E389 | Kaari Kink (EstVCA) & Margus Uudam (Karma Ventures): Estonia’s rise as one of Europe’s most dynamic startup ecosystems

0:28Welcome back everyone to the European VCBC podcast. European ecosystem and how we can move to progress. Thank you everyone for listening in. I do love you so much for it.

0:54This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Margus, Kari, welcome to the European VC podcast. Hi. Pleasure to be here. So before we dive into this conversation about the Estonian venture capital ecosystem as well, of course, SVCA, the Estonian venture capital association, let me just ask the two of you to introduce yourself to the audience so that everyone knows exactly who they're hearing from. Sure. I'm Gari. I'm the investment manager at Super Angel. And we are a 40 million euro fund located here out of Tallinn and Stockholm, predominantly investing very early stage as the name suggests and covering the Baltics and the Nordics market.

1:43And in addition to that, I'm also the chair of SVCA. Hi, I'm Margus from Karma Ventures, one of the partners. We are a deep tech fund in, let's say, seed, late seed, A round and investing across Europe. I have been in venture industry for the last 16 years initially with Skype founding engineers and I was managing their venture portfolio that was mostly seed portfolio and global. We got a number of exits from different regions and we figured out that there is a certain type of deep tech that gets also strategic interest from quite early on. And this was the inspiration to launch Karma Ventures.

2:28And then we followed that strategy now at Karma Ventures, doing deep tech, which is attractive to acquire also in early phase. Ascari, I have been part of SVCA, I think, since beginning, when it was launched, and in total leading it for seven years. Beautiful. Maybe for the audience that is less well versed in how the different VCAs work, maybe you could just, and that's maybe you, Marcus, based on your long, long time history with SVCA. Could you maybe talk a little bit about the structure of these organizations? How do they work across Europe? What are the main bodies? What should people look at these organizations for?

3:21Most often, they are meant to develop the ecosystem in every single country. But I would say, based on experience, the VCAs are very different in their activities and also in terms of their members. Some, for example, like Sweden, is very much private equity heavy. And at the same time, for example, Estonian one is very venture capital fund. It's kind of dominant number of members are coming from venture capital. And all operate as well on a very different basis. Some are very actively doing trainings, for example, British one, and they offer it outside of UK as well. Some focus mostly lobbying with politicians.

4:10Some do a lot of networking events also across the region, across different countries, and some don't do anything at all. And I must say, VCAs, they really depend on who seems to be the chair at any point of time and who is the managing director. These two roles usually are always well covered, but where the direction is going depends on these two people a lot. Am I right that you just announced a new managing director? Yeah, we did. Congrats. Thank you. Very excited to have Marty join us. He's been a founder for a long time, and I think he takes this building, big vision and execution with him.

4:58so exciting times for SVCA. Yeah, and I think that the fact that it's a founder speaks volumes to, you know, the entrepreneurial slash VC heavy leaning in SVCA. Maybe on the European level, because Marcus, now you covered a bit what you have in the individual countries. On the European level, Is it in mass Europe that people should look to? Yes, quite often that's a key partner who helps to coordinate the policies, ecosystem development on European level and having relevant discussions with European Commission. But of course, there are some bigger VCAs are very dominant as well. that makes sense to keep relations active.

5:49And obviously, for example, EIF, who is also a dominant policymaker through their investments in Europe, is one of the very critical partners for BCAs as well. Can I ask you about why do you think we're seeing now the creation of EUAC? Then you have EU Inc, which is happening outside of Invest Europe, not really an Invest Europe initiative. And then I think you also have Index that has this powerful initiative around warrants that's kind of run out of Index and not out of BVCA or Invest Europe. Why do you think we have this, I don't know if I should call bifurcation, but at least not everything run inside these organizations?

6:38Quite often, VCAs, for example, think mainly about their own country. And there is less maybe about working on initiatives that would make European ecosystems stronger. And then for some bigger ones in West Europe, they represent so many members with so different ideas. and there is a lot coming from European Commission as a regulation that they have to pay attention to. So it is very natural and I think it's also welcoming that there are initiatives from different parties and who really take European main issues like fragmentation into their heart and want to solve it. And that's maybe even some of these institutions or funds who have initiated these new approaches it is best to do from their point of view because they operate most often all over Europe.

7:39While for one VCA who is representing, for example, Estonia mostly, it's much harder to pull pan-European initiatives. I think it's a healthy mix of ideas to be implemented to really tackle the core issues in Europe. Kari, I want to ask you a personal question. You're young. Why do you choose to lean into this policy work today? Does policy work only come with older age? I don't know. I think, you know, I've been in the ecosystem now, first as an operator, then I came over to SuperAngel, where I have been for four and a half years. and all of this is so integrated everything that we do that the policies the favorable markets for our startups to be able to operate and you know one day we all have to raise funds we all have to operate out of our local markets and attract funding here so everything goes hand in hand And to be able to get this bigger picture already early on and expose myself into these topics to understand how everything is associated, to be able to talk on a political level as well.

9:03It very much makes sense when you're having a career here and to understand how everything affects and influences in the market. plus I think all Estonians and we will dive deeper into that there's a lot of pride and a lot of willingness to make things better it comes with our DNA almost and it's like a self-fulfilling prophecy yeah I absolutely agree and maybe I made a wrong statement when I said you're young because it's more that you're now defining where do you want to play? So it's not about you being young and why would you then care about policy? I care a lot about policy and I'm very much leaning into all of this.

9:54I also consider myself somewhat young still. So no comment on that. I do, however, think that, you know, if I were asked that question, I'd say, I think we're at a very interesting point of upheaval in how policy is thought about and how you might be able to enact policy changes given the movements that we can create and the power that the individual VC firms have. Many of us have very strong platforms when it comes to mobilizing both capital, but also listeners, audience, communities. So I think that if we lean in as an ecosystem, we can do a lot. And then everyone is very obsessed about, you know, what's the future going to be?

10:39We all have seen tech being the major driver of societal change over the last long period. And if there's anyone that spent all their time daydreaming and thinking about the implications of technology, then that should probably be VC. So I think we're in a very unique position to bring something to the table. Marcus, you're nodding a bit and you have the historical perspective of also having been right at the forefront of this right from the beginning. I mean, does any, you know, the things that I'm saying, is that particular to the day and age we're in right now? Or have you always thought of it like that?

11:17Yes, I think people who tend to lead VCAs and similar type of associations or initiatives, they might have still like caring about the ecosystem as part of their heart. So and I happen to be in Minister of Finance in early days in Estonia at the time when we actually joined European Union and NATO, taking care of the whole state budget tax policy and economic policy. and having been, let's say, on the other side of the table, you might be in a very good position to understand the whole ecosystem. I think based on that experience, it also helped us to discuss how to change, for example, options taxation in Estonia.

12:04And we did it in collaboration with Minister of Finance from SDC's point of view. And it was very quickly rated as number one ecosystem by Index Ventures in the world. and then very fast a few countries copied it and really everybody should do so that's a positive trend for having less friction in Europe and maybe this is a beautiful segue into talking about the Estonian VC ecosystem and why Estonia has come to be such a unique place for startups because you obviously have the huge startup successes maybe you can just mention those and a bit of the journey there But then also talk about the frameworks, the policies that allow this to flourish.

12:49Understanding why Estonia has become such a successful hub, it's very hard to pin down this one thing that has happened, but rather a sequence of events. and what Margus mentioned before, I guess the mindset has always been also from the governmental side to have as little friction as possible for people to execute on big ideas. And already back in the time when Estonia became independent, there were a lot of really bold people and really bold missions with a lot of freedom to execute on that. So we had a lot of investment being done into our computer systems and the networks to enable people to be exposed and develop their digital skills.

13:46And of course, when Skype was founded and the whole success story and how this had a major ripple effect back then, obviously kickstarted everything. And if you look at the Atomicos report now that was just released, it's incredible that the type of success. And when we look at the per capita, which we have to do to be able to sort of compare ourselves, we are by far the most successful hub in terms of VC investments into the ecosystem and the startups that are developing from here. so that the freedom that the digital savviness to be able to launch your company in 15 minutes to be able to access computers already from a very young age to have these extremely savvy skilled people from Skype staying in the ecosystem investing back into the ecosystem starting their own companies, there's a very illustrative picture of the Skype effect only in this ecosystem.

14:59The mentality, the pride that comes with being an entrepreneur, it is very much in the Estonian's DNA, which is not necessarily the case in many ecosystems. So it's a very proud thing to have your own company. And it's, again, like a self-fulfilling prophecy. And of course, the legislative environment has been extremely favorable for our companies to grow and expand from Estonia. I very much agree, actually. We should go back to the early time of independence. And for most countries, it's hard to imagine that suddenly you reset the country, like you reset everything and you start thinking, what's your constitution?

15:53What's your business law? And so many have built laws, you know, 100 years, 200 years, law on top of law. And so was the culture. So I think that was a very defining moment. Secondly, Estonia did something very differently from most companies who got independent at the time. we decided to privatize everything very fast. And that was a very painful decision to do. Because with privatization, immediately foreign capital comes in as a positive, but restructuring happens and everything gets more efficient, which means unemployment goes up. And quite many delayed privatization a lot. So what it led to, after getting independent, quite many of our parents became entrepreneurs.

16:42because literally you had nothing and everybody had to start something from scratch. So this was a restart of the country and combined with the fact that from summertime, for example, you know, mathematics, physics, chemistry was like highly rated, highly appreciated. This led a little bit to the Skype story and the impact to the ecosystem. But having said that, I think there is certainly an element of luck. And then whatever we tried to define, I think Skype was a lucky moment for Estonia, having the main engineering hub here. This luck is needed, I think, for all ecosystems to really to kick off.

17:26Otherwise, it goes into policy measures that sometimes are half well designed and they might have good impact, they might not. But the luck will come to every country at one point of time. And many have, of course, experienced it already building strong ecosystems. I know a story very intimately of an ecosystem, I won't name them here, but where the politicians and policymakers have kind of retrofitted a great narrative around why this ecosystem came to flourish. And it almost looked inevitable that these two companies that ended up being a very large success would come to be. And then after that, you'd have a flourishing of the ecosystem.

18:10But, you know, I've more and more come to think. I think it was freak luck that there were four guys in the same university that got together. They did something incredible. Then one of them spun out. Another one came in. And that was just freak luck. And then after that, a lot of beautiful things happened, kind of like you can describe with Skype, right? It was really a huge ecosystem around or were you just really lucky that there were some entrepreneurs that caught lightning in a bottle at that time and then managed to take it further there? If you were to point to any specific policies that you would say the European ecosystem worldwide, I was about to say, across the ecosystem would do very wise to adopt or look very closely at Estonia to learn from.

19:01What would those be? We're most famous for our stock option policies as they are the most. Could you describe the core characteristics for people to know exactly why? And maybe especially in addition to that, because this is where these things often are very difficult to implement in Europe. How do you get the general public to like this idea? because most places it's considered, say what? Are we going to do something preferential for the tech billionaires? Fuck you. I think Markus can comment maybe if there was any backlash at the time when this happened. But essentially, it's a lot to do with taxation.

19:50So when the stock options are given to employees, they are not liable for any sort of taxes at the time. And especially when these are being held for three years at least. So only after that, only after you exercise your shares, you are then liable or expected to pay taxes. So a lot of that is related to how tax friendly these are. If you decide to exercise earlier than three years, even then you have like a special tax policy that applies. The strike price can be nominal value, which is like one euro. And really the taxes to be paid is at the moment of exit and nothing in between. which leads to a very healthy and working structure for options that they actually really incentivize tech talent.

20:57And it is maybe not so much about the billionaires, but people who go to study in university engineering who will join in their tech companies. It makes sense. It's incentivized. It's well done. And there was definitely, as a whole ecosystem is so tech-friendly, then there was no strong public opinion against it. I think there was no public opinion at all at the time. So I think we have gained a lot of it and it's the right way to reward the engineering and tech talent. Is this something that can ever be implemented on a European scale or can be pushed through on a European level? Or do you think this is something that will always have to happen via each individual country and thus Invest Europe, as an example, doesn't get too involved in trying to help push this agenda through throughout Europe?

21:54I think it's incredibly difficult to harmonize anything on taxation side in Europe because every single country doing their state budgets, they look at the revenue streams. Sometimes these revenue streams are attached to certain expenditure and also who are the politicians who are more tech-friendly, who are less tech-friendly maybe, that I think that tax harmonization would be excellent for Europe, but maybe one of the most impossible things to do because it so much relates to the core of every country, policy and state budgets. And there's no channel through which you would try and encourage on a pan-European level, this type of alignment?

22:42If there was, let's say, one type of startup legal structure across Europe and it would be possible to operate on the same basis, that might introduce more and more ways how to harmonize step by step. Because I think Europe has to understand that what's our competition is U.S. and what's our competition with China. And some of these changes, US and China actually being, you know, large countries can do faster. And we can do on a small country level, one do another, another one don't. It leads to nowhere. And for the whole tech ecosystem where so many politicians are worried about the tech going to US and not staying in Europe, I think it is something to really think about what can and what should be harmonized because otherwise Europe might be in a losing game from that perspective.

23:45Yeah, absolutely. These decisions are often made. So yes, some companies make them very early on their journey, but they're often made a bit later as well when they grow a bit and start having more US investors on the cap tables. What are there, because this is the constant conundrum we all talk about. how do we make the growth companies stay here? How do we make them take capital from Europe instead of the US? All these questions. How do we make them go on the European stock market instead of the US? And then anyone who has a stake in a company would say, guys, get over there. Do you have any views on how we can move past this?

24:29It's a very tricky question. From the fund point of view, for example, how we think is we should do what's best for the company. Now, what's best for the company? It's not necessarily the best for the country. And luckily, of course, it goes without saying US investors investing nowadays so much more in Europe and finding good deals. And Europe has proved that you can make good returns in here. Then quite often still, the company needs to move too close to customers. and quite often the US market is the best regarding the customers being close to them. Of course, you can keep a headquarter in Europe.

25:09And then the question is where? Where is the environment best for it? And as long as headquarters are... There is, of course, argument for IPOs and listing in the US, which is a whole separate story. But it is possible fully to keep headquarters in Europe and be close to customers in the US. However, is it easy to operate here where country by country, the bureaucracy maybe is not the best versus in some preferred places in the US? It's something that Europe has to answer. And if Europe doesn't answer, then it's a complicated wish to assume that companies will stay in Europe. It's easy to start.

25:56Like you can pick Estonia or any other country where it's easier to set up companies. It is easier to start here, to raise seed money, to be operated wherever in Europe. Business practices. We invested into one company in Tahr region to make the deal. It was six hours in notary versus digital signature. Some other countries. So I think Europe doesn't pay still enough attention what it takes to keep the companies here. And the thought is, let's build, let's establish large growth funds to keep the companies in Europe. But I don't think it's a dominant driver. It's the only dominant driver to stay in Europe.

26:45And that's not the dominant way to stay in Europe. Quite often, actually. And if you were a fully privately funded growth fund, you probably would not ask your European companies to stay in Europe. You know, because as you just said, you do what is best for the company. And oftentimes, unfortunately, there are definitely not companies or countries where it's perfectly all right to stay in Europe. But there are definitely also situations where you would say, let's move to the US. in certain circumstances a number of companies can prove that Europe is a good place to be but enterprise B2B for example it's much trickier yeah no exactly I think when you're building a B2C business or marketplace it might be a little bit easier and I guess when you look at Bolt example where Sequoia came in they haven't expanded to the US And right now, I don't think they're planning to do that either.

27:47But they have built an extremely successful business in the European and Africa and Middle East area. So when you're able to operate here and grow and the market is wide and open, you're very welcome to stay here, I think. But exactly when you go to enterprise customers, you go to B2B, very, very often you're going across the bond. I actually don't know, maybe one of you do, do the EIF money to the growth funds come with a heavy string attached on where the companies must be domiciled even later as well? I have specifically not looked into it, but the policy, if they define in that way, definitely will have impact.

28:42Just to bring an example, 2016, when we launched Karma Ventures and we were deep tech fund since beginning, there were not many deep tech funds. You went to events and deep tech was kind of rare. But EIF was very clear that a few years back they said we invest in deep tech, quantum, life sciences, climate, so on. And you could see quite quickly European landscape at events. Hey, I'm climate fund. Hey, I'm deep tech fund. Hey, I'm quantum fund. So suddenly everybody fall into the EIF buckets. So I think the question is, if Groveswans, based on any limitations, what the policymakers are setting, are able to raise from private money additional funding, and that will be the proof of the policy direction.

29:36I'll definitely do an episode on that sometime soon. That should be explored. Okay, I want to ask you something which is very pertinent to the very small ecosystem of European VCs, which is I saw a year or maybe two ago, a lot of people talking about Estonia as the place to domicile your fund. But I kind of haven't heard as much about it the last year or two. Can you talk a bit about that trend and where it is today and what was driving it? So firstly, I think it was back in 2017 that first the Investment Fund Act came to Estonia. So that was the first time, I think, when we were able to launch our funds here rather than do it in Luxembourg.

30:32And many, many funds, including super angel-like funds, are now domiciled here. I'm not sure maybe Markus can comment on whether that was also whether there was a bigger push to get foreign funds to launch here. But it's certainly for the Estonian ecosystem and for the VC and PE ecosystem. That was a very important policy or change that also SVCA was able to create so that we have locally domiciled funds. I think for most countries, it's kind of natural to have good ecosystem for funds. And I think we did also effort in that direction. Because overall, the public sector digital infrastructure supports it very well to run funds from Estonia.

31:24For a long time, there was a problem that funds over here were not transparent, which is mandatory for international investors. And then we made that change as well. However, in practice, it seemed to be the case where all type of different fund managers tried to come in. And we have here a big neighbor as well, who back in time looked where to domise their funds. And we wanted all the marketplace and the ecosystem to be clear, clean, you know. And then we discussed what would be the right ways to manage it and what would be the right restrictions. overall for a small country to become a a significant player as a domicile for funds is quite tricky in a sense that when it gets to really bigger funds the question is how stable is the legal environment how much practices or court cases have been with funds that we can learn from and understand how the legal system operates and so on it takes like 20 30 40 years to build up In that sense, for example, our fund is Tomiseld in Luxembourg.

32:35We have investors outside from Estonia and we wanted the place to be such that investors would be used to it and wouldn't have any questions what the legal environment would look like. I heard primarily also from emerging managers that were looking for a place where it was easy and it was cheap. and that matters quite a bit that rules out luxembourg and then you typically then transition to luxembourg structure when you get larger and you have the institutional investors that are really just wanting to see everything as it always is so funny to get out yeah it's super expensive but it's so funny to also get outside of venture and then talk to normal people then you talk about these luxembourg domiciliations and then they're like yeah it's fucking tax haven finance guys.

33:27You just got to do it. It's not about all these optimizations and being super capitalistic necessarily. It's just about the name of the game. That's quite interesting to always. I love being outside of venture sometimes to see what my neighbors in my little village that I live in think about our world. And they definitely don't always look at us as the way we think they would. We had this famous sketch last year for the Estonian Startup Awards and they went to the supermarket to ask and showed the pictures of literally the most famous people that we think there are in the ecosystem like Markus Willig, the CEO of Bolt.

34:17And it was a very good reality check of the bubble that we live in because quite often they have never heard or seen the people. And then if they were to guess who they were, they'd say, well, some famous influencer or hobo. Exactly. Singer. Like recent college grad. It was a great entertainment. It actually strikes a very strong nerve with me at that point exactly because I think it's one of our key challenges in the European ecosystem is how do we build champions in our ecosystem that go outside of just venture? Because if we want the support of the public, which we do need if we want to be able to have, as an example, good stock option laws, then we need to have someone who wants to champion that inside of parliament.