The Next Frontier

Denis Payre’s first big score was Business Objects, the $2.3 billion global software company he helped start in France in 1990. From there, beginning in 1997, he sprinkled seed money among 10 Internet European start-ups, ending up averaging a 10% return on investments.

Payre certainly enjoys the rewards he has reaped — the blue Porsche, the catamaran docked in Martinique and the vacation home in Arcachon, France — but that cosseted life hasn’t dulled his taste for taking risks. From a 24th-floor office in Brussels’ Tour Louise building with a panoramic view of Europe’s capital, Payre and fellow Frenchman Marc Fourrier are quietly mapping out their next assault on the Internet. Though their new company Kiala is still under wraps (even the website is not operational yet), Payre and Fourrier, who previously participated in the launches of Ilog and Wavecom, are convinced they are well on their way to the Next Big Thing. “We are going to be the post office of the 21st century,” says Payre, a boast the two are willing to stand behind with a personal bet of several million dollars.

Meanwhile in an old wallpaper factory in Prague’s Vinohrady district, Roman Stanek, a Czech who sold his software tool company NetBeans to Sun Microsystems for an undisclosed sum in 1999, has just launched another new high-tech company. Idoox, says Stanek confidently, “is aiming to change the whole dynamic of how software is sold.”

Still in their 30s and 40s, European serial entrepreneurs like Payre, Fourrier and Stanek are bent on providing the infrastructure and software that will underpin the next generation of the Internet. Largely spared from the bloodbath that is hitting the tech sector, with hundreds of companies dying and thousands on the critical list, these executives are finding promising niche markets to exploit. In the case of Kiala, it’s providing a software backbone and a set of distribution services to any type of direct vendor in Europe (like catalog retailer La Redoute and beauty product company Yves Rocher) that will allow customers to pick up orders made through the Internet, mobile phones or television sets at locations such as gas stations (Kiala already has an agreement with TotalFina-ELF) or convenience stores. The plan is to have 20,000 Kiala-branded take-out stores across Europe by 2004. And despite the fact that venture capitalists are now wary of investing in tech, Payre says that Kiala has been able to raise twice the amount of money it needs to get started.

Idoox, which is being backed by Internet doyenne Esther Dyson, is aiming to help software companies provide value-added services to their customers. “With our product every single software vendor can become a service provider,” says Stanek. For example, instead of buying financial software like Quicken or even renting the software over the Internet, customers could send their accounting information electronically to a software company and let the company do the work for them. Such services are part of the xsp market, a catchall acronym for “x” number of service providers that will host infrastructure and services over the Internet. Tech consultancy IDC expects the xsp market — an area that is attracting lots of big players including Microsoft — to grow from last year’s $115 billion to $400 billion by 2004.

In addition to business software applications, European companies look poised to play a leading role in new areas of wireless networking, high-speed optoelectronics, optical components and fibers, as well as proteomics, the study of proteins and the hottest new area in biotechnology.

The landscape has changed dramatically since last year, when Time Digital first profiled “Europe’s 50 Hottest Tech Firms.” Many of the companies on last year’s list went stone cold because their market projections were overoptimistic, their business models failed and/or their technology proved not to be up to snuff. Web commerce didn’t take off as quickly as predicted, in part because access was too slow and the technology was faulty; businesses did not gain all the efficiencies from the Internet that tech companies had promised and fewer people than expected were lured by all those sexy new mobile data services, since Wireless Access Protocol (wap) services did not work well over gsm. (Perhaps no more dramatic illustration of the changes since 2000 is that this year’s list has been pared down to 30.)

If you want a clear example of how the tech landscape has changed in 12 months, look no farther than Finland. Last year, venture capitalists from around the world scrambled to invest in start-ups in that Nordic country, a hotbed of wireless innovation. But this year, at the April 10 meeting of the Helsinki branch of the First Tuesday networking group, which aims to link idea people with money people, the theme was a grim one: “Market turmoil, layoffs, end of the hype — these describe the last months,” read the invitation. “Is this the end (for now)?”

To be sure, some of the money has moved away from Web and mobile to areas like biotech. But wireless is hardly dead and the Internet is still expected to be huge. The focus of the five categories chosen for this year’s companies is primarily on what is under the hood. Investors are concentrating on core technologies rather than applications, says Antoine Schwartz, co-head of European technology and telecommunications investing at Goldman Sachs. “One of the main reasons things didn’t work out is there is a big disconnect between the adoption rates of the customers versus the expectations of the entrepreneurs. There was a feeling it would happen overnight. Now we know it is going to take more time. That means the payoff on applications is much further in the future so the emphasis is on ensuring that things work properly.”

A number of European start-ups are ready to take up that challenge….A number of European start-ups are ready to take up that challenge, among them the Helsinki-based Fathammer, whose management team includes Samuli Syvahuoko, another serial entrepreneur who founded European game company Remedy Entertainment and co-founded MadOnion.com, which makes a benchmarking tool for game players. Finnish engineers working for Fat-hammer have come up with a way to port 3-D graphic games from PCs and gaming consoles onto current and future mobile devices. IDC predicts that there will be 60 million mobile devices on the market by 2004. Fathammer expects about 10% of the users will play games over the gizmos. That’s where Fathammer will be, with a technology that works over multiple mobile platforms. “The cool thing about our technology is that many existing games can be converted without heavy modification to the user interface,” says coo Syvahuoko. That means that game developers will not have to change the audiovisual concept of the game when they move to wireless applications.

Another growth area where European companies are well placed to compete is wireless networking in the office, according to Falk Müller-Veerse, European research manager at research and investment firm Durlacher. Increasing the efficiency of employees on the move is a priority for business and fulfilling that demand will be essential to the success of third-generation mobile.

Using wireless to improve communications within offices will also be a priority and Norwood Systems seems to be off to a good start. The U.K. company uses Bluetooth — a technology that allows devices to communicate with each other within a 10 m radius — to connect office workers to their key communication applications when they are away from their desks. In other words, the technology allows you to have a single number that will reach you on a pda, smart phone, laptop or desk phone, wherever you happen to be. The company officially launched on New Year’s Day and within weeks won first prize at Comnet, a major networking technology conference in Washington, D.C., beating such big players as WorldCom and two entries from Cisco.

Other European wireless companies are gearing up for one of the most crucial challenges, making inroads into the Japanese market. “A year ago everyone was talking about how Europe was 18-24 months ahead of the U.S. Today the dicussion centers on how Europe is two years behind Japan,” says Durlacher’s Müller-Veerse. So, “if a European company can make it in Japan then they have really earned their merits.” There are now some 30 million users of wireless data services in Japan — many of them teenagers who use the DoCoMo system to connect to the Web. That is why Irish mobile-commerce platform provider Network365 secured money from a Japanese venture capital firm and is now piloting its product in Tokyo.

But don’t just think about wireless — think about wired, as in optical fiber. “I’m a big believer in the optical field,” says Schwartz, at Goldman Sachs. “There is a chance it will be the size of the semiconductor industry.” Why? “Over time the bet is that it will be the fastest and cheapest way to send data around the world,” he says. While Europe has strong optic component companies of all sorts, the new European start-ups and spin-offs show disproportionate strengths in semiconductor devices, particularly high-speed optoelectronics and all-optical regeneration components and active fibers, according to RHK, a California-based independent research company which specializes in optics.

While it used to be said that U.S. companies were far better at capitalizing on pure biotech research, “more and more we see that Europe is catching up in terms of company creation,” says Robert Zegelaar, the biotech specialist at Atlas Venture, a venture capital firm which last year did 11 of the 30 worldwide initial public offerings in the biotech sector (six of Atlas’ 11 biotech ipos were in Europe).

But here let us pause for the number of companies whose futures now look anything but promising. One technology magazine ran a black humor advertisement for a T shirt which said “My venture capitalist gave me millions of dollars and all I have left is this lousy T shirt.”

Boxman, one of the three dotcoms featured in last year’s Time Digital list, has died; another, LetsBuyIt.com, was rescued after filing chapter 11-style bankruptcy proceedings and winning the dubious honor of being listed among Europe’s bottom 20 tech initial public offerings in 2000 according to Tornado-Insider.com magazine. And the field of web consultancy businesses has been decimated: since last June Framfab has seen its valuation drop 98%, Pixelpark by 95% and Icon Medialab by 93%. (A report card on some members of the class of 2000 comes later in this special report.)

Meanwhile, business-to-business exchanges — which were going to use the Web to change the way the world’s buyers and sellers do business — are now in danger of going out of business themselves. Shares of sector leaders, like U.S.-based Ariba, were down 97% from their 52-week high in early April. (One exception to the rule: BuildOnline, which provides a trading platform for Europe’s construction industry, and was featured in last year’s 50 Hottest list. Despite the current economic climate, in April it secured $14.4 million in third-round funding.)

So what lessons can we draw this year? First, Europe still produces fewer real stars in the technology firmament than the U.S. As Alex Vieux, who runs the annual European Technology Roundtable Exhibition, one of the industry’s key events, explains, the Continent turns out great ideas, but its engineers are unable to effectively export them. Second, European marketers tend to be slow and deliberate, while more nimble companies in the U.S. will grab hold of the same or similar idea and beat European companies to the finishing line.

But if anyone can break these stereotypes it will be serial entrepreneurs like Payre. “Europeans are learning to build companies the American way,” says Payre, “to leverage the technical skills and bring on top of this American aggressiveness, a no-prisoners type strategy.” If they can pull it off, then European tech companies should not merely survive in 2001 and beyond, they should thrive.