Earlybird Magazine 01-2009

1. January 2009 01 C y b e r F i n a n c e

2. 03 _ State-of-the-Tech From the noble stock market to the new-fangled smartphone 04 _ Work in Progress Smava – A marketplace for peer-to-peer lending 08 _ Panorama Established players and newcomers make for strange bedfellows 10 _ Done Deal Interhyp – Comparing mortgage rates per mouse-click 16 _Vision Futurist Paul Saffo on the future of money, banks and credit cards 18 _ Up Close and Personal Earlybird Managing Partner Christian Nagel The Partners of Earlybird (from left to right): Wolfgang Seibold, Hendrik Brandis, Christian Nagel, Roland Manger, Rolf Mathies, Thom Rasche “Welcome to the EARLYBIRD Magazine. We want to share our insights in technology segments relevant to our industry such as Internet-based services, communications, cleantech, medtech and others. This first issue is on Financial Services.” welcome | content

3. We’reapproaching a rather obscure anniversary. Six hundred years ago, in 1409, the first stock exchange was opened. It was the brainchild of Robert van der Beurse, a citizen of Bruges who had seen merchants from many parts of Europe doing business in his cosmopolitan city. He observed theirdifficultiesagreeingonexchangeratesfortheircoins,andtheirtroubles in transporting their goods.A traditional market could not solve these problems, so he thought of a different way. He invited a group of merchants to his house – to do trade without bringing their goods or their money. In those days, the concept of dealing with commodities that were miles away and letting an independent third person fix exchange rates left many uneasy. It was simply too…virtual. Today, our tech-savvy financial industry is many orbits further away from “reality”– and we have experi- enced both the highs and lows of such detachment. But technology has not yet liberated consumers in the way I’d hoped. On the contrary, the financial crisis of 2008 has shown that the system is still dictated by an exclusive club of players – ratings agencies, hedge funds, insurance and mortgage companies and, most notably, big banks. I have never been a friend of big banks. As a student in Hamburg in the early 1980s, I scouted banks to see where I should open an account. But instead of welcoming me as a customer with a set of services, they all let me feel that they were the ones doing me a favour. I thought this would change once I was working and had regular income. It didn’t. Even when I started buying companies and wanted to partly finance them on loans, I felt treated as a solicitant, just on a different level. I thought this was odd – and a clear indication that traditional banks had lost the sense of their original purpose: serving people who trust money to them, and others who need money and who are trustworthy. This lack of consumer orientation has been a huge business opportunity for new players. Many industries have already been transformed by newcomers using the Internet. The fact that finance has become entirely virtual means that newcomers in this sector do not have to bother with physical infrastructure. They just have to work fast and hard enough to reach economies of scale. A company that has managed this in a most impressive way is Interhyp, an online mortgage broker. It was one of the best investments Earlybird has ever made (pp. 10-15). We see equal potential with our investment in Smava, a peer-to-peer lending portal (pp. 4-7). Thanks to increased transparency and competition, new players in the mortgage and lending sectors are upping the ante on the old. Some of the traditional players were fast enough to enter voluntary alliances with the new kids on the block, some were later forced to link arms (pp. 8-9). Istronglybelievethatwhatwehaveseensofarinthenewworldofcy- berfinanceisjustthetip oftheiceberg.Imagineaworldwhereplasticmoney isnolongerneededandinsteadofswipingacreditcard,shopperssimplypull outtheirsmartphones.SiliconValleyguruPaulSaffopaintsaninterestingvi- sion in this respect (p. 16-17). Once cyber finance goes mobile, smartphones will become the most powerful tools in consumers’ everyday lives – and that will be really exciting for financial entrepreneurs. christian nagel Managing Partner Hamburg “Thanks to increased transparency and competition, new players in the mortgage and lending sectors are upping the ante on the old.” Of Stock Markets and Smartphones Photos:Earlybird;CoverIllustrations:DavidBray/PrivateView “STATE-OF-THE-TECH” | editorial

4. Eckart Vierkant remembers that life-changing phone call from his old college friend,AlexanderArtopé. It was inApril 2005. “One dayAlex called me at home and asked what I thought of the idea of social lending,” he remembers. “My initial response was: ‘In Germany? With Germans? No way!’” Despite his initial skepticism, he immediately sat down and looked at established peer-to-peer lending sites on the Internet. Within an hour, he calledArtopé back, telling his friend: “I like the business model.” A few months later, he left his job at a British healthcare company in Wolfsburg and moved to Berlin. Artopé had considered a social lending venture long before starting Smava, but had decided to bide his time. “Around 2003, Germany had seen something of a renaissance in online marketplaces,” he said. “But at that point I felt that there would be too much of a problem with consumer acceptance. We also realised that you need an entire eco-system built around it, including a credit scorer, some kind of payment system and a debt collector.” Not to mention a bank licence. After shopping around for a bank that could solve a number of these problems by act- ing as a middleman, Artopé and Vierkant partnered with the Bank für Investments und Wertpapiere (BIW), and drummed up enough institutional investment to launch the site in March 2007. Using a PR agency to help put the company on the map, they compensated for a lack of an advertising budget by boost- ing brand recognition with as many media appearances as possible. Eighteen months on, Smava numbers 25 employees and has facilitated a total loan volume of €5 million. The company’s sprawling but scruffy office crammed with workstations is tucked away on the fourth floor of a court- yard tenement block in the Berlin district of Mitte. With its faded grey carpets, functional furniture and untidy kitchen, the look is wholly in keeping with the fabled Silicon Valley geek house. CEO Artopé acknowledges the Californian influence. With his blue eyes, carefully parted hair and preppy roll neck, he bears a striking resemblance to James Spader in the 1987 movie “Wall Street” – a film that reflected the ethos of its era. But at 39, Artopé is too young to have been a Wall Street yup- pie in the cut-throat me-decade, and instead came of professional age in the comparative Garden of Eden that was Silicon Valley before the dot com bubble burst. It was here that he was first bitten by the start-up bug. “It was a very innocent time,” he said. “So much made an im- pression on me. I met Tim Koogle, then president and CEO of Yahoo. I saw a talk by Marc Andreessen, co-founder of Net- scape Communications Corporation.They were sitting in these tiny offices talking about conquering the world, and initially, I just thought they were crazy. But then I saw that you need to Alexander Artopé Born: Sept. 12, 1969 Nationality: German Family Status: Long-term relationship Education: Business Administration (Ludwig Maximilians University, Munich), M.A. in Communication Science (Free University Berlin) Brother, Can You Spare a Dime? The US has Prosper, the UK has Zopa – and now Germany has Smava. A Web-based marketplace founded by college palsAlexanderArtopé and EckartVierkant, it allows people to sidestep banks and instead borrow and lend money directly from each other. Watch: Hilfiger Car: Audi A3 Favourite Entrepreneur - Alive: Richard Branson Favourite Entrepreneur - All Time: Andreas von Bechtolsheim by Jane Paulick “WORK-IN-PROGRESS”

5. Smava founders Alexander Artopé (left) and Eckart Vierkant (right) are confident that social lending platforms will soon be giving traditional banks a run for their money. CASE STUDY | SMAVA

6. have this kind of conviction. The two lessons I learned in Sili- con Valley were: you can do whatever you want and, whatever it is you do, you have to do it with passion.” He andVierkant are passionate about Smava’s mission, which they describe as nothing less than democratising the lending process. As an online marketplace for money, Sma- va matches people who have money with people who need it – for anything from a divorce to therapeutic riding lessons for a sick daughter. The company simply runs a credit and identi- ty check on the users, and leave the marketplace to decide the rest. “We don’t make the credit decision, and we don’t set the interest rate,” saidArtopé. “We just present the data in the loan listing. We provide people with the tools, and they do the rest themselves. All we do is control access to the marketplace.” What makes Smava more efficient than banks is its ability to offer transparency. “With normal banks, it’s not clear why people do or do not get loans,” said Artopé. “But we tell them exactly why we’re not admitting them to the marketplace. With us, people can see exactly what the price of their loan is. Basically, we can behave like a bank without being a bank.” Ideally, borrowers will also pay less interest than they would with a bank, while the lenders can enjoy healthier returns. But the prospect of cold, hard cash isn’t the only motivation. “If you ask people why they come to Smava, on the one hand they will say it is because they get good interest rates,” saidArtopé. “But it is also because they like the feeling that they are self-empowered. Smava democratises the lending process.” Right now, Smava boasts some 30,000 members and oversees around €600,000 of loans per month. The company takes a cut of 1 percent of the credit sum, and in case a borrower defaults – which happens in roughly 2.5 percent of cases – it sells on the debt to a collector. Lenders can invest up to €25,000 in a single project and decide themselves which projects appeal to them – and therein lies Smava’s chief strength.Artopé says that what primarily at- tracts members is the fact that loans are secured against people rather than financial institutions, allowing for optimal transparency. “People really like the idea of investing into single loan listings,” he explains. “It puts you as a lender in the driving seat, and people love the idea that they can decide who to give their money to. That’s what we call the social return ele- ment. People can invest in projects that are important to them, they can change someone’s life – and that’s very gratifying.” Antje Stobbe from Deutsche Bank Research agrees. “These lending sites are a product of the Web 2.0 wave and represent a specialised business model which allows people to con- tact others directly when they want to request or fund loans,” she said. “The motivation to join this kind of lending platform is often very personal – lenders want to know who they are lending their money to and for what purpose.” That’s exactly what attracted lender Benjamin Herz, 29. “What appeals most is the peer–to-peer factor – helping others and at the same time en- joying a considerably better return than offered by a normal investment account,” he said. “At the moment I am looking at an average return of 9.4 percent, but I also like the fact I can choose who gets my money, and support projects I consider worthwhile.” The growing popularity of Smava and its US and UK prede- cessors Prosper and Zopa also re- flects an emergence of consumers characterised by self-reliance who have given up trusting institutions, particularly in light of the current lending crisis. “There are distinctly differing groups using these sites,” said Professor Michael Hulme from Lancaster University in the UK, author of a 2006 study on Internet based social lending. “Some (groups) are intellectually disaffected with large banks, and there is therefore a degree of idealism. Others see investment in social networks as part of the broader investment portfolio. Others might struggle to get loans through more conventional sources.” Smava is well aware that one of its strengths is that it caters to demograph- ic groups that tend to be disadvantaged by normal banks, such as retirees and the self-employed – as well as people in tran- sitional phases of their lives who fail to meet the standard cri- teria for loan approval. “In November/December 2007 I was looking for a bank loan,” said borrower Friedrich Niemann, 54. “My current job had only begun in August that year, so I was still in a probationary period. Moreover, the company I was working for was a branch of a Dutch firm and was not al- lowed to operate independently. My car had broken down, and I needed it for work. But no bank was willing to give me a loan to repair it. I started looking for ways of finding a loan on the Eckart Vierkant Born: March 19, 1972 Nationality: German Family Status: Married, one child Education: Business Administration (Free University Berlin) Watch: Tissot Car: BMW, 3-Series Favourite Entrepreneur - Alive: Muhammad Yunus Favourite Entrepreneur - All Time: Werner von Siemens Smava lenders can make use of many different tools to find out about borrowers before investing their cash. “WORK-IN-PROGRESS”

7. “Smava is an ideal vehicle to show credit needs and their risks. I think institutional investors will soon discover it” Bird’s-Eye View How much did Earlybird invest in Smava? Christian Nagel: We initially invested €3 million, and we invested another €2 million in a second institutional round of financing that was closed in September of 2008. Skeptics think social lending sites like Smava will only ever remain a niche market.You obviously think otherwise. Nagel: If we’d thought it would only remain a niche market, we would never have invested in it. We believe it’s an efficient platform that has the potential to change the banking industry. Will current developments on the markets affect Smava’s performance? Nagel: The whole banking industry is re-grouping. Smava might profit if banks start to get more risk-averse, and they probably will. What is your vision for Smava? Nagel: Right now, the platform is driven by private people and the “social” aspect, but I think this will change. Smava is an ideal vehicle to show credit needs and their risks, so I think institutional investors, such as asset managers, will soon discover it and act as lenders. Smava’s revenues in 2008 are some- where around €50,000 – is this in line with its business plan? Nagel: We revised the business plan at the end of 2007, but this had nothing to do with bad performance. We wanted to have clarity on regulatory approval and so we curbed the original expansion plan. The company is in line with the revised plan. When do you expect Smava to break even? Nagel: We foresee this happening in the last quarter of 2009. CHRISTIAN NAGEL Managing Partner Hamburg Internet, and ended up on the Smava site. Once my loan application was online, it took just six hours before I had obtained a loan for the full amount, at a very reasonable rate of 12.5 percent. At a bank, I would be paying closer to 13.9 percent.” But, as Artopé says, money is a cultural issue. So how exactly did he and his team persuade Germans to overcome their natural caution? “It helped a lot that Stiftung Waren- test (a consumer ratings service) gave us a good review one month after we came on the market, because that gave primarily borrowers the sense that Smava was a trustworthy place to go, and surprisingly, they were ones that needed most reassur- ance,” said Artopé. “Germans hate risk, that’s why they spend so much money on insurances. We knew we had to structure preferences in a way that the risk would be calculable and particularly, automatically calculable.” Smava therefore slots borrowers into six risk catego- ries, while lenders can reduce risk by joining pools. By sharing it between the lenders, no single party bears the full credit risk of a single counterparty. “Still, we knew we had to create an additional layer of trust in the marketplace,” said Artopé. “So we allow users to find out more about prospective contracts by using Smava’s messaging system, we post user histories and there is a lot of information circulating in threads in the Smava forum. The marketplace can control itself.” “I look carefully at the borrower’s credit score; I see how old he or she is; I study the project and how it is presented and even take spelling into consideration,” said lender Herz. “Any questions I have are always answered promptly, either by e-mail or by phone. You find out whatever you need to know in the forum, where users discuss Smava in general as well as specific projects. Investors and fans provide a lot of tools that take much of the work away from amateurs like me.” Smava is growing by 10-15 percent per month, and its expansion to Poland is already well underway. And although Artopé takes a modest view towards expansion, saying he would be happy to operate in just two countries, he admits that he sees interesting prospects in Russia. It is still early days, but he thinks social lending will soon be giving traditional banking a run for its money. A re- port by the Gartner information technology research and advi- sory company earlier this year appears to back him up, predicting that by 2010, social-banking platforms will have captured 10 percent of the available global market for retail lending. “I knew I could create a marketplace which is more valuable to consumers than the existing banking industry – and that’s what gets me out of bed in the morning,” he said. “We believed that if we could create a safe, fair and efficient marketplace, then our site could become as big as Ebay. We’re pretty confident this will happen.” Photos:MattiHillig CASE STUDY | SMAVA

8. Just a decade ago, most people looking for a loan would have gone directly to their high street banks. Since then, their options have expanded enormously thanks to technological developments, financial deregulation and the rise of new players, who sometimes even end up working in tandem with the competition. Over the last few years, online mortgage brokers have been popping up everywhere. France has Meuil- leurtaux, Italy has Mutuionline, the United States has E-loan – and Germany has Interhyp, the country’s leading Web-based mortgage broker. These companies allow consumers to compare scores of offers before applying for the most suitable one. This is clearly good news for the man and woman on the street. But as Interhyp founder Robert Haselsteiner says, banks have found the development to be something of a dou- ble- edged sword. “Traditional banks understand that the Inter- net has brought a new dimension of transparency to the market and that they have to react,” Haselsteiner said. “In the case of mortgage brokerage, they know that if it wasn’t Interhyp, it would be somebody else.” While some banks are being pushed into forging new partnerships, others are jumping. On the upside, partnerships with large online brokers can guarantee certain volumes of business as well as lower office overheads. In the face of increased cross-border competition in the financial sector, banks have been actively looking for intermediaries to help them to better vertically penetrate the market, according to Alexander Grous of the London School of Economics. He says newcomers often have the agility and the vision more traditional institutions lack. “When it comes to the Internet, the banks haven’t been moving forward in quantum leaps,” said Grous. “The development has been more evolutionary. In principle, banks tend to be more cautious and less entrepreneurial. Entrepre- neurs have stepped in and bridged this gap.” Volker Breuer, the founder of pre-paid credit card company Payango, is one of them. His credit cards are designed to appeal to the Net Generation, allowing young people aged 12 and up to pay for their own online purchases without the risk of getting into debt. The 32-year-old entrepreneur acknowledges that there can be a potential conflict of interest between traditional banks and new start-ups like his own. Germany’s Landesbank Berlin and Dresdner Bank, for example, both offer their own prepaid credit cards targeted at the youth market. “To some extent, we represent a form of competition, but we also help the banks,” Breuer said. “We do things that they can’t. They find it very difficult to authentically address young people.” After a six-month search, Payango teamed up with the southern German Baden-Württembergische Bank. It’s a clear win-win situation, according to both parties. Payango needed a bank to act as the card issuer, and the regional bank was looking for opportunities to expand its activities Germany-wide. “We bring our know-how in the pre-paid card business to the partnership, and they put their enthusiasm and their heart and soul into it,” said Eric Bayer, head of product management of accounts and cards at BW-Bank. While these two partners might be able to envisage a future of happily growing old together, peer-to-peer lending platforms and banks make for slightly more uncomfortable Hooking Up With the New Kids on the Block Financial newcomers have much to offer traditional banks willing to embrace change. The mortgage business has its roots in ancient Rome, where modern transaction modes were developed. Banking was frowned upon and money lenders were held in contempt. It was tulips that caused the first crash on a stock exchange in 1637 in Amsterdam after contract prices for the bulbs reached extraor- dinarily high levels and then suddenly collapsed. The first public share issued in Germany was for Dillinger Hütte steel in 1809. The oldest known share certificate (1288) was issued for Swedish mining company Stora Kopparberg. From the much- loathed bankers of ancient Rome to the savvy smartphone owners of today – through- out the history of mankind, technological innovations have played a key role in shaping the way people interact through trade. Car manufacturers in the US such as General Motors and Ford kickstarted the car loan industry in 1919 by becoming the first non- bank financing sources for automobile loans. Financial Transactions – Yesterday, Today, Tomorrow “Panorama”

9. The Minitel, launched in 1982 in France, was a precursor to the Internet. People could make purchases, search phone directories and have virtual chats, all from the comfort of their homes. Pizza Hut was the first national food chain to offer online-ordering in 1994. It started with a test delivery service at one restaurant in Santa Cruz, CA, and the rest, as they say, is history. An online auction determined the initial share price of search engine giant Google when the company went public in 2004, circumventing the order books traditionally used during an IPO. The Automated Teller Machine (ATM) was the first way to get money from a bank without having to go to a cashier. The first ATM was installed in 1967 in London by Barclays. bedfellows. By enabling ordinary people to lend money to other individuals directly over the Internet, Web sites such as Ger- many’s Smava and the UK’s Zopa pose a considerable challenge to the banks’role as the traditional middleman. It comes as something of a suprise, then, to see that here, too, banks have been enabling newcomers to gain a foothold in the market. In Germany, for example, Smava needed to secure a partnership to avoid the protracted and prohibitively expen- sive business of securing a banking license. While his proposi- tion frightened off more conservative suitors, company founder Alexander Atropé finally hooked up with BIW, a bank based close to the western German city of Düsseldorf. “In principle, it wasn’t all that difficult to find banks willing to partner with us,” Atropé said. “Obviously not the big universal banks with strong branch networks, but others. The real problem emerged when we told them that we wanted to connect to their banking system. If you talk to a high-ranking manager of a bank about touching their system, they usually respond by saying they would rather kill you than allow that. Once, I mentioned this in Mobile financial transactions via smartphones and similar devices are often seen as the future of financial transactions, with some experts even predicting the dawn of a cashless society. a phone conversation and the immediate reaction was, ‘Never! Never!’The call was over in less than three minutes.” British leaders Zopa UK also encountered a degree of resistance when looking to strike up a partnership. Unlike in Germany, the activities of P2P platforms in the UK do not have to be underpinned by a banking license, but the company does need a third party to hold its lenders’funds. “A number of banks who shall remain nameless did take the attitude, ‘Why should we cut off our noses to spite our faces’,” said Zopa UK’s Managing Director GilesAndrews. “But banks are interested in large money movements. That’s what they make their money from. Rather than worry about what kind of competition we might represent in the future, the Royal Bank of Scot- land decided that it would rather profit from those transactions now,” he added. When it comes to fresh talent, some banks at least are clearly open to offers – particularly in niche markets. Social lending has been a fast-growing market over the last three years, but the market remains tiny, for the time being at least. Zopa UK has 220,000 members in the UK and has lent GBP 27 million to some 6,500 people. Smava has around 30,000 members and facilitated a loan volume of €1.4 million in the last three months, with a growth rate of 40 per cent per quarter. “The P2P platforms are taking a chunk out of a very specific market,” said the London School of Economics’Alex- ander Grous. “Mainly it is people looking to borrow in the re- gion of GBP 5,000 - GBP 10,000. The big banks are still standing at the top of the tree looking down far below.” by julie gregson Regulatory Issues Finding good partners is one challenge many new players face, understanding the regulatory environment another. While P2P lender Smava faced hardly any regulatory hurdles in Poland, the company spent a long time in Germany making sure that the financial watchdog BaFin would not object to the site. In the USA, P2P lenders Prosper and Lending Club had to temporarily stop their operations in 2008 after it emerged that their loan notes were regarded as securities and, thus, had to be registered with the regulatory body SEC. Prosper even had to pay a $1m fine. Race to Success While some online banks and brokers are already established players and many insurance or mortgage portals are experiencing strong growth, there is a long list of new players that are in the starting blocks or have just begun to operate. Their activities range from P2P lending (Zopa, Smava) and micro-financing (Kiva, Finca, Microplace) to portals for money management (Mint, Rudder, Geezeo) or investment clubs (Updown, Betterinvesting). OVERVIEW | Partnerships, regulation, history

10. Marcus Wolsdorf Born: January 28, 1971 Nationality: German Family Status: married, two children Education: International Relations (Brown University, Providence) Watch: IWC Car: Porsche 356, Audi A6 Allroad Favourite Entrepreneur - Alive: Steve Jobs Favourite Entrepreneur - All Time: Ferdinand “Ferry” Porsche “DONE DEAL” 10

11. Robert Haselsteiner Born: April 7, 1962 Nationality: Austrian Family Status: married Education: Business Administration (University of Economics, Vienna) Watch: Omega Seamaster (in orange and black, Interhyp’s corporate colors, yet not custom made) Car: Audi A6 Allroad Favorite Entrepreneur - Alive: Charles Schwab Favorite Entrepreneur - All Time: John Pierpont (J.P.) Morgan by Thomas Clark Racing Interhyp, Full Speed Ahead The road was strewn with obstacles, but Interhyp’s founders expertly navigated them, driven by their aim of transforming the German mortgage market. 11 CASE STUDY | INTERHYP

12. Interhyp’s original business plan foresaw customer relations happening exclusively via the Web. But, recogni- sing that many people still need a “human touch,” the company now has 17 branch offices where customers can discuss their mortgage options face-to-face. Revenue In its first year, Inter- hyp brokered just over 1,000 contracts. By 2007, this number had skyrocketed to well over 38,000 mortgage contracts. € -5.74m / € 0.6m € -2.69m / € 2.0m € -0.76m / € 4.8m € 0.16m / € 8.7m € 1.9m / € 16.6m € 12.93m / € 39.4m € 22.41m / € 60.1m € 28.47m / € 75.4m 2000 2001 2002 2003 2004 2005 2006 2007 Operating Result The company took less than three years to break even, starting with a profit margin of 2 percent. Four years on, it reached an impressive margin of 38 percent. “DONE DEAL” 12

13. Robert Haselsteiner had just finished his presentation, confident that his audience would sign a partnership agreement – an agreement urgently needed in order to launch an online mortgage broker that would allow home buyers to compare offers. Without sufficient offers from mortgage banks, of course, there wouldn’t be much to broker. And given his investor’s stipulation that the further flow of money for the venture depended on at least 10 banks joining the platform, time was short, pressure high. Haselsteiner was working hard on acquisitions. When he was invited by RheinHyp to come to their headquarters in Frankfurt, he was hopeful, mainly because a board member had said he would attend. During the presentation, his hope seemed justified. The group was interested and asked lots of questions. “I was sitting there, discussing details with the board member,” remembers Haselsteiner, “when suddenly he said, ‘We like that model but unfortunately we can’t work with you, because we have decided to launch our own service called ExtraHyp. So we are actually competitors.’” Ouch! A few weeks later, Haselsteiner and his partner, Mar- cus Wolsdorf, were invited to have lunch with the new Euro- pean head of E-Loan, Mirko Siepmann. E-Loan was the company that had pioneered the idea of online mortgage brokering in the United States and built up an impressive track record – both in terms of snapping up market share from traditional players and venture capital from investors. Laden with success and money, the company was looking to expand to Europe. Dining at Munich’s upscale Mövenpick restaurant (now Lutter Wegner), Siepmann wasted no time on verbal diplomacy. Instead, he presented a threat couched in a seem- ingly nice offer. “He told us that E-Loan would come to Ger- many and that we wouldn’t have the slightest chance against them,” recalls Wolsdorf. “He then said that we had the unique opportunity to get 2 percent of the German subsidiary if we joined forces.” Wolsdorf knew that E-Loan had a budget of $100 million to set up the venture. At the time, Interhyp had secured just DM8 million, roughly $3.5 million. Ouch again! Both episodes happened in autumn 1999, a few months before Interhyp’s Web site was launched. A pullback then would have been possible – and some might have argued that it would have been wise, given the dark clouds forming over the fledgling startup. But bailing out was not an option for Ha- selsteiner and Wolsdorf. Molded by the tough turf of Goldman Sachs, they were determined there’d be no going back. But they realised that in an environment where at least four competitors were vying to establish the same service, they had to act fast, very fast. Visiting their headquarters in Munich, one can still sense the speed that drove the company right from the outset. The receptionist knows immediately who we are, and within seconds passes us on to a colleague who quickly leads us to a conference room where, minutes later, a spokesperson reels off some background info as if he were trying to improve his words per minute score. Consequently, when Robert Hasel- steiner enters the conference room, one is tempted to fire off a slew of questions in the fear that he might suddenly disappear to another meeting. Surprisingly though, Haselsteiner con- veys an aura of calm. He has an unhurried conversational style which has much to do with the fact that he comes fromAustria, where people generally take their time, and instill melody in- to their sentences. In relating the story of Interhyp, it emerges that the two partners’ personal styles complement each other. This is reflected in the way they decided to split tasks. Haselsteiner is responsible for marketing and personnel, and is the liaison to the outside world. Wolsdorf deals with IT and finance and took the role of internal master. “Marcus would say that if this were a car race, he would be the engineer and I would be the one driving the car,” Haselsteiner says. Wolsdorf later confirms that statement. The racing team analogy aptly describes not just the delegation of tasks, but the whole Interhyp story – from building the vehicle to waving the start flag on the race itself. Drivers, rev your engines Haselsteiner was brought up inAustria in the 1970s and 80s, in a society that was both stable and stagnant. Wolsdorf, born in Germany, got to experience life on the other side of the Atlantic from the age of 14 onwards, when his father, a manager with Daimler, was transferred to help manage the company’s US truck business. Haselsteiner studied at the large state university in Vienna where just getting a seat in a lecture hall was a challenge. Wolsdorf went to an elite Ivy League university. Yet both chose careers in investment banking and ended up at Goldman Sachs. When the firm opened an office in Frankfurt, both men moved to “Mainhattan” where they occu- pied neighboring chairs on the trading floor. That was in 1992, when Haselsteiner was 30, Wolsdorf 21. Despite the age dif- ference, the two got on well – and soon decided that a well re- munerated job at a pedigree address was not what they were looking for long term. “We talked intensively at that time and agreed that what we really wanted to do was set up our own business,” remembers Wolsdorf, “We started to discuss the first ideas as early as 1994.” Two years later, they made the leap into entrepreneur- ship when the Stuttgart-based retail bank Landesgirokasse offered them a consulting contract. Their remuneration wasn’t anywhere near the $500,000 plus salaries they had received at Goldman, but it wasn’t money that drove them. It was the evolution of a logo The first drafts of Interhyp’s logo (first and second from the left) were never used. The original logo (third from the left) has since been updated to its current form (right). 13 CASE STUDY | INTERHYP

14. employee growth In its first year, Interhyp had just 39 employees. Five years on, the number of staff had increased by almost seven-fold, and is now nearing the 500-mark. chance to find out more about the average high street banking client. They soon added more mid-sized German banks as customers – from Cologne’s Stadtsparkasse to Hamburg’s HASPA. “We branched out as consultants, getting very much into retail banking,” Haselsteiner said. What could the new world of the Internet bring to the sector? It was sometime in the spring of 1999 that they first saw E-Loan’s Web site. E-Loan had revolutionised the US mortgage market by brokering home purchases and refinancing loans over the Internet. Would such a service work in Germany? The partners weren’t sure. They first wanted to analyse the market, the technological and regulatory requirements and the compet- itive environment. This analytical approach might explain why Haselsteiner can’t remember when exactly he first visited eloan.com. He can’t remember the day because there was nothing revelation-like to it. He certainly wasn’t emo- tionally taken. “In German, you summarise the mortgage and home loan business under the old-fashioned word ‘Baufinan- zierung’,” he says. “Trust me, there’s nothing sexy about ‘Bau- finanzierung’.” What did seem sexy, though, was the market potential. The total amount of real estate loans in Germany was €900 billion, the annual growth rate was 7-10 percent over the past five years. For most Ger- mans, buying a house or apartment was the single-biggest investment they would make in their lives. The market was enormous yet opaque, and finding the right financing was a tedious undertaking. The two founders saw this as a chance for a via- ble business. Test driving Interhyp Within weeks, the two bankers had drawn up a business plan, three months later, they had an investor: Earlybird. Their first installment of €1.5 million was paid in late August 1999. The remaining money – €3.5 million – would be paid once they had reached certain benchmarks, such as a working Web site and partners. With just four months to launch the site, Hasel- steiner and Wolsdorf went into overdrive. While Wolsdorf con- tracted IT specialists to set up the Internet portal, Haselstein- er pitched to mortgage banks, hired a PR firm and worked on an advertising campaign for the launch. “That was a fast time,” Haselsteiner says with a grin. Just building a Web site to deal with the lending crite- ria of different banks as well as their pricing was a monstrous job on its own. “The intelligence behind the site was enormous,” said Thomas Geiger, owner of a Web-based company and then a member of Interhyp’s supervi- sory board. “Executing that in less than four months was a tru- ly Herculean task.” The duo also had to re- cruit a team, from IT specialists to sales people. Between September and the end of De- cember, they hired 25 people. The site was to go live on Jan- uary 10, 2000. Haselsteiner approached the day with a mix of anticipation and sheer terror. He was plagued by the thought that Germans might not be prepared to type their personal financial data into the mask of a Web site and then send it into cyberspace. “We simply didn’t know if consumers would file an online application,” said Haselsteiner, “This was unchartered territory.” His fears soon proved to be unfounded. “We launched the Web site early in the morning and at 10:50 a.m. we already had our first application,” he said. “On the first day, we got four applications. Out of these, one closed six weeks later.” This was Interhyp’s first customer. Full speed on all fronts In 2000, Interhyp brokered a credit volume of €150 million and had 40 employees. By 2005, its annual brokerage of mortgage loans surpassed €3 billion and 269 people were on the payroll. Haselsteiner and Wolsdorf, it seems, had managed to combine the accelerating power of Formula One with the endurance of the 24 Hours of Le Mans. “The speed and in- tensity with which Robert and Marcus built up their company is something I have never seen before, ever,” declared Geiger. When Interhyp started operations, it had about 15 competitors. Five years later, it had left them all behind. Rheinhyp’s Inter- 2000 2001 2002 2003 2004 2005 2006 2007 473377269171137 4539 79 From the time they met in 1992, Haselsteiner (left) and Wolsdorf (right) knew they’d start a business together. 14 “DONE DEAL”

15. Photos:Laif(1);Interhyp When did you first meet the founders of Interhyp? Christian Nagel: I first met them in autumn 1999, and a couple of weeks later we invested. Decisions had to be made quickly in the dot com era. To what extent was your investment influenced by the fact that both founders had a successful career at Gold- man Sachs behind them? Nagel: Actually, we had mixed feel- ings about their background at Gold- man. It showed that they were ambi- tious, clever and hard working, but at a company like Goldman you get many benefits. So we asked ourselves, “Are they really entrepreneurs?” In the end, their personalities prevailed. When you invested in Interhyp, did you know that there were others trying to do the same thing? Nagel: We knew of at least two other teams attempting to do the same thing. We also met them – and then knew that Robert and Marcus were the best. Were you worried that Interhyp might be run over by competitors with deep- er pockets? Nagel: We weren’t afraid of the local players, but we were a little wary of E-loan. The challenge for Interhyp was to become big, fast. If E-loan had tried to take over Interhyp – well, that would have been one exit scenario. You sold your first shares in Interhyp at the IPO in 2005. When did you sell your last shares? Nagel: At the end of 2006, seven years after our investment. What was your return on investment? Nagel: The return was 52 times the money we originally invested. net offspring Extrahyp stopped business in 2002 and E-Loan never made it in Germany, Interhyp became the market lead- er in online mortgage brokerage by a wide margin. In the vast billion-euro mortgage market, it had reached a market share of almost 2 percent. On Sept. 29, 2005, Interhyp had its IPO on Frankfurt’s stock exchange. The company was valued at almost €300 million, and the share price rose by almost 30 percent on the first day. It was Germany’s most successful stock market debut in years. But there was something missing. Pit stop for street traffic Claudia Bochmann gives visitors a warm welcome. As the manager of Interhyp’s Hamburg branch office, she is the company’s face in the Hanseatic metropolis. Here, not too far away from the railway station and the harbor, home buyers can meet with one of 13 local agents. Some 60-100 people per week come to the local branch for guidance on their mortgage deal. But why do they make the effort to go there? Why don’t they use Interhyp’s Web site and do the follow-up via phone? “There is no logical reason,” Bochmann admits. “Tech- nically speaking, we can handle everything over the Web and phone. People come here because they want to meet a human being before they make the biggest investment of their lives.” Catering for such needs was not part of Interhyp’s original business plan. Wolsdorf and Haselsteiner had planned to race their business entirely on bits and bytes. “In 1999, it was all Internet, Internet, Internet, of course, but just a few weeks after our start, we realised that many people had a need to meet a person,” said Wolsdorf. He says that, occasionally, customers came to Interhyp’s headquarters to personally hand in printouts of their online applications. “There was obviously an inherent insecu- rity about whether we really existed as a company,” he said. When it began, Interhyp could offer people good mortgage deals, but it wasn’t able to offer them the “human touch.” That all changed just before the IPO, when the company opened its first regional offices in Frankfurt and Ham- burg. By the end of 2008, the number of local branches had increased to 17. The investment has clearly paid off, as the con- version rate has increased by 25 percent. The high-speed rac- ers had learned to cater for more slow-moving traffic. In July 2008, the two founders sold their shares to the Dutch conglom- erate ING, cashing out €67 million each. Interhyp was valued at €400 million at that time. But Haselsteiner and Wolsdorf have made it clear that they have no desire whatsoever to leave Interhyp any time soon. Instead they would like to leverage the power of its big new proprietor to expand to other countries. The story of Interhyp as a stand-alone German company is over. But the next race has just started – and it’s going to be an international one. “When we sold our shares in Interhyp, we got a return of 52 times the money originally invested.” Bird’s-Eye View CHRISTIAN NAGEL Managing Partner Hamburg € 143m € 256m € 558m brokered credit volume Since 2004, Interhyp has seen a mas- sive increase in the loan volumes it’s brokered. This is in part a reflection of the company’s success in acquiring new partner institutes. In 2000, it had just 15 partners, but by 2007, Interhyp had brought 50 partners on board. 6bn 5bn 4bn 3bn 2bn 1bn 0 2000 2001 2002 2003 2004 2005 2006 2007 € 1.332bn € 3.022bn € 4.403bn € 876m € 5.658bn 15 CASE STUDY | INTERHYP

16. Photo:KarstenLemm Mr. Saffo, do you see paper money ever going away? Paul Saffo: Ever more transactions in our lives are electronic from the very start – like online purchases. There is no way to hand a $20 bill to Amazon. Or thinkofeBay,whereitissomuch easier to use PayPal than to send a check. We are seeing a steadily greater number of transactions that are intrinsically cashless. So where cash is an option, that percentage is shrinking every single day. And then a day will come when you are walking in- to a store, and if you offer them cash the merchants will think you’re a drug dealer. Already, more than a few physical retail- ers are non-cash. My local doctor, for example, has no idea how to accept cash, much less make change. How far away are we from a day without physical money? Paul Saffo: It could be 20 years out, but I think it’s going to pick up steam and it might just surprise us by happening very quickly. It’ll accelerate because it’s a generational thing. Young consumers are going to say, “Why do I have to carry this cash stuff around?” They were born with credit cards in their hands, they are used to using debit cards for everything – and depending on where you are, they are used to using their cell phones for transactions. New technologies such as Near Field Communication (NFC) and corresponding payment terminals suggest that it soon might be as safe and easy to use a mobile phone to pay for something in a shop as it is to use a credit card. Will the cell phone become the digital wallet of the future? Can you imagine a world where debit and credit cards are completely integrated in one’s smartphone? Paul Saffo: Just as we have seen consumers move from paper money (currency) to plastic money (credit cards) over the last few decades, we are now well into the early stages of a move from plastic money to “digital money.” And just like the move to plastic several decades ago, there will be lots of ex- periments. Most of them will fail, but a few will break through. The key to success is “universality”– for it to qualify as money, it has to be accepted everywhere. Personally, I think the secret to success will be a subtly different form of universality – the ability to hold different kinds of money-equivalents, such as frequent flyer credits, frequent buyer credits, etc. The incentive As long-term fellow at the Palo Alto-based Institute for the Future, Paul Saffo has built a reputation as technological guru. The author of various books and regular contributor to magazines ranging from “Fortune” to “Wired” calls himself a “forecaster”. He has been associated with the World Economic Forum for over 10 years. Paul was educated at Harvard, Cambridge and Stanford. The Future of Money We asked futurist Paul Saffo to gaze into his crystal ball and tell us if mobile phones will replace wallets and what banks should be worried about. by Karsten Lemm “VISION” 16

17. to me as a consumer would thus be to have a digital wallet that was intelligent enough to know which is the cheapest “cash” to apply in a specific transaction with a specific store. The banking industry pretty much operates in the same way that it has for a century or more. Could an Internet startup come along and turn this industry on its head, just like Nap- ster did with the music business? Paul Saffo:Absolutely. The music industry is instructive here. Executives were so busy fighting to preserve a dying old technology, that they entirely missed new opportunities, such as ringtones, and got completely snookered by a newcomer (Steve Jobs and iTunes). I guarantee you that someone is going to do the same sort of thing to the banking industry. Because the most dangerous thing that you can do in a situation like this is to focus on pre- serving what’s old. If banks aren’t the ones to destroy their old business models first, someone else most assuredly will. How profound is the change going to be? Paul Saffo: Profound – there is a hurricane building just over the horizon. And while you can’t stop the waves of change, you can learn to surf. Keep in mind that it is possible for companies to migrate from old to new orders. IBM for example once made mechanical business machines, but learned to become a computer pioneer. There’s no reason that banks can’t do the same. Where do you see the biggest opportunities for startups and entrepreneurs? Paul Saffo: I would deliver convenience in a way that makes people feel good. I would find a way to create a system where people were capable of lending and funding transactions that are microloans. Isn’t that what microcredit institutions such as Finca and Kiva are already doing? Paul Saffo: Kiva is great. I love it. But the weakness of something like Kiva is that it does only one thing. If you think about it: My relationship with a bank is not a single relationship – it’s a bundle of relationships. I have a credit card, a couple of bank accounts, and a mortgage. I’m trying to minimize stuff. One more account is one more thing to pay attention to. Fold it into my cellphone, let me add stuff to the accounts I already have – that’s the advantage that incumbents have. What could startups do to overcome this disadvantage? Paul Saffo: Commerce today is being overwhelmed by myriad currencies, virtual currencies and various credits. For example, just today I was making a purchase and I was startled when the store asked if I had a AAA auto club card. It turns out that mentioning my AAA card gave me an additional 10 percent discount. The advantage of a single aggregating card/account, issued by a startup, would be to squeeze all this value out for me when it doesn’t occur to me to ask about this or that card or membership. Now, add in the social causes I care about, and you’d have my instant, unwavering loyalty. What will the successful financial player of the year 2020 look like? Paul Saffo: In consumer banking, it’s going to be a player that can follow its customer to every retail transaction the customer wants to do. It’s the player that can be a convivial partner to the customer when they want to be close, but knows when to keep a distance. Let’s look at the big picture: Given that a number of new players have made financial services a lot more transparent, from social lending sites to online brokers for mortgages and insurances, do you think that the new generation might completely dismiss brick-and-mortar banks? Paul Saffo: Money is becoming a digital abstraction. Consumer transactions are becoming instantaneous, and banks are already moving their branches closer to the transaction by placing them in super- markets. We already have some banks that are purely virtual, so that will, of course, continue. There is still a value to physical branches, but in general, banks need to look at success stories like Amazon and PayPal, and ask how they have managed to gain such customer confidence and loyalty without offering so much as phone support, much less a physical location. How will money itself change? A decade or two down the road, will dollars still be dollars and euros be euros? Paul Saffo: For starters, look at all the alternatives to currency. Things that are valuable and that we don’t consider a currency per se; things like frequent-flyer miles or reputation points on Amazon. And you see that having an impact on the actual financial world? Paul Saffo: The low-probability but high-impact event is: maybe sometime in the next 20 years we’ll have a world currency. Some collection of banks will come up with something that is just so popular that everybody uses it. Do you really believe that’s a possibility? Paul Saffo: It’s a wild card – a 10 percent chance, maybe. But the events of the last six months were a stark reminder that we have a global economy. Well, if we have a global economy, why can’t we have a global currency? “If banks aren’t the ones to destroy their old business models first, someone else most assuredly will.” 17 Interview | paul saffo

18. At a regatta in the Mediterranean Sea in autumn 2007, the “Earlybird” team finished third out of 30. A year later, the team won. Holding the Course Christian Nagel is one of Earlybird’s founders. Find out what makes him tick. Christian Nagel Born: May 11, 1961 Nationality: German Family Status: married, three children Education: Industrial Engineering (Uni- versity of Hamburg), Business Administra- tion – Doctoral Studies (University of St. Gallen, Switzerland) Watch: Swatch Chronometer Car: Porsche 911 Favourite Entrepreneur - Alive: Warren Buffett Favourite Entrepreneur - all time: Andy Grove Tell us your life’s motto in one sentence. Christian Nagel: Standing still is a step back. Which talent would you most like to have? Christian Nagel: I would love to be a guitar player in a rock band. I really like music, especially guitar-based rock. Unfor- tunately, I have no musical talent whatsoever. What is the most memorable thing you ever did or received that didn’t cost any money? Christian Nagel: That was during a summer night in August 1990. I was invited to a party given by one of Hamburg’sYachting Clubs. I was standing at the bar, trying to get a drink, when suddenly a beautiful lady approached me and introduced herself as Marie. She later became my wife. If you could be reborn as an animal, what would you be and why? Christian Nagel: First of all, I wouldn‘t like to be reborn and I don‘t believe in reincarnation, so I would almost certainly turn down such a beastly offer! However, if I had to be reborn as an animal, I would pick the biggest of all pachyderms, the elephant. Elephants are fair and have a strong memory, they are social and live in herds and they have a strong physical presence. I find it also quite charming that they have no natural enemies. If you could take one year off to help solve one of the globe’s major problems, which cause would you devote your time to? Christian Nagel: I would promote clean mobile technology, and help to reduce the amount of carbon emissions which so badly hurt our environment. There are a number of young companies that produce vehicles that run solely on electricity, fuel cells and battery power. I would try to join or support one of these companies. What I really like about their mission is that they help protect the environment without asking people to limit their individual mobility. If you could have one day without any private or professional obligations, what would you do? Christian Nagel: I am a keen yachtsman, so I would try to join the America’s Cup for a day and play an active part by helming a match race. These are the races where two boats compete against each other in a one-to-one regatta. “up close and personal” | Christian Nagel 18

19. Earlybird Magazine_ Editor-in-Chief: Dr. Christian Nagel; Development Project Supervision: Dr. Thomas Clark Managing Editor: Deanne Corbett; Project Team: Daniela von Wedel; Dr. Marion Jung Design Concept Art Directors: Andreas Volleritsch, Michaela Pernegger, Neubau Editorial Design Cover Design: Caroline Backhaus, Backhaus Design Contributing Authors: Dr. Julie Gregson, Karsten Lemm, Jane Paulick Litho: Otterbach, Munich; Print: Druckerei Kriechbaumer, Munich Earlybird Venture Capital GmbH Co. KG; Van-der-Smissen-Str. 3; 22767 Hamburg, Germany Tel: +49-40-43 29 41-0; Fax: +49-40-43 29 41-29, E-Mail: info@earlybird.com (responsible for the editorial content: Dr. Christian Nagel) Did you know that: During the first 10 years of its existence, Earlybird has invested in 56 companies. 19

Earlybird Magazine 01-2009

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Earlybird Magazine 01-2009