In 2001, the company’s lawyers arranged a meeting with the RIAA and the MPAA – large groups of lawyers who flew in from the East Coast to meet at their lawyers’ office in Beverly Hills on Friday. That Wednesday, they discovered a leaked internal memo from the organizations they were supposed to be meeting with, calling them “Public Enemy No. 1 operating offshore.” The note said, “we should have made an example,” he recalls with a slight smile.
“Instead of going to the meeting, we drove around and around while the lawyers went about their business. Later that evening, when we went into our attorneys office, we changed clothes with two attorneys from their team to avoid service. After that, night after night, we moved from one shady motel to another, paying cash, until we bought our tickets at the airport an hour before our flight because we were sure they were tracking our credit cards.’
In late 2001, Sennström and Fries sold Kazaa for a loan of €600,000 (about $600,000 at today’s exchange rates). Then, in 2003, using Kazaa’s P2P backend, they founded Skype, an application that allowed users to make calls by connecting directly to each other. But the early days of Skype seemed to reveal something unexpected – that European venture capital was not interested in innovation.
“We’ve all been turned down,” he says simply. “We wanted to disrupt the global phone network with this peer-to-peer technology, and that’s a big challenge. Many of them were burned in the dotcom crash. The model they preferred was to take what worked in the US and do it locally.” He pauses and smiles. “Of course, we were also involved in a huge multi-billion dollar lawsuit . . .”
Nevertheless, Skype quickly became 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 Sandhill Road’s major venture capital firms offered to finance the company, but only if it moved to the US. “At that point we had already built a world-class team in Tallinn, London and Stockholm, and I didn’t want to leave my team,” he explains. “We knew then that we wanted to build Skype as a globally successful technology company based outside of Europe.” He refused the offer.
A year later, Skype became a unicorn — eight years before venture capitalist Eileen Lee coined the term — after being sold to eBay for $2.6 billion. It was the world’s largest tech M&A since the dot-com crash and surpasses 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 venture capital did not take any risks. The founders came to him and asked for advice. Venture capital funds invited him to their boards to look good. “Meanwhile, the only place in the world that had a functioning tech ecosystem was Silicon Valley, and I like to go against the grain and disrupt monopolies, so we set out with Atomico to break the US VC tech monopoly,” he says.