Karma Ventures is a venture capital fund focused on early-stage deeptech software companies in Europe, where business traction is indicating the beginnings of predictable growth. The firm is currently investing from its €100 million second fund and, being in the middle of the investment period, is actively seeking new investment opportunities. Over the past 10 years, Karma Ventures team has backed and exited a number of early-stage deeptech companies, including Pactum, BforeAI, and Druid, working closely with founders and executives.
Fund strategy overview
Geography: Europe
Preferred industries: Software
Investment ticket: €1-5M
Company stage: Series A
Product type: Software products based on strong technology innovations
Product stage: Live product in the market and used by top-tier customers
Revenues: €1M+ ARR
Q&A with Kristjan Laanemaa, Founding Partner at Karma Ventures
What are the 5 main things you look for in a startup?
- Team suitability for the mission ahead. We look for a strong fit between the team and the challenges ahead, asking if the team has all the skills needed to scale the business to the next level, and if not, then examining the plan the team has for hiring the necessary talent.
- Market size. In order to build a business that has the potential to generate the level of return expected by a VC fund, the market size needs to be large. The acceptable size differs by fund based on the chosen strategy, but for us, the market that the company can participate in with its solutions needs to be at least several billion euros.
- Technology uniqueness. As a deeptech investor, one of the first topics we think about is tech defensibility – is this unique approach or will there be a number of companies competing with similar solutions.
- Commercial validation. We look at revenue, references from leading international customers or partners and try to understand if the market has shown signs of approval to what the target company is offering.
What disqualifies a startup as your potential investment target?
Obviously, being outside our investment focus in terms of geography, stage, or business sector is a key factor. Other elements that indicate poor fit are (a) small market size that does not support a venture-scale business, (b) no or very little commercial validation, (c) slow growth, (d) low founder ownership, (e) no or little competitive advantage, and a number of other factors.
But with the latter list, the decision is a bit more nuanced. In some cases, a certain aspect can lead us to a ‘no-go’ decision, but in other cases where the same risk is present, strengths can outweigh the risk, and we may decide to make an exception, take on the risk, and target overcoming the weakness together with the company.
Ultimately, we try to understand the overall risk level of the company and see if certain strong proof points outweigh other risks.
What in your opinion differentiates the best founders from the rest?
They have a very ambitious long-term business goal for the company, an obsessive focus on reaching it, and the ability to attract top people to work with them towards the goal.
What startups should take into account before making a deal with a VC fund?
Each company that receives an investment from a venture capital fund needs to multiply its value very quickly. The typical VC fund lifetime is 10–15 years, and they invest in new companies in the first 5 years, leaving only 5–10 years before the fund needs to return the money to its investors.
So, for de-risking key aspects of the business and maturing the company to a large exit, there is not really a lot of time. This is the reason why founders who choose this path need to have a risk appetite and openness related to decisions that have the potential to help the company progress even faster, even if these decisions might drive up short-term risk. Such decisions are often related to hiring, partnerships, sales and marketing, and fundraising.
What is your approach to startup valuation and preferable share in the company?
Our target ownership is usually 15% after our initial investment, but depending on each case, we can decide differently as well. So, in reality, there is a range. The valuation discussion with the founders usually starts from the company’s investment need and looks at the valuation range that this amount, combined with the target ownership range, would result in. We then compare this value to other deals, to valuations based on different multiplier benchmarks, and to a theoretical value that would enable us to generate our target return if the company is successful and goes through multiple funding rounds.
How do you support your portfolio companies?
As we make a handful of investments each year, we can be active with all of our founders. Historically, we have been able to give the most valuable inputs to founders based on our experience with hiring for leadership teams, fundraising, and exit planning. For any of these questions, the whole investment team is available for support and assistance, as we come from various different industry backgrounds and have a diverse set of experiences.
What are the best-performing companies in your portfolio?
Based on technology value, business growth, business potential and capital raising I would highlight:
- Swedish Minut, security solution for homes and rentals,
- Finnish Wirepas, mesh communication technology for IoT
- Estonian Tuum, core banking software,
- US-Romanian Druid, conversational business process automation platform,
- Estonian Cybexer, advanced cyber range solution,
- US-French BforeAI, predictive cybersecurity solution.
What are your notable lessons learned from investments that didn’t work out as expected?
The aspect that is particularly relevant for deep-tech investments is timing. A company with very promising technology that eventually generates a lot of value can still be a bad investment if the company raises funds from investors too early or from investors with a time horizon that is too short. As noted above, most VC investors operate based on a model where fast value multiplication is key.
The initial investment starts the timer, and if the company’s or market’s maturity is not at a level from which fast value multiplication can take off, then a downward spiral of an elevated cost base (ramped up because of ‘imminent’ growth), underwhelming results, and lowered investor interest can lead to a situation where the company is not able to become a leading player, even if the space becomes very attractive eventually.
What are the hottest markets you currently look at as VC, and where do you see the biggest hype?
Although we see great opportunities from many different countries in Europe, depending on the stage and development of different ecosystems, I think several countries in the CEE and Baltic regions have the potential to generate very interesting deep-tech software investment opportunities. To me, Lithuania and Romania, for example, are worth highlighting. But I’m overall optimistic about the whole region.
In your view, what are the key trends that will shape the European VC scene in coming years?
As investors who invest in funds are now allocating less fresh capital to VC fund managers, then overall early-stage tech companies will have less capital available. But at the same time, as investors are increasingly focusing on opportunities with the best risk-return profile, there will be a lot of competition for the best deals.
