Atomico, according to the “manifesto” on its website, is “not a traditional venture capital firm”. The existence of the manifesto suggests the firm wants to position itself differently; it paints a picture of a mission-based organisation. “We exist for more than returns […] we believe that entrepreneurs are the ultimate agents of positive, transformational change across every aspect of our society and economy,” it reads.
This is the language of impact, and it plays out throughout the firm’s communications. Atomico is the driving force and lead sponsor, for example, of The State of European Tech, a weighty annual research report produced with SLUSH. If you are not familiar with SLUSH, imagine a Davos for start-ups, where thousands of founders, investors and other tech types convene.
The mission-based approach is evident in Zennstrom’s own language. Most private capital bosses, when asked what makes them tick, will say hiking, triathlons or philanthropy. Zennstrom’s response, however, when Private Equity International puts the question to him at Atomico’s Bond Street offices in London, is on a different plane: “What makes me get up early and stay late at night is that entrepreneurs today are taking on some of the world’s biggest problems,” he says.
He speaks quickly, and at length, about the issues that emerging tech companies will help tackle (“climate change, the food chain problem, access to credit, mental health issues”) as well as the idea that the millennial generation wants both to consume from and work for businesses that work in a sustainable and ethical way… and that have a mission and purpose at their heart. “Entrepreneurs are more change-makers than politicians are,” he says.
It is inspiring stuff and, as the conversation develops, it is apparent that while financial returns are a necessity, they are a means to an end rather than the end itself. The firm, like most private equity and venture capital managers, won’t go into specifics on returns but a spokesman points PEI to the fact that Atomico has had four exits in the billion-dollar-plus category. It was among investors in Finnish games developer Supercell, which was acquired by SoftBank in 2015 for a reported $3 billion. It was in The Climate Corporation (a tech-driven business that insures agricultural businesses that was sold to Monsanto for around $1 billion in 2013) and Rovio, the developer behind the worldwide hit Angry Birds. The company’s 2017 initial public offering valued it at around $1 billion.
The spokesman for the firm also points to Skype, the internet calling business that Zennstrom co-founded in 2002 to “liberate people from the taxes of making phone calls” and subsequently re-invested in via Atomico. It was as he initially raised the capital for his start-up that Zennstrom realised the need for a European tech investor that had the appetite to make bigger, riskier bets.
“It was hard to [raise capital] from European VCs, because they were risk-averse and did not bet on disruptive companies that could become outliers,” he says. “They wanted to invest in copycats of something they had seen in the US. And the US VCs? The response from them was basically ‘you need to move over here’.”
As seems to be a habit for Zennstrom, he rolls from this statement into a wider assessment of the market: “Europe has a very good infrastructure; twice as many STEM [science, technology, engineering, mathematics] graduates as the US; the best academic institutions when it comes to computer science, science and artificial intelligence. What we didn’t have is the ecosystem of VCs of the people who built companies.”
Skype did get funding and became an extraordinary venture capital and private equity story in itself – with too many twists to recount here. Suffice to say it culminated in a sale to Microsoft in 2011 for $8.5 billion.
What Zennstrom took away from the experience – apart from an undisclosed but no doubt substantial personal wealth – was a desire to establish a VC firm with a founder-led mentality and the ability to write big tickets to scale European companies.
“They are very founder-friendly,” says Chris Grew, a partner at Orrick, who has represented Atomico on multiple transactions. “They will often ask us whether the terms are fair. And the founder background is appealing to entrepreneurs. He [Zennstrom] can connect with them in the way that other VCs cannot.”
Another contact of the firm puts it more simply: “They are not assholes.”
“Investing in tech companies is the opposite to buyouts. We don’t buy something, we get invited into founder-led companies” Niklas Zennstrom
In Zennstrom’s own words: “Investing in tech companies is the opposite to buyouts. We don’t buy something, we get invited into founder-led companies. We need to create a good rapport with founders.”
In terms of its ability to write big cheques, Atomico’s firepower needs to be taken in context. The firm made its debut in the PEI 300 – our ranking of the largest PE and VC firms by capital raised over a five-year period – in 2018, propelled to number 256 by the closing of the largest-ever European-focused independent VC fund at $765 million. It may be Europe’s biggest, but it exists in a universe in which an established heavyweight like Sequoia Capital can set about raising $8 billion for its latest fund and Japanese conglomerate turned mega-manager SoftBank can raise $93 billion.
What does Zennstrom make of SoftBank? “I think a lot of us thought it was mad… crazy at first. But they are looking at the next 10 years and looking at the value that will be created. They give [investee companies] more money than they need to have, thereby taking a lot of the risk out of it. It is bold, that’s for sure, and we shall see how it works out… but it is not completely crazy.”
Crossing the divide
When Zennstrom made the move from entrepreneur to venture capital investor, he was faced with the task of persuading European pension funds to change their attitude to risk. “I realised we were very different,” he says. “Our job as a venture capital firm is to take big bets, find the entrepreneurs who want to build something that has not been built before and build conviction that it is something that can become big. The pension fund’s job is to not lose the pensioners money and achieve a stable return.”
Specifically, Zennstrom finds that more risk-averse LPs are making the mistake of looking back and trying to get comfort from historical data. “But this is a world that is moving so fast into the future, that if you are looking into the last 20 years, you will totally miss what is going on,” he says.
“While these tech companies are producing so much value,” he continues, “I, as a European, would love to see as much of this value as possible coming back into the European economy instead of going to sovereign wealth funds in different regions. I would love to see European pensions benefiting from what their grand-daughters are creating.
“If we can get the European pension funds more excited about venture, then that’s a way to close the loop a little bit,” he says. “Right now, institutional investors from all around the world are seeing what is happening and investing here – maybe because they have more comfort in venture in the US and China. I am confident and positive that they [European investors] are starting to lean in and be more active. Certainly, a lot of the Nordic pensions seem to be a bit ahead of the curve and getting quite active.”
The Brexit distraction
As the unofficial ambassador for European tech investment, how does Zennstrom view Brexit? One of the reasons for the continent’s failure to keep pace with the US venture capital scene was that a fragmented series of small markets is a less fertile ground for scaling businesses than a large homogenous market such as the US. Surely further fragmentation is not useful?
“More friction is stupidity. The more single market we can have the better,” he says, although the impact of Brexit will be “a distraction” rather than material.
London’s appeal as Europe’s tech capital has been eroded, he says. “Before Brexit, London was really the talent magnet… if you were an entrepreneur somewhere smaller, maybe Austria or Spain, it was a natural thing to set up in London, because there was critical mass. That is no longer the obvious choice. Now if you are from Madrid? Probably you stay in Madrid.”