Last July, the New York Times Magazine published an article about the early days of a sizzling new Web company called Epinions. The headline said it all – "Instant Company: One New Internet Idea, Two Enthusiastic Venture Capitalists, Six Founders Leaving Behind Millions at Jobs They Quit, $8 Million Raised Before a Line of Code Was Written, 12 – Count 'Em – 12 Weeks." The new idea was recruiting Web surfers to write product reviews, thereby creating a site filled with useful content without going through the expense and hassle of hiring people to create that content. But that wasn't the point of the article, which was written by noted Silicon Valley chronicler Po Bronson. The point was that the light-speed launch of Epinions was an amazing thing, the sort of miraculous tale that could be told only now in the Internet age, in America, on that flat stretch of land along Highway 101 south of San Francisco. Except that on the other side of the world, in the 2,000-year-old Bavarian city of Augsburg, a 20-year-old named Valentin Yeo read the article in the online version of the Times and thought, "That's really a good idea." Yeo, an apprentice at an IT consulting firm in Augsburg, recruited seven of his computer-savvy friends and set to work evenings and weekends hammering together an Epinions facsimile. In six weeks they were done, but they didn't have the money to get their site up and running, and didn't know how to get any. So on a Sunday afternoon in early September, Yeo e-mailed a venture capitalist in Munich whom he'd read about in a German magazine, and asked for help. Within hours, the VC was on the phone, asking a shocked Yeo to come in for a meeting. Within days, the VCs had hooked Yeo up with a clean-cut trio of somewhat older and more experienced would-be Internet entrepreneurs from Munich, and lined up $4 million in funding. The newly formed company, Ciao.com, launched its site Nov. 15, only 10 -- count 'em, 10 -- weeks after Epinions's debut. That was remarkable enough, but it was just the beginning. By the end of November, a group of recent college graduates had launched another German Epinions clone, Amiro.de. Amiro was never able to get its hands on much funding (just $350,000 from angel investors) and has since merged with Ciao.com. But yet another group of Epinions copycats from Berlin made the VC rounds in early October and scored $2.5 million. Their site, called Dooyoo, launched in December. It is, muses Epinions co-founder and CEO Nirav Tolia, as if the Germans were saying, "You guys have got an instant company. Well, we've got it too." It's safe to say that instant companies – a.k.a. startups – are not what Europe is known for. In sharp contrast to the United States, the economy of the Old World has been dominated by old companies or spin-offs of old companies, with German software giant SAP (founded in 1972) the only notable exception. A lot of explanations have been offered for Europe's failure to breed successful entrepreneurs, particularly tech entrepreneurs: high taxes, risk aversion, an overly rigid educational system, too much state involvement in the economy – you name it. But the most obvious reason was simply that people who wanted to start companies had a hell of a time raising money. Around the middle of last year, that situation changed with a vengeance. VCs raised $5 billion for early-stage investment in European tech companies in 1999, up from just over $1 billion the year before, according to a PricewaterhouseCoopers survey. And while the spring Internet- and tech-stock collapse has calmed things down a bit, VCs focusing on the Internet in Europe raised billions of dollars more before the meltdown, and they need to find places to invest it.

The result is a new age. It's not that Europe suddenly has high-tech entrepreneurship and venture capitalism all figured out. The continent's startups are plagued by inexperience, unrealistic expectations, and a lack of new ideas (prime examples: Ciao.com and Dooyoo). As will become apparent in this article, a bizarrely high percentage of European Internet entrepreneurs and VCs once worked at the consulting firm McKinsey – which isn't necessarily a bad thing but does indicate a certain shallowness of the talent pool. And yet: For decades now, U.S. technology startups have been able to grow secure in the knowledge that, when it came time to expand beyond U.S. borders, they were unlikely to encounter much resistance. In the early days of the Internet, the story was the same. The Web may have been invented in Europe (at a nuclear research center in Switzerland), but the first serious browser software came from the United States, as did the pioneering search engines, the early content companies, and the first online retailers. And when a European challenger did appear, the high valuations U.S. investors were awarding Internet leaders meant that they could simply buy the competition from across the Atlantic. Those days are over. Epinions has been doing well in the United States, at least in terms of attracting an audience and capital. It has hundreds of thousands of registered users in its online community and has brought in $25 million in a second round of venture funding. But Ciao.com and Dooyoo have been attracting hundreds of thousands of people to their sites as well, and both closed $20 million venture rounds during the spring. They've also begun expanding into other countries, while Epinions hasn't. And when Epinions tried to buy its way into Germany, it found that it couldn't afford it. So while it's still far from proven that the Epinions business model will ever actually generate profits, the Germans at Ciao.com and Dooyoo are showing that they can roll it out even faster than the Americans who thought of it. This has significance way beyond the world of consumer-opinion websites."The startup process has gone global. I think that's unquestionable," says Bill Gurley of Benchmark Capital, an Epinions VC who played a starring role in that Times article. "I don't think anything is going to put it back in the bag." How did Europe, after all these years, finally get a vibrant startup scene? There are surely all sorts of important and complicated forces at work – globalization, greed, generational change, NFL Europe. But if you want to understand why Germany is now home to two well-funded, ambitious consumer-opinion websites, the best explanation is two simple, albeit German, words: Neuer Markt. Without the Nasdaq-like "new market" created by the Frankfurt Stock Exchange in 1997, none of the rest of this tale would be imaginable. There were VCs in Germany and elsewhere in Europe before 1997. The big three of Apax and 3i, both based in London, and Atlas Venture, founded in the Netherlands but with partners in several European cities and Boston, had all been investing in tech startups since the early 1980s. In Germany there was even something of a VC boom in the mid-1980s, with dozens of firms popping up. But most of those German VCs disappeared, and the survivors there and elsewhere in Europe practiced a more timid, less wildly successful brand of venture capitalism than that of Silicon Valley's Sand Hill Road. For good reason: Unlike in the U. S., there was no place in Europe to take promising but unproven companies public. The London Stock Exchange, for example, demanded that a company be profitable for three years before it could be listed. So when deciding whether to invest in a company, European VCs did so knowing that it might be a long, long time before they could get their money out. That finally began to change in the mid-'90s. In 1996, Apax chairman and co-founder Ronald Cohen, together with Nasdaq and a Belgian venture capitalist, launched a Brussels-based pan-European stock market called Easdaq. And while Easdaq hasn't exactly been a failure, even Cohen acknowledges that its biggest impact was in putting pressure on the Frankfurt exchange to create its own Nasdaq clone. In 1997 it did. On March 10 of that year, the Neuer Markt's first IPO, telecom upstart MobilCom (backed by 3i), jumped 52 percent on its first day of trading. A new German national pastime was born. The Neuer Markt is now home to 269 companies with a combined market capitalization of more than $200 billion. German newsstands overflow with fat new investing magazines. Online brokers are doing a booming business. Harald Schmidt, the country's David Letterman clone, holds stock-picking contests on late-night TV.

This is not a development that many people with experience of pre-Neuer Markt Germany would have dared predict. Which helps explain why, when the first young European Net visionaries began shopping around their ideas for local versions of Yahoo or Amazon in 1996 and 1997, they didn't have a lot of luck with the established VCs. It was just too hard to see where the profits would come from. Besides, these would-be entrepreneurs were a callow lot, most of them fresh out of a U.S. business school or a stint at McKinsey. So where did they turn? To upstart new VC firms run by people just like them. For the most part, these VCs hoped to cash in on their investments in Internet startups not by taking the companies public but by selling out to the U.S. competition. That was one reason European Net startups usually bore such an uncanny resemblance to already successful U.S. firms. "We preferred to avoid business-model risk," says Michele Appendino, who left McKinsey in 1997 to co-found Milan-based venture firm Net Partners, which was among the first investors in two European success stories – QXL in Britain and Selftrade in France. (They are copies, respectively, of eBay and E-Trade.) "We knew they were copycats, and that's why we liked them. In the worst case, we could sell to the U.S. company."


In Germany, the main VC firms that wannabe Internet entrepreneurs could turn to were Technologieholding, anomalous in that it was founded way back in 1987; Earlybird VentureCapital, started in 1997 by two McKinseyites and a former entrepreneur; and Wellington Partners, created when a grizzled German VC veteran joined forces with a young J.P. Morgan banker at the beginning of 1998. Among the copycats that Wellington backed was Alando, a German eBay



knockoff founded in February 1999 (five months after the real eBay went public) by four guys in their 20s. Four months later, Alando sold out to eBay for a reported $50 million. By U.S. standards that wasn't much; in Germany it caused a sensation. The Alando boys became celebrities. So, to a lesser extent, did their VCs. The Alando sale made Wellington's office in Munich – the country's VC capital – a must-stop for Germans hoping to get in on the Web bonanza. "If you have done Alando, all the big consumer concepts will come to you," says Ingo Krocke, a former Procter & Gamble brand manager and Apax VC who joined Wellington as its third partner in 1999. "We see all the copycats." At the same time, though, what happened in the Neuer Markt after the Alando sale made the folks at Wellington – and at the rest of Europe's venture capital firms – realize that selling out to the Americans wasn't necessarily such a great idea. Exhibit one was Ricardo.de, another German eBay clone founded not long before Alando. Ricardo went public on the Neuer Markt in July 1999 with a valuation of about $250 million. In May of this year, it joined forces with QXL, its fellow eBay clone in the United Kingdom, in a merger that valued the German company at $1 billion. For those not clear on the math, that is a lot more than $50 million.

It was into these roiling waters that Valentin Yeo steered his e-mail last September. (The German magazine article that had tipped him off to the existence of Wellington Partners was, of course, about Alando.) Wellington's Krocke, it turned out, had already heard of Epinions. In fact, a few days before Yeo contacted him, he'd been visited by a couple of recent college graduates from Cologne pitching a knockoff of U.S. community site eCircles. Krocke told them that they were copying the wrong idea, and that they should check out this new company called Epinions. One of them already had, and had sent an e-mail to Epinions in California asking whether it would be interested in a German branch. He got no response (at Epinions, they figure the e-mail got lost in the deluge after the Times article), so the team followed Krocke's advice and founded a clone of its own, Amiro.de. After meeting Yeo and his crew, and deciding that they were too young and geeky to actually run a company, Krocke tried to hook them up with the Amiro boys, who were only slightly older but had at least studied business in college. Then Krocke got a call from Fred Paul, somebody he used to work with at Apax. Months before, Paul and two pals, former McKinsey consultants Max Cartellieri and Verena Mohaupt, had shopped around a proposal to launch an iVillage-y women's site in cooperation with magazine publisher Burda. Krocke took a pass on the idea, but he liked the trio and knew they would appeal to investors. So when Paul called to say that his group had a "new" idea – another Epinions clone – Krocke immediately introduced them to Yeo and friends, and thus did Ciao.com come into being. (The name, in case you were wondering, stands for consumer intelligence aggregation organization. Amiro, meanwhile, doesn't mean anything.) The $4 million in startup funding came from Wellington, Burda, and the Kreditanstalt fur Wiederaufbau, a government-owned bank that matches most German VC investments with low-interest loans.

The Dooyoo (as in "Do you know about... ?") guys made the rounds a few weeks later. CEO Felix Frohn-Bernau says he and his five co-founders (a group of Berliners in their 20s and 30s, some with actual business experience) slapped together a business plan in four days and four nights in late September, mailed it out to VCs on a Friday night, took a train from Berlin to Munich on Monday morning, and put in calls to VCs saying they were in town to meet with other VCs. Wellington's Krocke met them and liked them a lot, but he had already committed to Ciao.com. A few blocks away at Earlybird, co-founder Hendrik Brandis (ex-McKinsey) had no such conflict. "They sent over the business plan and we said, 'Yes, we agree,'" says Brandis. Before long, with money from Earlybird, Technologieholding, and, of course, the German government, Dooyoo was on its way. The first that people at Epinions heard of all this was an e-mail from a German journalist in September, warning them that somebody (Ciao.com) had pirated their idea and was preparing to launch a rival site. Epinions's initial response was outrage; the company fired off a nasty e-mail to Cartellieri threatening to sue. But Cartellieri's response was disarmingly nice, and hinted of possible cooperation. So Epinions CEO Tolia, an effusively friendly young Texan, responded in kind. On a Sunday afternoon a few weeks later, the founders of Ciao.com and Epinions gathered together at Benchmark's office on Sand Hill Road. The meeting went well. "We realized right off the bat that they were smart folks," says Tolia. "Somewhere along the way during that afternoon, we said, 'We can work together.'" Later on, Amiro entered the equation. After a long, weird odyssey of meetings in Germany and California, Epinions came close to closing a deal with the two companies to create a European site in which Epinions would hold a two-thirds stake. But when Ciao.com ran this deal by its VCs, and Amiro by its angel investors, the answer was no way. "I got a call from one of Amiro's business angels, and he was just very, very rude," Tolia recalls. "He said, 'We went through this once with Alando, and we're not going to let it happen again.'" At one point during this saga, Tolia and a couple of his Epinions colleagues paid a visit to Dooyoo headquarters in East Berlin. They discovered that Dooyoo's founders had gotten more out of that Times article than just the idea for their company. Throwaway phrases from the story – "drag coefficient," a joking reference to the things like long commutes and marriages that might keep potential hires from putting in enough hours, and "Are you obsessed?" which appeared tacked to a bulletin board in a photo that ran with the article – had been adopted at Dooyoo as dead-serious buzzwords. "It was bizarre," recalls Tolia, "seeing this hyperbolic magazine article about our lives reflected in this company in Berlin." Much of what has gone on in the European Internet scene over the past couple of years similarly wavers between homage and parody of what happened in California a few months or years before. Silicon Valley's Internet startup mania of the mid- to late '90s was built upon decades of experience with startups, venture capital, and IPOs. Germany and the rest of Europe have been scrambling to build the same infrastructure in just a year or two. It hasn't always been pretty, or sensible. But as Epinions has discovered, neither can it be ignored. The most obvious unignorable fact is the money: With their $20 million second rounds – Ciao.com's from Wellington, Apax, and Geneva-based Index Ventures, and Dooyoo's from Earlybird and Technologieholding – the two German clones are almost as well funded as the American original. Internet-specialist firms like Wellington and Net Partners that had only a few million dollars to invest in 1997 or 1998 now have funds in the hundreds of millions. Meanwhile, big European VCs Apax, Atlas, and 3i have turned their full attention to the Internet. (One of 3i's moves in this direction has been to acquire Technologieholding.) And deep-pocketed American VCs are interested now as well. Among the first to cross the Atlantic in search of new investment opportunities were Los Angeles-based Global Retail Partners, D.C.-based private equity firm Carlyle Group, and B2B holding company Internet Capital Group. In May, Benchmark was the first top-tier U.S. VC firm to join the fray, with a $750 million European fund.

This means that even though public equity markets in Europe have turned against money-losing Net companies just as fiercely as has happened in the United States, there's enough VC money sloshing around the region to ensure that all but the most unfashionable ideas (seen any good sportswear-retailing sites lately?) still have a shot at funding. And beyond the money, European Internet companies, while they struggle with some obvious disadvantages in relation to their American rivals, do have a few points in their favor. For one, there still aren't all that many of them, so they're less likely to get lost in the fog of dotcom overkill that descended over many U.S. startups last year. The original New York Times Magazine article notwithstanding, Ciao.com and Dooyoo get far more media attention in Germany than Epinions does in the United States. For instance, Ciao.com's Cartellieri has been writing a regular "startup diary" for Tornado-Insider, Europe's version of the Red Herring, a Stateside venture-capital trade magazine. Also, Dooyoo's Frohn-Bernau shows up regularly in the German press commenting on weighty matters like taxes and immigration. The attention pays off: Media Metrix figures make direct comparisons tough, but both Dooyoo and Ciao.com appear to have attracted a bigger share of the Web audience in Germany than Epinions has in the United States. Of course, America's Web-surfing public is vastly bigger than Germany's. But within another year or two, it won't be any bigger than Europe's. And that's where things get interesting. Ciao.com and Dooyoo may be brazen copycats with inferior technology and less-experienced executives and VCs than their American counterpart. But they're already becoming experts at something Epinions has yet to do: setting up shop in other countries. Less than a year after their founding, both Ciao.com and Dooyoo have operations in Britain, France, Italy, and Spain, as well as Germany. How'd they do it? Well, to start Dooyoo Spain, Frohn-Bernau – who used to work as a lawyer in Madrid – called up a friend who works at McKinsey there and asked whether he could drop by. Once there, Frohn-Bernau gathered his friend and a few colleagues in a conference room and told them about Dooyoo and his hopes to launch a Spanish operation. This was at the end of February. By the end of March, Dooyoo.es was up and running, under the command of two by-then-former Madrid McKinseyites. As they never say in Spain, this ain't rocket science. But it's something you don't see three-month-old U.S. companies even contemplating. And a lot of European entrepreneurs and VCs are convinced that the experience they are gaining now in building border-crossing startups will give them a crucial advantage in the future – especially as Europe begins to generate Internet ideas (for the wireless Web, for example) that aren't copied out of American magazines. "The old model is to first show on the American market that your business model is scalable, then go abroad," says Gert Köhler, co-founder of Technologieholding and now the head of European tech investing for 3i. "Today that's too slow." If he's right, the building of instant companies has entered a new stage. And the flatlands along Highway 101 may no longer be the best place in the world to do it.

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