Estonian Startup Karma, Interview with Kristjan Laanemaa, Partner Karma VC

What’s the story of Karma? How did the fund start?

We started working on Karma Ventures together with Margus Uudam and Tommi Uhari in 2014. By that time me and Margus had managed Skype’s founding engineers family office’s (Ambient Sound Investments) early stage investment portfolio for 6 years and we had worked with Tommi on one of the investments in that portfolio (Tommi was a chairman of the board in that particular portfolio company). What brought us together to start a new venture fund together and made us a really strong and close team was the good personal match, diversity of our business backgrounds and how we complemented each other. We have have sought such match also later when adding people to our team.

But back to the start. As ASI started shifting its focus from investing in early stage tech companies directly to mainly investing in early stage tech via venture capital funds in different regions and we as an early stage investment team had demonstrated good track record, we were able to secure Ambient Sound Investments as the cornerstone investor for our new Europe focused deep-tech fund. We combined this commitment with commitments from other great fund investors and launched Karma in 2016.

What makes Karma unique as a VC? What’s your sweet spot?

Our sweet spot is investing in early go-to-market phase in deep-tech startups. We invest at the time when there is some market validation to the technology/product value but the scalable business needs to be developed.

I think one uniqueness that enables us to invest like this is our close relationship with very high quality technology advisors. We started off with two of the skype’s founding engineers — Ahti Heinla and Jaan Tallinn — becoming our advisors. Over the years we have added others, such as Jani Huoponen from Google and Till Quack from Mapillary (which was acquired by Facebook in June 2020). Our experience in working with deep-tech startups for over 10 years combined with the inputs that we are able to get from our advisors make us comfortable with taking risk and investing significant amounts relatively early in cases where we are convinced of significant value of the tech innovation.

There are many seed funds in Europe how do you look differently at startups?

In terms of stage, we are mostly focusing on series A stage but definitely get engaged also in later seed phase. The market has many niches. Tech enabled businesses are heavily competed for especially if they have strong early metrics. But for deep-tech startups where initial ramp up is often slower, there are much less funding options. This is where we feel we have a strong position as we can be comfortable with early stage risks if the target company’s tech has unique and strong value.

What can other VCs learn from you? Is there anybody in the global VC community that you look up to?

I personally don’t have a specific role model that I would single out but I like to read about how other people in the industry work and adopt bits and pieces that fit with Karma’s style. This style is built around strong team work. Often VC firms seem as groups of individually working partners but we have taken a ’team sport’ approach. In our team it is not a single person that is working on getting a deal done and then working with the company after completing an investment. We are very openly discussing who is the best person to lead a deal, in which areas other people should step in because of their unique skills or experience and based on the portfolio company needs who is the best fit to work with the company after the deal is done (we also take entrepreneurs’ input into this). So with us the companies can interface with multiple people in the team at any time depending on who has most value to add on a given topic.

How many exits does Karma have?

We are still in our fourth year with Karma Ventures’ first fund and the companies are not yet mature for good exits. But from ASI portfolio we have so far reached 14 exits and still have a couple of really good assets in our portfolio that we expect would increase this number further. Interestingly in 2020 a couple of Karma Ventures portfolio companies have been approached by large enterprises with M&A interest. So not impossible that soon we will have first exits also from Karma Ventures portfolio.

What are the metrics that you look for in startups?

We look for signs from the market that confirm the uniqueness and value of the technology (or product) that the company has. These signs differ based on stage, business model and target customer type. In b2b enterprise cases the main thing we look for is validation from competent global tier-1 customers. The validation can be for example early paid projects plus reference or in later stage cases (larger investment rounds) expanding implementation of the solution. For companies targeting SME-s ARR and revenue growth are the main validation signals for us.

What founder characteristics are important to you?

As one specific characteristic I would bring out openness to consider all possible inputs from a diverse set of sources when making key decisions about the company and then deciding based on what is best for the company. This impacts how entrepreneurs build their teams, how they make strategic choices that have large impact on company value, how they select and work with investors, how much value are they able to extract from their boards.

How can a founder grow a company from from zero to a unicorn?

I think I won’t be able to come up with a totally unique magic formula but based on our experience I would mention that the founder needs to have a strong vision, the founder needs to be able to gather a top-tier team around herself or himself, there needs to be a large target market and there needs to be certain amount of luck.

Do you invest outside of the Baltics and Scandinavia?

Yes we do. We invest in companies that are active in the EU so covering the whole Europe.

What makes Estonian a startup power house?

As anywhere the main drivers are people who have skills and vision for starting and leading scalable innovative companies. In Estonia the uniqueness comes perhaps from the combination of two things — small internal market that forces everyone to be international from the beginning and a great pool of role models (successful entrepreneurs and successful companies) that give starting entrepreneurs confidence in the possibility to build a globally recognized tech companies. I really see that the latter injects positive drive into Estonian entrepreneurs that often yields great success.

Are you seeing more activity from the Estonian diaspora or most Estonian founders you invest are from Estonia?

We are seeing more and more companies founded by Estonians living abroad but objectively looking at our deal flow numbers, most companies founded by Estonian entrepreneurs in our pipeline are in Estonia.

Estonian has a very active angel community of former founders. Is this a natural outcome of the Estonian startup success stories? We have noticed that these angels are investing in SV, London and Ukraine. Is this the next stage?

It is actually a mix. On one hand there is definitely a strong group of angels that are former tech company founders themselves. They are very highly valued by entrepreneurs and can bring a lot of value to early stage companies by sharing their experience. But at the same time we also have angel investors that have background from other business segments, did initial angel investments in the past, did well and expanded their activity and portfolio based on positive experience. Success of a number of companies and investors attracts people to invest in startups.

What’s the most important book you read?

I would say that the books that have impacted significantly my thinking, my approach to human relations, my approach to work and my approach to life are three books around the same topic which is Alfred Adler’s individual psychology. I started discovering this world by reading two books by Ichiro Kishimi and Fumitake Koga — ‘The Courage to Be Disliked’ and ’The Courage to Be Happy’. My interest in the topic became deeper and I went on to read ’The Science of Living’ by Alfred Adler.