Building the UK’s IT legacy

Podcast transcription - 3rd July

Alan Cowley:                    Welcome to the Invested Investor. I can't describe how excited I am today because I'm sat opposite Hermann Hauser. Hermann is a distinguished figure within the European start-up system. His entrepreneurial ventures include Acorn and Active Book Company, both of which successful exited. He was also involved in the incorporation of ARM. Since 1997, he has concentrated on investing, having co-founded Amadeus Capital Partners. Hermann, you've seen the rapid rise of the tech industry within the UK and Europe. Where did it all begin?

Hermann Hauser:           Well, often the beginning, especially of the Cambridge Phenomenon, is taken as the founding of Cambridge Consultants, so over 50 years ago, and that's probably as good a starting point as any. There have been lots of pieces of research that appeared in Cambridge in particular, where all the Cambridge companies came from, and one that was done at the Judge Institute showed that most of the companies at that time came either directly out of the university, out of CCL or Cambridge Consultants.

                                           So, out of Acorn Computers, my first company, each of these, I think, contributed. So at that time it was the beginning of the phenomenon of deep technology investing in Cambridge, and also the UK. And one of the nice things to witness now is that deep technology finally has received the recognition that I think it deserves. People are now, even the public is getting very excited about deep technology projects because they know that breakthroughs in the universities might turn into significant companies and significant contributions to society within a short number of years. You know, five to 10 years, rather than the 30 years that we were used to.

Alan Cowley:                    Let's take it back to Acorn, and you did a PhD in physics at Cambridge University. What influenced you to go from your PhD in physics to becoming an entrepreneur?

Hermann Hauser:           Well, I've often been asked this question, and there are really two parts to the answer. One is because my father was an entrepreneur. And so, there seems to be a relationship between what you experienced in your family and what you then want to do yourself. And the other was Chris Curry, who came to see me and said, "Why don't we start a company?" And quite honestly, it was then, the 100 pounds that it cost to start a company, he said, "Do you have 50 quid?" And I say, "I have got 50 quid." So we started this company. If it had cost a thousand pounds at the time, we might not have started Acorn Computers. But we just wanted to have a go, and it worked out very well.

Alan Cowley:                    And so, what were those early few months like? You've got your £50 each. You've got obviously a 50% share. How did it all start?

Hermann Hauser:           Well, it was a very, very exciting time because it was the time when the BBC had just produced a programme called’ When the Chips Are Down’. And what they meant by "the chips" was actually microprocessors. And they painted this vision of a future where every household might have a chip. I know, little did they know.

                                           And this sort of mesmerised the whole nation. People were really excited about this possibility that there were these chips that could automate things for them, like washing machines and the lights and so on. So there was a great hunger to find out more about chips, which really were microprocessors. And there was a student club at that time called the microprocessor group where all the people who had an interest in microprocessors went, and I signed up to that as well and got to know Steven Furber and Sophie Wilson, and many people that later on worked for Acorn Computers.

Alan Cowley:                    Okay. So in those early years, how quickly did you grow the company with Chris?

Hermann Hauser:           Well, it was at that time, Acorn Computers was the fastest growing company in the UK ever. We went from zero to a hundred million pound turnover in five years.

Alan Cowley:                    Wow.

Hermann Hauser:           Which was unprecedented then, and it's still unusual for a company to grow that fast. But there was no venture capital at all. And so, we actually financed this company the old fashioned way, with a bank overdraft. And I went to see the bank manager, and you might know this very iconic golden clock just opposite King's College-

Alan Cowley:                    Oh yeah.

Hermann Hauser:           ... that has a Chronophage, this grasshopper that eats the time every minute. Well, that was the entrance to National Westminster Bank, I went through to see Mr. Knight, who was the bank manager, and told him that we wanted to start a company and we needed an overdraft of 10 thousand pounds. And he said, "Isn't it jolly good to see young people start companies?" And then he did his due diligence, which was, "Now, which college did you go to?"

                                           And his office had a window that looked out onto King's College, so I could point out through his window and said, "That one, over there." He said, "That's all right. Here is 10 thousand pounds." So that was his due diligence. Now, a few months later, we came back and said, "Things are going very well, but we need 50 thousand." And he said, "It's jolly good to see everything going well. Here is 50 thousand." And then, a couple of years later, we came back to him and said, "Things are going really well now, but we need a bigger overdraft." And he said, "Well, how much do you need?" And we said, "Well, a million."

He had never come across any company that had asked him for a million-pound overdraft, or a million-pound facility. It went up to the regional office. They'd never come across a case like this before, so it was completely stuck. And then, although at that time we already had 1.3 million pounds of prepaid checks in an Aspera account of people who wanted the BBC Micro.

                                           So, we were very lucky that we then met Matthew Bullock who was the only banker in the UK who had ever been to Silicon Valley and studied Apple. Apple was started a year before Acorn Computers, and was already a great success. And he realised that we had a computer that was just as good as the Apple and we could do the same thing in the UK, and the only risk that he'd took was, could we produce the BBC Micro, and therefore collect the money out of the Aspera account?

                                           So, he gave us the one million, pound overdraft. I mean, it was just, looking back, I just can't believe that they did that.

Alan Cowley:                    So, for listeners, the million, pound overdraft, was that more of a loan that was given to you as a runway?

Hermann Hauser:           I think it was an overdraft. Clearly it wasn't a standard overdraft, because clearly we didn't have enough money. We would've gone bust if we didn't have that loan. I suppose it's a loan, really, rather than an overdraft. And then, quite a senior banker from Barclays came to me to negotiate the details of this loan. And I remember, I think he wanted something like two over base, and being so naïve about these things, first time CEO and seeing this, I said, "No, no, no, no. 2% is far too high." And I started haggling with him, and managed to negotiate him down to one and a half percent.

                                           It was a ridiculously low interest rate for the risk that he'd taken, but he was so taken aback that he gave me one and a half percent. So that's how we financed Acorn. That's how Acorn became the only company that I know in the world that had a capital gain of a million-fold. So every pound that we put in was worth a million pounds when we went public.

Alan Cowley:                    Wow. Okay, so let's talk about the BBC and that 1.3 million. How did that come about, and tell us a story about that?

Hermann Hauser:           Well, the BBC in its wisdom decided, after this excitement that they've produced with the programme The Chips Are Down, to educate the nation about microprocessors. So, they started a thing called The Computer Programme, which originally was going to be a 10, part series to tell the nation what computers can do. It then ended up being a 30, part series because it was so unbelievably successful.

In their wisdom, they decided that the only way they can educate the nation about computers was if there was a low-cost computer that people could buy to go with the programme. And they had worked with Newbury Laboratories for a couple of years to produce such a computer, and they still didn't have a prototype. So they finally decided to open it up and ask six people, or six companies, to bid for the BBC contract.

                                           And let's see if I can remember them. It was Clive Sinclair, of course, who told them not to go anywhere else. They had no option. The only sensible solution for them is to go with was a ZX81, or maybe it was already the Spectrum. Then there was a company called Tangerine. There was Oric. There was a Welsh entry with the Dragon computer. I think the fifth one was Nascom, which was a well-known home computer kit at the time. And then Acorn Computers, which was us.

                                           They saw us on a Monday with a specification which had everything and the kitchen sink in it, the typical BBC, and they were very specific about what they wanted. And that's why they didn't go with Clive Sinclair, because Clive Sinclair didn't have a number of things that they wanted, like a proper keyboard rather than the dead flesh keyboard of Sinclair's Spectrum. He didn't understand that you have to fit in with the BBC because they've got very clear ideas of what they wanted.

As luck would have it, Steve Furber already had a computer design in his drawer that he called the Proton, because our first successful computer at Acorn Computers was called the Atom, and the manual to it was called Atomic Theory and Practise. And the Proton was a clear design already, but it was only a paper design. So I said to Steven, "Is there any chance of having a prototype by Friday?" And he said, "No, absolutely not. This is a crazy idea."

                                           So, I rang Sophie Wilson and said, "Sophie, I've just been talking to Steven. He said if we really try hard, we might have a prototype by Friday. Would you be in?" She says, "Hermann, this is completely mad. This cannot be done. But if Stephen is willing to do it, I'm willing to do it."

                                           So, we worked for the three days and three nights. And there is a nice docudrama called Micro Men at the BBC which dramatises the situation. But it's very close to the truth that on Friday morning, the computer didn't work, and I then said, "Guys, the reason why it doesn't work is because we've got this umbilical cord with the development system. We could just cut that cord, put the programme into EPROM, and power it up all by itself and it will work." And they rolled their eyes and said, "Well, okay, you're the boss. We'll do that, but there's no chance." And it did work.

                                           So, the BBC arrived, and they couldn't believe that they would have a computer five days after they told us what they wanted, after having waited for two years with Newbury Laboratory, and they didn't have a prototype yet. So they were impressed by that, and we got the contract.

Alan Cowley:                    So how many did they order, then?

Hermann Hauser:           We had to prove to them that we could produce 10 thousand in the first year, and we sold a hundred thousand.

Alan Cowley:                    Wow. So that was the start of the huge growth for Acorn?

Hermann Hauser:           And it then became the standard in British schools as well, and many software companies and games companies that now exist say that the reason why they could produce these companies and these clever programmes is because they all learned how to programme on the BBC Micro in the schools. Because it was, Sophie Wilson just did a spectacular job on BBC BASIC. It was such an easy programming language, too, and the kind of proper programming language. And it had an easy way of including assembler language, so people also learned about assembler.

                                           And the school, the computing teaching in UK took a big step back when PCs were introduced, because PCs didn't have that programming environment. Every schoolkid would know how to walk up to a BBC Micro and say, "Print Joe is a silly bugger," or something, and then fill the whole screen with, "Joe is silly," or, "I love Mary," or something. They just learned how to programme.

                                           The other thing that happened, which was very important and very interesting, the easiest way of getting new programmes and new games was to type them in from programmes that were printed in Practical Electronics and Acorn User, because every publication had programmes in it. And of course, they always made mistakes when they typed it in. So when they made a mistake, it said, "Error in line 74." So then they went back and said, "What did I do wrong?" And that's how they learned how to programme.

Alan Cowley:                    Wow.

Hermann Hauser:           So, everybody who left school at that time knew how to programme. And when the PCs came, they learned how to use Word and Excel, but they didn't learn how to programme anymore.

Alan Cowley:                    Yeah. Until, I guess nowadays?

Hermann Hauser:           Until now with the code clubs, yeah.

Alan Cowley:                    Yeah. So that was my generation that missed out, unfortunately.

Hermann Hauser:           Yeah, yeah. It's very sad.

Alan Cowley:                    It is very sad. Okay. So, let's move on to Acorn’s growth. It's growing strongly. You then went to IPO it?

Hermann Hauser:           Yes. We took it public. It grew to a market cap of 200 million, which nowadays, on a 100 million revenue, you'd have a much higher valuation, probably a 4x revenue or so. But then we got into serious financial difficulty because the next product that we launched, which was the Electron, which was a low-cost version of the BBC Micro, that everyone wanted for Christmas, and we didn't manage to get them out for Christmas because we had a big problem with the ULA from Ferranti, the chip. We just didn't manage to get it done in time.

Alan Cowley:                    When was the release, then? Was it just slightly after, or was it months after?

Hermann Hauser:           It was just after Christmas, but we missed the Christmas rush. And then we finally sorted out all our production problems and had them coming in by the lorry-load. And the next Christmas, everybody wanted to buy CD players rather than home computers. They sort of hyper-dissipated, and we didn't know how to turn off these large orders that we had, and we had a cash flow problem. And we finally had to be rescued by Olivetti, who were wonderful. I became vice president of research for Olivetti, which is really the only proper job I've ever had in my life, and I really enjoyed those three years at Olivetti.

Alan Cowley:                    So, Olivetti is an Italian company. Did you move to Italy?

Hermann Hauser:           I did. I moved to Ivrea. It was the number one PC company in Europe at the time, with a seven billion dollar revenue base. So it was a fantastically exciting time. But they didn't have a lot of R&D. So I was asked to set up R&D labs, about seven R&D labs all over the world, that produced spectacular results, including the ones in Cambridge that then produced a number of really successful companies like Virata, which became a five billion dollar company.

                                           And just the share that Olivetti got on Virata more than paid for the whole lab, all the investment that they ever made in the lab, for the whole life of the lab. It was a great success.

Alan Cowley:                    That is a great success. So, you've got the entrepreneurial bug now, and how many years did you work for Olivetti?

Hermann Hauser:           Three years.

Alan Cowley:                    Three years. And then you had the idea for Active Book Company?

Hermann Hauser:           Well, both Chris and I have always been very entrepreneurial. So even during the early days of Acorn Computers, we supported other companies. So we had a company called IQ (Bio), which was actually doing a PAP test, a prostatic acid phosphatase test. It's a life science company which was very successfully sold to a Danish pharmaceutical company.

                                           So, we've been doing business angel investments very early on. And then during Olivetti, I had this wonderful person who was the vice chairman of Olivetti, Elserino Piol, who I started a venture capital company with. So that was my first excursion into venture, and we did a lot of corporate venturing together with Olivetti. So we made lots of investments at Olivetti. Also, in America, Stratus Computers was one of the famous ones. And Elserino was just a wonderful mentor for me.

Alan Cowley:                    So, you obviously got the entrepreneurial bug from your father, and then setting up Acorn. What was Active Book Company, and what was the product?

Hermann Hauser:           So that was when I came back to Cambridge, I started Active Book Company. And the idea was that most people knew how to write. So if you could create a user interface where people could write on the screen, rather than having to type, you'd have a much bigger audience. So this was quite a seductive argument, and there was a lot of excitement about pen computers. The US had a famous start-up called GO, which was backed by Kleiner Perkins.

                                           And I remember turning up with my Active Book Company project at Esther Dyson's PC Forum conference. This was the conference where everybody met. So Bill Gates and Steve Jobs and Larry Ellison were always there. We often were on the same table. And Esther is the daughter of Freeman Dyson, the famous physicist, and she ran for 10 years, the PC Forum was the place where everybody in high tech met. Because PC, of course, was the computer at the time.

She asked me to give a presentation. It was one of those funny things. And I said, "What do you mean a presentation? I don't have any foils with me." "No, no, no," She says, "Use PowerPoint." So I said, "What's PowerPoint?" And she said, "Well, it's the software by Microsoft where you can project these things." I said, "How am I going to get PowerPoint?" She says, "Go and ask Bill."

                                           So, I went to Bill and said, "Bill, could I have a PowerPoint thing?" He says, "Yeah, yeah, yeah." So the night before, Adele Goldberg of PARC's system, she was a Smalltalk expert, happened to be an expert in PowerPoint, so she was very kind. She helped me put this presentation together.

                                           So, there I was, Microsoft went first, giving the presentation on their penpoint solution. Then came GO, which was backed by Kleiner Perkins, John Doerr, and V-Notes, so they the famous VC, and this was one of the most talked about start-ups in the Valley at the time of Jerry Kaplan.

                                           And then came I with the Active Book Company. And at the end of these three presentations, Esther said, "Now, how many of you are going to write for the Microsoft environment?" And about a hundred people put their hands up. "How many people are going to write for the GO environment?" And about a hundred people put their hands up. I said, "Oh no” How many people are going to write for the Active Book Company, and the hundred hands went up.

So, it looked as if the pen computing market was going to split three ways. So, V-Note had me round their very fancy suite at Kleiner Perkins and said, "Why don't we merge Active Book Company with the hardware part of GO?" Which we did, and that became EO, and that was the main competitor to the Newton, because Apple brought out the Newton. But sadly both the Newton and EO didn't succeed because people didn't actually want to write on computers. As it turned out, they prefer the keyboard. So it was a vision that wasn't right.

Alan Cowley:                    It was a vision that's led onto what is now a smartphone, though, isn't it?

Hermann Hauser:           Yes. Yes, it did. And I'm amazed smartphones do now have pens. And the thing that convinced us all that the pen was going to be a revolution in user interface is that all the user interface studies have shown that the pen was the fastest way of picking a single pixel out of a screen. So the dexterity that we have with the hand-eye coordination on a screen is phenomenal, much better than with a mouse.

              So, we can do it faster, we can do it better, and we can write. So this was quite a convincing argument. We absolutely passionately believed that this was going to revolutionise computing. Well, it didn't. We got it wrong.

Alan Cowley:                    So, what did you do differently with Active Book Company compared to Acorn? How did you run it differently? Was there anything that you learnt from Acorn that you transferred into Active Book Company?

Hermann Hauser:           Well, there are many things that were the same. It was a breakthrough technology. It was working with exceptionally bright people, otherwise we wouldn't have impressed Kleiner Perkins and everybody there. It was actually a Smalltalk system, so we embraced a new object-oriented programming. So that was all very exciting. The difference was, of course, it was really a second stage. Well, because PC's already existed, and it wasn't as revolutionary as the BBC Micro. It was a version of a computer. And it was a portable computer, of course, so it was battery-operated.

                                           And in that sense, I learned that, of course, lower powers, it was very important, and you had to think about switching the screen off, so that you don't drain the battery, so all those sorts of things. And the new thing was a much closer connection with Silicon Valley. So we then had a development team in Cambridge, but also a development team in the US, and some of the Cambridge people went to the US.

                                           And, from a technical point of view, it was a great success. It was the first pen computer, together with the Newton at the time. And in a way, it was the forerunner of the iPad.

Alan Cowley:                    Yeah. No, no, definitely. That connection with Silicon Valley, did that then lead on to your involvement with ARM?

Hermann Hauser:           Yes. It was actually at the same time that Apple was looking for a new processor for the Newton. They were working with AT&T on a microprocessor called the Hobbit, and Larry Tesler, who was in charge of the Newton project, it was just this amazing decision. He did not trust AT&T. He preferred a little Cambridge start-up to do his microprocessor for the Newton. And he argued correctly that AT&T wouldn't follow through with the Hobbit, which, in the end, they didn't. They killed it. Because they'd killed a microprocessor before, so he knew that they'd try something and, if it doesn't quite work, they abandon it and just scrap it.

I suppose he argued that the little Cambridge company had nowhere else to go, so we were never going to abandon that processor, and Apple could fund it anyway if they wanted to. So they bought 43% of ARM for one and a half million dollars.

Alan Cowley:                    Wow.

Hermann Hauser:           Which was the only money that ever went into ARM.

Alan Cowley:                    Wow. Until it floated just a couple of years ago? Oh, sorry, didn't float. Sorry, sold. Sold, yeah.

Hermann Hauser:           Well, it floated before that. It became a public company, then it was sold for 32 billion. But John Sculley, you can read that on the internet, this is not me talking, said that Apple would not have survived had they not been able to sell their one and a half million dollar stake for 800 million at the time when they were in really serious financial difficulty. That's John Sculley saying it, not me.

Alan Cowley:                    And that was a period when Steve Jobs had left, hadn't he?

Hermann Hauser:           That's right.

Alan Cowley:                    And then he came back.

Hermann Hauser:           And Apple was making losses and couldn't finance the company anymore. We saved Apple, which is not widely known.

Alan Cowley:                   Thank you for listening to part one of Hermann Hauser’s truly incredible journey, it was fascinating to hear how he managed to secure funding from the bank for Acorn computers and how the team managed to put together a product for the BBC in just a few days. Be sure to listen to part two which includes tips for entrepreneurs as well as his continued angel investments.