All the Right Connections

The partners at Arts Alliance Ltd., a venture-capital firm, believe that success is about making connections — between companies and their customers, and between portfolio companies.

Thomas Hoegh, one of Europe's go-to guys for spotting hot Internet companies and entrepreneurs, never wanted to be a venture capitalist. In fact, until four years ago, he didn't even know what venture capital was. Trained as a theater director, Hoegh had coordinated rock concerts and public events, such as the one-year-anniversary celebration of the 1993 Oslo peace accord between Israel and Palestine, and the opening and closing ceremonies of the 1994 Winter Olympics, in Lillehammer, Norway.

These days, Hoegh (pronounced "hoag"), 34, is working behind the scenes on another public spectacle: the startup-and-IPO boom. Shedding his all-black wardrobe and waist-length strawberry-blond hair, Hoegh has created a strategy for building Internet companies that is generating lots of attention — and eye-popping returns — in both Europe and the United States.

His firm, Arts Alliance Ltd., with offices in London and New York (and with a laboratory in San Francisco), has assembled an investment portfolio that includes three of Europe's hottest Net companies — Chateau-Online, Interactive Investor, and lastminute.com — as well as high-profile U.S. holdings that have been sold to Amazon.com and to America Online. Hoegh's secret: advocating for users the same way that a director advocates for an audience.

"In theater, there's a sense of immediacy and a closeness to the audience that is directly applicable to the Web," says Hoegh. "Both in the theater and on the Web, there's a strong correlation between connecting to the audience and creating a successful enterprise."

Hoegh, a lumbering, goateed Norwegian with a dry sense of humor, is a rare mix of business strategist, product developer, and community organizer. Founded in June 1997, Arts Alliance is neither as big nor as world-famous as Silicon Valley heavyweights such as Benchmark Capital and Kleiner Perkins Caufield & Byers, but there's no denying the firm's huge success. Hoegh and his nine-person team have already invested in 36 companies, which are evenly split in location between the United States and Europe. Remarkably, only two of those companies have folded. In the first fund (of three), 6 out of 16 companies, including U.S.-based launch.com, either have had successful initial public offerings or have been sold at premium valuations to major players in the Internet economy (which is what happened to AOL-acquired Spinner.com).

Talk about smart money. Measured in U.S. dollars, the aggregate return on investment in the first fund was 600%. The ROI on the first six exits alone was 911%. Indeed, Arts Alliance's performance record is so stellar that blue-chip companies such as Allen & Co., Intel, Sony Music Ventures, and France's PPR Interactive (the venture unit of the Pinault-Printemps-Redoute retail empire) are all eager investors or coinvestors.

Fred Ehrlich, 38, president of new technology and business development at Sony Music Entertainment Inc., considers Arts Alliance's stamp of approval to be one of the absolute best in the Internet business. "Arts Alliance doesn't just help us find a good investment," he says. "It also helps each company become a better business — and that is really what's important."

Arts Alliance certainly knows how to play the startup game — but it plays by its own rules. Even the company's name hints that there's something a bit different about this VC firm: Why are the words "venture," "capital," and "partners" absent from the name? Because in a world awash in money, says Hoegh, the two rarest commodities are a unique customer-service experience (hence "Arts") and rich connections — that is, connections between each of the companies in the firm's portfolio, between those companies and their customers, and between recognizing an unbounded creative impulse and respecting the unforgiving demands of technology (hence "Alliance").

Says Per Hakon Fasting, 37, a vice president at Schibsted Multimedia, Scandinavia's premier online catalyst and one of Arts Alliance's coinvestors: "Hoegh is as much an evangelist as he is a businessman. He's tops on my list because he is obsessed with the customer experience and because he understands the connection between creativity and business."

The Customer Connection

The Internet has captured the world's imagination — in business and in culture — with promises of instant communication, global community, and a more-equal exchange of information and ideas. Which makes it all the more disappointing, says Hoegh, that the language used by most startups is so cold, so bloodless, so calculating. Web sites look to attract "eyeballs" and to maximize "stickiness." The people who visit sites are "users" that companies try to "monetize." So much for a people-centered Digital Revolution.

But the problem involves more than just words. The only way to build an enduring Internet company, Hoegh insists, is to build it not for customers but with customers. Companies that will win in the long run are those that invite customers into their enterprise, make it attractive for customers to offer ideas and to help create products, and share the value that gets created. "The next wave of the Internet Revolution needs to distribute wealth to both entrepreneurs and users in recognition of the role that users play in building the intellectual capital of the business," Hoegh says.

Arts Alliance has begun to enact this share-the-wealth principle — literally — with its portfolio companies. Sweden's Dobedo, a cartoonish world of virtual avatars and online mayhem launched in 1998, is a runaway hit with hipsters in Berlin, London, and Stockholm. Arts Alliance encouraged Dobedo to create a compilation album consisting of the favorite songs of the site's most-frequent visitors. The album, to be distributed by Sony Music late this summer, will feature the names of the people who chose the songs — a valuable bit of real-world recognition. Another one of Arts Alliance's companies, AtomFilms, an online and offline distributor of short independent films and animation, actually gives equity to filmmakers whose work is shown on the company's Web site or distributed by AtomFilms. "You can't talk about community unless you give people ownership," Hoegh says. "And in a capitalist system, the only way to give people ownership is in financial terms."

Hoegh and his colleagues devote much energy to identifying ways to transform fuzzy notions about "online communities" into something that is both tangible and powerful in the marketplace. "It's not the Peace Corps that's investing," quips David Eun, 33, a New York City-based principal at the firm.

Indeed, building robust connections with users is the best hedge against adversity. "Community is about more than bulletin boards and chat rooms," says Hoegh. "It's about creating new norms and aesthetics, new kinds of relationships, new ways of behaving." Hoegh believes that companies that form such communities will be best equipped to weather the inevitable downturn in the Internet sector. If your relationships with people are emotional, rather than transactional, then people will be more likely to visit you when the economy slows down. "Every day," says Hoegh, "we ask ourselves, 'Are we creating something that can survive adversity?' "

The Business Connection

The partners at Arts Alliance know that they learn the most from the people who use the Web — customers. But there's another source of valuable connections — the portfolio companies themselves. The firm has put together a thick manual of business techniques, called the "Arts Alliance Guide to Best Practices," that executives learn from and contribute to. CEOs share tips for advertising on the cheap and for hiring. The partners treat this manual as something of a business bible. They insist that their companies maintain a clear strategic focus, set realistic expectations, and hit revenue milestones.

But even as the firm's companies are expected to operate by the book, they're also invited to swap big-picture ideas. The catalyst for these strategic connections is a biannual summit of all of the companies in the Arts Alliance portfolio. These gatherings aren't management reviews or financial audits. They're all about blue-sky thinking. The group brainstorms wild scenarios for the future, discusses the latest trends in business, and explores where companies need to be in order to remain relevant to their customers.

"If we backed me-too companies," says Catarina Norman, 26, a New York City-based associate, "we'd set ourselves up for an ad- and-marketing spending craze that wouldn't help our customers or our companies."

One of the high points of these summits, say participants, is mealtime. That's when the down-and-dirty strategic connections get made. Arts Alliance staffers decide who sits with whom and then eavesdrop on the conversations. "It's like a dinner party where the host knows exactly whom you want to sit next to," observes Sarah Vickers-Willis, 28, cofounder and vice president of business development at San Francisco - based Ububu Inc. (Founded in May 1999, Ububu was recently named one of three hot Internet startups by Jupiter Communications. It is launching a graphical interface with customizable "planets" that people can use to navigate the Web.) "There were people at the summit whom we wanted to meet and start talking deals with, and magically, we found ourselves always seated next to those people."

This matchmaking also diffuses potential tensions among member companies. At one dinner, executives from AtomFilms and Ububu realized that their salespeople were calling on many of the same companies for possible deals. Rather than resenting each other for targeting the same partners, the business-development managers at the two companies agreed to help each other make contacts and close deals. "When you're dealing with a growing market," says Hoegh, "the more that companies help each other, the more successful they are. It's about increasing the probability of success."

There's one final principle behind how Arts Alliance works with its portfolio companies. The firm is prepared to invest not just in business plans but also in the (often very young) leaders behind those plans. Unlike other VC firms, Arts Alliance doesn't expect to toss out twentysomething founders in favor of veteran managers recruited from big companies. "We don't just invest in ideas," says Victoria Hackett, 33, a partner in the New York office and mentor extraordinaire to the CEOs in the Arts Alliance portfolio. "We back people. Talent is the most important asset when managing the hypergrowth of a startup."

Consider the case of Warren Adams. When Adams, 34, started PlanetAll, a contact- management and calendar service that was sold to Amazon.com in 1998, Arts Alliance coached him on everything from how to conduct effective meetings to how to negotiate a business-development deal. "They believed that I was the right person to build the company," says Adams, who is now a member of Arts Alliance's board of advisers. Apparently, Amazon agreed: It decided to keep Adams on as director of product development for its community and wireless initiatives, rather than send him off with a nice severance package and a press release. (Adams left Amazon in January to become a managing partner at Vineyard Ventures LLC.)

What's good for portfolio-company CEOs is also good for partners and associates, all of whom must have operational experience in order to work at Arts Alliance. If someone has never before worked at a startup, the firm sends that person off to one of its clients for a crash course. Hillary Hedges, 29, a principal in the London office, came to Arts Alliance after spending four years working at GeoCapital Partners, another VC firm. She spent her first six months not reviewing business plans but working at lastminute.com, a UK-based startup that uses the Web to help people make last-minute travel, dining, and entertainment plans, among other things. The company was rapidly growing — from 30 to 160 employees — and was getting ready to launch in three countries. Instead of sticking to departments with which she was familiar — such as business development or finance — Hedges worked in product development and in hiring.

The experience earned her credibility with the entrepreneurs in the Arts Alliance portfolio and helped her to network with other UK companies. More important, she says, it gave her an in-the-trenches perspective on startup life. "Never again will I sit on a board and criticize an entrepreneur for not doing something yesterday," says Hedges. "I better understand now how to help companies, rather than issue unrealistic demands."

The Creative Connection

Where do great ideas come from? How do we gain access to more than our fair share of those great ideas? These are urgent questions that every venture-capital firm in the world is facing. Arts Alliance tries to answer those questions by making one last set of connections — between the present and the future.

A case in point: the Arts Alliance Laboratory, in San Francisco. Hoegh and his partners have recruited graphic artists and computer programmers to build a freestanding R&D shop for the firm and its portfolio companies. The lab will investigate new ways to broadcast music, experiment with text, turn a handheld device into an artistic platform, and otherwise innovate the total customer experience. The goal is to explore ideas and technologies that the firm's startup companies can't, so that CEOs can benefit from the results without losing their focus on the immediate needs of their businesses.

Arts Alliance has assembled a network of creative advisers and technology partners to brainstorm for the future. One of those partners is KnitMedia Inc., a company that runs a chain of nightclubs, including Manhattan's popular Knitting Factory. It also has a partnership with Sun Microsystems to help portfolio companies with the technical problems inherent in hypergrowth environments. Although Sun offers its services to other VC firms, Sun strategist John McClure says that Arts Alliance is the most aggressive about finding ways to help its portfolio companies. A unique feature of the relationship: Sun and Arts Alliance provide scholarships to European students. The goal is to increase the pool of technical talent in Europe and to give Arts Alliance a chance to mentor potential entrepreneurs.

There's another way that Arts Alliance stays creative: by staying small. The firm is not interested in raising billions of dollars' worth of investments. It limits the size of its funds to about $150 to $300 million each. Billion-dollar funds have to make larger investments, which usually means investing at later stages of a company's development. Hoegh and his colleagues believe that as well-known VC firms raise bigger and bigger funds, Arts Alliance will have a clearer opportunity to focus on what it knows best — building companies from the ground up — even as the firm faces growing competition from all of the venture funds that are streaming into Europe. (Softbank, for example, recently announced a billion-dollar fund that is aimed at Europe.)

"We don't believe in flipping companies, or in incubating and then graduating companies," says partner Victoria Hackett. "All of our companies are sustainable because of how much time we spend with them — referring deals, helping solve problems, and searching for new opportunities."

While Hoegh is faced with many diverse options, he is revolving his search for the next wave of business opportunities around a sense of community and the customer experience. He wants to understand how mobile computing can lead to "user profiles" that are owned by people, rather than by companies. His passion for user-generated content is so strong that he believes that it can spur a renaissance in the most passive form of media — television. And, assuming that cell-phones continue to operate as "remotes for life," he is exploring how people will use them in richer and more-complex ways.

Hoegh is exploring one last frontier: the experience of business itself. Hoegh is both a champion of technology and a victim of it. He totes a different cell-phone for each continent on which he does business, and he calls British Airways his "unofficial residence." It's all very exciting and alluring, Hoegh concedes, but it's not sustainable forever. When, he wonders, will the 24-7 work style give way to a more rewarding experience? "At some point," he says, "we will need to switch off."

Rekha Balu (rbalu@fastcompany.com) is a Fast Company senior writer. Visit Arts Alliance Ltd. on the Web (www.artsalliance.com).

Sidebar: Work This Way

The Web is about big ideas, bold bets — and relentless execution. Arts Alliance coaches CEOs on how to build a strong culture and how to embrace effective business techniques. Here are some of the company's lessons, adapted from the "Arts Alliance Guide to Best Practices" and from the firm's conversations with CEOs.

1. Find your truth teller. Make sure that you have at least one employee who is plugged into the office and who isn't afraid to tell it like it is.

2. Eat and greet. Take every employee out to lunch at some point. Meet regularly with direct reports (but make sure that you don't have more than five direct reports).

3. Don't be afraid of information leaks. When employees feel trusted, they will unite. And, in turn, they will be honest with you. Give every department a chance to speak about its progress and to take ownership of it.

4. Check your ego at the door. Don't expect or ask anyone to do what you would not do yourself. Make it a point to do "nonexecutive" tasks, such as washing the coffee mugs.

5. You don't have to be CEO forever. Let employees know that there's room for advancement at every level. If you hire people who are good in areas in which you are weak, you'll have a ready pool to promote when the company needs to shift gears.

6. Less sooner beats more later. Don't let your long-term ambition detract from your short-term focus. Your job is to create results quickly.

Sidebar: Invest This Way

Venture capitalists are taking lots of heat for making some big bets on some pretty flaky ideas. Here's how Arts Alliance decides whether or not to invest in a company.

1. Is the company's product 10 times better than what's already out there or just incrementally better?

A product that wouldn't be possible without the Web is a winning business idea.

2. Does the size of the industry that the company is entering exceed $10 billion?

If not, then the company won't be able to grow — or to handle the inevitable competition.

3. Is the business model sustainable amid competition, market downturns, and other tough realities?

The business must be built from multiple revenue streams. It must also offer the prospect of above-average margins: Big revenues with no profits is not a sustainable strategy.

4. Does the company have a genuine first-mover advantage?

Arts Alliance doesn't fund me-too ideas, and it doesn't fund business models that don't involve a fundamental change in the structure of an industry.

5. Does the management team exude hustle?

It's not enough to have a great idea. You also have to be able to execute it — and fast. A winning team has solid experience in key functional areas, such as finance, operations, and technology. It also knows how to make decisions quickly and how to detect whether the current game plan is faltering. The team that makes the quickest adjustments wins.

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