Martin Varsavsky of Fon: the future is hardware. “Things!”

Martin Varsavsky is one of the most succesful entrepreneurs in Europe. Argentinian by birth, he started his career in New York real estate before moving to Madrid, where he founded seven companies, among which telecom provider Jazztel, Viatel (fiber optic circuit) and the popular Spanish portal, which he sold in 2000 to T-Online for a reported 550 million euros.

More recently, Varsavsky is the man responsible for compulsive “hotspot checking” behavior that can be observed in countries where his peer-to-peer wifi network Fon rolled out – people whipping out their smartphones to check if there is a Fon hotspot around here somewhere?

Varsavsky is also a big supporter of the European startup scene. A cheerleader with a wallet: he’s a superangel with investements in over 20 companies like Seesmic, Tumblr, Index Ventures, Pixowl (the full list is available on his blog). We asked him about innovation and entrepreneurship in Europe today.

In a recent blog post, you called for a real “United States of Europe”. You were talking about financial market regulation, but do you think the political integration should go even further? Labor law, social security, those things? Might that be beneficial to young European companies?

Varsavsky: I don’t think that we really need that. I was really referring to a stronger central banking authority and treasury, that allows countries to operate within narrow bands of credit.

I’m actually not against diversity in labor and social regulations – in a sense that I think that if we went for an average of European law, that average could be pretty bad. We need experimentation, and that requires diversity.

You don’t feel that European SME’s have trouble crossing the borders right now? Because that’s what I hear often when talking to European businesspeople and startups: it’s so hard to sell to Germans, or Italians if you’re not German or Italian.

Varsavsky: That depends on what you’re offering. In the case of Fon, we’re growing all over Europe, and different countries like Fon in the same way. Skype, for example – started by my partners Niklas Zennström and Janos Friis –  became a global force. There were no real barriers to using Skype.

The ones who are amazing at going pan-European are the Americans, because they’re unaware of the prejudice and the history of Europeans. Their ignorance works in their favor. They think we’re all the same, and if you think of it: we actually are very much alike.

“The barriers Europeans see are often in their head”

Europeans need to worry less and just go abroad?

Varsavsky: Yes. Most of what European businesses need to scale internationally, we already have: the ability to move labor around, for example. That’s even better than what Americans have: they have NAFTA, which allows them to trade goods freely, but it doesn’t allow them to move labor around – Mexicans or Canadians can’t come in to the US. In Europe, we can move people around. They have to want to move, but there are no legal barriers.

But I have a sense that something is changing in the mentality. If you go to Berlin now, a lot of the startups there are not German. Europe, overall, has the right frame for startups to prosper. A lot of the barriers that Europeans see are more in their head. There are some barriers, of course, but then compare it to America – one country, one market, right? But is that really true? If you’re tech startup from Arkansas, people will judge you differently than if you’re a startup from Silicon Valley. Even in the US, there are clusters of success, and there are actually big chunks of America that are very… unremarkable and unsuccessful. I think Europe is well positioned. Europe is the largest GDP (gross domestic product, rw) market in the world!

I don’t know if any American company has ever become really successful without succeeding in Europa. I can’t think of any. Google is what it is thanks to Europe – I think Google probably makes more money in Europe than in America, or at least the same. At one point, 17 percent of the earnings of Google came out of the UK alone. Facebook has as many members or more in Europe than the US.

So European companies don’t grow as fast, because they hesitate too long before jumping across the Atlantic to expand in the US market?

Varsavsky: Not quite, there is a unique spirit in Silicon Valley – which shouldn’t be confused with all the United States, by the way. Silicon Valley is an innovation cluster which is unparallelled in the world. But Silicon Valley is not the US. A lot of people in the US are trying to find a way to replicate Silicon Valley in their backyard. New York is beginning to compete – a little. But that’s it!

If you do a ranking of tech innovation with other cities in the US – Boston, Seattle, New York etcetera, I think European cities would come in pretty close behind Silicon Valley. Third, fourth, fifth position. They would come in way ahead of many American cities I can think of.

Silicon Valley is not a typically American phenomenon, it’s just unique in the world, because it has the combination of amazing universities with VC’s next door on Sand Hill Road, and the most important tech companies in the world who acquire startups, and then it has the best financial market in the world for tech companies to go public: NASDAQ. Stanford, Sand Hill Road, Mountain View and Cupertino. Not even in Boston, where they have Harvard and MIT, can they replicate this. Harvard and MIT are trying to get the Boston VC’s on board, but still: Zuckerberg went to Silicon Valley to do Facebook, right? Everything just clicked in Silicon Valley.

A VC recently told me: the risk of starting something in the US is just lower, because in the US, bigger players are more likely to acquire smaller players. Whether as an acqui-hire, or for the product. The European mentality would be to let you fail first, and take your engineers later.

Varsavsky: I think acqui-hire now happens because of the huge demand for engineers in Silicon Valley. Once they find a team of talented engineers who manage to work well together – even if they fail at whatever they’re trying to make – they get them. But it only happens in Silicon Valley. Because I’ve heard of startups that were in talks about acqui-hires, but when the buyer became aware that the team was actually in Romania or India, they just lost interest. Because they like the proximity.

It’s a bit chauvinistic, but it is not going to change anytime soon. They just like to have people close. In fact, when Google invested in Fon, we felt quite a lot of pressure to move to Silicon Valley. We didn’t. I couldn’t move, for personal reasons, and for Fon  it’s just easier to hire here in Spain. We’re now the largest WiFi network in the world, we have a traction here that we wouldn’t have if we relocated. On the other hand – not only salaries are higher, but valuations are higher when you’re there!

Who’s building global companies from Europe?

There are signs that Europe is becoming more entrepreneurial. I saw a headline recently that said: “Everybody wants to be an entrepreneur”.

Varsavsky: Paradoxically, that’s a positive effect of an employment crisis: the opportunity cost of being an entrepreneur goes drastically down. A crisis is terrible, but some things get better: there’s less pollution, traffic. And more entrepreneurship. For young Europeans, there just aren’t that many jobs. And even if they find a job, they know it doesn’t offer the security that it once did. They want to be masters of their own destiny, and give entrepreneurship a try.

Do you see any young Europeans that will go all the way?

Varsavsky: Daniel Ek of Spotify is building an amazing company, and he’s only 27 or 28. I’m sure there’s a few more. There’s a startup in Madrid called Busuu which has become the largest language learning community in the world, and it’s grown very fast – people teaching each other languages. That’s a former student of mine, who’s Austrian but lives here in Madrid.

There are entrepreneurs in their twenties building global companies here. We’ve done amazing things with low cost airlines, too. Europe really leads the way there.

You’re described as a “super angel”: how many companies are you currently invested in?

Varsavsky: I couldn’t say exactly, you can read the entire list on my blog. Actually, I wouldn’t describe myself as an angel investor. I’m actively involved in a lot of startups to help them grow, and sometimes I get some shares in return for that work. For me, being an “angel” is not just about investing, but a lot about mentoring.

There’s two kinds of investors: the ones investing in founders and people, and the ones investing in ideas or companies. What’s the most important consideration for you?

Varsavsky: I invest in products I use, made by entrepreneurs that I like to hang out with, at valuations that I can stomach (laughs).

If you were 23 right now, what would you try master? Looking beyond hype du jour big data, what are the next, next big things according to you?

Varsavsky: (thinks) Well, I like hardware. Things. Fon is made of routers. Hardware was out of fashion – but digitised things, things that can talk to the internet, that’s really interesting right now.

Spotnik, a company that Varsavsky invested in, is located near the Zermatt.

Spotnik, a company that Varsavsky invested in, is located near the Zermatt.

I’m investing in a company called Spotnik, in Switzerland, that’s like a mobile operator for things. I’m very interested in the question: how can you make a thing digital? How can you make the room tell you about air quality, temperature. It’s not just a matter of connecting things to the internet, but enabling these things to do some useful thing. I’m very interested in that. Or software that enables hardware. Things that didn’t use to have software, to make them come alive in a different way.

Take cars: there are tremendous opportunities in cars – it’s incredible that they’re not connected to the internet. They should be connected to the internet all the time! People have been working on that for twenty years, I’m amazed that certain things still haven’t happened.

I’m also a big believer in social travel: it’s crazy that you can’t book airline seats according to your Facebook or LinkedIn connections. There’s a lot of efficiencies that can be created. Travelling is uncomfortable, and the food is terrible, but if you sat next to someone who was interesting, that can change the whole experience. I also see opportunities in friend radars. When you go to Facebook, they don’t tell you who’s nearby, they tell you who checked in latest. I have friends from all over the world, and sometimes these people are shown as “nearby” when I know for certain that they’re not! Not even Facebook has developed a decent radar to find out where my friends are at night when I want to go party. The combination of social and geolocalisation is very promising, I think, so that you’re closer to people you like. Whether at a restaurant, a bar or a plane.

How Fon gets Google and Microsoft to play nicely together

Speaking of Fon: how did you get the telco’s to go along with the idea of Fon? You’re basically piggybacking on their platform, to offer free wifi hotspots. To put it bluntly: it seems to go against the self interest of telco’s, and they’re not known to go against their self interest often.

Varsavsky: When you first look at Fon, you tend to think of it as peer-to-peer wifi. And just like peer-to-peer music destroyed the music industry, you’d think that Fon will destroy the telecoms. That’s the first take that people have. Because from a consumer point of view, Fon is amazing: you share a hotspot at home, and you roam the world for free. People can’t reconcile it with the telecoms, because they think that telco’s really make a killing with roaming. They think that telco’s want to charge you when you’re at home and when you’re on the go.

But the reality is much more complex. First of all, you’re always paying somebody when you use Fon. That was my idea from the beginning: everybody was trying to do free wifi networks. I was thinking: how will they finance that? So from the beginning, the idea was: share wifi at home, and roam the world for free.  But the only way to share your home wifi is to pay a telco for a DSL connection, right? People who don’t share a broadband connection at home have to pay FON to connect. In this sense, Fon is not like peer-to-peer music piracy. There are never any free riders on Fon. And therefore, it’s not a threat to the telco’s.

We disovered that on the contrary, Fon is beneficial to the telco’s. Because Fonera’s are less likely to change providers. Even if consumers are seldom home, they keep their DSL connection, because their home connection enables them to connect to free hotspots when he’s on the road. Before Fon, this kind of customer would just cancel his DSL connection. All of this is  not obvious to the consumer, but it is clear to the telco’s that we increase the amount of connections and lower the churn.

Another issue is cost. It’s 90 percent cheaper to send a gigabyte of traffic over a landline than to send it over the mobile network. And the mobile networks are saturated anyway. So the telco’s actually prefer people to offload all that smartphone traffic to fixed connections. And that’s exactly what Fon does: we do a lot of offloading for the telco’s, and again they profit from this.

That’s really why the telco’s love Fon, and are even shareholders: BT is a shareholder. And Google and Microsoft – companies that normally never collaborate, collaborate in Fon. Because everybody wants a wifi ecosystem.

What’s the next big step for Fon?

Varsavsky: We will focus on growth, country by country. We did Belgium and the UK, now we’re active in France a lot, and then The Netherlands and Germany. We’re trying to get ubiquitous coverage: wherever you are, you’ll find a Fon hotspot. Not as ubiquitous as the GSM network, because we’ll never reach that. But we will compete in throughput, speed. We believe in a world where wifi and mobile network will work side by side: we will complement the mobile network.

“The hardest part is earning the first million.”

What’s your advice to young entrepreneurs?

Varsavsky: I think entrepreneurs should focus on creating interesting, appealing, fun employment. We need more employment that is appealing. One thing is how much you make, but another is: how much do people like their job. The US has been very good at creating fun, creative jobs in startup companies, and I’m convinced that Europe can do the same.

You’ve created a few big companies: what was the defining moment in your career?

Varsavsky: Oh, without a doubt: when I earned my first million dollars. I was 25 then, at university, and I raised 12 million dollars to convert loftspace in Tribeca. That was harder than anything that came afterwards (laughs).

Watch the young Martin Varsavsky put together his first deal in this fascinating video!

Watch a video of how a 25 year old Martin Varsavsky put together his first deal here!

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Raf Weverbergh

Editor of whiteboard. Raf Weverbergh was a magazine journalist whose work appeared in magazines like Rolling Stone, Playboy, Mail on Sunday, Publico and South China Morning Post. He is the co-founder of FINN, a corporate communications agency where he advises startups and multinationals on their PR and Mustr, the easiest media database for PR professionals. You can contact him on Twitter, Linkedin or Skype (rafweverbergh).

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