The best line about the whole Skype saga has been that “everyone who has ever done a deal with the Skype guys has walked away unhappy.” I think it came from Tech Crunch.
Now, Index Ventures and alleged slime ball Mike Volpi are out, and in their place comes the original dashing duo.
Read more. But I wonder, how long before Volpi leaves Index to “spend more time with his family?”
And seriously, what is wrong with a VC like Index to begin with?
Background
Mike Volpi was the executive at Cisco who ran M&A for John Chambers. His recommendations made millions for others (whose companies Cisco acquired) and helped make Chambers more and more powerful. Over time, he was asked by the founders of Skype, Janus Friis and Niklas Zennstrom, to sit on their board.
Then, Skype is acquired by eBay for over $2B in 2005, Friis and Zennstrom retain the underlying P2P platform, called Global Index, through their ownership of Joltid. In the sale to eBay, investors Index Partners and partner Danny Rimer make a killing.
Joost is Hatched, and Flops
Friis and Zennstrom launch Joost, a video P2P platform, using the same Global Index platform. Company raises $45M from a blue-chip roster of investors including CBS, Viacom, and many others.
Eventually, they recruit Volpi to become the CEO of the fledging video startup. Volpi, Friis and Zennstrom realize that the NBC/News Corp.-backed hulu has stolen their thunder and try to right the ship, by dumping the software client distribution model and adopting a browser strategy. By then, Joost hits considerable headwinds and decides to dump the consumer strategy and focus on white label licensing.
Back to Skype, but How?
Friis and Zennstrom wonder what to do next. Their focus shifts to their one main hit: Skype, currently in eBay’s hands. Volpi, meanwhile, wonders if he did the right thing by leaving the friendly confines of corporate life for the rough and tumble world of startups.
All equally troubled by the turning of events, they meet to explore their options. How crazy would it be for them to hatch a plan to reclaim their crown jewel Skype… but how to do without triggering a bidding war with corporate and private equity giants?
The Plan?
Since Joltid retained the source code for Skype, eBay only had access to an executable program. They probably ask Joltid for the right to tweak the software, Joltid ignores their request or outright denies it. Fearing the worst, eBay starts to tinker with the code, Joltid jumps on opportunity to claim that eBay is violating the terms of the license, they sue to prevent eBay from both tweaking the license AND from selling Skype to anyone else (Google, MSFT, etc.).
Fearing that they might lose the case to eBay, how crazy would it be for Friis and Zennstrom to offer Volpi an offer he could not refuse:
Use confidential material information to sell Skype to a third party by convincing them that he had the secret formula to get around the technical challenges posed by relying on the Global Index, but leave enough of a trail so that Joltid could pursue Volpi and the new buyers Volpi shepherded to ultimately force eBay to instead sell Skype at a steep discount to them as part of a settlement?
This way, Friis and Zennstrom did not have to enter into a bidding war against the much deeper pocketed Google and Microsoft, and private equity players that would underwrite this plan would be once bitten, twice shy about pursuing Skype as well?
You could argue, would Volpi do this?
Honestly, I don’t think so. I also don’t think - judging from the legal documents that Friis and Zennstrom unleashed on Volpi - that this is a case of three buddies hatching a grand scheme, but it does make for a great movie script, doesn’t it?
- Volpi stinks just as much as Friis and Zennstrom.
- Skype Founders Are Destroying Their Reputation and Ability to Recruit and Invest in Talent.
- Joltid jilted eBay, Twice?
Yesterday I suggested that Janus Friis and Niklas Zennstrom are better off letting bygones be bygones, but today the Skype saga got juicier and Mike Volpi is painted as the main culprit.
From GigaOm:
The gist of the lawsuit is that Volpi learned how to modify Joltid’s proprietary software to run on the web without the aid of a peer-to-peer software when he was transitioning Joost from a peer-to-peer service to a web-based Hulu clone. And with this knowledge, he was able to pitch a version of Skype that buyers could take over from eBay while side-stepping ongoing litigation.
(…)
“Volpi and Index lacked the credibility and financial heft to lead a private equity investment consortium to acquire Skype unless and until they advertised their knowledge of the Confidential Information.”
“In a very short time, Volpi burned through a substantial amount of the working capital available to Joost at the time he became CEO. Moreover, he had removed from Joost a significant portion of Joost’s innovating and market-driving technology, leaving Joost to rely on third-party technology products. Volpi’s overall business strategy failed. Moreover, it was a failure that was extremely expensive, with Joost expending tens of millions of dollars of investors’ capital.”
—Volpi is described as “a faithless fidicuary” who “took advantage of the trust and confidence placed in him to steal confidential, highly proprietary information relating to an extremely popular Internet-based technology, as well as other strategic, commercially valuable and sensitive information.” As president and CEO of Joost, Volpi, they claim, had access to info from both Joost and Joltid—including the Global Index P2P software that powers Skype and other Zennstrom-Friis efforts. Joost had the source code; Skype had more limited access—an executable-only code form of GUI. (That’s the license that is being litigated in the UK between eBay and Joltid; Skype’s continued use of the code is the subject of the copyright infringement case.)
and Tech Crunch re: the technical aspect of why Skype could never open up to developers:
A source code version of the GI Software is licensed by Joltid to Joost, allowing Joost to be the first company to successfully deliver television and other video content in real-time over a peer-to-peer network. An executable-only object code form of the GI Software was licensed by Joltid to Skype, a well-known Internet-based company that provides users throughout the world with free or low-cost telephone services over the Internet. Skype did not obtain a license to the GI Software source code, however, and the license it did obtain was terminated based on Skype’s breaches of the license agreement.
This is getting ridiculous. Is there anyone in this saga that doesn’t stink, basically?
Kazaa/Skype/Joost - and I guess Joltid - founders Janus Friis and Niklas Zennstrom are richer than God. Let’s get that out of the way.
Kazaa was a disruptive and destructive force in music that took the baton from Napster after the RIAA killed the popular file sharing software. But Kazaa’s fate was no different than Napster’s.
Skype, on the other hand, was not only disruptive but also wildly profitable. The duo cashed out admirably in a sale to eBay. It turned out, of course, that eBay bought everything but the underlying technology.
Joost was a disaster from Day 1, and as one of WatchMojo.com’s distribution partners, that was clear from Day 1. We try to tell them all of the things they were doing wrong, to no avail.
Regardless, even if every other project they touch fails, they have made their mark - and earned their fortunes - with the sale of Skype. However, I wonder if this has made them lose their senses.
In fact, I think that it’s a good thing that they two seem to have begun to focus on investments through their Atomico Investments, because I think they are damaging their own reputation as entrepreneurs and businessmen with the way they have handled everything since the sale of Skype.
For one, selling eBay the company without the technology is just bad form, even if the clueless Meg Whitman didn’t see a problem with this. I understand Friis and Zennstrom planned to use the underlying Joltid peer-to-peer Global Index technology for subsequent projects, including Joost, but it is simply bad form. What they should have done is worthy of a separate article.
However, the fact that they are now suing former Joost CEO and Chairman Mike Volpi is also bad form, because I don’t think that they will be able to recruit as many would-be CEOs in the future. By the looks of it, if what they allege is true, Mr. Volpi has also acted questionably, but at some point, you cut your losses and walk away.
As an entrepreneur, I inquired with Atomico way back in the day (full disclaimer: Atomico since invested in DECA, another content producer, though in no way really competitive with WatchMojo.com), but seeing how they have gone about this eBay/Volpi mess… you have to ask yourself, if you are an entrepreneur, does this saga make you more or less interesting to partner with them?
If they are now investors, the answer to that question should trouble them.
Here is my interview on Business News Network to talk about the eBay sale of Skype, watch it here.
eBay makes it official, here is the press release, here are some thoughts on the deal.
Q&A:
Q) They’re buying it at $2.75B – is that price tag too hefty?
Well, eBay overpaid for it back then, so while the business has grown the economic reality is less hype-ish and businesses are judged more on the P&L. But ultimately, in an M&A, it’s a combination of what a seller wants to let go of an asset and what the market will pay for it: eBay’s CEO had recently said that $2B was too low and since a private equity firm stepped in to make it happen, $2.75B seems logical given all of these variables.
Q) Why does this deal make any more sense than when Ebay bought Skype, (other than a lower price tag)
eBay made no sense but the notion that adding call options would increase sales and conversion was plausible. Ultimately, it wasn’t. The failed merger had more to do with culture and management than strategy, though. This can make sense if the right people step in. Skype, however, is no longer on the cutting edge of technology, in fact, they have fallen behind on some major opportunities they had.
Q) Are they angling for a potential IPO?
Yes, definitely.
Q) What about Ebay? How would unloading Skype affect Ebay stock (short and long term)?
The litigation involving Joltid was going to freeze the company from IPO-ing Skype or doing much to bring in more talent. Ultimately this is a distraction for eBay, which should focus on Paypal anyway.
Q) What’s the future for Skype?
Content sharing network + communications platform.
Q) eBay is keeping 35%, why?
It’s a tacit admission that eBay remains bullish on the future of Skype but is honest enough to say they’re not the best at maximizing value.
It’s also a sign that the market is not giving them the price they wanted for a full sale, so this way, they get some cash and keep some chips on the table.
I mean, people will forever think eBay was dumb in buying Skype, they don’t want to be known as twice as dumb for also selling it before someone else cashes big time.
Everything boils down to timing: a few years ago, as a publicly traded company, Doubleclick was in the gutter. A PE firm took them private for $1B and then a couple of years later, Google bought them for $3.1B. By and large, this was the same company, but the mood of the market had changed.
It is astounding that eBay forked over $3B for Skype and didn’t actually buy Skype’s underlying technology.
It is amazing that they didn’t realize this and outright criminal that they didn’t get a fully-paid, irrevocable, perpetual, non-exclusive (exclusive for the purposes of international calling) license.
Om Malik has all of the links you need:
- Skype Founders suggest they still own underlying technology to Skype
- Will Joltid turn eBay’s planned Skype IPO into a nightmare?
- Why eBay Should Accept Skype Founders’ Buyout Offer.
Now this will probably get settled one way or another, and as a non-Skype user, non-eBay shareholder, I don’t really care either way.
But a few points:
- this proves that just because you hire expensive lawyers doesn’t mean anything.
- One more example of upward failing, and to think this woman, Meg Whitman, could have been our Treasury secretary. I am sorry how wonderful Ms. Whitman was, this was done on her watch and it’s just appaling in terms of botched due diligence.
- With all due respect to Skype founders Niklas Zennstrom and Janus Friis, you have to wonder, will anyone ever buy a company from them again? I mean, sure Viacom/CBS and a number of VCs invested in their next venture Joost (hmm… is there such a thing as karma?), but this was before this bit of news was out. Ultimately, I am not sure I would have a lot of comfort and confidence doing a deal with these guys.
Accel’s Jim Breyer is joining eBay’s board. I am not a major fan of VCs, admittedly, most are having a hard time running their own business, let alone giving sound advice to the businesses they invest in.
But some VCs have managed to build their brand quite well, deservedly so, oftentimes through shrewd investments, sound decisions and a healthy dose of networking.
Breyer is probably best known for being on the board of Facebook and one of Mark Zuckerberg’s biggest backers. But while everyone can question Mark Z.’s wisdom for not selling Facebook yet or his management team’s game of musical chairs, as an entrepreneur myself, I must say, it’s great to see Jim Breyer back Mark Z. 100% (I don’t doubt if privately they have heated exchanges, but at least in public, the man stands alongside and behind Mark, and doesn’t seem to try to get in the way).
Anyway, what’s interesting about Breyer is that he’s not just a sought after board member of startups, but also established powerhouses such as Marvel and Walmart. Well, you can add eBay to the lot, too. For eBay, this is critical since they just announced spinning off Stumble Upon and word on the street is that Skype is next.
If a company shells out billions on startups ($4B for Skype, $75M for Stumble Upon) and doesn’t know what to do with them, they lack startup mojo, and perhaps having someone like Breyer on board will allow them to not just spot amazing opportunities but integrate and scale them further. Read Mark Arrington’s man crush here.
And speaking of Marvel, check out some of these videos on DC Comics and Marvel action heroes below:
“eBay announced that it had aquired Bill Me Later for $945 million. Bill Me Later raised about $200 million and it sold for a valuation of 6.5 times 2009 revenues.”
$75M is a lot of money any day, but while a few years ago it seemed like a small exit, today it’s actually a very high figure, especially for the Web 2.0 variety of startups that are built on low funding, such as Stumble Upon.
eBay bought SU a couple of years ago for $75M, and if you believe the rumors, the company is looking to unload it, but is seeking the same amount.
Few companies will fetch $75M these days, especially a social media one, which does not really have the DNA makeup advertisers want.
There are way too many social bookmarking / social news services out there. Even the so-called Cadillac of them all, Digg, has been unable to find a buyey: not at $150M (News Corp.), not at $200-300M (Google). It recently raised nearly $30M, allowing founder Kevin Rose to cash out a bit. Ultimately, I think Digg is a cool site, but with MSFT providing the bulk of its revenues, the company is stuck between a rock and a hard place.
Initially I thought someone like CBS might like these social media sites, but CBS can simply take Last.fm’s underlying music recommendation technology and duplicate it for websites as a recommendation engine, which is essentially what SU is and does. The thing is: I think we are seeing the floor fall from under these social media sites anyway, look at CNN’s iReport false report that Steve Jobs had a heart attack; then look at this image of a threeway lesbian orgy in the middle of a street, uploaded to CBS’ citizen journalism venture and you start to get the idea: marketers don’t touch this with a ten foot pole… speaking of poles, did I mention the three lesbians getting it on here?
Separately, this also raises another point: lightning does not strike twice, let alone thrice. Sure, eBay’s $1.5B acquisition of Paypal was brilliant, but its acquisitions of both Skype and SU have been anything but.
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