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The Nordic Model

A Conversation With Niklas Zennstrom

Niklas Zennstrom

  • Country: Sweden
  • Title: Entrepreneur
  • Education: Uppsala University, University of Michigan
  • Known For: Co-Creating Skype
  • Website: Zennstrom Philanthropies
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A native of Jarfalla, Sweden, Niklas Zennstrom studied business, engineering physics, and computer science at Uppsala University and the University of Michigan. In the mid-1990s, while heading up the Danish division of the Swedish telecommunications firm Tele2, he hired Janus Friis to run customer support, and soon the two of them decided to collaborate as entrepreneurs. They founded the peer-to-peer file-sharing company Kazaa in 2000 and the Internet telephone company Skype in 2003. In 2006, Zennstrom started Atomico, a firm that invests in innovative technology companies around the world. And in 2007, with his wife, Catherine, he started Zennstrom Philanthropies, which focuses on human rights and the environment. He Skyped with Foreign Affairs editor Gideon Rose in early November.

What are the most important qualities for a successful entrepreneur to have? Courage—because as an entrepreneur, you’re trying to do something that no one has done before, and a lot of people will try to discourage you. You need to have a lot of courage to take the first step and stay your path through all the challenges. That’s very, very important. Another important thing is curiosity—being curious about how things work, trying to see around corners, trying to understand what the world could be like in the future. And the ability to question the status quo, to ask why things cannot be done in a different way.

Even many people who have those qualities don’t succeed. Are there some predictable things that separate the winners from the losers, apart from luck and timing? [Just like when] you play basketball or football, you need a bit of luck to win sometimes. But timing is hugely important. Entrepreneurs who come up with their idea at the right time are much more likely to succeed than those who come up with the idea a little bit early or a little bit too late. But refusing to give up—that’s very important. And also having vision and clarity and focus about what you want to achieve. That’s something that differentiates the ones who become successful from the ones who fail.

You’ve been involved with a number of companies, some of which ultimately became giant hits. Did you know those were real winners back when they were just embryonic companies, or were you surprised by their success? When we started Kazaa in 2000, we’d seen Napster, and we thought they had a great hybrid peer-to-peer model for music. We got inspired by what they were doing and saw they were running into some problems with the music industry. We thought, this is interesting—we can do a full peer-to-peer technology which is much more efficient, but we’re not going to do it in music. We’re going to do it for any kind of media product, all your video, images, or software.

We thought it was great timing. It turned out that it was not good timing, because when Napster got shut down, people went from using Napster to using Kazaa for music. So while we became hugely successful and popular with users, we failed to develop a [viable] business model because the music and the movie industries were determined to shut down all file-sharing services.

A few years later, Apple came up with iTunes, and then YouTube came up. It, too, was on the verge of being shut down by the media industry, but that’s when they seem to have realized that the Internet was here to stay and they needed to try to find a model for working with these players. So in that case, YouTube had fantastic timing and Kazaa had poor timing. But I never gave up, because I realized that even if using it for transmitting files didn’t work, we could still use this very powerful technology in a different way.

So we kept going, and eventually came up with the idea that it could be used to disrupt the telephone sector. When we started to look at opportunities with Skype, we thought, you know what? Maybe now the timing is perfect, because of broadband. In 2002, people started to migrate from dial-up connections to broadband connections, and you started to have WiFi. You started to have what today are called smartphones (at the time, they were called PDAs). And you started to have other technologies that could enable powerful Voice over IP service. That’s why we felt that the timing was really good with Skype.

And then, as we launched, we benefited from still other technological trends. For example, except for Macs, laptops used to be shipped without microphones. But then all PCs and laptops started to be shipped with microphones. And the year we launched video coincided with all laptop manufacturers starting to install video cameras into their computers. So you can say we were lucky in that we benefited from other technologies that enabled our business. We were kind of just in front of the wave all the time, riding it, and that enabled us to get network effect and critical mass. Is that luck? Is that skill? It’s timing. We could not foresee everything, but we thought when we started that we had a lot of winds at our back that favored us.

Was Kazaa a precursor of the “sharing economy” that’s getting so much attention these days, with Uber and Airbnb and so forth? Yes, it was, but Napster was the innovator there. Napster had it first, a hybrid peer-to-peer model in which people shared their music libraries with each other. We took that to the next level. That was certainly part of the sharing economy. The problem with that model was that you were sharing something that maybe you didn’t always have the right to share.

What is the relationship between entrepreneurship and innovation? They’re certainly interrelated. Almost all successful entrepreneurs within the technology field have some kind of innovation. In other fields, finance or real estate, they may not be so involved with innovation. But in technology, there is always some kind of innovation. Some times it’s deeper than others. With Internet businesses, the innovation has become more about the product and the business model [than the underlying technology].

Schumpeter felt that entrepreneurship was crucial not just for individuals and firms but for the economy as a whole—that entrepreneurs were these great men and women driving society and the economy forward. Do you agree with that? Absolutely. I think it’s a huge driver for the economy, because in sectors that become mature, you have mature companies who improve [only] on the margin. Maybe they’re growing a little bit here and there, becoming a little bit more efficient, making iterations of the products that they’re selling. But what entrepreneurs do is start with a clean sheet of paper or a clean whiteboard and say, “How do we do this in a different way? How do we solve this problem? We’re not the incumbent; if we just start from now, if we don’t have all this legacy infrastructure or technology, can we do it in a much more efficient way?” And they can innovate [and come up with] a business model or a product that costs a tenth of the way the incumbent did something or provides ten times the efficiency. The sharing economy, for example, is about innovation that increases the utilization of resources that are underutilized. It’s great, and it’s driving economic efficiency.

Is the disruption that your companies are trying to achieve always, on balance, a good thing for the economy and society? On balance, disruptive innovation is very positive. In an isolated environment, something is being done in a traditional way. Then innovative entrepreneurs come out and say, “Hey, you can do this much more efficiently for a fraction of the cost and with a tenth of the number of employees.” For customers, it’s fantastic. But there are people who are losing jobs, which is not great for them and potentially a burden for society. Over the long term, however, if you don’t have disruptive innovation, you will become a country or a market full of incumbents and will eventually be disrupted by somebody else, which would be very bad for you. So yes, on balance, disruptive innovation is good.

Many people think of technological innovation and entrepreneurship as an American, and particularly a Silicon Valley, specialty. You’re an example of the global spread of tech entrepreneurship. Are you an exception, or are you the new rule? This is something I’m really excited about. One of the reasons I started Atomico eight years ago was to prove that Skype was not just the one exception where a global tech company was created outside of Silicon Valley.

Silicon Valley was the first technology ecosystem created. It’s been around for over 50 years. And it is the most prolific location for creating successful technology businesses. But we did some research and looked at the last ten years in the Internet and software sector to see where the billion-dollar companies were coming from. What we found was that 40 percent of those companies came from Silicon Valley and 60 percent came from outside. My prediction would be that over the next ten years, Silicon Valley will account for less than 40 percent.

[For a technology ecosystem to thrive,] you need to have people who are encouraging. You need to have role models. You need to have capital. And you need to have people who want to come and work for these entrepreneurs. That is starting to happen in more and more places. Obviously, China, with Beijing, is in second place. But Sweden is now third in the world in producing billion-dollar software and Internet companies over the last ten years.

There’s no lack of talent in these other places, and technology education is very good all around. Ten or 15 years ago, if you wanted to be an Internet innovator or entrepreneur, you packed your bag and bought a one-way ticket to Silicon Valley and made it over there. Today, you don’t need to do that. You can be equally successful in many other places around the world. This is an irreversible trend. I think you’re going to see more and more great entrepreneurs and great technology companies being created in other places.

Is it easier being entrepreneurial in some countries as opposed to others, and can governments do things to increase the scale and quality of entrepreneurship in their countries? One of the reasons Silicon Valley has been successful is by having a culture that’s supportive of entrepreneurs. Some countries have more of a cultural challenge with entrepreneurs, whether that’s in Europe or Japan—countries where being an entrepreneur is not encouraged and you were supposed to have a career and job security. But that is changing. We see it in the United Kingdom, in London. In Stockholm. In Berlin. China has a very entrepreneurial culture. And also in Tokyo you’re starting to see more and more of it.

Governments have a role to play in encouraging entrepreneurs by shining a spotlight on them and helping create role models. But ultimately, the biggest change comes from building an ecosystem where a successful entrepreneur goes and invests in the next generation. People who worked for the first-generation entrepreneur start companies. Then engineering students go to work for a start-up instead of a large corporation or a bank, and you start seeing successes. Governments can facilitate this. In the United Kingdom, for example, the government has been very focused on making the country a great place for entrepreneurs, and that has been helpful in making London a terrific tech hub. I wouldn’t say that the government has created it, but they’ve been helpful.

For example, one of the big challenges when you start a company is hiring the best people, with the right talent. And the U.K. government has made it easier to hire people from other countries. Another big challenge for entrepreneurs is getting financing before they’ve proven their business. (Once they’ve proven the business, it’s no problem, because then a lot of investors come along.) So what governments can do is not invest themselves but make it easier for private investors to invest—by, for example, reducing capital gains taxes for investing in start-up companies. And a start-up company doesn’t have a lot of money, so you pay employees with stock options; governments can make sure that those stock options are not too costly to administer and are taxed as little as possible. And they can make it easier to do cross-border business.

Many American entrepreneurs and people in the technology sector see the market and the state as enemies locked in some kind of zero-sum death match. The Nordic model would seem to transcend that. Is the fact that so many entrepreneurs have come out of Sweden proof that you can have both a large, generous state sector and entrepreneurial success? Sweden has always had a lot of successful entrepreneurs, even a century ago. Companies like Alfa Laval or Electrolux that become global success stories and are still around today. A few generations ago, you had companies like Tetra Pak and Ikea and H&M. And now you’re seeing a wave of technology entrepreneurs. I think that has to do with the fact that we’re a small market and people learn to speak foreign languages early. And because we have a harsh climate, we tend to like to travel abroad. So it’s easy for Swedish entrepreneurs to think about trying to capture the world market rather than focusing on the domestic market.

Over the last decade, tax reform in Sweden has been very favorable to entrepreneurs and their investors. There is no capital gains tax when you’re investing in private companies; there is no wealth tax; there is no inheritance tax. I don’t know if there’s a correlation between that and the fact that there have been so many successful entrepreneurs coming out of Sweden, but maybe it is a reason for those entrepreneurs not to move abroad.

The Atomico research suggests that some sectors have been more disrupted than others—enterprise software, e-commerce, and social communications, for example—while other areas, such as health care, education, and real estate, have yet to see much disruptive innovation. Is there something about those first sectors that makes them naturally disruptable, or is it just a matter of time and we should expect other sectors to follow? My belief is that over time—and it can be a long time—all sectors in our economy will somehow be disrupted. Some sectors are easier to disrupt. As soon as there was broadband, it became quite easy to distribute media on the Internet, and that’s when the media industry got disrupted. Then, you know, distributing newspapers and stuff like that as text and images became quite easy to do as well, so it was easy to disrupt. Disrupting telecommunications was quite easy to do once people started using broadband, laptops, and smartphones.

Health care is harder to disrupt, but you’re starting to see already a lot of innovation there as well. It’s something that I hope will be disrupted, because it’s a very inefficient market. Software and biochemistry and biology are intersecting, and different sciences are going to provide some very interesting and disruptive things.

Education is the same; it is certainly starting to be disrupted. You have all the MOOCs [massive open online courses] making it possible for all with a smartphone to get access to the best teachers in the world. You have companies like Knewton (one of our investments), which are using algorithms to provide adaptive learning. That means that you can get your course material adapted in real time to suit your learning pattern, which means that you can get high efficiency. It hasn’t really made a big dent in that sector yet. But that’s something that we’ll see for sure over the next decade.

Are you bullish or bearish about the future of technological innovation? I think this is the best time to be a technologist and to be in this sector. And I’m probably going to say the same thing in ten years. I think that the increased penetration of technology and the different layers of technology building on top of each other and recombining just provides more and more opportunities and efficiencies. If you’re a business leader and you start to say that there can be no more innovation, you should probably retire, because you will get disrupted.

Do you worry that in this new age of entrepreneurship, there’s going to be increasing inequality, as the rewards from new ventures go to ever fewer people at the top? Some companies can go from nothing to huge values in a very short time and make a few very smart people who have the right timing and a bit of luck very wealthy. And that is happening at the same time that there are people in our society who are living in poverty. But the technology itself is not creating poverty. If anything, technology makes things cheaper and allows people who are living in challenging conditions to get access to more opportunities.

Soon there will be as many mobile phones as there are people on this planet. Even a lot of people with very low disposable incomes have a smartphone, because they are becoming so cheap. And if you have the smartphone in your hand and you’re unemployed, you can take an online course for free. You can learn something like software programming. You don’t need to go to MIT to do that. You can do that from your smartphone, if you have time and if you have the will. I think that the Internet and technology actually make things more equal. They are an enabler for people to get more control over their lives. You don’t need to have the right parents or get into the right school, because you can get the best education and training online. So I think it’s a net positive.

One of the main focuses of Zennstrom Philanthropies is climate change. Do you think technology can provide the answer there, or will it require state action and international agreement (in which case we’re all probably in big trouble)? That is my hope. We’ve known about the need to reduce greenhouse gases for many years, and governments are not doing what they should in terms of making the reductions they need to. So in the short term, the world is unfortunately going to be worse off. But my belief is that in the long term, innovation and entrepreneurs are the solution to this, because over time, they will make renewable energy cheaper than fossil fuels. When that tipping point happens, then people will buy renewable energy.

I think there will also be a change in consumers’ behavior, driven by the Internet, as the world becomes more transparent. In ten or 20 years, it is not going to be acceptable for any company to offer products or services which are not produced in a sustainable way. And the same thing goes with energy. Younger consumers—not you or me but the next generation—they’re going to have different values, because of growing up in a world with transparency. That’s my hope. I don’t know if it’s true, but as an entrepreneur, you sometimes have a feeling, and a hope, that innovation will change things for the better.

Note: This interview has been edited and condensed.

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