Martin Varsavsky
Fon

Martin Varsavsky is an Argentine entrepreneur—the founder of seven North American or European companies within the past 30 years. As a college student, Varsavsky started Urban Capital Corporation, a real estate company in downtown Manhattan. In 1986 he started Medicorp Services, a Canadian biotechnology company. In 1990 Varsavsky founded his third business, Viatel Ltd., his first venture into telecom. In 1998 he started Spain's second-largest publicly-traded telecom operator, Jazztel Telecomunicaciones. In 1999 he founded Ya.com, Spain's third-largest internet provider. In 2000, he started a cloud computing company, EINTSTEINet, his only business failure. The company was sold in 2003 for one euro—and at a personal loss for Varsavsky.

Martin Varsavsky's current venture is Fon, the word's largest Wi-Fi network. The company is headquartered in Madrid, Spain, and its investors include Skype, Google, Atomico, British Telecom, Coral Group, Index Ventures, and Sequoia Capital.

Pedro Santos: Can you talk a bit about your history?

Martin Varsavsky: I was born in Argentina. I grew up there until the military coup [in 1976], when my family was forced to emigrate. When I was in high school, we were given refugee visas by Senator [Daniel Patrick] Moynihan [D-NY] and immigrated to the United States.

I started college in the States. I went to NYU. I did philosophy and economics in my undergrad and then I went to Columbia University, where I did two master's degrees, one in international relations and international affairs and the other one in business.

When I was at school I had to pay for my schooling. I started doing menial jobs such as being a bike messenger, but I soon realized that I had an opportunity to build businesses.

My very first business, while I was at the university, was like a search engine. A search engine in the late seventies meant that I would get requests over fax from countries outside of the United States about information that was at the NYU library in books that would cost $20,000 or more.

There was a lot of information that was held in books that most people, even businesses, couldn't afford. So I started a company in which I would get requests over fax.

I would just walk over to the library, find the answers in these guides that were too costly for most businesses to have, and I would sell the answers. So it was like a very primitive form of search engine.

Then I also started a business, which has grown to become pretty sizable. It was called Urban Capital. Urban Capital was basically realizing the activity that many of my classmates were doing in the early eighties, which was illegally occupying or being squatters in loft buildings.

Instead I became partners with the commissioner of leasing for the City of New York and I started Urban Capital, which legally transformed the use of these industrial buildings into office and residential buildings.

We did like half a million square feet of—well of loft buildings: both residential and office by the time I finished school, or two years after I finished school in 1987. And I have only done technology businesses ever since.

But I still own one building in Tribeca that's 120,000 square feet. So I still have that original business or parts of it.

I built four technology companies that got to be worth over $700 million by the time I sold them. These companies are Viatel, Jazztel, Ya.com, and Eolia, which is an alternative energy company. Now I'm on my fifth one that is approaching this value and it's called Fon.

I also built another company called EINSTEINet in which I lost €35 million of my own. It was one of the first cloud computing companies, ahead of its time, and it's been my big and only really significant business failure.

Santos: Of all these first four technology businesses that you did, what were the main lessons from each one?

Varsavsky: Well, in general my businesses value comes from turning ideas into a business. The ideas are sometimes my own, and sometimes other people's ideas. In the case of Viatel, for example, or Fon, it was my own idea to invent callback and that was the start of Viatel. And I was also the first builder of the pan European fiber optic network.

Then in the case of Fon, I have the patent, the US patent, for Fon—which is that you share a little Wi-Fi at home and you roam the world for free. The concept of the global affiliation of Wi-Fi routers who share Wi-Fi.

And so sometimes it's my idea, and sometimes it's other people's ideas. For example, I worked with Nobel Prize winner Cesar Milstein in the eighties to start Medicorp Sciences. He's the inventor of monoclonal antibodies and we were one of the first companies to do AIDS tests.

In this case, I was the business person behind his ideas and the ideas of some other scientists. So I either transform other people's ideas into businesses or my own.

Santos: Before you actually go on to start the business, how do you measure if the idea? How do you see the potential of the idea? How do you decide to do it? Or [is it a matter of] it's an interesting idea, but I won't do it?

Varsavsky: In general, and since 1990, all my businesses have been in telecoms, internet, and alternative energy. Since I've been in those fields, in general it's something that relates to “if it's good for me …” I know this may not be the most objective rule on the planet—it's probably the most subjective rule on the planet. But it's kind of like, if it's good for me, it should be good for everyone else.

And so for example, I invented Fon while looking for Wi-Fi myself. I was unable to connect to Wi-Fi in Paris while I was visiting and I would find tons of Wi-Fi networks. They were all locked.

And I said how could I convince the people of Paris to open up their Wi-Fi for me? And that's how I thought, “Well, maybe if I open in Madrid for them, and maybe if everybody opens their networks to each other in quid pro quo, then we will have regulated.”

Not open Wi-Fi, because open Wi-Fi had not worked, and I knew that. So just ask people to open their Wi-Fi and not get anything in return, but I thought we could establish a global quid pro quo.

If I, Martin, would be able to open my Wi-Fi if they give me Wi-Fi when I travel, many people may want to do the same. So I generally use myself as the reference, and I think if something works for me—and I do that also for investing. Like, I only invest in companies whose products I use.

Santos: And once you had the idea for Fon, what was the first thing you did to implement it?

Varsavsky: Well, the idea for Fon has not changed since I've had it, but the strategy of Fon changed two times. The first idea I had was that the Fon was not going to be a business. That it was going to be an NGO¹ where people would download software, change the behavior of their routers, and build a global Wi-Fi network. And that didn't work, because only very few brands of routers could be reflexible, meaning that their software could be changed.

So then I changed to the second idea for Fon, which is to manufacture the Fonero and sell or give away for free our own routers, so people would use our routers to share a little Wi-Fi at home and roam the world for free.

But that also didn't work. People didn't buy our routers massively, and even when we gave them away for free, half of them didn't connect them, and we lost a lot of money. And Fon almost failed.

But then I had the third idea of Fon, which was to work with the people who were supposed to be our enemies to begin with … the telecom companies.

And then we ended up creating BT Fon, for example, British Telecom, and many other associations like that in other countries around the world. Like with SoftBank in Japan, or MTS in Russia, or Zon in Portugal, SFR in France, or Belgacom in Belgium, and so on.

And then Fon really worked. But the other thing that made Fon work was the advent of the iPhone. The iPhone and Androids, but first the iPhone massively created a need for public Wi-Fi, or Wi-Fi everywhere.

When we started in a world of laptops, there wasn't enough interest in Wi-Fi, or not as much as there is now, so it was a trend that helped us and a change of strategy.

Santos: How long did you try the NGO approach?

Varsavsky: I tried the NGO approach for very little time, between like the end of 2005 and February 2006 when we incorporated and got Google and Index [Ventures] and Sequoia, and Niklas and Janus from Skype as partners. Then we tried with the formula approach between 2006 and 2008. And then we tried a corporation with the carriers after 2008, and then it was also the birth of the iPhone, and then it would all worked out.

Santos: And how did you actually convince what would be perceived, as you said, your enemies of the company? How did you convince them to join forces with Fon?

Varsavsky: Well, it was interesting, because we're now the largest Wi-Fi network in the world, but when we were trying to do this, we were nobodies, right? And so it was interesting, because Google had me onstage with Ian Livingston to debate BT, Fon vs. BT and we were onstage at Google's Zeitgeist, debating each other.

And then we kind of found we had a lot of things in common because I started arguing that Fon was a great addition to BT, actually, and shouldn't be seen as an enemy.

Because people still pay at home, and the benefit of roaming doesn't cost anything, and that that was the way that Wi-Fi could really become a basic necessity, that you paid at home, but you got Wi-Fi everywhere, at home and everywhere else.

That you paid at home, and I argued that that would make the customers at BT more loyal next turn. And the iPhone, the average revenue per user will be higher at BT if they had this vs. competitors.

And that also the customer acquisition cost would be lower because there was a bigger benefit to signing for DSL Wi-Fi at home, because you would get it at home and everywhere else.

And I kind of convinced Ian Livingston, so instead of debating, we went backstage, and then we made a deal.

Santos: And once you had that deal, it was much easier to bring other deals from other countries, I expect.

Varsavsky: Yeah, BT is one of these companies that are a global reference.

Santos: And you mentioned that you got investments, as you said, from Google, Skype. Was it in the NGO phase or after?

Varsavsky: After the NGO. Yeah, obviously, when we said we'll be a NGO, we didn't get any investments. When I decided to turn this into a corporation, that's when I got the investments.

Santos: And how did you convince Google and Skype? What was the interest from those companies?

Varsavsky: Well, we were the first European investment that Google ever made, the first European company Google ever invested in, and the first European company Sequoia ever invested in. I think Google felt and Skype felt that if there's Wi-Fi everywhere, their products will be more successful. That's their strategic investment and they also wanted to move into an investment outside of the United States and we had a good proposition.

In the case of Google. In the case of Skype, they were already a European company.

Santos: But at the time, you were still in the beginning. Can you share a bit of how you pitched the idea to them?

Varsavsky: So I pitched to Google, both to Chris Sacca and Sergey Brin. And Chris Sacca was the head of Wi-Fi at that point and was very skeptical of Fon, but Sergey Brin was the revolutionary there, and he saw that Fon could have a potential. And he decided to go ahead with the investment.

Santos: And once you raised the Series C round, you personally invested in Fon through your holding company. In previous rounds, no. What was the reasoning to invest in the C rounds instead of the previous rounds?

Varsavsky: Well, there was a point where nobody wanted to invest in Fon, and we almost went bankrupt. That I was the only investor, and I was the only one who could lend to the company. I made it until we became profitable. I had come from losing €35 million of my own money in EINSTEINet, in the cloud computing company before, and I was very skeptical of being the only person who invested in a company. But then what happened was that I had no choice, basically.

Because that was the worst time in the company's history, and we thought we were going bankrupt. I didn't want to go bankrupt, and I thought Wi-Fi had a tremendous future, and I decided to risk my own money to save the company.

Now we're profitable, in fact now we accumulate cash every month. We don't spend cash.

Santos: Another interesting thing is that in 2008, you launched a service called Twitxr.² Why launch this service? It seems a very off-core business of Fon.

Varsavsky: No, it's the same thing. I wanted that. There are a lot of services I launch because I want them myself. There's another one I just launched [on the Android platform] a few weeks ago called RadioMe.

It's an application that when I'm on my bicycle it reads my tweets, and my Facebook, and my Gmail, and plays my music, so when I go on the mountain bike, which I do three times a week in Madrid, in the mountains near Madrid, I go for like two hours, and I listen to RadioMe. So I did RadioMe for myself. And it's in the Android market. You can test it yourself. But I do a lot of these things—I do it because I need them. So, I design them, and I get an engineer, and I do them.

But that doesn't mean that they're meant to be businesses. These are all, by the way, very small investments. It cost me, like, €10,000, €20,000, to do each one of these things. And I do them because I like them. My business is fun.

And my business also is investing with other entrepreneurs, which I do, like the founders of other companies. They are all listed in my blog, but most, the best-known companies are like Tumblr, and then some others. Tumblr, Dopplr, whatever. They're all in my blog. So I also do business mentoring accompanied by some investing.

But my main activities are Fon, and then I do some investing, and then I do some teaching, I'm a professor at Instituto de Empresa, and then I do some philanthropy with my foundation.

Santos: You're now based in Madrid. Before, you came from the US. You started businesses in both continents. In your experience, what are the advantages and disadvantages of building businesses in America vs. Europe?

Varsavsky: Well, I think overall it's easier in America, except there's more competition in America. I think that the market is bigger in Europe, but it's more fragmented. I think that there are three things in America that make building businesses hard.

The best thing is the access to capital, VC capital, that's phenomenal in America. But I find the legal system is very bad for business because of the uncertainty of litigation—and this constant uncertainty of litigation—that it's much better in Europe.

I find the health care system very bad and extremely costly for businesses, that if you want to offer health care, it costs like $1,000 a month per employee.

And so the problem of doing business in the United States is litigation, potential litigation, and the cost of health care. Those things are better in Europe.

What's better in America is that it's a unified national market, and in Europe it's sort of unified but not really. It's more fragmented.

I also think Europe has very difficult labor laws and high taxes on employment. Europe employment taxes are very high, which is unusual.

Not everywhere in Europe, by the way. Like Switzerland has very low taxes on employing people. I'm building a new business in Switzerland. The salaries are high, but it's nice to know that most of the money goes to the employee. So Europe is more diverse.

I actually gave a talk about this to people in the press, and there's a video about why you shouldn't move your business to Silicon Valley. That describes very much how I feel about this. It's complicated. It's not a straight answer.

Santos: But still you moved to Madrid. Was it a personal decision?

Varsavsky: It was purely a personal decision in the sense that it's not a rational one. If you study all the countries in the world, you wouldn't end up in Spain building technology companies. But I happen to be a big fish in a small pond and I'm happy there.

Santos: Of all these experiences that you had, including EINSTEINet, what were the main learning points?

Varsavsky: I think that Fon exists today thanks to EINSTEINet because in EINSTEINet, I sold the company for one euro to save the jobs of the employees thinking that I was the only crazy person to think that cloud computing had a future. And then two years later, cloud computing really took off. Now cloud computing is huge.

So when Wi-Fi looked like it was failing, I remembered EINSTEINet and I said, “I'm going to put my money there because my ideas are not crazy. It's just sometimes ahead of their time and if I have enough money to wait, the market will help me.”

Santos: What advice would you give to a new entrepreneur?

Varsavsky: Well, I would be realistic and I would say, “Look, if you think you are the lucky sperm that's going to get the ovule, go ahead and start the business.”

Santos: Do you think it's a lucky star or you think it's personal quality?

Varsavsky: It's a very difficult thing to do with a very high probability of failure. But it is essential for society and even those who try and fail are also helping society. So I encourage people to try, but at the same time warning them how difficult it is.

Santos: But you have several companies started and successfully built with only one failure. That's a very good batting average.

Varsavsky: Yeah, because I am tenacious and I am sometimes lucky and I'm good at spotting trends. Whether it was 1985 and realizing that lofts were a big trend and buying 120,000 square feet in Tribeca while I was a student.

Or being in 2005 and realizing that Wi-Fi was going to be huge and global, and to be the only global wireless signal while all the other wireless standards were not global.

And CDMA and GSM and GPLS and Edge and 2G and LTE and that Wi-Fi was Wi-Fi and everybody understood that in China, in Argentina, in the UK, in the USA, in Spain.

It's just having a sense of what technology people are going to want to use and being tenacious and being persuasive and being devoted to what I do.

But I was also lucky. Most people who try businesses fail. That's the truth and people should be warned about that.