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Entrepreneurship
Finnish your business: episode 9
Published : 04.06.2021

In conversation with Samuli Leppänen from Lifeline Ventures and Teemu Varpanen from Fiban we discuss the funding options for entrepreneurs.

Transcription notes

Interviewer: Namrata Sethi
Respondent 1: Samuli Leppänen
Respondent 2: Teemu Varpanen

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(word) an uncertain passage in speech or an unrecognised speaker
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[pause 10 s] a pause in speech of at least 10 seconds

, . ? : a grammatically correct punctuation mark or a pause in speech of less than 10 seconds

Length of the recording: 62 minutes

Namrata Sethi: Hello, and welcome to Finnish your Business. In our podcast we leave no business un-Finnished. I’m your host Namrata Sethi, and this podcast is brought to you by MEGE which is a joint project with Haaga-Helia University of applied sciences, Helsinki Business College, Aalto University, and The Shortcut and is funded by Uudenmaan liitto. Today we have a two guests joining with us from Lifeline Ventures and Fiban, Samuli and Teemu. Welcome to our show and thank you for joining us.

Samuli & Teemu: Thank you, thank you for having us.

Namrata Sethi: If you could please introduce yourselves.

Samuli Leppänen: Hi, I’m Samuli Leppänen, I’m a partner and CFO at Lifeline Ventures. Lifeline Ventures is a early-stage venture capital firm located here in Helsinki, we have a team of six. Basically, what we do is we look for future category-leading companies with strong founding teams. Me personally, I focus on companies, especially marketplace and fintech companies. I’m also the CFO so I’m responsible for the financial side of our operations as well. Bit of a background, lot of finance roles in corporate treasuries, banking, SME’s, companies like Microsoft, Nokia and Evli Bank. Before taking a little bit of chance, I guess, and moving into the startup world. Sports marketplace startup in 2015 and was supposed to jump to another startup but through some twists and turns ended up in venture capital in 2016 just after we launched our third fund.

Teemu Varpanen: Hi, my name is Teemu Varpanen. I would say I’m a software geek turned angel. I was in software industry for about 25-ish years working in the corporates with big projects. And also maybe third of the career in a startup-ish company, meeting great people and doing great stuff. Maybe five years ago I became financially independent and after spending couple of years with Netflix and computer games I was kind of bored to that. And I did a bit of soul searching that what I want to do when I grow up with the rest of my life and also why and with whom. Because I really loved the people in the startup community and the entrepreneur kind of mindset and the kind of forward pushing people. I decided that I want to help with the new companies and I started looking into angel investing. Quite early on I found the Finnish Business Angel Network, Fiban. It’s a beautiful place to be as an angel. And it happens to be memberwise the biggest angel organization in the solar system so it’s quite relevant. There are smaller ones but no bigger ones, I claim so. I was quite active in Fiban and did some 20-ish investments in a few years.

My initial strategy was to network, obviously, because that’s the most critical part of being an active angel investor. And I wanted to learn the processes and tools but also to learn the people whom I want to work with and more importantly learn to identify the people whom I don’t want to work with, even more important. So I have done about 20-ish investments, 16 of them are alive and few of them are doing fairly good. One hopefully is doing very good. One that we are sharing with Samuli, as well, at the Lifeline Ventures. And my focus is B2B SaaS companies which kind of relate to my background because I can help with those companies with my previous expertise and connections.

Namrata Sethi: Thank you. And what does entrepreneurship mean to you and why is it important?

Samuli Leppänen: You wanna go first or I go first?

Teemu Varpanen: I can continue. It’s always easier to stand on the shoulders of giants. So I’m kind of copying from Janne Jormalainen, the previous chairman of the board from Fiban. He said that he wants to build new companies so that when his children grow up there will be more companies in Finland than VR, the public railways, and Alko, the monopoly alcoholic company. So he wants to bring new successful companies and successfulness to Finland for the next generations. I can relate to that completely. But I also think the companies are the key for solving the big relevant challenges that the humanity faces. I think that kind of pressure to push forward and find the solutions for the big problems is extremely inspiring.

Samuli Leppänen: Yea, maybe continuing on that sort of macro economic aspect of companies, totally agree. Studied economics basically all my life with a lot of interests. And companies are definitely the backbone of the economy, that’s very clear, and employing people. But now with the current issues regarding sustainability and climate, for example, totally agree. We need the companies, of course the infrastructure around it to help solve these problems.

On a personal level, what entrepreneurship means if I sort of think about as a kid to some extent. I guess everyone is sort of an entrepreneur with what they do. Is it at home or at work or during their hobbies. ‘Cause basically we’re talking about looking at your environment, identifying opportunities and then solving them. So for me, essentially it’s problem solving to the extreme. And with startups, the startup entrepreneurs solve problems and try to make an economic profit based on that. And this is very much what it is. And if you look at the adjectives, what it means, it’s passion, it’s excitement, it’s ambition, it’s risk-taking. And being a bit different, I guess, because you’re taking a journey to the unknown, basically, even serial entrepreneurs. I’d say those are what it brings to mind. But naturally, it’s not for everyone. So it’s a tough road but that’s okay, not everyone should be an entrepreneur.

Namrata Sethi: But maybe everybody should have an entrepreneurial attitude?

Samuli Leppänen: That’s very correct. As I said, everyone’s sort of an entrepreneur everywhere, whatever they do. But being a startup entrepreneur, that’s a different ball game, I guess.

Teemu Varpanen: Yea, don’t do it. [laughs]

Namrata Sethi: [laughs] And how does your organization help entrepreneurs?

Samuli Leppänen: As I touched upon briefly, we’re a venture capital firm with currently about 230 million euros in assets under management. Of course what we do to help entrepreneurs in basic sense is we fund. Fund the best innovations, fund the best companies, those that have great prospects. That’s our task and that’s what we’re excited about and why we wake up and go to the office and look at new stuff. What we want to do, I guess, a bit differently at Lifeline Ventures but probably more venture capital firms should do as well is really form a very tight bond with the founder. So this is our way of helping companies and their founders. In addition to the funding be the closest advisor to the founder when building a product.

We’re very much focusing on early-stage investments. So is it angel, pre-seed or seed investments, however you wanna classify them. What we usually do, we invest in companies before they have significant revenue, before they have found their product market fit. Meaning that they have found customers and the market finds the product or service attractive. And sometimes even the company doesn’t have a product yet when we make the investment. So we have a great track record and expertise within our team from different industries to help. And we have the knowledge to help these founders to actually understand what needs to be done for this company to reach the next phase. Meaning that you’re actually achieving some sort of sales with your customers. This is very much what we do. It can be connections to some other parties, helping with recruitings, strategic role, board work, a lot of things basically. But we really want to be the first person a founder reaches out to, in good or bad times.

Teemu Varpanen: I guess, angel investing, like Samuli mentioned before, it’s a bit overlapping. Because some of the companies and within the scope of Lifeline and other VC ventures, and others maybe less so. So maybe I’ll explain the process from the Fiban perspective, how that works for the company seeking for funding and (byers).

Fiban serves the startup companies by having this kind of a deal flow. A funnel that enables them to pitch for funding but also for knowledge, expertise and contacts and so forth. And the process works in a way that you submit the application from fiban.org, I think, hopefully I got the address right. And the first initial process is a slight screening by Fiban office, where they check that all the relevant information is there and it’s legit. The next relevant phase is that we have bi-weekly angel screening meetings where a bunch of angels, half a dozen-ish, screen the companies, 20, 30 companies. And they select roughly one third of those to go to the pitching event that happens about eight times a year, typically one month apart except for the summer and after Christmas. From roughly third of the companies that go on stage and pitch get funded.

And typically the funding process, it’s clearly (describe) process and so forth. Typically it happens as a syndicate. Which means that there is several angels having different kind of backgrounds and expertise who are interested in the company. And they come together and assess the investability of that company. What is the business case, what is the problem that they’re solving, are they addressing relevant market and so forth. And most of all, is the team able to execute the plans that they’re putting forth. Then they do investment plan within themselves and they negotiate with the company that what is the actual round size and the financial terms. The pre-money valuation of the company and so forth.

There’s quite good data on fiban.org/data, right? But typically, the companies are pre-seed, seed stages, this is about 60 percent of the companies. And the funding is around 100 000 to 200 000. So you don’t fly that far with that money. But when we are in Finland there are several public money instruments and bank loans that you can use to multiply that money to about twice or 2.5 times. So that helps. And if they are doing their stuff right with this money hopefully they can go to the next level and maybe talk to Samuli and other VC parties to get a bigger funding round with the bigger goals and so forth. So that’s how it goes.

Namrata Sethi: And at what stage should they come to you? At what stage an entrepreneur can come to you?

Teemu Varpanen: Maybe I’ll start because I’m kind of bottom of the well. [laughs] So early. And sometimes, the team can approach the angels and pitch even before they have actually established the company. There are some benefits to that, and there are benefits to come as early as possible as a company age. But I would say that perhaps the optimal moment to come to get money is when you have the team in place or at least most of the team. Because that’s the most critical part. You have stated some kind of a problem that you are solving, you have understanding about the market size, and you have understanding about your solution and the market demand, early product-market fit. Optimally you have first few crazy customers that are actually paying for the product. Because this proves that somebody is willing to pay for your product. So there’s kind of theory that lots of people, lots of companies would be paying for it. So at that stage.

Samuli Leppänen: For us, from the VC side and from our side. Ever since Lifeline Ventures was founded 11 years ago by Timo Ahopelto and Petteri Koponen, the mindset has been the same. Our goal is to be the early investor or the first institutional investor in every significant startup that arises from Finland. And what this basically means is, as early as possible. There is no “is it too early?” or “when can I go to Lifeline Ventures?”, we want to invest early. But of course we want to invest in teams that right away are capable of knowing what to do with the money right away and going to solve problems within the product or the industry right away. But first institutional investor money of course means that it’s quite a lot of criteria that we look at. A lot of the same stuff that Teemu mentioned as well. And of course, because we have bigger funds, there’s slightly different economics involved which I believe we’ll get into maybe in more detail.

But there are a lot of names thrown around, it’s angel pre-seed, seed, sometimes it’s very hard to understand which is what. But early-stage investing is all of those. And what’s common to those is that it’s usually before you’ve proved you have the product-market fit. And early investors are taking a risk, and that’s what we love to do. We always want to highlight this to the entrepreneurs we meet and in the events we participate that we really want to be the first investor in a company. But of course sometimes there are angel investors involved which is of course not a problem at all. We have value-adding angel investors often involved in our rounds as well so there’s always a specific role. VC is more of an institutional player with a vast network and maybe some more tools to offer. Whereas angels have a specific expertise and work experience or founder experience in specific sector which can be super, super valuable for a founder.

Teemu Varpanen: Maybe one comment. What do you think Samuli, I read this statistics that 90 percent of the first VC investments are done to companies that the VC has been following for a year or more?

Samuli Leppänen: To be honest, that percentage sounds really high.

Teemu Varpanen: [chuckles]

Samuli Leppänen: But I know this is the case to some extent. But then again, it really might-

Teemu Varpanen: Maybe not for you.

Samuli Leppänen: Yea. It depends on the VC. Of course if we have series A, series B venture capital firms which basically invest a bit more than us in companies that have more traction in the market. Of course they follow them for a very long time. Whereas we have more of those cases that we identify a team, a serial entrepreneur, young entrepreneurs, a great diverse team and we know they’re on a project. If we get to know them well and we form a great partnership, you know, we can do any investment within a month. It’s just that we get to know each other and we know there’s a great opportunity there. I’d say for us, it’s the other way round almost.

Teemu Varpanen: Bigger funds might-

Samuli Leppänen: Yea, exactly. So we do make investments where we follow the company maybe for a year or two. But I’d say the majority of the cases we do because we invest early. It happens quite soon to finding about the opportunity.

Namrata Sethi: And how does the angel network work?

Teemu Varpanen: Okay, maybe I get this. I briefly talked about it earlier. But it is the network that brings the biggest values for any angel investing landscape. Early on of course, when you start building the network, you have to walk the walk and also do the talk the talk part. So you have to get involved with the process and portray yourself as a person and your process as a know-how and so forth. And quite early on, at least for me, I was happy and privileged to connect with the top names in Finland in this space and in Fiban space.

Once you have built the trust, and I think the trust is the critical part of any angel investment network and investments overall of course. When you have the trust and you know the logic of the other angels, how do they work and what they value and what they think and also what they do not think. Then you kind of build the puzzle that what is the best fit for you and have this extended group of people that you can easily relate to. And you can get good deals from there, and if you have a good deal, it’s very easy to get other angels to get involved and assess the case and maybe invest with you. So participating with the angel events, and there are a huge amount of events even in this day and age that you can network and connect with other angels. But you have to be active of course.

Samuli Leppänen: Maybe to comment what we’ve seen in the past few years. Now with more and more entrepreneurs in the space and more experience about startup investments that angel investors have. The angel investor space, it’s so much more experienced and vast nowadays. Actually we’re seeing now currently that a lot of former entrepreneurs, they’re able to make angel investments. Because the ecosystem in Finland, we’re still very young startup ecosystem. But we’ve reached the next phase that we do have more serial entrepreneurs. And those are coming to the table as well and offering their help and willing to invest more money in the startups which is great.

Teemu Varpanen: Yea. Also, probably the best because they have the experience, money and the connections.

Namrata Sethi: And how can you join Fiban as an investor?

Teemu Varpanen: Just apply in the webpage. [laughs]

Namrata Sethi: Okay. [laughs]

Teemu Varpanen: But there are a bit limitations. There’s a small joining fee and yearly fee as well, obviously. But also, two reference people are required. And you don’t want in any way to be any kind of an elitistic club or anything like that. But because of the profile of the typical angel, they are also very wanted target audience for any sales guys. And we want to keep these close relevant people there, and we don’t want anybody to come in and start selling aggressively some stuff to each other. That would ruin the trust and the network spirit. So basically, having a couple references and just showing up. Maybe the optimal background is something like having a long business career with expertise and know-how in some specific areas. Or like Samuli mentioned, having the entrepreneurial background, having maybe exits and experience and stuff like that. And you want to give back the money which is less relevant than your experience, contacts and know-how which is more relevant. So that’s how. And I definitely recommend that because there are quite extraordinary people there and it’s very difficult to connect with so many great people at the same time. So come on in!

Namrata Sethi: And how does venture capital work?

Samuli Leppänen: That’s a big question.

Teemu & Namrata: [laugh]

Samuli Leppänen: Just to summarize, maybe there’s two sides to venture capital. Our venture capital firm, we get our investors and then we make investments in startups who are looking for investors. So maybe to summarize in five stages. How it all starts, we as a venture capital firm, we have to establish a fund. And to establish a fund we need to get our own investors. For example, our latest fund launched in 2019 had a size of 130 million euros. And the majority of that money comes from pension funds, family offices, government entities, fund-for-fund’s so basically investment companies, and insurance companies and other types of asset managers as well. Now when you’ve done this fund raising for a fund, and these funds usually last 10 to 15 years, they have an investment period of 4 to 5 years. So every 4 to 5 years a new fund is established and then you have more monetary firepower to do these investments.

But now you have the fund and now you can go and invest in startups. Which is what we of course on a daily basis, assuming we have the fund in place. There, it all starts with deal sourcing. Through different avenues, is it the network you have in place, an email, or just personal meetings or events, you look at different startup possibilities in different sectors. Of course, it depends on a VC what they do and what stage, what industry. For us, it’s early stage and industry agnostic basically. After deal sourcing, if you like the case and it fulfills the investment criteria and passes the due diligence. In some cases it’s very light, with some a bit heavier. Then you make the investment. That’s sort of the investment decision phase.

After that, it’s about ownership activities and monitoring your investment. For a venture capital firm, usually it means that you appoint a board member from the venture capital firm to the company. And that basically means that it helps you be an active owner. Help the company, help the founder, understand what’s going on, have the shareholders’ interest in mind as well as your own fund’s interest in mind. And in addition to that, which is super, super relevant for us is in addition to this formal role, you want to be a close advisor to the founder. Especially for us, we invest locally here in Finland and it’s where we believe we have the most value. We try to stay very close to the founder and form a good partnership. He or she seeks advice and we’re able to help there and help with other connections as well. And of course, we’re learning at the same time there as well, especially with new emerging industries that might be case every now and then.

In addition to that, active ownership for us also means that we’re able to make follow investments in companies. Assuming we invest 500 000 in the early stage round and there’s a next round, maybe with a new lead investor, then we would do our share of this so called pro rata investment. Might be a million, might be two, depending on the funding round. And this is very much part of our ownership. Not all venture capital firms can do that but for us it’s very much our investment strategy.

Then, if you will, the end of the cycle. Of course our duty to our investors and what the founders and the shareholders of the company also want is, you try to monetize on the economic potential of the company. So this can be an exit, initial public offering in the stock exchange. It can be a trade sale to an acquirer, it can be a majority stake sale to a private equity house, to another investor. Or then the company just becomes really super profitable on it’s own and might be able to distribute dividends. But at some point in time a venture capital firm has to exit and sell its stake. Because our funds, as I said, they’re 10 to 15 years old, the term, so at some point we have to exit the business and realize our investment. It’s a very long road ahead before that because our average holding period in companies is, let’s say, 7 to 8 years. So it’s not something you can think about or the founder should be thinking about when you do the investment in the first place. But at some point in time, that exit happens.

Teemu Varpanen: Maybe complementing on that. I just heard a comment from a lead investor, a lead angel in Estonia who said that the investment period in the startup company is longer than the average marriage. [laughs]

Namrata Sethi: [laughs]

Teemu Varpanen: So pick your investments carefully.

Samuli Leppänen: [laughs]

Namrata Sethi: Can you tell us a bit about your investment criteria and the investment sizes?

Samuli Leppänen: Maybe I can continues ‘cause sort of talked about that a bit. I guess the most important investment criteria, main five now. So number one, we look for a company that has potential to be a category leader in its space. Number two, there has to be a unique competitive advantage. Number three, the market has unlimited characteristics. Number four, at least one, preferably two of the founding team has potential to have a sustainable leadership role in the company even as it grows. And number five, in an economic sense we look for companies that are able to return the fund, basically.

I’ll just touch on those five aspects quickly. So category leader, what it means is that the company can actually become number one in its space. Based on our experience, ‘cause we take a big risk with quite a substantial investment size early on, we really want to see potential for that company to be number one. It’s always gonna be a tough road ahead if you don’t have those blocks in place that could make you number one in that segment. That’s connected to the second one, so you need competitive advantage. There should be something that makes it tough for a competitor to take your position, so some barrier for entry. It can relate to the innovation, it can relate to the team’s technical skills, execution capability, or just the market position or market characteristics of that specific space.

Number three, I was talking about the third one, the unlimited characteristics of a market. What this basically means is that usually what happens, company has some sort of projection for the market, almost always that shrinks. So you look for something that’s very big already. So there’s a lot of potential there because you’re gonna have to iterate your business and find the right customers and find the right demographics there. You want that to be super big already, and preferably with customers that are growing themselves. So there’s a solution that there will be even more need in the future. Founding team is super important. What is important is that hopefully at least CEO is a great leader, has the relevant skills to be in that position for a very long time. ‘Cause at the end of the day, we’re talking about the product and the innovation that basically the founding team has been responsible for and what they’ve created. So you really want that so that they can realize the vision. Of course you have to recruit the best people. But you hope that these key people can be those that are in it for the long term and are capable of that.

And going to the economics, there I mentioned the fund returner. It’s how we work, how the majority of venture capital firms work. A normal fund makes 20 to 30 investments, a lot of investments, and they know that perhaps not the majority but a lot of them will fail. So they look for the profits and those are derived from a few cases, and you want those few cases to be super successful. For us, it means a fund returner. So as an example, a fund is 50 million euros, we would want that in the best case scenario this investments returns 50 million euros to the fund. I. e. meaning that if there’s a 500 million sale to a trade buyer some way into the future and we hold 10 percent of that company, so we would be getting 50 million euros for a fund. That’s sort of the economic criteria, minimum criteria what we would be looking at. So maybe those five are, I guess, the common theme across all of our investment decisions.

Teemu Varpanen: Pretty much the same stuff, obviously. Maybe the logic, because this is extremely high-risk investing, so typically the companies with a few exceptions are not generating profits. Their revenue is quite low so they’re basically burning money every month for several years before they become profitable. And this is called the value of death and it’s quite typical for startups. In the angel logic, if you make ten investments five of them will fail one way or another. Out of the ten maybe four will be somewhat successful. And you aim to find that one that actually pays the rest of the investment for all of those companies and returns you profit. So it’s similar logic as with the VC part. Maybe the risk factor is even higher with angel investing because you go even earlier than the early stage. Even though Lifeline is kind of in a similar space. And one more thing, if you angel investing you cannot know which one of the companies will be successful. Even the best angel investors on the planet don’t know that. So the only way to handle that risk-profit relationship is to have a portfolio. And roughly 15 to 20 companies starts to sufficient to equalize the risk-return profit model. So that’s quite relevant.

Investment criteria, it’s very similar, obviously, that Samuli has there. But maybe looking from my perspective it’s the market size. And you have to have the actual problem that somebody’s willing to pay and early attraction is a good proof of that. Then you have to have a team that can grow like Samuli mentioned. In early companies it’s very different kind of a company than it will be already in two years from this moment. Because if you triple your revenue two years in a row you’re basically a tenfold company in couple of years. And it’s a massive change for the company and the team and so forth. So ability to scale the business model is difficult but ability to scale the people, their mindset, their way of working, it’s much more difficult. So having a background and experience in the business world or former companies is quite a king maker in this case.

And otherwise, of course, the same logic of being able to grow company in that market space and having that same kind of defensibility in the business is quite critical. Because it doesn’t make sense to bring new innovation and make it a profitable great company and then comes the competition and wipes the floor with you. So you have to have some kind of edge there to protect your business. But I think there’s a fairly common understanding that the team is the key to any success. Because a B level idea with an A level team will be a successful company but other way round it won’t be. And quite often if the team can make a great product and great company initially, they probably can, if there are problems do so called pivot to turn the business around and make new a innovation. So the teams can innovate business but business can’t innovate people.

Samuli Leppänen: I think it’s also important, we’re talking now from the investor side of things, angel or VC. But personally, try to have an entrepreneurial mindset in everything, even when investing. So it’s important for the founder to always have, as well, some sort of own criteria regarding investors as well. So all investors are different. Some people, some firms, they are value-adding, some not so much. Some have different specific set of skills and different criteria as well. Not everyone has the same criteria as us.

And it’s very important, of course it’s good to be educated regarding what investors usually look at. But it’s never wrong to try to find out really if that partner is right for you. Are your interests aligned, are you a founder who’s looking to grow super fast. ‘Cause if you’re talking with an investor who needs a high-growth company but you’re looking maybe at a different way of pursuing your entrepreneurial goals there’s a mitchmatch there. And at the end of the day, an investor becomes an owner in your company. So is it a couple of percentage points with smaller angel investor tickets or big VC investments that we might do and all the way up to 25 percent? They became a big owner, part owner in the company. The best you can do is find the right partner. And that applies to us when we look at founders and applies to founders when they look at investors as well.

Namrata Sethi: What would be your ideal investment opportunity?

Teemu Varpanen: Maybe I go first. Looking purely from my personal space, it’s a B2B SaaS company with early revenue, low evaluation, cheap, right? That has a great team that has experience in that area. And they are addressing a market that is global. And they have defensible, like we talked before, product solution, market-fit kind of a (thing) there. And they are hungry and able to grow that market to a bigger scale. When we are talking about Finland as a country and market, this is basically a polar swamp in the corner of Europe. So it’s not relevant market at all. And the most critical part for any business to go successful from Finland, they have to go abroad. And ability to do that first leap and have those so called foreign customers is one major success factor. But B2B SaaS company with a good traction and great team.

Samuli Leppänen: Yea, probably a lot of overlapping things and maybe talking about the investment criterias which basically always need to be fulfilled. But maybe couple of points just regarding the team. You cannot stress it enough that there has to be some specific aspect about the team which makes it probable. Or at least there’s a great potential for it to realize its vision. So it can be a serial entrepreneur, it can be a team with a diverse set of domain knowledge. It can be a very young team but so that they have attachments to the entrepreneur community and they’ve seen how things should be done. And are super, super hungry and they’ve identified an exceptional place.

Of course in an ideal case, you look at a company who has some sort of traction already and there’s evidence that the business model could be scalable. You can easily write that on a spreadsheet. Just model the customers that you can really easily name and the number of end clients within that organization on paper. And when you discuss with the team it feels like when you invest this money there’s a clear path where that money should be used. And at the end of the day, the point is to grow the business and fund the business, grow it faster with the investment money. And when you have this scalable model with traction it makes it very attractive. And of course, we want to do good as well. Looking at later things we’ve done and which is relevant, a climate tech investment would be great, a diverse founding team, we don’t see enough of those. All these would make an investment opportunity even better.

Namrata Sethi: And what startups shouldn’t do when they’re approaching you?

Samuli Leppänen: What they shouldn’t do? Three things come to mind. Number one, is it now that it’s been with the Zoom meetings maybe and seeing people in person, physically. Hopefully we get more of those as the spring goes along. The pitch, the presentation to the investors, whatever you do, how you interact. It cannot be too rehearsed, it cannot be too planned. Because the investor will always ask specific questions, try to really drill down and find holes in the business model. And try to understand what the founders are like, what’s their story, how the business was built initially. How ambitious are they, what’s the excitement and passion level there regarding the business, and the will to be it in the long term. I find it’s very hard to rehearse that stuff. If your passion is about your project you will know how to present it. Of course some people are worse at storytelling and presenting but those skills will come along when you do it more. But what holds you back is if you’re too rigid and keep the same story and are very inflexible. That’s one.

Number two is don’t rush it, don’t have a specific timetable in mind. You don’t want the entrepreneur to set a definite timetable for investor. “Within two weeks we get the interested parties”, “within weeks two to six we receive offers and then we close”. No, that’s not what we want at least. We want to get to know the founder. It can happen within a week but there’s a lot of discussions, a lot of hours spent with the entrepreneurs. As I said before, you’re giving a big chunk of ownership and you become partners. You want to know that your vision is aligned and you get along with each other and you’re able to really direct with the feedback and what not.

Maybe the worst one, perhaps, is that a founder thinks about the exit already at the early stages of a company. Of course for an investor there is an exit moment in time. But when we’re talking about an early-stage company that’s still learning to be an entrepreneur or building a product, finding the customers, trying to understand how to recruit the right people. There are so many challenges that if you’re thinking about cashing in already, and even worse, saying that you’ll do it within a couple of years, I’m planning for it. That’s a red flag, that’s never good. You want those that are passionate about the product and building a business, not those that are thinking too much about money already in the first place.

Teemu Varpanen: From the angel perspective and talking a bit about the numbers. When I’m actively looking for new companies I go maybe 500-ish companies through a year. Some of them very lightly and some of them I spend days with, and I invest in about 2 to 3 percent. So that means that most of companies I want to invest (that) come to me, and the team and the company have to stand out quite way high from the crowd. There are probably companies that have been great but have not been able to present them well enough. And it’s kind of depressing if a startup company or a team approaches an investor and they haven’t done their homework. So if as an investor I can spend five minutes on Google to find what are the key elements in a good pitch, what things should I have there and so forth. If I can do that in five minutes and the team hasn’t spent that five minutes then it’s a signal that they are completely unprofessional or they are very arrogant or they don’t have any skills at all to grow the company. Because if they can’t do that how on earth could they handle the next two years of the rollercoaster ride. That’s not going to happen.

So do your homework, then do them again, practice with your dog and with your wife and your mother and whatever. And after you have done that twenty times then come to the angels and so forth. And learn from the others and pitch, pitch, pitch, pitch. When you have done it a few dozen times then it’s almost good and you can start working on it really. So practice and do your homework.

And kind of related to that. It’s quite easy to build a model for yourself that what is the value of the company, how much money do you need. And it’s quite important that what do you need the money for, where are you going to be after that funding round. Because already when applying for the pre-seed funding you have to think at least the next stage and even the stage coming after that. So you have a plan that is viable and you don’t kill the company funding and the team with the initial funding round. And I think one of the typical mistakes for the team, hopefully not typical but I see those that at the first investment round they give out too much equity from the company. So the team should retain control and a large enough portion of the shares, the huge majority so that they can be funded further on. I think Samuli could go on for days about this. [chuckle] But they should have a significant or sufficient ownership so that they can be funded in the future as well. So you have to (build a track) and this is just a first step. So homework, homework, homework.

Namrata Sethi: And pitching?

Teemu Varpanen: Pitching, yea. But practice it, with the dog.

Namrata Sethi: [laughs] And what kind of role equity investors typically take after investment? Like mentoring or board work or introductions?

Samuli Leppänen: As I mentioned, board work is more often than not a part of what we do as a venture capital firm. So when you’re on the board the board is responsible for basically guiding the team, guiding the CEO and looking after the interests of share holders which an investor always is. It’s the best position to be in and to get all the possible information about the business. But specific to of course us being an early-stage investor, and what I’m sure Teemu will continue on, is that you’re very close to the founder right from the getgo after the investment. So hopefully the founder wants an investor that can help him or her with specific things. And this is what we want as well and want to invest in the cases where we bring value. Is it a specific industry, is it a specific stage of the business, maybe the potential connections with the best possible recruiting channels or key people or investors. Just being very, very close to the founder and being his or her closest advisor.

I think I said it before but for us it’s about having a founder mindset in everything we do. Even though we are VC investors and there’s specific things involved in being an investor, you have to look specifically just from that point of view, our mindset is very entrepreneurial. And that means being close to the founder. We don’t have an operative role because we are not an employee but we’re an investor. So there’s a lot of strategic advise. Is it board work or away from the board meetings is a super, super important one when building a business.

Teemu Varpanen: I guess kind of similar stuff that Samuli has there. So the board position is I think the typical position to be in. And looking as an angel group, the syndicate does the investments, it’s typically the lead angel running the show that takes the board position. And there can be one or two angels supporting otherwise the company with their knowledge and so on. If it’s a balanced network you don’t have to be in the board of every investment of the company that you make. Sometimes you can be but you want to distribute the workload as well. So for example, me having 16 companies, I’m active in 3 to 4-ish and I spend about 20 hours a week on those companies. And there are days that I spend 20 hours a day on a company. [laughs] But hopefully that’s kind of a exception. So helping to go on with the company. And in some companies I am in contact with them several times a week, and with some companies once a month or something like that. It varies quite a bit.

Samuli Leppänen: Yea. It’s good to recognize the vast amount of knowledge and experience the best investors have. So like Teemu said, a lot of cases, a lot of experience. We have made approximately a 100 investments as well with a lot of active companies and great success stories. It’s perhaps not only what we’ve learned as investors but there’s a lot of this intuitive knowledge there. And of course, a great pool of other founders and connections to be made within the ecosystem. It’s not all about the connections but I’d say that the journey, there’s so many unknowns ahead that you really want to surround yourself with people who can share those experiences.

Teemu Varpanen: Maybe I can supplement on that, riding on Samuli’s note there. Having several companies, it’s quite valuable to connect the teams to each other so they can learn from their successes and of course the mistakes and speed up the things quite a bit. So reusing the experiences and the connections and the solutions in other companies. It can be a massive help.

Samuli Leppänen: Exactly. We can talk about this a lot. But is it the board work or the connections to specific angel investors or the knowledge of the investor itself, the strategic aspect is very important. Because being a founder, being an entrepreneur, you have so many things on your table that it’s very hard to maybe lose your focus, lose the sense of direction where you should be going, how to spend that money, look at the bigger picture of things. You need this advisor in the majority of ventures at least.

Namrata Sethi: Now this brings us to the last question. What advice would you give to an entrepreneur in five words?

Samuli Leppänen: Five words? Focus, learn and recruit well. That’s five words, I think. Focus is so important. Even a lot of experienced entrepreneurs say that how tough that is. Because basically you’re facing an uphill battle against potential competitors that have superior resources to yourself. You have so many unknowns, you’re still learning. So when you do the things you need to know how to focus on specific things within all that chaos that’s going on. Because if you can’t do that you’re doing a hundred things but you’re not doing even one of them well enough. So learning to focus and what skills are required, that’s super important. That’s gonna take time, of course. Learning from those mistakes because you will make mistakes when you’re an entrepreneur. Assuming you’re the correct entrepreneur who takes risks it’s trial and error. So you just have to learn from them quickly. If you can iterate even quicker, all the better.

And then recruiting well, is it partnering up with a right founder right from the getgo, recruiting the first employees, the next set of employees. Take the time there, it’s the hardest aspect probably. HR is super hard and the majority of startups struggle with that. Luckily we have a great pool of talent in Finland currently who’s even more interested than before to be working in startups. So there’s a great market there. And of course sometimes you have to do some additional work to get the person you want in the team. But what is for certain is that if you make your decisions perhaps too quickly without proper background checks and without knowing the person it will backfire more often than not. So find the right people, definitely. The team is everything.

Teemu Varpanen: This was quite hard. I was thinking that maybe to most relevant advice is that do not become a startup entrepreneur because that’s crazy stuff. But if you’re already on that path or you are committed then I think learn, execute, team up, be nice and learn. Because when you dive into this mud pool of doing this stuff you instantly realize that you don’t know anything. And when you have learnt enough then you realize that you were right, you didn’t know anything. So it’s constant learning and it’s very hard learning curve. So you have to execute, do stuff, learn new things and repeat the vicious cycle of that. So learning is critical.

And in connection to that, you should be coachable. So you should be able to take other people’s advice without feeling bad about it, that’s a super power. And team up. Nobody is a superhero, everybody needs a team around them. And they need to be aligned and have the same values to minimize the friction. You can’t remove it but you can minimize it. So you have to build a team and think beforehand what kind of a team and what kind of people do you want. But you need them, that’s for sure. And related to that, be nice. So if you are, I will use the word asshole because Elon Musk uses it. So nobody wants to work with those. If you are a nice person it’s so much easier to connect to new team members, the funding parties and everybody else. So be respectful, give back and be polite and so forth. And of course, it is business, it’s not a hobby. So execute, get results and then execute some more. And when you are through that you come back to the learning. Because when you go through that you realize that you have to do all of those, you don’t know them, you have to learn them. And you have mastered that in 6 to 18 months you have to learn it all over again because the setup has changed.

Namrata Sethi: It’s a round cycle.

Teemu Varpanen: It is. And it’s a vicious cycle. But it also can be the greatest thing that you ever did.

Samuli Leppänen: Exactly. I guess this is not advice but what all entrepreneurs really should have, they should have the most curious mindset possible. Because it’s gonna be trial and error, it’s gonna be about learning, doing stuff on your own that you never thought you would be doing. The more you are curious the better and you’ll conquer these challenges much more easier.

Teemu Varpanen: Yea, and have no fear.

Namrata Sethi: True. Thank you so much for joining us and sharing these insights.

Teemu Varpanen: Privilege.

Samuli Leppänen: Great to be here.

Teemu Varpanen: Yea, thanks.