Interview – Niklas Zennström

Niklas Zennström, along with his partner Janus Friis, founded Skype in 2003; sold to eBay in 2005, Skype is now used by millions of people the world over. What were the most important lessons he learned from Skype’s success, Caroline Hartnell and Alejandro Litovsky asked him. And how do these lessons apply to Zennström Philanthropies, founded 18 months ago with his wife Catherine?

The lessons of Skype – think big and be nimble – apply both to his philanthropic venture and to his day job as CEO of venture capital company Atomico Ventures. In both cases, it is about making bets on a few carefully selected small organizations that have the potential to disrupt the system.

Credit Eduardo AparicioWhat lies behind the success of Skype?

What is clear is that with Skype there was never any question of starting small and then growing: the mindset was always to think big. ‘From the beginning,’ says Zennström, ‘we saw it as something that could be used by hundreds of millions of people and make a big difference in how people communicate. But of course we also wanted to build a good profitable business.’

But thinking big never meant being big. ‘We realized that being small and nimble is an advantage compared to existing telecoms companies. Large companies tend to respond very slowly to changes in the environment. If BT said they were going to change their pricing plan next month, cutting revenues from international calls by 90 per cent, I’m sure their shareholders would be very upset. Not having that baggage, we can be super-nimble. We can challenge the established rules of the game.’

Do these lessons apply to Zennström Philanthropies?

Zennström admits that it is difficult to apply the same kind of mindset. With Skype, they were producing a new product to compete with existing technologies; with Zennström Philanthropies, they’re aiming to help change the system where markets for environmental solutions don’t yet exist. This is why the philanthropic fund focuses on the enabling market, rather than individual businesses.

‘We are very small and there is a lot of money around everything that has to do with reducing emissions,’ says Zennström. ‘So we’re trying to achieve scale by working with small organizations, typically non-profits, which can create leverage effects’ – a description that would neatly fit Skype in its early days. He gives an example of what he means by leverage: rather than backing a company that is developing LED lights, he would aim to identify the business case, helping to demonstrate that if a city replaces its street lights with LED lighting, it will save money as well as cutting emissions.‘Then you bring city mayors together and show them what has happened and where the economic benefits are. This is the way to get solutions scaled. You need to show decisionmakers how they can make a decision that is good for the city budget and for the environment.’

Another organization they support is P8, which is convening pension fund investment managers and trying to help them to understand how they can make decisions to invest more in green solutions. ‘If P8 can convince a few of these pension funds, which manage billions of dollars, to redirect a greater proportion of their investment to green technology, then that’s another huge multiplier effect.’

Investing in new ‘smart’ technology to disrupt the system is another option, though on the whole Zennström regards this as ‘too much of a bet’. He goes back to the LED lights example. Now the big industry players are involved, but ‘just a few years ago it was smaller companies that were pushing the technology.

Here, he suggests another parallel with Skype. As well as being a very successful company, Skype had a much larger imprint on society by challenging and pushing phone companies around the world to change their price plans. Today BT charges more or less the same rates for calls within Europe and the US as for calls within London. He compares this with the LED lights. ‘We are working with The Climate Group, helping to push large manufacturers of light bulbs to put more effort into innovation and bring more low-energy lights to market.’

Atomico Ventures and Zennström Philanthropies

But The Climate Group and P8 are only part of a portfolio of organizations supported by Zennström Philanthropies. Zennström outlines a choice for grantmakers: ‘Either you write a cheque once a year to an organization working in an area that you believe is important in the hope that they’re going to do a good job, or you decide to be much more of an active participant in this ecosystem.’ Not surprisingly, they went for the second option. ‘What we’re doing is actually very similar to what I’m doing in my day job, where I’m CEO of Atomico Ventures.’ Atomico invests primarily in early-stage technology companies. ‘We invest in only a few companies a year and we are very selective in who we pick; we then try to help them to build their companies. Last year at Zennström Philanthropies we said the focus for climate change work in the next two years should be influencing policy makers. Then we sought out a few organizations that we think can actually have an impact.’

Here the parallel between Atomico and Zennström Philanthropies comes apart slightly. In a typical venture capital firm, some portfolio companies will succeed and others will go to the wall. With Zennström Philanthropies, even less successful investments help to determine what works and what doesn’t. ‘It’s much more difficult to measure success if you’re a non-profit, especially in an area like climate change. Working with several organizations enables us to compare them and see what is working.’

As well as putting money into NGOs, Zennström Philanthropies is supporting funds like E+Co, Acumen Fund and Root Capital, which are working more like venture models. ‘It’s actually not yet proven that these models can scale, but we would like them to be able to,’ says Zennström. ‘We hope they will develop a sustainable commercial model because that’s really the way to get scale.’

There is a clear synergy here between Atomico and Zennström Philanthropies, with the latter helping to develop sustainable commercial models that could be supported by venture capital firms such as Atomico. ‘Obviously we have to be careful with Atomico. We’re a venture capital fund. I cannot take investors’ money and put it into something that I think is great for the environment but not good for profit. It’s the same with the pension funds: they can’t invest in something just because it’s green.’

That’s an advantage with Zennström Philanthropies, he says. ‘Because it’s using our own money, mine and my wife’s, we don’t have to be accountable to someone else who’s donated or invested money. Nor are we a family foundation founded three generations ago with some mandate that doesn’t really apply to today. If I want to experiment with models, I can. If I find an entrepreneur who has a business that is not yet 100 per cent investment grade but looks as if it will have a very big impact on the climate, I can invest in it.’

Making the business case

Asked what he sees as the biggest barrier to creating the impact he’s looking for, Niklas Zennström comes back to the need to make a business case. ‘Climate change is being portrayed as a problem, and associated with that is a cost to fix it. That in itself is a problem. We need to turn it around and show that individuals and businesses and cities can save money by moving towards a low-carbon economy.’

Credit Joe PennistonPart of this, he says, is putting a price on emissions. ‘I have had so many companies pitching to me that they have these great solutions, but the cost equation doesn’t really make it. If you factored in the real cost of emitting, all of a sudden these green solutions would work.’

This is why, in the short term, Zennström Philanthropies has decided to work largely with policymakers. The most important thing is to create an environment where commercial entrepreneurs can be sustainable. ‘But I think over time we’re going to be working more and more with sustainable entrepreneurs.’

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Photo caption: This castle at DisneyWorld, Florida uses LED lights. According to the Disney website, it only uses the power needed to run three tumble dryers.

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