F E A T U R E S    Issue 2.12 - December 1996

Think Big. Stay Small. Make Money.

By Steve Shipside

A new breed of entrepreneurs is defining the way digital business is done in Britain.

By British standards Peter Molyneux has made it big. He had an Aston Martin in the garage even before he sold his games company, Bullfrog, to Electronic Arts for about £40 million in January 1995, and his pockets are deep enough to foot the repair bills. "I've crashed it three times," he sighs; "Aston have practically asked me to change car." Molyneux has many of the other tokens of success and excess, too - including the envious snipings of his peers, and a purpose-built dream house. The house is riddled with more gismos than a James Bond film, including an imported Japanese toilet that automatically attends to his intimate hygiene needs. He's honeycombed it with secret passages. "I'm obsessed with secret passages, so I'm having them installed everywhere. One leads out to a secret courtyard with a hot tub in it, another connects the gym to the swimming pool and another leads to the office - you can't get in if you don't know how to activate it."

But in the middle of the night, just about every night, Molyneux sits in that office churning out games code just like a grunt geek at the bottom end of the computer food chain. Why? This is a man who could wear flash suits, do power-lunches and make deals with the best of them. If he was a Californian success story he would almost certainly be doing just that. Molyneux has tried power mogulling; now he prefers to get back doing what he does best. "I spent about a year doing corporate meetings, and it soon became apparent this was the most depressing way of spending the day. So I got back to programming games. I'm not denying that I want to make money, but being creative and running my own life come first."

Molyneux is not alone. Britain is full of entrepreneurs whose idea of making it big really means keeping it small. It has been that way for a long time - though not that many people have noticed. Molyneux reckons that a third of all computer games have been created in Britain. British entrepreneurs often go unrecognised because, while they concentrate on coding, others distribute the games and put their names on the boxes. When you hear the name Lemmings, do you think of its American publisher, Psygnosis, or the team at DMA in drizzly Dundee that actually created it? Mortal Kombat sold eight million copies; Mortal Kombat II made US$50 million in its first three days on sale, but have you ever heard of Probe? When Fergus McGovern finally sold Probe to the American games company Acclaim in 1995, his shares propelled him into The Sunday Times' list of Britain's 500 richest people. But what US executive would have waited twelve years before cashing in?

Today it is digital media - the Net, new film and television outlets, games - that is grabbing the attention of Britain's young innovators, and a guerrilla corps of young companies is attacking global markets. The London-based Web design firm Obsolete built the "Levi's" jeans Web site; the Brighton-based multimedia company Cognitive Applications created some of Microsoft's better (and better selling) CD-ROMs. The oddly-named Lost in Space created the groundbreaking special effects for Terminator 2, among other smash films. Yet amid all this success and innovation, most Britons - including most politicians, investors and policy makers - still wonder why the country lacks the drive, skills, greed, smart customers or what-ever else it might be that is keeping Britain from producing entrepreneurial all-stars to rank alongside Bill Gates and Steve Jobs.

Time for a reassessment. Lots of British entrepreneurs are making it, but they're doing it their way. For a number of reasons, these companies haven't followed the Silicon Valley model of growth - found the company; expand like crazy; cash in on the stock market. But they're making money and creating new stuff nonetheless. True, some have stayed small because they didn't have the tools with which to grow. But now, American venture capital is flooding into Britain, the Internet is creating vast global opportunities and the cadre of experienced British high-tech executives and innovators is expanding. More and more entrepreneurs have a choice, and many have chosen - not to grow. Peter Molyneux may have an Aston Martin, but he insists that money's not the point in British success stories. "I know lots of people who aren't making money, but just getting recognition in their industry - the Bitmap Brothers, for example. They've been in this industry longer than I have, producing a catalogue of brilliant games in the process, but they never really made good financially. They intentionally keep themselves small, to keep themselves creative. Traditionally the British are very hot on creativity, but crap at exploiting it. It's not the same in the States; the whole ethos is very different. In America, a company will set off with a target: to get so big with so much capital in so many years. In Britain you start off with a few friends and maybe, just maybe, you make it big."

"We decided five years ago to keep ourselves small and compact," concurs the Bitmap Brothers' Stephen Kelly. "You can go big and release three or four games a year, but we feel the quality suffers and you dilute your talents." Three partners, Kelly, Eric Matthews, and Mike Montgomery - as their names suggest, brothers in spirit only - originally formed the Bitmap Brothers in 1987. Now ten strong, the company has a string of games to its credit, including the latest, Z, and not a Ferrari in sight. "It's not about making huge amounts of money, it's about making quality games. We started a publishing company for ourselves once, but we sold it because it got too big."

Alex Morrison, managing director of Cognitive Applications (CogApp), agrees. "We operate on the model of an architect's office more than a Hollywood production studio - our aim is to build very high quality products, not necessarily on enormous volume." That kind of work has led to around a dozen projects with Microsoft, including ROMs The Microsoft Wine Guide, and bestselling The Microsoft Art Gallery. CogApp can also boast impressive staying power: Morrison founded the company in 1985, yet it still numbers only eight.

"We like to keep it small and focused," says Morrison. "A skilled programmer will not only produce better results but will be ten times more productive than an average or bad programmer. In order to attract people who are that good, you need to provide a working environment that's creative, fun and congenial." Not only do creative content makers tend to prefer close-knit teams to big-business behemoths, but being small may offer them their best shot at reaping a big reward. "You're more likely to make the money by creating the next Myst than by joining Netscape," says Morrison.

Among all the brave young firms dreaming of making it big in new media, it's surprising how few have the desire to be big. Take, for example, Lost in Space (LIS), which Christian Hogue set up in 1990. LIS provides special effects and 3D animations for high-profile projects. It created Terminator 2's death throes, the blue-eyed space-babe Levi's ad and the National Lottery hand; it has done cinema work for everyone from Bertolucci to Cubby Broccoli. Yet although its work is truly global, LIS's core is just eight animators in London who coordinate what LIS calls a "virtual studio" - LIS uses the Net to team up specialised animators the world over. The firm aims not to create a special effects factory that rivals Industrial Light and Magic, but instead to promote creativity by keeping it personal - just a handful of experts working intimately, albeit over great distances.

Likewise Steve Bowbrick and Ivan Pope, at Webmedia: Steve used to teach media studies, and Ivan printed a newsletter about the Internet. Two years ago they put theory into practice and created Webmedia. Key jobs like building the BT site helped keep the ball rolling; Webmedia is now the UK's largest independent Web house. And believing that companies, like jazz bands, find it difficult to improvise with more than nine or ten members, Webmedia has sub-divided its 40 staff members into four business groups, Webcontent, Webdevelopment, Webmedia and Webservices.

Even when UK new media companies do grow large, they rarely grab the headlines by going public. Lemmings was such an immense success when it launched in 1991 that it was, for some time, a benchmark of graphics standards; if you couldn't run the game, you weren't VGA compatible. David Jones founded DMA, the Dundee-based company that created Lemmings, in 1987. DMA's first office was his bedroom (well, he was only 22), but it now has 120 staff in the Dundee office, and 20 in Colorado. While you couldn't exactly call that small, DMA is still run by Jones as a private limited company, and remains independent of any one publisher. "We value our independence," says DMA's general manager, Stuart Dell.

True, there are some British entrepreneurs who have successfully followed the Silicon Valley model. Robert Madge built Madge Networks into a global force in token-ring networks - and a very successful public company - from his barn in Bucks (which is as close as they get to a garage in those parts). Hermann Hauser, one of Acorn's founders, has dedicated his career to making Cambridge the sceptred isle's Silicon Valley. These same names are repeated over and over, like a mantra. No disrespect to either, but they're hardly in the Jobs/Gates league, and they are of a different generation altogether to the new wave of entrepreneurs starting up in new media. The Andreesson of Albion, if he's out there, is sulking like Achilles in his tent - and sniggering at the trials of those who've tried to grow too far, too fast. The latest cause for smugness among the bijou brigade is the difficulties that First Information Group (FIG), a spin off from the Chrysalis entertainment empire, is currently experiencing. FIG was one of the few UK multimedia companies to grow by American rules. It attracted at least £8 million in venture capital before floating its shares on the stock exchange. And a fat lot of good that did it; FIG has just made redundant over 80 of its production staff - almost its entire creative arm - in the sluggish CD-ROM market.

Indeed, many of the larger British multimedia companies seem at least as notable for the entrepreneurs who've left them as they are for their own achievements. The MultiMedia Corporation ("the MMC") was originally the BBC's interactive arm, but was cut loose because this kind of development didn't fall within the Beeb's licence-fee remit. Creatives at the MMC have gone on to found companies like TUI, a London firm that develops interactive music; Mediamation, a Scottish firm that creates multimedia tools; and NoHo Digital. NoHo's London-based staff - about 20 people - created that Guinness screensaver, and also does work for Microsoft, Disney and other global firms. "It's healthy," notes Ciaran Doyle, the MMC's managing director.

And, having experienced the relatively pampered life of a bigger company like the MMC, do these new sprouts want to grow up to be big? No way. "If you look at Mark Andreesson," says Tim Carrigan, co-founder of NoHo Digital, "he has a tiny stake of a big thing. In the UK, for companies like us, it's the opposite scenario: we want a big stake of a small thing. It is about being in control. It's not that we don't want to make £100 million, but that's not what we're driven by.

"I don't see Bill Gates as a role model; I'd rather pick someone like [architect] Richard Rogers. That's more the British idea of success: fantastic projects done with relatively small but highly talented teams. In that respect the UK multimedia market is looking less to companies like Netscape or Yahoo! for its lead, and more to the success stories of other media like Planet 24 [The Big Breakfast], or Hat Trick Productions [Have I Got News for You]."

We don't want your money

That's easy for Carrigan to say now, when - no matter how British or un-British big may be - it is just plain hard for most entrepreneurs to grow here. The Internet, however, is about to put new temptations his way. The Net means that British companies can distribute to their biggest market, the US, from the comfort of their own armchairs. It creates a huge demand for the sort of highly crafted content that Britain's companies excel at creating. And it has sparked a wave of venture capitalists rushing east from California to make British entrepreneurs offers that they'd be hard put to refuse. A few British companies have even been tempted to issue shares on AIM (the Alternative Investment Market), the investment market for young firms that the London Stock Exchange founded in February 1995. Traditionally, the path to riches for a British entrepreneur has been to create a product here, then sell it on to a publisher or distributor in the US - the world's biggest market. Probe and Bullfrog went one step further and sold the Yanks the companies to boot. On the whole, though, it has just been too tough for the British to crack distributing in the US.

But the Net changes all that. Says CogApp's Alex Morrison, "The Net still raises questions about bandwidth and how you go about getting publicity. But they are trivial compared to the problems of getting boxes into Walmart or Comp USA."

Equally important, the Net also opens the door to ways of making money other than just shipping boxes. Steve Bowbrick of Webmedia is exploring these already. "Since this is a fresh industry, we can try different models back on the service side, and perhaps break the mould a bit. There's a more sophisticated model at work here, with service at the core, but spinning off other possibilities like licensing revenue, rather than just shrink wrap."

Bowbrick is fortunate. Maurice Saatchi's new-media investment company, Megalomedia, has invested in his firm, buying him time to explore these new business models. Most British entrepreneurs, have had to take on small jobs to finance slightly larger ones, growing their companies contract by contract. Early outside investment has played a key part in creating the Silicon Valley style of entrepreneurship: not only has it given entrepreneurs the ability to grow, it has also given them overpowering incentives to do so in order to pay off the "vulture capitalists".

Dhiren Shah, managing director of Morgan Stanley, doesn't see that sort of thing happening in Britain - yet. "Just spend a week in Silicon Valley and you'll see there's an insatiable appetite to build wealth," he says. "Out there, it pays to start your own company, take a risk, mortgage your family and swing for the fences. That kind of spirit does exist here, but the well-oiled financial mechanisms that enable it to work aren't in place. In order to reach the next level you come to the point where you need a million or so, and there's no one to give it to you."

Giving entrepreneurs a million or so is not Morgan Stanley's job. It gets into the act at the last stage of the growth cycle, when a company floats its shares on the stock exchange. (Netscape was one of its more successful recent clients.) Explains Shah, "The issue for start-ups is attracting seed capital to build on. There is a gap between starting up and going public. We give a fair amount of management advice, and we think there are going to be strong high-tech stories coming out of the UK, but they still have to deal with that question of finding investment capital."

In the US, according to US venture-capital research company VentureOne, nearly half of the 1,500 or so companies that benefited from venture capital last year were technology companies. And according to Price Waterhouse, total investments by US venture capitalists came to over $7.5 billion; in Silicon Valley alone, 350 companies received $1.7 billion.

In Britain, it's all much more modest. "3i is a pretty big investor," says Patrick Sheehey, 3i's local director of Emerging Businesses, "and last year we backed about 60 technology businesses. [In Emerging Businesses] all we do is invest in unquoted companies, and last year we did that to the tune of somewhere around £340 million. We estimate that to be about half of the UK high-tech market." It's also a far cry from that $7.5 billion figure enjoyed by their transatlantic rivals.

Received wisdom has it that 3i, which unquestionably dominates the market, actually restrains entrepreneurial growth, because it prefers the relative safety of financing management buy-outs of established firms to the wild frontier of start-up companies. It's a point that Sheehan acknowledges, but doesn't entirely agree with. "The fact that we fund start ups has got lost in the focus on management buy-outs, but we do, and we are very keen to do more."

So what's stopping them? "You can't just transplant American venture capital culture. It's very aggressive and more overtly hands on than the long-term, supportive style we have. The US is a different market in many ways; the quoted technology sector is more distinct and more developed with a larger home market so it's easier to have big winners."

William C. Schmidt, director of the venture-capital firm Advent, has seen the picture on both sides of the Atlantic, and agrees with Sheehan's cautious verdict. "A lot of people blame [British] venture capitalists for not being venturesome enough. But Europe has always been a more difficult place to do technology venture capital. The UK is better than continental Europe, but it's still not as easy as the East Coast, the West Coast, Texas, or Israel. Technology venture capital works well in clusters where entrepreneurs, good products, early customer adopters and finance are all found in the same place. It's from that cauldron that you get emergent life. Perhaps you've got that in Cambridge, where you've got the companies, the business park and sparks like Hermann Hauser that attract capital and corporate funds. But right now it's only in Cambridge where you get that cluster of managers and funds, and I'm speaking as a guy who has looked across the whole of Europe for deals."

Let's Deal

Others, though, don't agree - or just don't know better. Earlier this year Red Herring, a US magazine reporting on high-tech venture capital, organised a conference in London called Venture Market Europe. Its aim was to bring together new technology companies with potential backers in an American-style schmooze fest. Local talent, including 3i, was well represented.

But a lot of the interest, and most of the talk in the toilets, focused on the presence of US financial interlopers such as Alex.Brown Inc and Hambrecht & Quist - the powerhouses of Silicon Valley, recently arrived in town and hot to deal. Stories of US money chasing down UK entrepreneurs have always sounded like wishful thinking, and the likes of 3i have always been sceptical, but the atmosphere at Venture Market Europe suggested it may at last be happening. Peter Spencer, head of Hambrecht & Quist's London office, is emphatic. "Before now in the UK, there just hasn't been the education or the money as the majority of UK investors are dramatically underweight. Everyone's perception of technology in Europe has been one of commodity materials like semiconductors, and there is little understanding of the new generation of software like Netscape.

"The UK is technically rich, but there's not a lot of money going into seeding, which is why we've set up offices here to help provide a corporate finance platform to facilitate growth. It's not anyone's fault, but we are about three to five years behind. It's just a question of time and encouragement before we're selling UK-quoted product into the US."

According to John Edelson, the general manager at Argonaut, "The schmoozing at the Red Herring event was particularly impressive." Argonaut - founded by Jez San, legendary British games hacker - is now expanding from games into chips that accelerate on-screen graphics. "I do see the venture guys looking for deals in the UK. I see 'em, and I know they're American - you can tell by their accents." Edelson's own accent reflects his birth in Washington, DC, and his professional background includes Silicon Graphics and 3DO.

Finding a Silicon Valley manager at Argonaut is the first real hint that the US model may in fact be arriving in Britain - no matter how much British entrepreneurs fete their smallness. Indeed, Argonaut needs to get big, fast.

Argonaut says it has no immediate plans for flotation, and intends to keep its game division at roughly the current size (around 50 people). But at the same time, it is aiming to grow the company courtesy of graphics chips destined for the interactive TV market. Moving to that kind of hardware production takes money, but Jez San and John Edelson are confident that the capital is now becoming available to achieve that transformation.

"There is a boom, and you're entering the same cycles here as in the States," says Edelson. "Venture capitalists are sheep when push comes to shove....

"We've had very good response from potential investors since the Red Herring conference, not all of whom have been English. Most of us don't care where the money is coming from; we just care about it being intelligent, and making its way to us." As far as Edelson is concerned, that's exactly what is happening right now. "The market has changed dramatically in the last twelve months," he says. "It's a trend, and it will continue to grow. More people will want to get in on it and we're starting to see a number of people floating.

"In the games business only a year ago there was just one public company in England, US Gold - ironically, the one publicly quoted British games company got its name from its origins importing American products.

"Now there are three or four, like BCE and Eidos, and others like Sales Curve and Digital Creations that have announced they intend to."

In fact, Edelson's real concern is that things might get out of hand. "I think there will be many more deals. I fear that the markets will get excited and get carried away." Carried away? "Yep, even the Brits." Lordy.

If things do get out of hand, much of the credit will go to the Alternative Investment Market. AIM is not specifically about high-tech; being British, the number of high-tech companies is actually rivalled by the number of brewers. The joy of AIM is that it doesn't exclude anyone; it doesn't require any minimum percentage of equity in public hands, or a minimum size, or a three year track record. Consequently AIM is home to companies like Easynet, an Internet service provider; Concurrent Technologies, which makes single-board computers; and Digital Animations, a game company. AIM is also home to more established multimedia companies like Omnimedia, the MMC and FIG.

"AIM is attracting a lot of companies," Celia Glynn-Williams, its marketing manager, says. "In fact we had one yesterday who could have gone to NASDAQ but chose AIM because it's on the doorstep, it doesn't confront them with regulation requirements, maintaining a quote, or the problems of long distance investor relations. The US has a more mature retail investor base when it comes to high-tech stocks, but we are witnessing an increasing willing-ness on the part of investors here, including institutions."

So here's the question. Britain has always had creative talent. Now it's got access to markets, and American venture capitalists lining up to fill the coffers of British entrepreneurs. Given all that, how long will Britain's bijou brigade resist the temptation to sell out, and continue to exhort the virtues of smallness?

To Grow - Or Not?

Whichever way they decide, it's a great choice to have. But even as some British entrepreneurs hop onto the rocket ship of American-style, shoot-for-the-stars entrepreneurship, there will always be some things in the Silicon Valley model that sit uneasily upon British shoulders.

Take Argonaut's Jez San. He hired a Silicon Valley entrepreneur to grow his business, and he's by no means averse to success on a global scale. But at an income level where many Silicon Valley entrepreneurs are on their second Ferrari, San says, "I drive a nice car, but not a flash one, so as not to rub peoples' noses in it. I wouldn't drive an expensive car around because I want to count everyone in the company on my side, especially as we're growing it, and displaying wealth is the wrong way to go about that."

In Britain, even the pilots of the rocket ship still want to like to look like they're strolling down a country lane. And as for enthusiasm, well, talking up your prospects is a game best left to the Yanks. But there are a lot of talented Brits dotted around the country who have a lot of very powerful computers tucked away in converted barns, and, discreetly tucked away in the barns next door, a growing number of extremely expensive cars.

Peter Molyneux, Bullfrog
A self-confessed games fanatic, Molyneux started his company, Bullfrog, in 1987 and sold it nine years later to Electronic Arts for a rumoured £40 million.
"I'm not denying that I want to make money, but being creative and running my own life come first."

Tim Carrigan, NoHo Digital
NoHo provides interactive work for international giants including Disney, Coca-Cola and the Microsoft Network, as well as creating that Guiness screensaver.
"Mark Andreesson has a tiny stake of a big thing. We want a big stake of a small thing. "

Jez San, Argonaut
It's been some years since Argonaut could be called small, but it is now playing the Americans at their own game: finding a Silicon Valley manager at Argonaut is the first real hint that the US model may in fact be arriving in Britain.
"I wouldn't drive an expensive car because I want to count everyone in the company on my side."

Steve Bowbrick and Ivan Pope, Webmedia
Steve and Ivan have acted on that belief by splitting their company of 40 into four separate divisions.
"Companies, like jazz bands, find it difficult to improvise with more than nine or ten members."

Alex Morrison, Cognitive Applications (CogApp)
CogApp has been around since 1985 and worked on over a dozen projects with Uncle Bill, most notably the Microsoft Art Gallery, the Microsoft Wine Guide and the Microsoft Ancient Lands series.
"We like to keep it small and focused."

Christian Hogue, Lost in Space (LIS)
LIS provides spectacular effects and 3D animations, including Terminator 2's death throes, the blue-eyed space babe in the Levi's ad and the National Lottery hand.
"LIS's core is just eight animators in London who coordinate what LIS calls a "virtual studio" over the Net."

Steve Shipside is a freelance journalist who lives in Paris.