Stock Ideas
[ March 30, 2000 ]
Interview -- Simon Murdoch, Partner in Episode 1
In association with Intel's® WebOutfitterSM Service (IWOS), we have recorded eight 15-minute interviews, with various industry big-wigs, on the Fool site. Below is a text transcript of one of our interviews. To see the RealPlayer audio/visual stream of this interview, click here.
Until co-founding Episode 1 Partners, Dr Simon Murdoch was Vice President Europe of Amazon.com. He founded Bookpages in late 1996 which he sold to Amazon.com in April 1998. He managed the hugely successful launch of the Amazon.co.uk service in October 1998, and oversaw the growth of Amazon.de from January 1999 onwards.
Prior to Amazon.com, Simon was Managing Director of a UK-based software house, Triptych Systems. He has a BA in Physics and a PhD in Computer Sciences and Expert Systems.
The Fool: Simon Murdoch, partner in Episode1, thank you very much for agreeing to be interviewed by The Fool. First of all what first gave you the idea to set up Bookpages, which was one of the first e-commerce businesses in the UK?
Simon Murdoch: Well, I was in the right place at the right time really. I happened to be running a software house called Triptych Systems, that did systems for bookshops and customer ordering and stock control, and I watched all this happening with Amazon.com in the States and thought "well, we can do that." First off I went to WH Smiths and Waterstones and those sorts of people and suggested that we developed a site for them but they were slow so we decided to create our own company to do it as Bookpages.
The Fool: Right. And what was it like running an e-commerce business at that time?
SM: Well we actually founded it in late '96, first employee in September '96, we went live in December '96. So it was very early and at the time, first off, it was very difficult to get financing for it, so it was early days. It took us, really, the whole of '97 to raise just a million pounds of finance.
The Fool: Wow.
SM: That was the biggest difference. So we were running on a shoestring. I remember my budget for marketing in the first year was £30,000
The Fool: As much as that?
SM: which these days wouldn't get you anywhere. That's the key difference.
The Fool: It's amazing. It's like we're talking about prehistory here but it's less than three years ago. It's just extraordinary. So the business grew, you managed to get funding eventually. So why did you sell out to Amazon? What was the...?
SM: Well what happened was that we got a million pounds of business angel finance right at the beginning of '98 and that seemed like the right amount of money at the time. But then some of the deals that Amazon was doing in the States and the aggressive way that they were growing I just realised it was actually much better, when they approached us, to be part of a bigger team. For them it was useful to have a local team who knew the market, knew how to approach customers in the UK and suppliers. So it was a win, win for both of the companies.
The Fool: And how did the absorption into Amazon go?
SM: It worked out very well. I mean the key advantages that they had, which I learnt from, went to Seattle and looked at exactly what had made Amazon.com so successful, and actually a lot of it was about fuelling the word of mouth. Providing an absolutely brilliant service, in customer service and fulfillment and then getting people, effectively, to tell all their friends and family that this is the place to go to buy books. So they were able to provide us all the infrastructure and the technology and the finance to do that here in the UK. That was the key thing that made Amazon.co.uk such a great success when it launched. So the integration went very well.
The Fool: So what do you most admire in Amazon's business and its business model, is it that?
SM: I'd say so. I mean Jeff Bezos is a very visionary guy and the thing he realised right from the beginning of Amazon.com was that the Internet, in every sector, is going to be incredibly competitive, and the only way to stay ahead is to have a ruthless focus within the company of doing the best possible job for customers and by often overinvesting in areas to do a good job for customers they found that they could stay ahead of the competition. And the nice thing about Internet businesses and why investors, because, of course, I'm an investor now, like them so much is that if you're number one you can be ten times bigger than number two which can be ten times bigger than number three. So there's great benefits of being the market leader in some sector and what Jeff recognised early on is that doing a great job for customers is the way to get that market leadership.
The Fool: Yeah, I mean that's clearly one of the keys, isn't it, and not always that easy to replicate, particularly for the sort of older, more established companies.
SM: That's true, and the old adage for retailers is "location, location, location." Within an Internet business the phrase we always have is "execution, execution, execution."
The Fool: Right.
SM: Everybody wants to do a good job for customers, it's actually much harder than it seems to execute on that. So there was a very strong focus in the company of trying to create the culture in the organisation to really make sure that happened.
The Fool: So what was it that made you leave Amazon to become a venture capitalist which kind of sounds like, it sounds very close to vulture but I know it isn't.
SM: I know. Of course we're not a vulture.
The Fool: Course you're not a vulture.
SM: What happened was that we recognised that we'd done well financially out of it, myself and my partner, Richard Tahta, and I was fortunate that Jeff asked me to become VP for Europe for Amazon, which I did through the whole of 1999 pretty well, and I was also still running the UK operation. And realised that having been an entrepreneur I loved the early stages of setting up companies. But rather than going off and starting one company myself and being the lynchpin I felt it would be less stressful to have other people in that situation. So we went out and we raised a $100m from Chase Capital Partners, part of Chase Manhattan Bank, and are now investing that money in other entrepreneurs and giving them the advice of how to grow their businesses, largely from scratch or from the early stages. And it's nice to be in the situation to help ten, fifteen, twenty companies rather than putting all of our eggs in one basket which is what it's like if you're an Internet entrepreneur.
The Fool: And what's the main focus of your investments?
SM: Well it's all Internet. It's early stage, so the company could be a complete start up, not even launched yet or they can be six months or twelve months old, I'd say is the maximum. And we don't have a specific focus, a lot of people ask; "are you B to B, B to C etc". We actually want to diversify within the Internet so we're investing in some software infrastructure companies, some marketing companies, some e-tailers and some B to B.
The Fool: Right. What do you look at? I mean, what's crucial? What dictates whether a business plan gets shoved in the bin or whether you take it home and read it on the train?
SM: I think that we have one phrase which encapsulates it all which is that we're looking for people, a team and a business model that can dominate a valuable niche. And what that means is you find that lots of plans that come in don't actually satisfy that. In particular to dominate you need to be early or have a good way of attacking a particular business that means you can beat the competition. So we find lots of people are coming to us in sectors that are already very well established. Other things is that we get lots of plans that when you look at it you think "well actually, the market for this is relatively small and this could never be more than a five or ten million turnover business" and in those situations we actually do sort of reject those quite quickly. But if you've got a group of people and way of attacking a particular business area that can dominate some sort of valuable niche then it's something we look at very closely.
The Fool: How many niches are there? I gather in business schools there are business students just like going through every industry sector and checking out every possible permutation and no doubt there are computer programs doing it
SM: It is hard and the other thing is that sometimes you might think you've found a niche, what's a good example? Like selling luxury goods, let's say e-tailing luxury goods. But when you think about it other companies could come and encroach into that area and you don't really have a niche at all, it's something that, say Amazon, or another company could then just take over. So it's a subjective judgement you have to make about whether the niche is defendable.
The Fool: So what do you think the most crucial factors are in setting up a successful business, from amongst the entrepreneurs yourselves?
SM: I think one of the key things in Europe is to be ambitious, so if you compare what Jeff Bezos did when he started Amazon. He happened to choose books and the US as the place to start, but he always realised there was a possibility of selling anything to anyone in the world, just that books in the US was just a starting point. Certainly my attitude was "I want to be the number one or number two book seller in the UK." And so I'd encourage people to think big, but the on the other side you've got to be realistic. So, I particular, I would recommend people very, very strongly to look and think about the competition. You get a lot of plans in where people will say "ah, well although there's ten competitors we're better than all of them." And often it's not credible. You have to really think hard about how, not, just the competition there is now, but what sort of entrenched interests are there in your particular industry and will the be able to take over? And it will really have to be plausible that you can win some area.
The Fool: Now I know that Episode 1 invests right across the board, into all the different business models but is there any particular views on any of them. Do you find some of them more attractive than others? I mean, a lot of people these days are sort of worrying, business to consumer, are there really going to be margins down. Down the line it's going to be very competitive.
SM: It is an important issue and really that comes down to the other thing that investors and venture capitalists look at which often entrepreneurs don't think about is, what is the exit? And the reason that investors are nervous about B to C is it's felt that the exit routes are harder than for B to B areas. Investment actually, surprisingly, actually does follow fashions. So a couple of years ago, two and half years ago everybody wanted to be creating the biggest search engine, before that was "who can be the biggest ISP?" last year, last couple of years it was "who can be the biggest e-tailers?" and now it's going to be "who's going to be the biggest B to B business?" So we will invest in some e-tailors but not many and we are very keen on B to B and we're very keen on software technology and infrastructure businesses. And this all comes about because in order to be successful, from our point of view, from an investors point of view you have to invest money now, help a business grow you know five, ten, hundred fold over the next couple of years and then find some way of exiting and getting the money out of the investment.
The Fool: Yeah. Now are you involved at in funding for wireless projects? And really I guess, the critical question is, there's been a lot of hype about the Wireless Internet, do you think there is real potential in wireless-based profitable businesses down the line?
SM: That's the great question and the answer is it looks difficult. We were very keen on this sector and have quite a few plans for the area but one of the difficulties is "where's the money?" A lot of the things that you see when people talking about using the location, the information, providing entertainment information over your mobile phone. When you look at these things it's very hard to see where the actual revenue can come from. The other thing is that because you've got two massive, two or three massive handset manufacturers and you've got four mobile networks those organisations have got a very strong hold over the area so can a start-up find some sort of way of making money against that potential competition, and the answer for virtually all of the things we've looked at, from our point of view, has been "no". There's one or two companies that we are still looking at but we haven't invested yet. So it would be great if there are some models that can work in those areas but it's very difficult.
The Fool: It's a bit of a head breaker when you do try and think of it and just try and think where the revenues going to come from. OK and final, the inevitable question. What is your best advice for the Internet start-up entrepreneur wannabe who's sitting out there?
SM: It's difficult because there's so many things that you have to get right. It's like a spinning plates thing, there's hundreds of things you have to do to create a really successful business. But another thing we haven't mentioned so I'll highlight it, although it's not necessarily the most important thing, the other thing is to get great people around you. To build a very strong team of individuals, because what you'll find is that a venture capitalists will look at your plan and say "well this doesn't sound quite right but the team is so good, I want to invest in these people."
The Fool: Right.
SM: And then we may well help you to modify your plan, we certainly do this in a way which does make it backable. And a way of doing that is to go and find people who are consultants or have run Internet businesses or have been great marketeers in other companies and then have them as part of your team.
The Fool: So get great people.
SM: Get great people.
The Fool: So Simon Murdoch thank you very much for being a very Foolish interviewee.
SM: Thank you: I'll add this to my collection.
Related links
• Episode 1's website
