One thing I've noticed during my six months of jet-setting is that entrepreneurs around the world want to be compared to Silicon Valley, but frequently get upset when you do it. Michael Arrington jokingly asks how I intend to piss off a whole country this time before I leave for any trip. (At least, I think he's joking...)
So, note the tap dancing below as Ayelet Noff asks me to compare Silicon Valley entrepreneurs to London entrepreneurs and Israeli entrepreneurs.
[Cross-posted from TechCrunch]
What’s awesome about the Internet is how it breaks up monopolistic markets where middlemen unfairly gobble up outsized fees, leaving us little choice but to keep paying them. It happened with software, it happened with music, and it’s happening now with media. But there are a few sectors of our economy that have stayed mostly undisrupted—one of them is banking.
Sure there are companies like eTrade that opened up the market for buying and selling stocks. But it didn’t fundamentally change the market that much, it just moved part of it online. The thought for a long time was that banks needed to be too controlled, too regulated to be turned over to the Wild West of the Net. Then the credit meltdown hit and we saw just how reckless these so-called safe and regulated institutions were. The time is right for the Web to unleash its full market-destroying power on the finance world and while I was in the UK I found a company making a promising start: Wonga.
Now, Wonga would hardly say its role is to upend the world’s financial institutions. But it’s one of the most dramatic examples I’ve seen of a Web company using what the Web does well to remake lending.
Wonga gives people a way to borrow small amounts of money quickly, between £50 and £200 for first time borrowers to be repaid between five days and 30 days. (Returning customers with a good repayment record can borrow up to £750.) A would be borrower gives Wonga just eight pieces of personal data online, and its algorithms find 1800 data points based on that within 2 seconds, making a rapid decision about whether that person is a good or bad short term credit risk. If approved, the money is wired into the borrower's account within the hour. And, the borrower gets to decide when to repay the money, with no penalty for early repayment. One of the most notable things about the UI is a sliding scale, which shows exactly what fees someone would owe Wonga for every dollar borrowed and extra day before its repaid. No fine print and formulas to calculate; the cost of every dollar you borrow is calculated for you.
Wonga was founded by Errol Damelin, a serial entrepreneur who previously started a supply chain software company named Supply Chain Connect. He sold that company in 2005 and decided he didn’t want to build another enterprise software business. (Smart move.) So he traveled around the world looking for ideas. In the U.S. he became captivated with payday lending companies—an industry of strip mall storefronts that generates a whopping $12 billion in fees.
There was a clear demand for short-term loans to tide people over or take care of emergencies. But it was a polarizing industry, seen as predatory and exploitative. Damelin spent more than a year digging into it, and brainstorming with well-known UK angel investor Robin Klein on how to rethink it and make it better.
Two things excite me most about Wonga. The first is that it isn’t peer-to-peer lending. Peer-to-peer lending in a social sense, like Kiva, is one thing, but I’m not convinced peer-to-peer lending for profit works or scales. It feels a bit like trying to apply Web 2.0 ethos of wisdom of the crowds and social networking somewhere that it just doesn’t fit. Instead, Wonga has raised $28 million from Balderton Capital, Greylock Ventures, Accel Partners and Dawn Capital and is loaning out its own cash. In its first year of business it did more than 100,000 loans, for an average of £250 each, and it’s already profitable. “This is the best business I’ve ever been in,” Damelin says.
Second, it’s the first time I’m aware of that a bank that has actually aligned its incentives with what’s right for the customer. Put another way: Wonga makes its money when you repay the loan, not by keeping you in debt longer. Think about it: Credit card companies make the most of their money from people just able to make their minimum payments every month. And payday advance chains make most of their money by rolling over your debt to the next payday.
Critics have said that Wonga is usurious by charging a 1% interest fee per day. But that’s a knee-jerk response. Wonga is simply charging a premium because it allows borrowers quicker access to cash than any other service, the same way a town car is going to charge you more than a cab off the street. And because it only makes money when a borrower repays the amount, there are no tricks to keep you in debt longer. Wonga’s ideal customer is someone who uses the service two to three times a year and always repays on time, Damelin says. If more financial institutions had this basic orientation to doing business, we wouldn’t have had the credit meltdown because people would have known exactly the risks of agreeing to ARMs and zero-down mortgages.
Sure, you can say Wonga is dangerous because it's giving people an easier way to live outside their means. But that's a bit like arguing giving kids condoms encourages teenage sex. You can't change human behavior, but you can help make people safer.
Now here’s the downside on Wonga: It’s only available in the UK, and it will likely stay that way thanks to a bevy of licenses and regulations entailed in getting near the finance sector. It’s even worse in the US, where each state has its own laws. Even a copy cat business might be cost-prohibitive in the U.S. because of all the state-by-state regulations and red-tape. As our taxpayer dollars continue to bail out the same lousy institutions, it’ll take innovators like Wonga to force real change in the finance world. But in this country, it’ll need an assist from the government as well.
After all, it competes game-to-game, with similar mob-style and poker games, and was said to be doing the same revenues as Zynga with much higher profitability. (As my column pointed out, Zynga’s revenues are more like double Playdom’s—and since I’ve heard the discrepancy is even greater.)
As you’d expect Zynga’s CEO Mark Pincus pooh-poohed Playdom as any sort of threat. But tellingly, he said the company he was worried about was UK-based Playfish. So, while I was across the pond, I decided to see what the fuss was about and sat down with Playfish’s founder and CEO Kristian Segerstrale. I came away convinced this was one of the hottest companies to watch in the UK. Here are five reasons why.
1. Not “The UK Zynga.” Playfish is very much running its own race in this market, and this may be a case where distance from the Valley is actually healthy. It doesn’t try to compete on specific games with Playdom, SGN, and Zynga. For instance, it doesn’t have a mob game, the most popular genre right now, and it doesn’t have a poker game, Zynga’s top earner. “That’s such short term thinking,” Segerstrale said. “Something is wrong if your route to success is copying competitors’ games.”
2. Platform Development Doesn’t Have to Mean Half-Ass Development. Playfish is not about building a game in a week or so and throwing it up on Facebook. Playfish spends six months to a year designing a game, and they’ve only produced seven of them. While everyone else talks up how quickly and cheaply you can build a game on social networks, Playfish still employs the same artistic discipline of a console game with a Wii-like look and feel. The plus with platforms like Facebook and the iPhone isn’t speed to market for Playfish, it’s easier distribution and greater social engagement.
3. Traction. The painstaking design process appears to be a hit. Every one of Playfish’s games has been a top ten hit on Facebook. Across all platforms, those seven games have yielded 100 million installs and 30 million monthly uniques, says Segerstrale. Playfish pays “practically nothing” for customer acquisition and makes money through virtual goods, ads and premium versions of games.
Playfish is profitable and hasn’t spent a dime of its recent $17 million funding round. That’s gotta be some top line given Playfish has 200 employees across several offices. In fact, TechCrunch Europe’s Mike Butcher speculated that Playfish could be the $1 million-dollar-a-month Facebook app maker, back in September 2008. It certainly puts the company in an enviable position given the paucity of venture funds in the UK.
4. Proximity to the Valley Insiders via Investors. While Playfish enjoys distance from the one-ups-man-ship or developer poaching of SGN, Playdom and Zynga, it’s connected into the Valley where it counts. One of its main investors is Accel—also one of the main backers of Facebook. Yes, that matters. (See Sequoia Capital-backed Google’s purchase of Sequoia Capital-backed YouTube.)
5. Segerstrale Knows Games. This is the fuzziest one, but also probably the most important. As a CEO, Segerstrale comes to this industry from a different point of view than Pincus. Pincus has said he was never really much of a gamer—Segerstrale on the other hand has loved games since he was three years old playing Pong with his older brother. He always got a visceral rush from playing, especially with other people. So he’s spent much of his career working towards two goals: Decoding what makes a game “fun” and deconstructing the concept of a “gamer” so games are just something everyone plays.
His first attempt was at mobile, thinking that with phones in every pocket, everyone would essentially have a game console. Indeed, the company he cofounded, Glu Mobile, went on to a successful IPO. But gaming was still a niche activity on phones. There were too many barriers set up by the telcos and it wasn’t as easy for people to find and download games. Facebook turned out to be a much greater platform for this kind of democratization of gaming because users could market games to one another.
Segerstrale’s macro theory is that we’re in the first shift of a move from physical games and goods to digital ones, and from games as a product to games as a service. It’s a theory that seems right-on to me. For one thing, we already saw it with the transition from enterprise software to software as a service. For another, sales of console games are down 20% year-over-year according to NPD, while comScore says social gaming is up 20% year-over-year. It’s nice to see a CEO who can articulate not only a product vision, but a clear industry vision.
All the positives above aside, I’m still not convinced that Segerstrale will succeed in his mission to democratize games. I still mainly use Facebook as a way to connect with friends, not to build virtual restaurants and I don’t necessarily see that changing. In fact, Facebook has so de-emphasized apps in its new all-feed iteration, I spent nearly an hour trying to find a listing of games, before someone finally told me it was on the throw-away bottom bar of the profile page. And by emphasizing the social stickiness of a game, there’s a chicken-and-egg risk that the games are boring for people who don’t have enough friends already playing.
But these are execution risks and every promising startup has them. When it comes to business model, financing, vision and product, Playfish is certainly a formidable competitor to Zynga. With hundreds of millions in real dollars already swarming around social gaming, this will be fun space to watch.
[Cross-posted from TechCrunch]
You think you have it bad, Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash? Try life on the other side of the pond.
Out of 39 firms that were active investors in British start-ups over the last five years, only thirteen venture firms have £5 million or more left in their coffers to invest, according to NESTA, the UK agency that advocates for start-ups and also sponsored the recent Traveling Geeks blogger tour.
That’s right: All but thirteen firms in the United Kingdom are either completely tapped out or have committed the rest of their funds for follow-on investments in existing portfolio companies. In total, NESTA estimates there’s about £400 million left that’s uncommitted among the thirteen, with only half of that available for brand-new series A deals. To put that into perspective, there’s roughly the same amount of money in the fund Marc Andreessen just closed than there is for new companies in the entire United Kingdom right now.
This is coinciding with a precipitous drop in UK firms closing on new funds thanks to the global credit crunch. In 2008, only seven firms closed new funds, and NESTA expects fundraising to be even weaker in 2009.
As most people know, I’m a pretty big advocate of the idea that many of the next great high-growth companies will be founded outside of the U.S., but these stats starkly demonstrate a undeniable advantage of being Valley-based. Even when fundraising slows and VCs save bigger reserves than usual for current investments, there are still billions sloshing around to fund new deals. Sure, it’s hard during times like these even in the Valley, but raising venture capital should be hard.
As with most research reports on the venture business, it’s the trend line that’s important to note here. It’s probable that NESTA isn’t counting a firm here or there. But it can’t be too far off. Indeed, the stat explains a lot of the anecdotal evidence that hit me in the face as soon as I arrived in London two weeks ago. Many of the entrepreneurs who’d pitched me on my last visit to London in November have already shuttered their companies and were unsure of what to do next. I have exactly one friend in Silicon Valley who has been forced to that point.
Even the good UK early stage names are struggling to close deals. It took AlertMe—a hot energy home monitoring company that won The TechCrunch Europa for best clean tech company last week—a whopping nine months to raise money almost landing the company in bankruptcy. (Index Ventures and others finally snapped up the deal a few months ago.) “I don’t want to go through that again,” the very polite and British CEO Pilgrim Beart demurred.
It’s that kind of bleak desperation that lead the infamous Paul Carr to pronounce the UK Internet scene dead….just before his own column in the Guardian became its own victim of the economy a few days later. (See Mr. Butcher's TechCrunchEurope rebuttal here.)
Indeed “the scene” may be dead, but there’s an upside here. The companies that are still around have a much greater emphasis than Valley companies on making money. The Traveling Geek contingent went to Accel’s London office to meet with a handful of start-ups, and each one emphasized revenue and profits in their five-minute elevator pitches.
One that caught me by surprise was Michael Smith’s Moshi Monsters, a social network/ virtual game for kids. Cute idea, but sounds like it should be road kill in this environment, right? Nope. Its revenues are growing 35% month-over-month, it has 85% gross margins, and just five months after launching the site is cash flow positive. Nicely done, gents. (BTW, Smith isn’t all business. His house was the setting of those famous Scoble pictures…)
Indeed, there’s always something healthy about startups having to work within constraints. There will be fewer of them, but it’s possible that the companies that make it in this environment could well make up one of the most promising crops of UK companies we’ve ever seen. After all, Skype was laughed out of VCs’ offices when it started in the wake of the dot com bust.
In the coming days, I’ll be writing several more posts about the London companies that impressed me the most. Stay tuned.
I'm about one-third of the way through my 18-month death-march around the world seeking its best entrepreneurs, or as I call it in polite conversation, work on my new book. It's time for a break. Aside from a few day trips here or there I'm sticking in San Francisco for the next six weeks where I'll try to be a better blogger for TechCrunch, a more reliable columnist for BusinessWeek and get more actual writing on the book banged out. I'm going to keep working on learning Portuguese and Mandarin. I'm going to cook dinner for my husband. I'm going to reintroduce myself to my much-stood-up Pilates trainer. And I may even attempt to have a social life again.
I feel mixed about it. Most of me is screaming out for a break from 20-hour flights, endless meetings and the frustration that comes with interviewing someone from a totally different culture, who is frequently speaking a totally different language. (See photo to the right-- just moments before a speaking gig. See sadder photo below. Human rights groups are investigating.) On Thursday as I was packing up to leave my hotel in London, scouring for every stray sock or earring, wondering what I'd leave behind this time (sunglasses as it turned out), and hoping I'd allotted enough time for customs, security and the like-- I had a crushing feeling of I desperately, desperately need a month off!
But as I reflect on everything I've seen and experienced during the 10 weeks I've spent in Israel, Rwanda, China and London, another part of me can't wait to get back on the road. When I set out to write this book, I didn't totally know what I was getting into, aside from the hope that it'd be important and the certainty that it'd be life-changing on a personal level. The first few months I felt a bit lost and concerned, but now, six months in, it's coming together. I've written several thousand words, discovered stories so dramatic they could be made into films and the big macro themes of book are shaping themselves in my head every day. The book is becoming less of an epidsodic travel narrative and more of a, well, book. As much work as there is ahead, I know now I've got something, and that's a huge relief. (See photo to below taken in a happier, more rested moment. Although note my sad, tired computer is missing an "R" key.)
So as I pause for a bit, I wanted to thank everyone who's made the whole thing possible thus far: Dan Nova for introducing me to Rwanda, Roi Carthy and Orli Yakuel for being my den mothers in Israel, Tom Limongello for, well, everything in China, and Paul Carr for being my unofficial personal assistant in London, while Rachel Bremer set me up with some of the most impressive companies I've seen in the UK to date. Huge thanks also to Endeavor-- the experts in emerging world entrepreneurship, and to BusinessWeek and TechCrunch for being endlessly supportive of this suicide-mission. And, of course, Olivia for taking care of the kitties in my absence, and Mr. Lacy for somehow putting up with all of this.
After the break, I'll finish the year with Brazil, China, India, and back to Israel. As always, let me know anyone I must meet.
[PHOTO CREDITS: Ayelett Noff, JD Lasica, Craig Newmark]
I did very little blogging while I was in London, but it wasn't because I didn’t find anything interesting to write about. It’s because I was talking, laughing, eating or drinking nearly every moment of my two-week trip. I proudly announced to my husband that I hadn’t taken a single Ambien during the visit. Unfortunately, it wasn't because of some no-jet-lag magic, it was because I only got about two hours of sleep a night.
Every time I visit London I find a city with zero downtime filled with entrepreneurs, investors and the like who are offering to take me for afternoon tea or a drink to talk about the industry or well, just talk into wee hours of the morning. One Oli Barrett even serenaded me with several songs from Mary Poppins and Chitty Chitty Bang Bang late after the TechCrunch Europa awards. After all, that’s how we Americans all think the British talk, right? That’s pretty accommodating stuff.
And look no further than these pictures to see how much fun Scoble was having. Even Last.fm had a sense of humor when a TechCrunch editor stormed their offices somewhat unannounced. (Michael Arrington? Less of a sense of humor about that post. Sorry, Mike.) People are intense about their companies, but there’s a sense in the UK that it’s not the only thing that matters.
The joviality is all the more surprising given the rough times UK start-ups are having, as I detailed today on TechCrunch. Money available for early stage start-ups is perilously low and good many entrepreneurs I know have already closed their companies or sold them on the cheap. But here they are all still hanging out, supporting one another, having wild parties and enjoying life. It’s as if (gasp!) the world doesn’t revolve around the Internet.
As a business reporter, I’m of two minds on whether this is a good thing or a bad thing. I’m a big believer that there’s no such thing as work-life balance when it comes to start-ups—a view that frequently gets me in trouble especially when I’m talking about why there aren’t more women in the business. But sometimes the Valley takes the macho-look-at-me-working-24-hrs-a-day thing too far. Startup or no, I’m not sure I know anyone who works just 40 hours a week here, and I know I don’t know anyone who isn’t checking their email every minute of the day. The debate about whether that’s healthy is one thing—but does it actually make us more successful?
God forbid I sit still for more than two weeks. I've still got my Africa jet lag, but I'm already planning my time in London July 4-16.
The first week I'm traveling with a group of videographers, bloggers and authors called "The Traveling Geeks." I went on the first Traveling Geeks trip last year, which was also my first trip to Israel. Most people know I usually like to travel alone, but every once in a while experiencing another culture's tech scene with people from slightly different media disciplines can be eye-opening. Plus, they needed someone in charge of pub crawling. (Ahem, London readers, leave your suggestions in the comments...) I'll also get to present an award and do my best Michael Arrington impression at the UK TechCrunchies, or as they're actually dubbed the "Europas." I'll be blogging here and on TechCrunch, as I try not to step on Mike Butcher's capable TechCrunch Europe toes.
If you want to hang with us, get your ticket to the UK Crunchies or come to our Tweet-up. Tweet-up tickets are half-price until Friday, if you say you read about it on SarahLacy.com. (Just kidding, they're half-off for everyone until Friday.) Our full agenda is here in case you want to just STALK us the whole time.
Our statement of ethics is going up on the site soon, and I wanted to bring it up since I've been pretty harsh on Pay-Per-Post. No one on this trip is recieving any payment in exchange for coverage. We do have sponsors paying our travel costs, so we could get a diverse group of attendees without worrying about income or travel budgets. We disclose those sponsors here. Our only obligations are to go to the events we've committed to and write about whatever we find interesting.
I love London and spent a good deal of time there last year, so I padded five extra days onto the trip so I can reconnect with friends and meet new ones. I've always got a list of startups to meet, but this trip, I'm particularly interested in ferreting out some London investors who are doing deals in China, India, Africa and South America. Most of the ones I know do more Western-centric early stage tech venture capital. Would be great to mix some European investing perspective into the book, so please let me know any suggestions.
Also, in case you were about to comment about the un-American-ness of my leaving on INDEPENDENCE DAY to go see the very people we declared independence from in the first place, Mr. Lacy has already beat you to it.
You know how in Yosemite Sam cartoons you hear a loud crashbang and then a huge cloud of smoke and dust comes billowing out of a mine shaft or a general store? Yeah, well welcome to SLDC headquarters this morning, as a construction team is currently demolishing the chimney. I love how they decide to put a tarp down AFTER a piece of roof shoots out of the hole above the stove. Psh.
Needless to say, we've been a tad distracted. So much so that we missed the launch of Njoyed.com, the latest start-up of Tech Hugh Hefner, British Michael Arrington,and all around polar bear, Mr. Robert Loch. According to his stream, Robert has recently Njoyed Chumbawamba's "Tubthumping" ("it will be played at my funeral") and absinthe ("the devil's own drink"). Nteresting.
Although currently homeless and wandering from coffeeshop to coffeeshop, Sarah and I want to send Rob and his business partner Scott Rutherford a huge congrats on the launch. Posts will come when we can actually sit in the living room without developing a case of black lung. Until then, Njoy!
It may not sound like a relaxing way to end a vacation to you, but believe me, the closer I come to working through a back-log of Flipcam footage from the last month, the weight is just lifting off my shoulders. Now if I could only finish that BusinessWeek column and other secret project....ah well, that's what a long plane ride is for, right?
Among Flipcam gems I've found today are these two clips from London, featuring two of my favorite people Robert Loch and Paul Carr. In both, the guys have to hide how nice they're actually being to me, by kinda acting like jerks. But I see through it. They love me.
Here's some clips from my London book launch event, which in Robert Loch's infinite politically correct wisdom was held at the second oldest strip club in London. It sounds shadier than it was. It was actually an amazing venue and the proper business-y crowd and Fidelity Ventures sponsorship poshed it up more than my Minnie Mouse hairbow ever could have. If you've heard me speak, you've probably heard half of this before. If not, enjoy! Thanks again to Loch, Washy and Carr for an amazing event. Let's do, say, Germany next?
An unforgettable portrait of the emerging world's entrepreneurial dynamos Brilliant, Crazy, Cocky is the story about that top 1% of people who do more to change their worlds through greed and ambition than politicians, NGOs and nonprofits ever can. This new breed of self-starter is taking local turmoil and turning it into opportunities, making millions, creating thousands of jobs and changing the face of modern entrepreneurship at the same time. To tell this story, Lacy spent forty weeks traveling through Asia, South America and Africa hunting down the most impressive up-and-comers the developed world has never heard of....yet.
Buy it from these sellers
On the Blog
- Brilliant, Crazy, Cocky
- Food and Drink
- International Travel Tips
- Once You're Lucky, Twice You're Good
- Silicon Valley
- the always controversial sarah lacy
- venture capital