The Reality of Global Competition

To those who think all of the brains flows out the Silicon Valley is fooling themselves and
smoking crack. ... ["Above average brain power"] is everywhere. ...

Ppl at Silicon Valley and in the S/F Bay Area has gotten fat and lazy. Believing their own press that this is the most innovative place. ... Not any more.

Same ppl who believes the Raiders are going to win the Division w.o. defense.


# # #
http://www.siliconvalley.com/mld/siliconvalley/12652317.htm
Skype hunt: How VCs struck gold in Europe

By Matt Marshall

Mercury News Staff Writer

As far as venture capital goes, the investment made in
Internet telephone phenom Skype was about as sweet as
it gets.

But the story behind Skype is also about a scrappy
scoop scored by a relative novice at the venture
business, Howard Hartenbaum. And it may reflect the
danger of Silicon Valley-centric firms becoming too
complacent, even while business goes global.

On Monday, eBay announced it would pay up to $4.1
billion for Luxembourg-based Skype, which lets users
make calls free over the Internet and is growing like
a weed, with 54 million users.

That represents a huge return for investors, who
injected only $20 million. The earliest investors
garnered far in excess of 100 times their original
money. The icing on the cake: It was quick. Skype
delivered less than three years after the first
investments -- unlike Google, which made its VCs sweat
for six painful years before it went public.

"This was the best return I've ever had," says Bill
Draper, one of the earliest venture capitalists in the
United States and a partner in venture firm Draper
Richards in San Francisco.

Together with his partner Hartenbaum, Draper invested
about $250,000 into Skype in late 2002. They became
the first outside investors, and enjoyed a 5 percent
stake. (And while the exact numbers aren't known, they
invested when Skype was valued at less than $2 million
-- meaning they've seen close to a thousandfold
return.)

The investment does say something about how lucrative
Silicon Valley's venture model remains.

But the more intriguing part of the story is how
Hartenbaum, with no prior VC experience but plenty of
hunger and persistence, did the real legwork.

Many big venture firms have good reason to be smug,
accustomed to letting eager entrepreneurs come here to
hunt down money. But Draper, who also had begun making
investments in India, decided to send Hartenbaum on a
mission to Europe. Hartenbaum was an entrepreneur who
had also worked at Honda and Hughes Electronics, and
Draper wanted him to scout out some small investments.

The valley network helped. Draper's son, Tim Draper,
suggested Hartenbaum track down the young founders of
the controversial file-sharing company Kazaa. Its
viral growth made Kazaa the favorite music-sharing
site post-Napster, and it too had come under legal
fire. The founders, Swede Niklas Zennstrom and Dane
Janus Friis, had -- through some complicated legal
maneuvers -- been forced to distance themselves from
Kazaa, but were still drawing revenue royalties from
the company.

Tim Draper was curious to see what they were up to, in
part because an affiliate of his firm had invested in
a similar file-sharing service, Streamcast Networks'
Morpheus.

Turns out, Zennstrom and Friis were eluding U.S.
record industry authorities, who were chasing them
around trying to serve them subpoenas.

When Hartenbaum finally tracked them down in London,
they were lurching among makeshift offices there, in
Estonia and in Sweden, often meeting in cars or bars.
And they were launching Skype, but weren't giving out
phone numbers on their Web site.

Bill Draper and Hartenbaum pumped in their own money,
and Tim Draper followed with more later.

You could see why the Skype guys might be interested
in taking Hartenbaum's money. Besides his link with
Tim Draper, backer of a like-minded file-sharing
company, Hartenbaum would be their eyes and ears in
the United States. Hartenbaum helped them write their
business plan, and practically became their ``U.S.
representative,'' explains Bill Draper. ``Howard has
worked like hell on it.''

Other venture capital firms invested later, including
Bessemer Venture Partners, which led the next round a
year or so later; Tim Draper's firm, Draper Fisher
Jurvetson; and Index Partners. But all are noteworthy
for their relative international reach.

Bessemer began in New York and opened up a Silicon
Valley office in the early 1970s. It has since opened
offices in India and China, and it stumbled upon
Skype's founders through its networking in Northern
Europe.

Tim Draper and his partner Steve Jurvetson had created
a number of affiliate funds active internationally,
including ePlanet Ventures, one of the earliest firms
to surf the latest VC wave into China. Jurvetson, who
is of Estonian heritage, said Skype's Estonian board
meetings were ``some of the most rewarding and
memorable of my career.''

And Danny Rimer, of Index Partners, is based in London
and fixed Skype up with offices just minutes away from
Index's Soho office.

None of the purely Silicon Valley-focused firms was in
on this blockbuster deal. Rimer, who spent years in
Silicon Valley, explains that he had to chase down
Skype -- something Silicon Valley investors aren't
used to doing.

"In Silicon Valley, all the entrepreneurs go from door
to door on Sand Hill Road," he said. "In Europe, you
have to uncover every individual rock. There's no hub,
and entrepreneurs aren't going to go out of their way
to find you. We've got to do a lot more work."
How did Rimer find Skype?
"We sent them an e-mail. . . .
That's how it all started."

Contact Matt Marshall at 408-920-5920 or via his blog
at www.SiliconBeat.com.

# # #