This weekend Nina and I were in Rome. Original plans were just to hang out and enjoy what possibly is the most beautiful city in the world but a fortuitous encounter led me to give a talk to a group of techies in Trastevere on Sunday. The talk was very interactive, with me presenting but mostly asking questions about the Italian start up scene. The event was organised by Johanna of Frestyl, which is a website that brings fans and amateur bands together. Freestyl is currently under development and it is one of the investments of my friend Joichi Ito.
If you have read my article about creating businesses Europe you can probably imagine what I spoke about. It´s a mixed picture. The European scene for start ups is better because there is less competition, salaries are lower and medical and legal costs are much lower but it is worse because VCs are rare, markets are fragmented by language and labor laws make failure, common in start ups, extremely costly. But what I found in Italy was discouraging because, as opposed to Spain, where I live, labor laws are even worse, VCs are even rarer, Internet success stories are few, and the Italian language market is much smaller than the Spanish language market. After asking many questions about the Italian startup scene I reached the conclusion that, even though Spain’s economy is doing worse than Italy’s in general, our technology startup ecosystem is doing better. When we built Ya.com, for example, we invested 38 million euros, and sold it for 550 million. Of those 550 million euros, 70 went to 50 employees thanks to our stock option plans. Jazztel was a similar story depending on when employees cashed stock options after IPO, some did very well some didn´t. But out of all of those who did well many new angels emerged. Jon Berrojalbiz is one great example of a successful entrepreneur who came out of Ya.com. He is currently CEO of the very successful Trading Motion and an investor in other strat ups like Isolee. There is also the case of Miguel Salis, who was CFO at Jazztel and is today CEO of Eolia Renovables. Eolia, which was started when Miguel was the MD of my family office in 2004, is now the biggest independent alternative energy company in Spain. Over $1bn was invested, EBITDA is now over $120M and up 110% from a year ago and many jobs were created tons of carbon emissions saved. There are also many cases of companies that were sold successfully in Spain which had nothing to do with me. In Italy, however, I did not hear stories of 70 million euro stock option plans or cases in which wealth was created and distributed in a way that would create an angel network. As a result, the culture for small investors in Italy is lacking and entrepreneurs have to ask their parents or family for money which I consider in general a very bad idea. The only way to do well in VC type investing is to have a diversified portfolio, asking your parents to invest with you is contrary to that.
And then there is the cost of failure. Most start ups fail and that is true anywhere in the world, but in Italy the cost of failure is enormous. If a company shuts down because, for instance, their product had no demand and this company has say 100 employees, the costs for the entrepreneur can be brutal. In Fon, for example, we began with many employees. Unfortunately we had to lay off half of the team at one point and now that we are profitable we have started hiring again. This situation would have ruined us in Italy, because there they have different laws of forced severance payments for companies under 15 employees and over 15 employees. Significant startups can’t exist in this environment since they never know with certainty how many people they are going to need. On top of this, entrepreneurs who fail are seen as crooks. Not as people who tried to create a good product and create jobs but simply failed. Having an entrepreneur president who has barely escaped jail for many years now has given Italian entrepreneurs a bad name and that is not fair. So, on top of everything, I said before up and coming Italian entrepreneurs confront a mood very different to those of say Dutch entrepreneurs, Netherlands being the European country which in my view respects entrepreneurship the most. Now, to end on a positive mood, Italians are still very creative and have many SMEs who thrive on a European and sometimes global basis and hopefully this will soon also be the case of Italian Tech Companies.
And, in closing, here are some pictures of Rome.
During my business career I have founded 7 companies. The first, and least known, is Urban Capital Corporation, a company that develops and manages real estate in Tribeca, NYC. I started that company while I was at Columbia University together with my partner Len Kahn. We developed over half a million square feet of loft buildings. We currently own 32 Varick St or 11 Beach Street, a 120,000 sq ft building that is made of office lofts and is a favorite with high tech and media businesses.
My other companies are high tech companies. 3 got to be worth over half a billion dollars, one did ok, in one I lost 45 million dollars and while the jury is still out on Fon, I believe it could be my fourth company worth over half a billion.
During my business career in High Tech however, I have alternated between investing in my own start ups, occasionally backing other start ups (the most successful being Eolia started out of my office by my dear friend Miguel Salis, ex CFO of Jazztel and now worth over a billion) and investing in real estate both in Europe and in the USA. Investing in unleveraged real estate has proven to be pretty counter cyclical to high tech. For example when everything went to hell in tech between ’01 and ’04, real estate did very well. And while my timing for real estate has been occasionally wrong (I lost money in 2 hotels in USA in the ’90s) it has been mostly very good. I buy real estate with little or no debt and simply hold on to it. I have rarely sold any.
As an example, 2 weeks ago I bought an apartment at the Continuum in Miami. I bought it at a historically low price. And currently I have my eyes on a San Francisco apartment. Also in a prime building. Why am I adding to my US portfolio of properties? Because real estate is a long term play and I see US real estate at a historical low now both in terms of a low dollar and low values in key markets. So after staying on the sidelines for a decade I am now buying for the following reasons:
My brief view of the contemporary financial world is that George W. Bush and his team did horrendous damage to the US economy, but fortunately neither he nor his mismanagement style are coming back. During his tenure, I avoided the US dollar and anything US related. When we raised US dollars at Fon for example, we immediately, and smartly changed them into euros. But for the next decade I have a different view. I see a Europe unable to make the changes it needs to adapt to a globalized economy and I see America avoiding the mistakes of the past and adapting well. I see Bush as a one of a kind idiot. The fact that Americans chose Obama shows that there is hope in a more educated generation of American voters coming up more focused on substance than myth. That even if Republicans win again during the next 11 years, they will win with somebody more like Bush senior than Bush junior. I think that future US leaders will have common sense and will not dilapidate the country´s economy by fighting useless wars and probably at least partly address the other two huge “leaks” of the American economy: the cost of health care and the costs of administering “justice”. Concretely, and in favor of buying real estate, I think that Obama´s team will reactivate the US economy but will be left with some inflation that will likely do two things: help real estate, and help the US dollar as interest rates rise to stop it. Both are pluses for US real estate.
Bottom line of all this is that I am now converting euros into dollars to buy more US real estate for the first time in close to a decade. I also was lucky enough to change euros into pounds at 1.05 at the beginning of ’09 in anticipation of buying a home in London as well. London is and will be the global financial capital of the world, and right now, with the pound depressed and the markets down, it is a good time to buy there as well. So far I put in bids for different homes in London but they sold for more to others. Will keep trying.
I end with an anecdote. An hour ago this auction ended in Hawaii. I participated in it and I was surprised to see that the home sold for over $5 million. Especially considering how high the real estate taxes, maintenance and membership fees are in Hualalai. A person who buys a home in Hualalai has to spend around $250K in the membership, and an extra $150K per year in taxes and various fees. Plus of course getting to Hawaii. I confess that I was not prepared to pay more than half of what the home sold for. Now you could say, why would people pay so much for real estate that if lucky they will use for a month a year? The answer is that there is something to real estate prices that is akin to brand value. Real estate, surprisingly enough, elicits feelings. And the property I own is in those places, places that turn people on for some reason. Places that other than serving as useful homes make people feel better, like brands, for better or worse, do.
So while I will continue focusing on building companies around my ideas in Tech, I will also continue looking for the new or rising real estate brands. Currently I see them in South Beach, downtown San Francisco, the West End of London and Tokyo.
I am in NYC right now. Today I met with my friend Jack Hidary and we had a conversation as to why NYC, a city that is so successful in so many fields, has failed to produce dominant technology companies. Silicon Alley never really took off while Silicon Valley continues to dominate the American and global Internet. My answer? Mobility. In America people just move to where the jobs are. If we went through the ranks of the most successful technology companies in the Valley we would probably find a lot of uprooted New Yorkers contributing to their success. In Europe however, people tend to stay where they grew up. As a result there are less clusters and all industries are more scattered.