war story

This War Story is one of those stories that was certainly interesting to experience, but oddly enough I haven't been really talking about this almost at all. It's a story of how severe natural disasters can also open up good relationships and expand businesses.

Back then I was (CEO) with Magenta and Ruukki Group, after a tradesale we had done about a year earlier. Magenta was a specialized hosting company for customized and demanding hosting solutions. We took care of clients like Habbo Hotel, Stardoll, IRC-Galleria and some bigger corporations like Nokia, Pilkington Automotive, McDonalds, Sony BMG, EMI, AOL, Coca-Cola company, etc.

I was in Thailand on 26th of december 2004 when the tsunami struck. Luckily enough I was in an area that wasn't directly hit by it. The earthquake was felt all the way there thou. We were traveling together with a group of friends and IT business people; me, one software entrepreneur, one engineering manager from Nokia and one private investor. We woke up early and turned on the BBC news channel which told us that "even up to 400 people might be dead". The figure turned out to be quite more than that in the end; 176 269 dead, 51 485 missing and over 125 thousand injured. More than 5 thousand dead in Thailand alone.

Magenta had a data center in Singapore, and our local british manager there happened to be in Thailand as well. He wasn't so lucky with the location; he had gone fishing with 6 other blokes on the morning of the tsunami. They got hit really badly by it close to the shore. He was the only one from the boat to survive, but survival almost cost him his legs: he had to climb out of the ocean through a coral reef, that pretty much shredded his feet and legs to the bone with big cuts all over. Recovery took some time, I can only imagine.

Finns are quite active with vacationing in Thailand. A few citizens were lost that morning. Fortunately there are also plenty of famous survival stories around. One of them is from the speaker of our national parliament, Mr. Sauli Niinistö. He had to cling to a light post while being washed by the tsunami. Later he wrote a book about his near death experience.

Us four traveling together were lucky with the location; however the effects of the tsunami were felt. Suddenly the area we were in experienced a huge influx of people coming in from the immediate disaster zone. There we people around with bandages on their heads, arms, legs etc. Many of them had seen the disaster up close and personal, but made a choice to continue their holidays regardless. The locals really welcomed them in and showed some of that famous Thai hospitality.

CC Atrribution: estorde@Flickr

A day or two after the disaster I received a call from an extremely well connected thai gentleman who put in me in touch with the CEO of Thailand's national Internet company (and regulator) Inet Thailand. This company has been originally set up by the order of His Majesty King Bhumibol Adulyadej, which is a rather unusual way to get your Internet business going..

Thailand has long had the kind of Internet infrastructure that is nationally controlled, and there's only one sizeable gateway handling traffic in and out of the country. Most traffic to Europe goes through the USA (the other way around as you would imagine) and this makes Thai websites very slow to access from the EU.

The Tsunami caused chaos, information was not easy to obtain, hundreds of thousands of worried relatives etc were trying to find out what ever they can on the net and the infrastructure could not handle it all. Inet Thailand asked for our help, and we immediately stepped in. It took a few efficient phone calls from the beach back to icy, cold and dark Finland to get everything organized. Magenta had a data enter in London, and we set up everything there in cooperation with Inet Thailand.

Altogether 14 different government instances had their data mashed up and collected to a joint mirror in London. Those included Thai ministry sites, crime scene investigation sites, Thai navy sites, hospital patient listings, victim ID listings, disaster information services etc. In fact you can still find all the data online here:

http://www.inet.co.th/tsunami/

On the pages it still says "We would like to thank Magenta Sites Ltd for hosting the European Mirror of this site for the first 2 years, and Parisian Ltd for continuing hosting support."

The business related interesting part is what followed later because of all this. By setting up the mashed up mirror site and cooperating with the Thai authorities we established quite close relations that still remain to this day. We ended up establishing a Thai subsidiary of the company there locally and doing some business together. This was a big learning experience for me; how the Asian world of trust works. Once you are proven to be trustworthy things tend to flow quite a bit easier and all sorts of opportunities spring up. To a Finn it is somewhat odd when you get requests for quotation on businesses you have nothing to do with at all, but you get them because the trust is there ;)

My fellow board member from Aula Mr. Alex Nieminen who is a pro-level scuba diving instructor also did something similar: he used a diving website to followup and post the latest information better than any main stream media. He won a special recognition award from this.

Thinking aloud: There's the old argument that frequently comes up; wars and disasters are good for business and for economic growth. After experiencing all of that myself and seeing how much business and opportunity sprang from it all - I sort of agree. It is entirely plausible that severe disruption and chaos are strong forces in the creation of the new an unexpected. So be there with your own startup when something disruptive happens: have you thought about how to capitalize on the current economic downturn? You should.

I did an interview with Viktoria Trosien for Tiburon TV at the Slush Helsinki event. It just got posted online as a video that you can find from here:

http://www.tiburon-tv.com/2008/12/01/i-started-with-failing-serial-entre...

It's about how I "started with eventually failing" when Taika Technologies had to discontinue after a promising start (that's another war story then). And moves on to stuff that I have been involved in, my views and opinions about how Finland is as a place for startups and what's the local scene like etc.

I make a claim that Finland would be a forward-looking place where people are willing to abandon the old ways if they don't work. Is this really true or not, what do you think?

This is part II of the "funding of Taika" war story, part I here:

http://tane.li/2008/war-story-funding-taika-technologies-part-i

Brief summary: months after the dot-com nuclear meltdown of 2000 my first startup Taika Technologies managed to secure a financing round for more than 19M EUR valuation, with no product and no revenue. How? What's the story?

Taika had just managed to get professor Reijo Luostarinen onboard as our new chairman. He was vital in approaching VCs and we had just written a business plan. Our vision was that "one day the Internet will be social, people will share, talk and network online in a massive global scale".

Even prior to Reijo joining our team we had managed to get many meetings with VCs, and he helped in opening up more doors. The first VC we had originally pitched Taika to was no other than Nokia Venture Partners, the VC behind PayPal. They passed on Taika very quickly like a pro, and as they probably should have considering that we didn't have a written business plan at that time. Besides Nokia we had already talked to Tekes, Finnvera, SFK Finance, MVI Partners, and Sonera Ventures. Some of those companies don't even exists any more, how quickly do the times change.

With a door-opener and credibility boost in the form of Reijo we set out to talk to multiple investors. We presented our holistic and nearly all-encompassing vision of the "social Internet", which extended to online gaming as much as peer-to-peer filesharing. Concepts that were barely visible in 1999 and early 2000. Reading from my old files, the kind of rhetoric we used had stuff like:

- "grand global scale" (social networking megatrend),
- "online community feel and atmosphere" (horizontals vs the verticals, the user experience as the most important thing),
- "virtual economy" (habbo-like virtual stuff, online games),
- "virtual collective" (Digg, votes and user generated content),
- "business scalability" (scales to hundreds of millions of people),
- "effects of virtual economy on revenue models" (how to sell virtual stuff and trinkets),
- "product branding, visibility and promotion" (social media advertising),
- "Taika's unique way of segmenting customers and their needs" (forgetting traditional segments and redoing them in a more relevant manner).

Actually reading it now, about 9 years later, it still seems pretty valid and actually quite impressive. Did we write that? I guess we did ;) Our plans and presentations talked about the kind of stuff www.irc.fi and www.facebook.com, www.habbo.com, www.digg.com and www.myspace.com do as their daily business today.

We did the vast majority of our investor pitches as two man team: Reijo and myself. In some meetings Atte was also present to give a technical rundown of what we are going to do. My memories of the meetings are about this same pattern repeating: me, as the over-eager young dude, going on endlessly about the vision and everything it encompasses. Pretty soon the investors must have felt like their heads were spinning and the Q&A sessions were all over the map on a range of topics. To me (and to us, the founders) it all seemed so clear: having been part of the digital online culture from the BBS days (I was a SysOP of my own BBS for many years) we thought we knew exactly how the whole Big Picture was going to evolve and progress. The investors didn't have that same insight and convincing them of our vision wasn't quite that easy after all. We ended up talking and pitching to maybe around 30 VCs and investors in Finland, not that many of them demonstrated any signs of grasping our "social Internet" vision. Which is another way of saying that we (and I as a 21 year old) were quite naïve at times.

After learning a lot of lessons the hard way we started to get some headway and had our first really truly interested investor. After a series of talks they seemed to understand the grand vision and proposed that they would invest, and even accept our high valuation for the company, if we would find another investor to co-invest with them. This was an absolutely critical moment in Taika's history, and it allowed us to build on the situation of having one supportive investor committed to the project with the condition of finding them company. Also the fact that they accepted our rather high valuation was excellent: the other investor would probably have to accept it as well.

We had a round of planning and decided that finding the co-investor would have to be in a manner that preferably creates an atmosphere of competition around "who gets to invest". So we proceeded collaterally with multiple investors. We were bold enough to call many of them into a meeting at the same time: I remember being there and watching 4 VCs in the same room glancing at each other and making tense remarks. None of them really admitted that they didn't get the vision, but they did complain about the valuation. The mood got really serious when one investor showed signs of not really considering the valuation to be so high. Remember: this was about 17M EUR post-money with an extensive stock option plan that would dilute the investor in effect making it a 19M EUR post-money proposal, for a company that had a grand vision and an eager team, but no product or revenue.

The competition between the investors started to heat up when we did a round of calls to them and tried to push them to move forward. One of them was brave enough to verbally close the deal right there on the phone: we had found our second investor! I printed out the investment papers and hopped in a taxi to meet the investor at the airport, we signed the papers in the airport arrivals lobby and suddenly the deal was done. I was 22 years old and now founder/owner of a company valued at 19M EUR by very well known and serious investors. The sky was the limit! (or so I thought).

Taika had been running up to this point on the seed money fumes the founders had put in. There was already a proper technical team working on the product and burn rate was up. The dot-com meltdown had happened some months earlier and the climate around us had started to take a turn towards the doom and gloom of nuclear winter, with zero positive news coming from anywhere.

This is a bit of a secret that I'm sure comes as a surprise to many of the Taika Team members: at the time of receiving the investment the company was in fact out of money. During 1999 and the spring of 2000 we had burned through our seed investment and there was just about nothing left. After signing the investment papers the whole gang, 17 people at the time, gathered to the Russian restaurant Saslik to celebrate and really start building up the company. After giving a very short speech-like remark I broke my wineglass to the table hurting my hand and getting a small scar as a memory of the evening. The money from the investors arrived to Taika's bank account one day before payday, and nobody (besides the founders) knew how close it was to tumbling down like a house of cards.

And that, in brief, is the war story of how Taika got funded. There are many more stories to be told on Taika: how the team got together, how we managed to get all of those big name board members to join us, and how the company eventually failed and had to shut down.

Some lessons to be learned from this:

1) On a very rare occasion there are investors who have the courage to believe in excellent visions, even when the world seems to be freezing into nuclear winter around them.

2) Execution really is everything: look at Taika's vision and how its come true today (and by what companies?). All the elements of success should have been there, but the execution didn't deliver. That's a very long war story right there.

3) Enthusiasm, energy and belief in your own vision is impressive and founders should not forget that. Let it show, you need to be more into your vision than anyone, and know why you are correct.

4) Get as much help as you can: Taika had many co-founders and an authority of a man as the chairman. That clearly helps.

5) Creating some competition between the potential investors is an excellent thing. Taika can be elaborated as an example success case of how that's possible and what results it can produce for your financing round.

6) Speed is vital. Look at Taika's vision: it seems that many companies had the same vision (or part of it) around the same time. www.irc.fi started in the year 2000, www.habbo.com started in 2000. And this is not unique: the best ideas often come from megatrends and involve realizations that are visible to an open mind. If you plan to ride such a megatrend then speed is essential: you need get yourself to be "a Facebook" faster than other companies riding the same trend will.

7) There is such a thing as being ahead of your time, by multiple years.

Taika was my kickstart to my entrepreneurial career. It was the ride of a lifetime and I still feel like doing these fast moving startups will accumulate your experience and insight so much faster than a corporate job ever would.

This is the first "old war story" on a series of stories I plan to write about past startups I have "done".

Taika Technologies was the first startup I co-founded in 1999 with couple of other people: Atte Lahtiranta (now at Nokia), Sami Sunila (private investor), Jouni Mannonen (Mahtava Development, Anyfun Games), and Niko Punin (Designer).

Other members of the Taika Team were (and still are) some of the most highly competent technical people I have ever seen. As a sort-of proof of the team's excellency the real interesting war story about Taika is this one thing:

Taika was a company with no product, no revenue. It closed a financing deal in late June 2000, months after the Dot-Com bubble had already burst (it went in the beginning of the year, March at the latest), and yet still the company managed to get financing with over 19 million EUR (fully diluted) post-money valuation.

How did we manage that?

Before answering to that, let's explore what Taika actually did. There's not a whole lot on the web that has survived about Taika. Only few odds and ends and random pieces of news. Since the company is buried a long time ago (August of 2002, and that's another war story), all of the IPR and software is now owned by the Taika Team who have a registered organization set up for that as Taika.org.

Taika worked on what would nowdays be know as social media, social software, instant messaging and micro blogging. All of them, plus a bunch of other things that complement the same "social Internet" vision. As a blast form the past here's an untouched old PDF of Taika's "communication suite" product from February of 2002. Reading the leaflet reveals that almost all of the products and ideas it talks about are being implemented out there by other companies. In essence Taika tried to create a Facebook, and a LinkedIN, and a Twitter, and a Second Life.. years before its time. I have tons of Taika's old designs and documents sitting in my hard drive, and its rather amazing to see that still the level of implementation and design on social networks has not reached the level we envisioned already in 2001/2002. Progress is always slower than one might expect?

Early funding of Taika was committed from the founder's pockets directly. Four of the founders together put in some 424 thousand EUR or so of financing to piece the team together, rent an office, and all that. At that time I was 21 years old and full of motivation, so I threw 106 thousand EUR of my own money into the company (partially debt-leveraged). That's about what it costs to get a top-notch MBA from one of the world's leading business schools. Considering the fact that the company was eventually shut down; do I feel bad about spending that in retrospect? Not one bit. The "education" I got out of that experience was better than any MBA and I would not be here today without it - besides you can always do your MBA later, like I did a few years after Taika was done with.

So, the company had seed funding but no product, no revenue and no proper written business plan either. Writing the plan was what came next. Taika had rented a gorgeous 100 year old Villa in a posh district of Helsinki (Kulosaari) to be our HQ (anecdotes about that: the building was a former Iranian embassy, which we noticed when one day political protesters showed up in our doorstep. The building also had a garage originally constructed for the purpose of hosting Adolf Hitler's car on his state visit to Finland). The office was 600 square meters and totally empty. I took up a room on the 3rd floor of the building and started working on the business plan by sleeping on the floor and writing for about a week. It was agreed among the founders that it would be faster just to let one of us write it quick and the rest would edit if needed. So I ended up soloing almost the entire plan, 51 pages plus another 50 pages of enclosures, analysis, excels and such. My memories of that week are bit hazy: I basically don't remember anything else except sleeping on the floor, eating unhealthy food and writing, writing, writing. But finally it was done. Jouni (from the other founders) contributed with a few enclosures about technology, and Professor Reijo Luostarinen (our new Chairman of the board) acted as the editor/consultant on structure and content. Sami worked on the excels.

I'm skipping ahead and sharing an interesting picture with you from the past. This is from the time when Taika had closed the big financing deal and had its first proper board+advisory board meeting. In the picture are: (from left to right, back row): Prof. Erkko Autio, Mikko Heikki Kosonen (Nokia's CIO at the time), Prof. Frank Biocca, Jouni Mannonen, Chris Donahue, Tuomo Airaksinen, (middle row): EU Commissioner Olli Rehn, Sami Sunila (CFO), (front row): Atte Lahtiranta (CTO), Taneli Tikka (CEO), Prof. Reijo Luostarinen (Chairman), Antero Norkio (VP Product Marketing). Me in that picture with a big fat black beard an all is a good example on how I have moved from "corporate stiffness" towards much more laid back style and touch.

Back to the story: so we had a plan and it was time to approach some investors. Actually we had done that already and had started talking with investors even without a proper plan, using some plain presentations and materials. After all Taika was something we had envisioned for many years in with our dealings with online games and communities, the Legendary BatMUD in particular.

An important factor in getting the investors to meet us was our new chairman of the broad: professor Luostarinen. We managed to get in touch with him through knowing his son, Antti, and we presented our vision to him: "one day the Internet will be social, people will share, talk, and network online in a massive global scale". Much to our amazement he grasped the idea pretty quick and actually agreed that it was a great vision. Amazing us even further he offered his multiple decades of growth company wisdom and agreed to join us as our chairman.

.. the story continues in Part II

Recently Kauppalehti and ArticStartup have been amongst the media that have reported on the acquisition of IRC-Galleria.net by the Sulake Corporation.

Kauppalehti had dug through the latest financial documents by Sulake Corporation that in compliance of the IFRS accounting (that public companies in Finland use) discloses the transaction price. From that source Kauppalehti had found it to be 12.5 million €, and further speculated that it would be 6.6 times net sales, and 25 times earnings. Additionally the IRC-Galleria owners received 105144 series A stock from Sulake at a price of 118.88€ per share.

There may be certain obligations that prevent me from discussing the full details of this deal I negotiated and put together. However there are some things I wish to comment on.

In a very summarized form my (and the whole team's) mission in IRC-Galleria at that time was twofold: 1) to build an amazing business (and an amazing service), 2) to find a very good partner to ensure its future growth with. The second turned out to be an assignment to evaluate potential buyers and eventually sell the company. IRC-Galleria was in the talks towards many directions for quite a while: over a year, as I mentioned to the press when we published this acquisition. We always considered many options and many different types of buyers: media companies, software companies, something creative and unusual, and even considered taking a venture capitalist on board and growing the thing as an independent venture. There were many VCs eager to finance IG, which didn't necessarily need the money: it had plenty of it in the bank and more coming in daily, with pretty extreme levels of profitability being the monthly norm.

In the end it seemed that Sulake was a soulmate of IRC-Galleria in a sense that their thinking (at least the management's business thinking) was quite similar, and they shared similar views on a range of topics. Sulake also seemed to be in the best and most believable position to grow IG internationally, plus its a good company full of driven and competent people. IG had many offers on the table, but in the end Sulake convinced us that their way is the way to go, and so we did. I acted as the chief negotiator (from IG's part) in making the deal - even up to the scary point of negotiating against a group of lawyers alone in a conference room :) it was a great experience and my 4th tradesale, so I had the benefit of knowing at least something about what's there to decide in a deal like this.

Some of the other discussions IG had ongoing were, to my opinion, bordering on textbook cases of classic failures. There were certain large corporations that gave a few serious offers to IG in multiple millions of cash, and more later (based on milestones), but the way they conducted the discussions didn't exactly inspire confidence in anyone. It is beyond me why a corporation that's considered to be competent in acquisitions does not listen to its potential partner; doesn't sound like a very good idea, now does it? People may claim that even talking about this (what went on "behind the scenes") is unprofessional. However please remember that one of the main purposes of this blog is to share views and insights, and in this case my judgement tells me that this is something worth sharing: even with a great company like IG it's not always rosy and wonderful. Or as one potential buyer said to us (direct quote, not kidding) "the best deal in my opinion is a deal where I can screw over the other party as much as possible"...

Back to the details Kauppalehti wrote about: they are technically correct. However there may be something else in the deal that's not covered by those financial numbers. Revenue figures Kauppalehti uses seem to be based on a less than 12month, older FAS fiscal cycle. So speculation on those is not an entirely accurate exercise.

The real question is: how much is that 105 144 stock worth then? Since all ownership records in Finland are public, it is rather easy to find out that Sulake has 2 459 984 stocks outstanding. That makes the IRC-Galleria owner's share to count as 4.274% of the entire Sulake Corporation. What's that worth then? The infamous SAI 25 list from Silicon Alley Insider has Sulake's value at 1.25 billion $. I am quite convinced that the Alleyinsider made that list only to get good coverage as people gossip about how ridiculous hype it is. Just to say that I don't agree with their PR tricks and views, still they are just about the only player out there that's bold enough to make suggestions. Using their big number for some simple math brings the grand total to 53.43 million $ for IRC-Galleria owners in stock alone. Hype or no hype?

The SAI 25 list was made at a time when Sulake was not yet profitable (as it is now) and didn't have over 100 million registered users (now it has more than 108 million, with 100K coming in every day). But then on the other hand: there was no failed wall st bailout around either ;-) Still the real value that comes from a profitable and fast growing business can never be ignored even in a times of economic downturn. Especially when most of research says that people actually use the net more and play more games when things are looking bad outside. Which sounds kind of logical to a Finn with the slush and all.

What's the whole thing really worth? That's anybody's guess at this point. I once read an excellent interview of Sir Richard Branson who put it quite nicely: "I have no idea how rich I am. You only know when you are selling, and I'm not selling." The value of anything prior to an exit is always zero (unless there's dividend, and there rarely is..) and I'm sure all the "worth millions on paper" -people from the Dot-Com days remember this quite keenly ;-) I think I must have been worth some ~5M€ "on paper" at one point in the good old days of 2000 :)