net. Freeserve changed all that last fall by becoming the first ISP in Europe to drop the access charge; it gets its revenues from advertising, e-commerce and by sharing the money the phone companies rake in from all the new customers it attracts. Now all customers pay is the phone charge for their time online. It was a simple change--but one that revolutionized the market. Consumers rushing to sign up for Freeserve were outrun only by investors trying to buy its shares in an eye-catching $500 million IPO last July. The company quickly soared past AOL Europe to become the No. 1 ISP in Britain, with 1.3 million registered users. It also forced several other players, including AOL, to launch their own free services in Europe, upping Net usership across the continent.

Freeserve didn't just reinvent the ISP game and prove to Europeans that the Net could make them rich, too. It also allowed Europeans to swagger a bit, because they had showed the Americans how things are done on their side of the pond. The Internet is, after all, an American phenomenon. It grew up in Silicon Valley, where one generation of talent mentored the next. Major U.S. players like Yahoo!, AOL and Amazon.com are all staking their claims in the European market. What's now coming clear is the extent to which a feel for local conditions matters in this famously global business--and how much success the Europeans are having at making the Net their own.

Being a step behind the American growth curve has a major advantage for Europeans: they get the chance to see what works, and what doesn't. They've been watching carefully. European telecoms have embraced the Internet faster than their American counterparts. In Germany and France, the top ISPs, T-Online and Wanadoo, are run by Deutsche Telecom and France Telecom, respectively. T-Online is also expected to be a major competitor of Yahoo! in the portal business. Portals are like electronic malls--they provide a user-friendly entry to the Net, from which consumers can easily shop, chat or access content. European portals will likely take a healthy slice of the global online-advertising dollar, which is expected to grow to nearly $33 billion by 2004, according to Forrester Research.

European retailers have likewise learned from America. Instead of waiting for Internet pure-plays to take a big bite out of their businesses--the way Amazon.com took one out of Barnes & Noble's--they're setting up shop online. Dixon's, which owns Freeserve, is a high street electronics seller. The German department store Karstadt has an online mall called my-world, which averages about 5,000 visitors per day. Kingfisher, a U.K. retailer, just launched a free French ISP, libertysurf.com, with one of Europe's highest-profile businessmen--Bernard Arnault of LVMH Moet Hennessey Louis Vuitton.

Big businessmen like Arnault have watched the American experience, too, of course--which is why they're angling to own choice pieces of europe.com. Rupert Murdoch recently tapped BSKyB head Mark Booth to run a $300 million new-media investment fund called e-partners. Television companies such as Canal Plus and the Kirch Gruppe are exploring Net opportunities. France Telecom's venture fund Innovacom is already a key high-tech investor. And then there are the dozens of traditional multinational venture-capital firms, such as Atlas, Apax, Global Retail Partners and 3i, which are pouring more and more money into high-tech start-ups. In the past three years, 3i, once known as an old-style LBO firm, has tripled its investment in early-stage tech companies, which now represent 30 percent of the business. Of course, Arnault's investments are among the most-talked-about. And perhaps the luxury tycoon's sense of what's hot accounts for his interest in some of Europe's sexiest Net start-ups. Through his newly created v500 million investment fund, Europ@web, he's looking to buy stakes in all sorts of Internet companies with Pan-European potential. He already owns a piece of the London-based auction company QXL. He's also invested in French search-engine company Nomade, run by Gilles Ghesquiere, a Boston University grad who once developed new products for France Telecom. He's also in peoplesound.com, an online music retailer that's similar to MP3.com (which he also has a stake in). And then there's boo.com, a sportswear retail company that has yet to launch a site but has already been the subject of major features in business magazines on both sides of the Atlantic.

That could have something to do with the company's photogenic founders--Ernst Malmsten, who looks a bit like a Nordic Elvis Costello, and his partner Kajsa Leander, a former Elite model. Back in Sweden, the pair created bokus.com, which has since grown to be the world's third largest online bookseller. After selling the company in 1998, they turned their attention to the fashion market. Clothes are a tough sell on the Net--you can't feel them, and you can't try them on. Still, Malmsten and Leander thought there was a young, tech-savvy customer who'd pay full price for tough-to-find sportswear items like Vans sneakers (worn by skateboarders) or Cosmic Girl T shirts. Arnault, who likes to surf the Web in his spare time, thought so, too, as did the Italian retailer Benetton. Boo.com quickly raised three large rounds of capital (though not the $125 million that was widely reported, says JP Morgan's Chris Bataillard, whose firm helped the company secure much of its funding). Even in development, the site looks like it might match the hype. Users have their own shopping buddy, a chic little avatar named Miss Boo, who guides them through the 3-D selections and comments on clothes. Content is localized down to the last detail (e.g., pants in the United States become trousers in Britain). The company even had a stylist consult on the length of Miss Boo's hair.

From Boo's Carnaby Street offices, hot from computers running all night and too many bleary-eyed young programmers and designers piled on top of each other, Malmsten and Leander will oversee a simultaneous seven-country launch this fall. It's an incredibly ambitious strategy, one that many other European Net companies will be forced to follow if they want to survive the inevitable shakeout that will begin as more Europeans jump on the bandwagon and more Americans turn their attention eastward. "There's been so much growth in the U.S. market that American companies haven't had the time or need to look to Europe," says Bataillard. "They'll have about another year before the U.S. really turns full steam on the European market."

The smartest European e-commerce and content players aren't waiting; they're trying to get big, fast. QXL sells computers, gifts and travel products in 16 European countries, leaving America's eBay--which only recently acquired a tiny German auction company --in the dust. QXL's founder, FT columnist Tim Jackson, is part of the growing mafia of British media types who have brought their talents to the Web. Chateau Online, a French site specializing in wine, also does a brisk business in Germany and Britain. The Sportal Network, a new media company run by onetime Murdoch protege Rob Hersov, is building a Pan-European sports platform, partnering with local sports stations and top teams like Italy's Juventus, Bayern Munich and Paris St. Germain. The idea is to create something similar to interactive TV, but on the Net. You can get an audio stream of the game, watch particular plays on your screen and order a jersey all at the same time. "One year ago people thought we were crazy," says Hersov. "Six months ago they thought maybe we had something right. Now big media companies are coming to see us." Hersov says he aims to take Sportal public before the end of 2000.

And why not? The great European IPO rush is already underway. Eighty-three new tech companies have gone public on Germany's Neuer Markt this year. One of them, German online broker ConSors, is now the fifth largest broker in Germany. Even more amazing is the fact that this Net company turns a profit--$14 million in the first six months of 1999. Afraid to miss out on the boom, London is easing its standards for listings, encouraging a crop of young companies to follow in Freeserve's footsteps. Lastminute.com, a successful travel site that specializes in great deals on eleventh-hour vacations, plans an IPO within a year. The company, founded in 1998, already pulls in $10 million in yearly revenue. But it will need serious support for its launch into the U.S. market, scheduled for December. That's where American investors like Intel come into the picture. "We were lucky," says cofounder Brent Hoberman. "There was so much buzz, the U.S. came to us."

Consumer e-commerce companies like boo.com and last minute.com are undoubtedly the glamour plays of the European Internet. But just like in the States, there are lots of Internet ventures in Europe that are a lot less famous--and often more profitable. For starters, there's plenty of money in the business-to-business applications that help make existing companies more efficient. IBM, which services many of them, says the support side of its European e-commerce business will quadruple by the end of the year. Intershop will also cash in on the rush to e-commerce. It was East Germany's first Internet start-up, and is now the world's biggest seller of software for online-shopping sites. Developers like Peter Kabel of Kabel New Media in Hamburg make lots of money creating Web sites for multinationals. Integra, founded by French entrepreneur Pierre Gerard, a Wharton grad, will help host and operate the thousands of new sites expected to appear in France in the coming months. Integra's stock, traded on the Nouveau Marche, is at v42 a share, up from the June IPO price of v20, and the 58 initial investors in the company have all become millionaires. "It's not yet Microsoftian," says Gerard. "But we're going to make a lot of money."

He's right on both counts. There's no European Bill Gates. Seed money in Europe is still a fraction of what it is in the United States, despite phenomenal growth rates. And plenty of smaller European Net companies are expecting to be swallowed up when Americans finally awake to what's happening overseas. In fact, some are counting on it (hey, it's an exit strategy). But something important has changed in Europe. It's become a good place to take a risk. European business schools are teaching their students how to become entrepreneurs. Government-sponsored incubators are supporting them. Smart money is funding them. And the talent that once fled Europe for America is coming back home.

That's where the growth is. And the stories of wealth and competition are starting to rival the tales from Silicon Valley and Route 128. Twenty-eight-year-old Ernesto Schmitt, the founder of peoplesound.com, remembers the hiring battle for Martin Turner, a former managing director of CompuServe UK, who was headhunted by a major investment bank to help start a financial-services Web site. "The [banker] invited him to lunch," says Schmitt. "When he got there, he asked if Martin noticed all the cars in the parking lot. He pointed to one, and told him that if he signed right then, he could have the keys." It was a Ferrari. Turner declined. "He doesn't like red," says Schmitt, who promptly hired him to be peoplesound.com's COO.

The First Tuesday Web site captures the frenzy. A new job or business plan is posted there literally every few minutes. The club, which can no longer accommodate the hundreds of people who spill out the doors of its monthly London mixers, will be expanding to 25 other cities in the fall. And there are investors clamoring to give it money. The idea that venture capitalists would pay millions for a cut of a social club seems like an "only in America" kind of story. But the entrepreneurs and investors who make up First Tuesday are, as Nick Denton puts it, "spiritual Americans," people who have blended American charisma with European style. He's one, too. And he's got the equity to prove it.