We've all heard of the so-called "PayPal Mafia." They are a group of entrepreneurs and angel investors who were founders or early employees of online payment service PayPal. All of them went on to found their own tech companies, as well as fuel the next-generation of startups.
For example, there is Peter Thiel, the former CEO of PayPal, who was Facebook's first investor, and is Managing Partner at The Founders Fund. And David Sacks, founder and CEO of Yammer, which was bought by Microsoft for $1.2 billion, in cash, in June of last year.
There is also Chad Hurley, who founded YouTube, and Jeremy Stoppelman, co-founder and CEO of Yelp. And, of course, there is Elon Musk, CEO of Tesla Motors and SpaceX, and all around world changing inventor.
PayPal changed Silicon Valley; it was a disruptive startup, whose exit (it was purchased by eBay for $1.5 billion in July of 2002) created a mass cohort of investors and entrepreneurs that, in turn, created a new ecosystem.
With that in mind, and Vator Splash London coming up on Nov. 7, what I wanted to know is: has there been a company that did for the London tech scene what PayPal did for the Valley? And if not, why not?
(Note: Are you going to Splash London? Vator readers and members can use Vator20 for a 20% discount off the already low prices. Register here.)
The closest thing to a PayPal?
When I reached out to a group of London based venture capitalists to find out, the most common answer I received was subscription-based DVD rental service LoveFilm.
Amazon purchased the company, which is essentially a European Netflix, for £200 million, or $317 million in January of 2011. Most of LoveFilm's founders went on to create their own companies, even before the company exited.
For example, LoveFilm co-founder Alex Chesterman and Simon Kain, who was a senior developer at the company, went on to create property and house prices website Zoopla in 2007. The company raised over $10 million before it merged with The Digital Property Group in June 2012.
Co-founder Graham Bosher went on to found his own company as well: Graze, which delivers natural foods, to residential homes or workplaces. Founded in 2009, the company has raised $1.4 million in venture funding.
Paul Gardner, who as founder and CEO of LoveFilm, created two companies: he was the co-founder and CTO of Identity, a taxation software suite that is now owned by Deloitte and he then founded medDigital, a technology company that focuses on "developing digital technology in order to improves the professional lives of people working in healthcare," in 2008.
Meanwhile, fellow LoveFilm co-founder Saul Klein founded Seedcamp, which VatorNews listed as one of the top acclerators in London.
One person who struck out on his own following the sale of the company was Andrew Ground, LoveFilm's UK managing director, who left to start TutorFair, a company whose goal is "to make life easier for tutors, parents and students."
Despite all of that success and entrepreneurship, not everyone agrees that the impact that LoveFilm had has is comparable to PayPal.
"I really don't think it created many tech investors who went on to do other great things," Mike Turner, Partner and UK Head of Technology Media and Communications at Taylor Wessing, told me.
Instead he pointed to the sale of MessageLabs to Symantec in 2008 as having had a much bigger impact on the scene.
"The founders set up Notion Capital, which has invested in some great UK tech companies," he said.
John Spindler, CEO of Capital Enterprise, was a bit more accepting of LoveFilm's stature, saying that "the analogy with PayPal is not bad," but he also partially discounted the impact as well.
"It did not create 100's of new investors as PayPal did, but then what exited company has?"
The challenges to creating a disruptive startup
So if no definitive startup emerged as a game changer, why is that?
To Spindler, it is because companies are not giving their employees the same kind of stock options that companies do in the United States.
"European tech business founders are not generous with providing options to staff and partners so even with they exit it rarely creates a Pay Pal mafia."
He chalks that to a few different things, including the lack of exits, which means that most employees would rather be paid higher wages than wait for an IPO that will likely not come.
"Apart from tradition, I think the root cause is probably the smallness of seed and series A rounds and the lower valuations - founders feel they do not have much leeway to be generous," Spindler told me. "Also the relative lack of exits means early hire employees do not see their value and therefore rarely demand them."
Turner, however, did not entirely agree with that assessment. It was not the lack of options, he told me, but the small size of the exits.
"U.K. option pools tend to be of a similar size to those in the US, but the reality is that the average exit, at least in the top 25% of deals, is of course at a much lower value and there are comparatively few IPOs, he said. "Which all translates into less money in the option holders pockets."
Plus, he said, the London scene has a long way to go.
"The UK tech scene is significantly behind the Valley tech scene in terms of maturity and funding, so by definition we don't have success stories equivalent to those in the Valley in the sense of something so large that it spawns it's own ecosystem."
The U.S. vs the U.K.
Paul Jenkinson, Managing Partner at Jenson Seed EIS Fund, reiterated the same sentiment as Turner and Spindler regarding the stock options given to employees.
"I think most start-ups use equity to incentivise but the problem is more that the employees still tend to want market rate salaries so there is less need to give big options to compensate for low salaries," he said. "This comes down a bit to there being no huge win to encourage employees to take more of a risk."
But he also noted one other major factor for the U.K. having not seen a PayPal-like transformative company: the difference in the size of the market and in how the U.S. invests in companies compared to the U.K.
In the U.S., he said, VCs tend to seed a larger number of companies, with only those with momentum getting follow on funding. It starts with 20, then goes to five, then three and then one.
"By default the companies that succeed have taken many rounds of investment from a growing pool of investors and what you get is some very large winners with very deep pockets."
The other companies, meanwhile, fall by the wayside. This "creates a few big winners but leaves the vast majority of businesses behind."
In the U.K. on the other hand, "we invest in companies and we want all of them to succeed and to us this is a far less risky strategy for entrepreneurs but doesn't create the big winners."
The U.S. he said, rewards scale, which means a bigger prize for investors. That is simply not the case in the U.K.
"The UK has built some global leaders in many industries such as banking, accounting, law and pharmaceuticals and big IT businesses such as ARM but our failure to create a FaceBook orPayPal is more about the unique size of the US market and how it favours home grown talent than a reflection on the UK's failures," said Jenkinson.
Who could be next?
Even with all of those issues, the VCs that I spoke to seemed to all be hopeful that the problems plaguing the London ecosystem would change.
"The London start up scene is still immature and therefore with exception of companies like Skype, Autonomy etc very few have exited. We expect that to change over the next 18 months," Spindler said, while Turner noted, "the London tech scene is growing up in a hurry."
And so many of the London-based VCs also gave me the names of future companies that they felt could potentially be the next PayPal of London.
"London is the place to be for innovators at the moment. There are many start-ups with prototypes getting traction across a vast array of different arenas, all hot on the heels of growing businesses that have already redefined industries and created new ones," Richard Muirhead, Managing Partner at Firestartr.co, told me.
These included: mobile payment company Yoyo; Azimo, a digital service that gives consumers cheaper international money transfers, which closed a $1 million seed-funding round from e.ventures last month; and global b2b video network Rightster.
But the name I heard most was same-day delivery service Shutl.
Founded in 2009, Shutl works with a network of same-day local courier companies, so when an order is placed, its technology finds the courier company that would be ideal for that delivery. The carriers can compete for deliveries by flexing their pricing options, but Shutl also emphasizes quality service, so carriers that have performed well in the past get higher priority. The customer is then given a delivery price quote.
The company raised just under $9 million, including a $2 million investment in August 2012 from UPS Strategic Enterprise Fund, Hummingbird Ventures, and others, followed by $3.2 million in a round of financing led by new investors e.ventures and Notion Capital.
The most obvious parallel between the two though: Shutl which has was purchased by eBay two weeks ago, just like PayPal was 10+ years ago.
(Image source: http://www.dunlops.org)