A great team will help you find your strengths - an interview with Kristjan Laanemaa
The concept of karma is based on causality — your intent and actions determine your future. As such, it is highly relevant to the VC world. To begin with, as an investor, you reap what you sow. If your portfolio company is successful, it could sprout out the next generation of entrepreneurs and startups. If you’ve done well on the founders, they might become your future limited partners. The circle of life continues.
Karma itself was not the topic of my interview with Kristjan Laanemaa, one of the founders and a General Partner at Tallinn-based Karma Ventures. However, we talked about his VC journey so far, building partnerships based on trust, and how he found his peace of mind in this fast-paced career.
Paweł Michalski (PM): Kristjan, what did you do in your twenties?
Kristjan Laanemaa (KL): I was wrapping up my athlete career as a cyclist. I needed to decide whether to continue or to go to university. I concluded that I would never become a great sportsman, but it was a nice thing while it lasted.
I went to study business and started working at one of the leading corporate finance advisory companies in the Baltics. I tried to learn as much as possible in every way. I wanted to work with great teams, which meant that I was usually the youngest person there. Eventually, I went on to work at a private equity firm, and that’s where I developed a taste for investing.
PM: How did you end up in venture capital?
KL: In 2008, Margus Uudam, now my partner at Karma, went to build a venture capital portfolio management team at Ambient Sound Investments (ASI) — a VC firm launched by the founding engineers of Skype after they exited to eBay. Those guys wanted to build a team of specialists to run a professional investment management organization.
Margus started putting together a team of investment professionals and was hiring. Somebody who knew us both encouraged me to meet him. Some of ASI’s companies needed help with fundraising and I had the right skill set to aid them. I joined ASI and immediately started working with the existing portfolio.
PM: What prepared you the most for your role as a VC?
KL: I think that all those years at ASI prepared us well to run our own fund. We learned how to develop our thesis and how to put together a portfolio. We saw both failures and successes. Thanks to that experience, we started getting this understanding of what style fits us, what to pay attention to, and when to make investment decisions.
We had to experience those things but also had a very valuable opportunity to learn from ASI’s owners. After all, they saw Skype becoming a huge success and had other entrepreneurial adventures — they simply knew how to spot good companies.
PM: How would you compare the VC ecosystem back then with what we have now?
KL: When I started, Ambient Sound was one of the very few proper VCs up until then, at least in our region. We were an institutional investor that was investing regularly. It wasn’t that common back then. Now there are seed funds, Series A funds, and business angels in the ecosystem. The whole picture is entirely different.
When Ambient started, only a few people had any experience with high-growth companies. These days, there are many success stories and many people with that kind of experience. Skype might have been the original catalyst, but we had many cases contributing to the development of the entrepreneurial ecosystem since then.
For instance, one of the first Skype employees (Taavet Hinrikus) started Transferwise and now we already have successful companies started by ex-Transferwise employees. It’s been a gradual process and it has included many companies. Each new exit has been generating a new generation of entrepreneurs in the market.
PM: Let’s come back to you. What do you believe is the most important part of your job as a VC?
KL: At Karma, we all believe that the companies in which we invest have the best probability to become successful if they build top-tier teams. I’m talking about teams that consist of people that fit well together and have the right kind of experience, as well as the best skill set in their respective fields. We deem it our mission as investors to encourage young entrepreneurs to build these world-class teams.
It seems obvious, yet over and over again we see people trying to do everything on their own. As a founder, you need to attract and work with people that are even better than yourself. You need to bring them together around a shared vision.
It is one of the critical things we do as a team — we help entrepreneurs validate different candidates and help them understand what kind of qualities they should look for in people they hire. We have worked on a number of these hirings in companies where we have invested and we have seen many people go through the process. We have an educated opinion on how these candidates stack up against each other. It is always an interesting discussion, in which we bring our experience-based opinion to the table. In the end, it is the founders who make the final decision, but as such, it’s based on all inputs they were able to gather.
PM: Is the ability to judge people the skill that makes the best VCs?
KL: Years ago, I thought I needed to master all aspects of business life — I thought I should know how to be a great CEO, how finance works, and how to build a vast network. It would be best if someone knew all these things to perfection, but we are limited in our capacity. What’s more, every person has his own style and his natural strengths.
At Karma, we believe that as a strong team of people with diverse strengths we can achieve much better performance than a group of individually operating partners we have taken a team approach. We are all engaging with our portfolio companies and contributing based on our personal strengths. For example, based on my experience I tend to focus a lot on setting up systems, advising founders on metrics, option and compensation plans. I’m also driving forward processes, for example, fundraising for our portfolio companies or structuring M&A deals. On the other hand, Margus reads people really well and has the ability to distill ideas into strong visions and strategies. Tommi has the most entrepreneurial mindset of us and is always the one that comes up with out of the box ideas. He’s also the best networker among us all.
In the end, I think that the skill that makes the best VCs is the ability to build partnerships with other people. I find that to be true in every aspect of VC work. It’s relevant for working as a strong team internally, or sourcing deals because you need to partner with people who would lead you to great deals. It is also important in raising a fund because you need to build rapport with limited partners.
Generally, you need to build trusting relationships, not ones that are simply transactional. People with this skill can be great venture capitalists.
PM: Is there something that you struggle with as a VC?
KL: Of course I struggle sometimes. Things don’t go the way we expect all the time. However, I don’t find it especially hard to deal with.
(Pause.) Nothing particular comes to mind. There are no problems that we think about every day. There are smaller issues on every front, like how you get LPs interested in venture capital, but nothing we cannot wrap our minds around. The world is open and full of possibilities.
PM: Does that mean you haven’t made any regrettable mistakes so far?
KL: We could debate the definition of what a regrettable mistake is, but… Well, if you agree with me, that the definition is: “if things had been different I would be in a different place,” then no. I made many small mistakes, and I learned from them.
PM: What is the most rewarding part of your job?
KL: The coolest moments for me are when an entrepreneur whose company I’ve invested in has a business that starts working and gaining speed. Sometimes you can’t even tell what changed, but suddenly, the entrepreneur has more confidence. He cracked some difficult challenges, and now it’s like he could fly. The person becomes free. This part is fascinating.
Even when companies are not doing well and the entrepreneurs lost that belief but something clicked — let’s say the company found itself in a pretty good exit situation — it’s so fun to see how people’s life positively change.
PM: Has any of your portfolio companies achieved outsized returns relative to others?
KL: No, our track record has been quite even. We have good results on the fund level and consistent performance across the entire portfolio. We haven’t had any super performers — for us, it’s been evenly distributed in terms of returns.
PM: This is something that deviates from the long-tail model of venture capital.
KL: We invest in deep tech and companies where the underlying technology has value on its own. We were able to salvage companies for a reasonable multiplier even when the business result was not as good as expected. We have a rather high percentage of companies that we were able to exit from our portfolio.
Of course, we aim for huge winners as well, but the VC model still works even if we don’t have those outsized winners.
PM: Do you have any advice to other VCs?
KL: If you’re early in your VC career, find a great team, and work with them. It’s an excellent way to learn about your strengths. As I said, early in my career, I tried to be the best in everything. It causes a lot of tension and may lead you to think that things are not progressing in the best way. You start questioning yourself. After I learned that I could be great in what I do, life became so much easier.