MORE ON SKYPE... BEHIND THE SCENES TO THEIR FUNDING AND SUCCESS

Tim Draper has a midas touch. Read this interview at AO about how he funded Skype:

Draper: I came out to see Niklas because he created Kazaa. When I met him, we had a wonderful conversation. We talked about a variety of things, and then he said, 'Well, I'm thinking of starting this new business.' And the business he described was fascinating, but it had nothing to do with what we've done here at Skype. I was so impressed by Niklas that I just said, 'OK, I'll fund you, whatever it is. You go do it.'

I heard that Draper rejected Niklas's first idea and wanted to do his second, which was Skype.

PE Week Wire's Daniel Primack has some of the background information of Skype's funding rounds:

Have you heard that eBay is buying Skype for up to $4.1 billion? OK, that's just a little joke, since there already have been over 350 print articles on the deal and at least one thousand Internet mentions (it also was our top news item yesterday). The vast majority of these articles are of the "The bubble is coming, the bubble is coming" variety, with folks unable to reconcile a commerce/payment company like eBay paying so much for a communications company like Skype. My opinion on the matter is that I don't have an opinion, since my primary interaction with eBay involves searching for last-minute Patriots tickets. So rather than laud the deal for shock value or slam the deal to be popular, let me talk a bit about the original VC investment that will produce a multiple in excess of 100x.

Luxembourg-based Skype was seeded in 2002 by Draper Investment Co. (Bill Draper's firm), but got its major VC infusion -- $18.8 million -- in early 2004 from Draper Fisher Jurvetson (Tim Draper's firm, via its ePlanet arm), Bessemer Venture Partners, Index Ventures and Mangrove Capital Partners. It likely will go down as the most lucrative deal done by any of those firms (including DFJ's Baidu.com play), so I spent some time yesterday asking Rob Stavis of Bessemer why he pushed for the original investment. His answer is stunning in its simplicity.

According to Stavis, Bessemer was already looking around the VoIP space when it first met with Skype in the summer of 2003. The firm was impressed with the founding team's P2P pedigree (they previously co-founded Kazaa), and thought that the business model made sense from a scaling perspective. What really seems to have sold them, however, was the ease and reliability of Skype's software, which they initially tried out in beta. Specifically, this was one of those rare pieces of software that Stavis and a far-flung colleague could download at the same time and be using five minutes later. No firewall issues, no "this doesn't work on my PC" problems. It may sound basic, but think about all the times you and a colleague have tried to download a piece of software (particularly communications software), only to find out that it works far better on his computer better than on yours.

"Regardless of the firewall, it would traverse the network and find the connection," Stavis explains. "And then it worked 100 times better than anything else we had seen."

I'm not saying that VCs should always invest in something just because it works (and there obviously were other factors in the Skype decision), but it is worth remembering that a product is only as good as is the customer experience with that product. Bessemer understood that, which is why its limited partners are about to be much richer.

UPDATE: Matt Marshall has more on the Skype story, "Skype hunt: How VCs struck gold in Europe"

UPDATE II: BusinessWeek has an article on the Skype deal, "Skype's "Aha!" Experience"


[tags: skype, ebay, tech, voip]