Europe’s Plan to Beat Silicon Valley at Its Own Game

In 2001, the company lawyers had arranged a meeting with RIAA and MPAA—big teams of lawyers flying in from the East Coast to meet in their lawyers’ office in Beverly Hills on a Friday. On that Wednesday, they found an internal memo leaked from the organizations they were supposed to meet that called them “Public Enemy No 1 operating offshore.” The memo said “it was imperative to make an example of us,” he recalls with a slight smile.

“Instead of going to the meeting, we were driving around and around while the lawyers were doing their thing. Later in the evening, when we went to our lawyers’ office, we switched clothes with two lawyers on their team to avoid being served. After that, we moved from one shady motel to another, night by night, paying in cash until we bought tickets at the airport an hour before we departed, as we were sure they were tracking our credit cards.”

Zennström and Friis sold Kazaa for a loan note of €600,000 at the end of 2001 (about $600,000 by today’s exchange rates). Then, in 2003, using Kazaa’s P2P backend, they founded Skype, an app that allowed users to make a call by directly connecting with each other. But the early days of Skype seemed to reveal something unexpected—that European VCs were not interested in innovation.

“We got turned down by everyone,” he says simply. “We wanted to disrupt the global telephone network with this peer-to-peer technology, and that’s a big ask. A lot of them had been burnt by the dotcom crash. The model they preferred was to take something that worked in the US and do it in a local market.” He pauses and smiles. “Of course, we were also involved in a massive, billion-dollar litigation …”

Nevertheless, Skype would soon become one of the first European startups to challenge the hegemony of American internet giants in the early 2000s. Zennström faced a crucial decision when, in 2004, one of the big Sandhill Road VCs offered to fund the company, but only if it moved to the US. “At that point, we had already built up a world-class team in Tallinn, London, and Stockholm, and I did not want to leave my team,” he explains. “We knew then that we were committed to building Skype as a globally successful technology company based out of Europe.” He declined the offer.

One year later, Skype went on to become a unicorn—eight years before venture capitalist Aileen Lee coined the term—after being sold to eBay for $2.6 billion. It was the world’s largest tech M&A since the dotcom crash and dwarfed eBay’s $1.5 billion acquisition of PayPal in 2002.

All of this led to Zennström’s next move—to disrupt venture capital with the launch of Atomico in 2006. European VCs weren’t taking risks. Founders were coming to him and asking for advice. VC funds were inviting him onto their boards to make themselves look good. “Meanwhile, the only place in the world that had a functioning tech ecosystem was Silicon Valley—and I like being contrary and breaking monopolies, so we set out to break the US VC tech monopoly with Atomico,” he says.