StartupBanking – Karma Ventures Interview

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Intro: Jaap Dekter spoke with Marili Merendi, an Associate at Karma Ventures, at the recent Startup Banking event in Amsterdam in January 2019. The interview took place in front of a live audience with the aim of fostering a better understanding of VCs and their reasoning. Read the full transcript below for insight into what Karma Ventures is looking for when choosing its next investment.

Jaap Dekter (Startup Banking): Can you introduce yourself and Karma Ventures to our audience?

Marili Merendi (Karma Ventures): Karma Ventures is a pan-European fund based in Estonia; it was launched in the spring of 2016. Over the past three years, we have done ten investments: mostly in the Baltics, but also two in Finland, two in Sweden and one in the UK. The focus is on startups building unique, tech-heavy solutions that are really solving the big problems. We’ve seen that our preference is mostly for deep tech B2B software startups, although there has also been one investment in a company that has a hardware offering in addition to their software. This was Minut.  Minut is a Swedish/London-based company who offers a non-camera home security solutions. It relies on a single smoke alarm-like device that analyses sound and environmental data to identify fires and other anomalies in a building.

Regarding the definition of deep tech at Karma, well, there really isn’t one fixed description. While we don’t have a specific sector or vertical preference, we do look for engineering heavy solutions where the tech in question should deliver exponential improvements in its respective field of operation. Naturally we also look at the team, both their background as well as their potential to build a strong business. Other inputs include: the market size, market trends that might influence the future business, usage of the product, and client side adoption factors.

Karma Ventures, including myself, is composed of a six-member team. Collectively, our prior professional backgrounds has shaped our understanding of entrepreneurship, operating large enterprises, engineering, marketing, finances, and managing VC-backed global portfolios. Our cornerstone investors include Skype’s founding engineers – they act not only as investors but also as tech advisors to the fund. So sometimes, as a joke, we say that we are not Atomico, but the ‘other Skype fund’.

Jaap: Based on this, I presume you encounter a lot of founders with strong technical backgrounds. When you look at founding teams, what do you want to see: a mix of strong technical and business skills, or are you fine with there just being a heavy tech component at the beginning?

Marili:  Karma invests in late seed and in A rounds. The initial ticket size ranges from half a million up to three million euros, with the capacity to invest up to ten million per company over the investment lifetime. When it comes to the business stage, and expectations for the late seed round, we typically come in when the product is mostly ready. This means that the company does not need to invest a lot to take the initially developed technology and turn it into a product, they already have their first paying customers, and/or currently have pilots in an advanced stage that are about to be commercialised.

In other words, we don’t come in with technical advice for product development, instead, we come in to help to scale the business. For A round investments that can go up to three million euros, we assume that business traction already shows some understanding of the product market fit and that the founding team, the CEO, and the key employees are in place and able to bring the business to the next level. Still, our experience shows that in both stages, recruitment – which is often time critical – is the key aspect to being able to keep up with the competition, bring the company to the next level,  and prepare one for the next financing round.

Jaap: And what do you see as the most common mistake that these type of founders make when they’re trying to scale their company?

Marili: Sometimes what we see, especially with engineers turned founders, is that they are perfectionists. And they are waiting too long to actually launch the product. I am sure that many have heard that launching early enables one to collect customer feedback, fix issues, and iterate quickly along the way. If one spends too long polishing the product, this valuable information is unavailable to fix potentially larger issues further down the line.

Every now and then we also encounter founders that are reluctant to take on external advice, especially when the discussion pertains to the recruitment of senior positions. While we acknowledge that we can be wrong as well, our experience has shown that starting early, especially with marketing and sales recruitment, yields better results and more data to analyse over a longer period of time. So, we are not coming to a board meeting saying ‘Hey you should do this and that’, you know, with a strong opinion or recommendation that it should always be done how we say. We are always trying to encourage brainstorming and the generation of ideas together. Therefore, I would say that as a founder it is a key to balance the confidence you have in what you are doing while also staying open-minded towards advice.

Another thing we sometimes experience is that some founders are unable to envision the bigger picture and ask ‘Where does the company need to get to?’, and then, from that endpoint track back the steps needed to get there. So, what we’ve seen is that some entrepreneurs can think too narrowly in terms of what the potential of their business could be. Of course, you need to stay realistic, but setting the milestones higher may help you reach altogether new heights.

Jaap: So, after that initial meeting with a founder, what does your typical internal process look like? What are the next steps?

Marili:  After one of us meets the founder or the team, we discuss the business investment opportunity internally with all of Karma. Specifically, we hone in on impressions of what we do or do not appreciate. By this point we’ve also done our own research about the market and the competition. Of course understanding the founder’s character is subjective, but also very important to consider, especially as we tend to work in a very hands on manner. Therefore, having good and honest communication from the start is a prerequisite for building the relationship.

After this first round of internal discussions, we then hold a full team meeting with the founding team. This differentiates us from many other funds where the entrepreneurs meet not only few of the members in the investment team, but all of us. The point is to gather input from all members of the Karma team for our investment decision. If we decide to proceed after the team meeting, the founders meet with the Skype guys and then it’s the terms sheet, legal, and technical details of closing the investment.

Jaap: I’ve sometimes read that certain firms want a little bit of disagreement before they make an investment because they say that the clear winners are usually not such clear winners from day one. But Karma Ventures opts for unanimous voting. Do you fight a lot? Or are you mostly all on the same page from day one?

Marili: No, not at all. While we all aim to get on board with the decision to either move forward and invest – or not –  at the same time all six of us are very different and give varied input. We always say that if you wanted everyone to be the same, why would you need the six of us? We have a voting system; it’s not yes or no. Individually you argue how much ‘yes’ you are and how much ‘no’. So while the system allows for a veto, we make sure that everybody has the opportunity to discuss the pros and cons and argue in favor or against an investment. Everybody is supposed to be able to describe the logic behind his or her decision and, based on this, we collectively take a decision. And I can say that, thus far, our decisions have never been unanimous – instead it’s more like a collection of well analysed viewpoints.

Jaap: That’s a very interesting approach, fascinating really. Although I wish we could delve deeper into that, I want to return to the topic of founder character you touched upon earlier. Do you have a fixed set of words or terms that you use to describe or evaluate founders? For instance, do you always judge someone by how funny they were, or do you and the team just blurt out whatever comes to mind?

Marili: A founder’s character, well, that’s a very subjective topic actually. Analysing, judging, observing – whatever you want to call it – is always relying on a subjective perception and fit with their counterparts’ values, background, current mood, and many other items, many of which are not even possible to identify. This is precisely why we have team meetings with all six of us present, to balance out individual, subjective decision making. But, generally speaking, we definitely look at more factual items like: a founder’s past track record, the type of experience they have in terms of building something from scratch, or in operating and managing teams. We further consider things like: ‘Have you been able to attract tier-one talent to work for your firm? How do you develop and retain this talent?’ At the end of the day, you’re only able to grow and scale by having  great people by your side. So I truly believe that that’s the most important thing.

More recently Karma and a few  other funds pay attention to the  ‘game changers’ philosophy and that game changers are needed in order to make a substantial difference in business execution. These are people with global experience that can help your company to get to the next level. Yes, usually they’re expensive, so you should evaluate the expense versus the potential benefit. Now, when evaluating founders, we look to see if they are able to attract this kind of talent and get them on board. This is particularly crucial in countries where there is a very small pool of senior talent. This is the case in the Baltics, where the companies usually need to hire talent from London, Berlin, the US, etc. to fill positions.

I do, however, really need to emphasise that there is no single definition or path to becoming a great founder. The most common denominator among the great founders is probably their passion, energy and vision to really make a difference and build something big. And also the ability to have fun along the way.

Jaap: In Estonia, you must be witnessing that the local talent pool is improving given past successes, right?

Marili: Absolutely. Estonia really benefited from Skype’s exit. Not only were some of the proceeds invested back to the economy, but most importantly, there was a spillover effect. The spillover of knowhow, access to global networks, and even a boost in motivation and self-belief were huge given that Estonia went from being a little, unknown country to one capable of building really big companies that affect people’s daily lives. Today Estonia already has four unicorns: Skype, Playtech, TransferWise, and Taxify. For instance Taxify, a competitor to Uber, has achieved a market leader position in many cities where Uber also operates. So, overall, I would say that top-level access to tier-one global knowhow is available in Estonia. Of course, our strongest angle is still the engineering knowhow, whereas sales, marketing and senior operational competencies are still under represented in the Baltics. We, at Karma, try to leverage our global network to help our portfolio companies with recruitment from the global talent pool.

Jaap: To close, do you have any particular advice that founders should be doing or really should not be doing when pitching to you?

Marili: Founders, please don’t pitch. Honestly, let’s just talk. We are all on the same side with the single aim of understanding whether or not we have the synergies and the competencies to work together, and whether or not we could help each other to build something great. While the pitch format enables one to convey the message in a structured manner to the target audience over a limited period of time, still, please keep in mind that at the end of the day there is a human on the receiving end. On a fundamental level we are just two people talking to each other. While I think of the pitch as an element from the entertainment industry, and while it’s needed, I guess I still strongly believe that the same results can be achieved in so many other ways.

Again, special thanks to our sponsors ABN AMRO and Adyen for making this event possible!

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