British breakthrough on Web 2.0(2)

Last week’s acquisition of London-based web start-up Last.fm for $280m could herald a new era for UK internet companies. Dave Keating reports.

Martin Stiksel, Richard Jones and Felix Miller have come a long way from the early days of their internet radio venture, Last.fm. Just four years ago the three and their staff were living in tents on the roof of the start-ups office. Last week, the three were made into multi-millionaires overnight, each receiving £19 million from the sale of their fledgling internet radio and social networking company to American broadcast giant CBS for $280 million (£142 million).

Last.fm’s logo

The three entrepreneurs weren’t the only ones elated with last week’s development. Index Ventures, which invested an estimated £2.5 million for a 20 percent stake in the company last May, is expected to make £28.2 million from the sale. The firm is no stranger to European web start-up success, having also invested in Skype and Betfair.

The sale is significant because it’s the first big acquisition of a British Web 2.0 company, and its three founders are now the first British Web 2.0 millionaires. Though the price may seem paltry compared to the $580 million News Corp paid for social networking site MySpace in 2005 or the $1.65 billion that Google paid for video-sharing site YouTube in 2006, it’s still the largest the UK has ever seen for such a company. British entrepreneurs, as well as VCs, will certainly be taking a keen interest in the sale.

The possibility that US media giants may now be looking to Europe for attractive social networking and other Web 2.0 candidates could spur VC investment in other homegrown start-ups like London-based television social media hub TIOTI, Bath-based workshop organsing sites DropSend and Vitamin, and UK distributed search engine Majestic-12. But UK networking site Bebo is being looked at as the most likely next acquisition. The company received a $15.5 million investment from Benchmark Capital in May of 2006, and just a few months later in August it was reported that Viacom may be interested in buying the site. Today Bebo announced it has struck a deal with Apple’s ITunes music store for a partnership with the site.

The problem is that even the limited number of UK Web 2.0 start-ups have only gained any traction in the past year. It is extremely difficult to launch such an application with direct US competition from Silicon Valley, so where entrepreneurs have been successful it has been in developing radical and disruptive solutions that target a niche demographic, which have less chance of facing a US competitor.

That is where Last.fm was able to set itself apart. The site is able to identify a user’s music preference by observing what songs they listen to. It then provides recommendations for similar artists, and acts as a social networking utility between users with common music interests. Although there are a few similar sites out there, Last was the first to combine it with social networking in this way. Stiskel told The Guardian this week that although London isn’t a centre for Web 2.0 activity, it is the best place in the world for music, and that’s what Last.fm was able to play on.

The company has also recently developed a tie-in application to work with the social networking site Facebook, which has become wildly popular in the UK. Facebook, which was developed by a college student at Harvard, has recently decided to allow outside developers to make tie-in applications that work in conjunction with the site. Considering the popularity of the site in the UK, VCs may want to look at these new applications, which are coming out of the woodwork from all corners of the country, as potential investment opportunities. The Last.fm acquisition may give UK and foreign VCs the confidence to take a chance on some of these strange new applications.