Gerri Kodres: "Science-based startups could be the next growth engine for Estonia"

Gerri Kodres is the co-founder of the venture capital fund United Angels VC and an angel investor who has invested in around 40 startups, including Bolt, Veriff, Monese, Starship and Comodule. He started investing in startups in 2012 while working in the mobile payments company Fortumo but made his first stock investments already as a university student. In 2019, Gerri earned the title of “The Investor of the Year” from the Estonian startup community.
In his interview, Gerri shares what qualities are keys to becoming a good investor, what makes a startup attractive in the investors’ eyes, and which sector he bets on to become the next growth engine for Estonia and the whole region in the next 10-15 years.

This interview was conducted by Kristel Kont, a member of the sTARTUp Day Marketing & PR team.

Let’s start with the basics. How would you explain investing to someone unfamiliar with the concept?

I’d start with saving and the fact that you first need to save in order to invest. Once you have resources, investing them gives you the ability to grow them over time. The key here is time and a systematic approach.

As to startup investing, then the investor’s role is much more active here compared to, for instance, stock investing. In addition to money, most young founders also need the know-how to get their business off the ground, and a good startup investor usually has both. As an early phase startup investor, you can’t just pick a company and sit on it, you need to contribute more actively for the company to succeed.

Startup investing is a two-way process which is what makes it so exciting and emotionally rewarding. You continually learn from the startups as well as feel you contribute to something that is perhaps going to make the world a better place.

What qualities are necessary to become a good investor?

I’d say patience and a systematic approach. Often, stock investors try to predict what is going to happen to a certain stock in the short term and act accordingly. However, in the long run, the average investor can rarely beat the market when speculating. You are much more likely to achieve success by setting aside some money on a monthly or quarterly basis and investing it without even trying that much to predict what is going to happen in the market.

As a startup investor, patience is even more important because the average time to exit is 7–10 years. It might be impossible to exit the company before that, even if you wanted to. Also, looking at the winners in my portfolio, in most cases, it was unclear during their first years, whether they would survive in the first place, not to speak of how big they would grow.
Besides personality traits, an investor’s reputation in the startup community is crucial for accessing good deals.
You can never take advantage of the entrepreneur. And even if you don’t invest at the moment, it’s important how you say “no”. A good investor tries to provide value even in those cases by offering feedback or making intros to other people.

What was your very first investment? What made you take up investing in startups?

I bought some local bank stocks in 1997 for my student loan. I was studying at the Stockholm School of Economics in Riga, which filled in the theory and made me understand why certain things happened the way they did.

After graduation, I worked in sales and business development in technology companies Reach-U and Fortumo. In the early 2010s, when more and more startups started to spring up, I discovered that often their founders had good tech backgrounds but lacked business development experience. I began to advise the startups and found that besides advice, they also needed money. Back then, there were almost no angel investors in Estonia.

I, and my friend Riivo Anton, made our first investments in startups around 2012–2013. From the first three investments made in that period, Cloutex went bankrupt, VitalFields was sold to Monsanto after four years, and Monese has raised B-round and become a very successful company by now. So, already the first three startups showed us a full range of possible outcomes.

In 2017, you founded one of the first local VC funds with Riivo Anton and Indrek Kasela. How was United Angels VC born?

By that time, I felt I wanted to turn investing into a full-time profession, which would also enable me to provide more assistance to the startups. Additionally, it had become clear that for success, you need to do follow-up investments in the winners of your portfolio, which requires more funds than an angel investor typically has.

To date, United Angels VC has invested in over 20 companies. Estonia and our region more broadly have been a great place for investments, particularly in the past 4–5 years. First of all, past success stories have got the momentum going in the community, and thanks to this snowball effect, we have plenty of inspiring founders and high-quality startups here. Secondly, geographically and culturally close investors are crucial in the early stage. Foreign funds that invest here also often want to have some local investors on board who know the local circumstances and community.
As an organization, we strive to be founder-friendly and lean ‒ cut the red tape and take decisions quickly whenever possible. We see that the founders appreciate that.

What typical mistakes do you see founders commit when seeking investments and how to avoid them?

One mistake I’ve observed is not thinking through what sets you apart from the competitors. After all, most business ideas are not super original, and that’s perfectly fine. But you must know how your implementation and approach are different from the others. And be able to explain it convincingly.

VCs often say they primarily invest in the team rather than the idea. What does it actually mean?

First, there are the hard facts. Does the startup have a sole founder or several co-founders? The latter is always better. Has the team already worked together previously? If not, there’s a greater risk of them falling apart as a result of some conflict. On the other hand, if the founders have worked together for 3–5 years, the risk is considerably lower.

Then, how well the team knows the industry, they’re seeking to change. The best option is if the team has left an already successful tech company where they were solving a specific problem and now want to do the same for all the companies in their sector.

It’s also important to observe how you click with the team. Do you feel like working with these guys, and do they feel like working with you? Such personal validation is necessary as your collaboration may last up to 10 years.

Finally, of course, there’s also some intuition involved. One mental exercise to illustrate how intuition works is to imagine the founder leading the company once it’s grown to 100 or 500 employees. Can you picture them in that role?

What have been your biggest lessons and successes as an investor?

I don’t consider it a failure if a startup goes out of business because some business risks materialize. In the startup world, it’s common, and nobody blames the founders or themselves for investing in the company in such cases. Failures have rather been those instances where I’ve misjudged the founder or team and haven’t recognized in time that our work philosophy and ethics don’t match. Luckily such cases have been very few.

As to the biggest successes, then these have been the cases where I’ve had the luck and wisdom to recognize excellent founders early on and invest ‒ sometimes even before there was a product yet ‒ in companies that have become very big. From our portfolio, I’d perhaps highlight Veriff, Monese, and Comodule. In all these cases, the founders’ ability to engage others in their vision was powerful already in the early stage.

So, while I previously listed the components of an ideal team, sometimes you encounter founders who do not meet these criteria but are so inspiring you nevertheless believe their vision and invest in a situation where there is nothing else yet.

What sectors are currently on your radar where you see the great potential?

I think that the science-based sector could be the next growth engine for the local startup ecosystem and, in fact, for the whole Estonian and regional economy over the next 10–15 years. I also feel personally motivated to contribute to the advancement of companies in this sector as an adviser and investor.

When we think of the success stories that have come out of Estonia so far, these have not been super complicated on the technology level. Almost all our unicorns have been Internet-based platforms whose competitive edge has been their business model or strong execution. After the software-based success stories, companies combining hardware with software started to appear, where the level of complexity is already somewhat higher. Several successful examples have emerged in this sector over the past 4–5 years, such as Comodule, Starship, Cleveron, Bolt’s scooter business, etc.

Yet the next level is science or R&D-based startups, which require a lot more time and money to bring a product to the market. Success in this sector requires entrepreneurs and employees with a specific skillset, investors with enough resources and patience, as well as support systems.
Before a strong R&D-based startup sector can emerge in Estonia, all the components of the ecosystem need to be at an advanced level. Recently, I’ve observed very positive developments here.
When some entrepreneurs with a research background sent us their business plan a few years ago, these explained in detail the technical or scientific framework of their achievement but barely touched upon how to turn it into a product and business. However, last year we started to see many entrepreneurs with a research background who also had the right entrepreneurial mindset. With United Angels VC, we’ve also made our first investments in this sector.

For a sector to take off, it needs to have a first big success story or champion, like we once had Skype as a catalyst for the whole startup sector. We’ve had such examples in the software business for a long time, and in recent years, they’ve also emerged in the hardware combined with the software segment. Now there are first champions also in the science-based sector, such as Skeleton Technologies. If such a role model comes forth, all the prerequisites are there for the experiment to take off.

What has made this shift possible?

I feel there are several reasons. First of all, universities are focusing much more on the business side in their technical curricula compared to even a few years ago. University programs and collaboration with the private sector have strengthened. As a result, scientists see that becoming an entrepreneur could be one of their preferred career paths, where they could change the world quite a bit.

On the other hand, the state has done its part. Just like 10 years ago, the state contributed to the development of the startup ecosystem by creating SmartCap. Back then, the state only made an investment when it was matched with private investment, which encouraged the emergence of early stage investors. Similarly, state programs and initiatives now play a crucial role in getting the ball rolling in the science-based sector.

The past year has been a good time for reading. What books do you recommend to novice investors or entrepreneurs?

The books by Ben Horowitz are valuable for both founders and investors. I’d certainly recommend his The Hard Thing About Hard Things for those who haven’t read it yet. Also the classics in this field, such as From Zero to One by Peter Thiel and The Lean Startup by Eric Ries. Once the company has already taken off, High Output Management by Andy Grove, the former CEO of Intel. It may have a dull-sounding title but is a practical manual for a tech company leader.

From company stories, The Everything Store by Brad Stone which recounts Amazon’s phenomenal journey or The Bad Blood about the downfall of Theranos. But in these complicated times, I’d also recommend boosting oneself mentally with fiction if possible.

Investor of the Month is a column focused on wise and experienced investors in the startup scene. We talk about how and why they got into investing, biggest successes and failures, mistakes founders make and so much more!
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