Having heard that Vntrs is looking to invest in Latvian startups and considering an outpost in Riga too, Lelde Beņķe caught up with Kristaps to chat about the 'sweat equity' model, observations on the regional startup and investment scene, and Latvia’s strengths, weaknesses and untapped potential.
The concept of sweat equity – investing labour not capital – is not that widely known in the region. Tell us how it works for Vntrs.
The idea is that startups need capital and advice, so we form syndicates with other angels or investors. When we started seven years ago in Sweden, this was unusual. But there are certain similarities with accelerators that invest in startups who take part in their programmes.
Founders vary. Some are serial entrepreneurs who have a clear idea of what to do, but others don’t have that experience. We match well with founders who are experts in their field, like doctors or lawyers – people who have knowledge that others don’t, who know how to solve a problem but don’t know how to build a startup. Our model works well in these cases.
If I look back to when we made our first investments, we didn’t really know what we were doing. We had an idea but didn’t know all the steps and what would happen later. We’ve learned a lot. The initial challenge was getting companies on board.
Now, we’ve made over 30 investments in Sweden. You could say that we’ve grown to become the biggest player. We have a strong brand.
How do the partnerships work and how long do they usually last?
Let me give you an example. We can help build a product. But it’s not like you can come to us and say “I want this” and we build it. If you have an idea, say, software or a platform, we look at what you have to prove to get it to the next stage. Ideally, you have to do most of the work yourself but there will be things you can’t do.
We’ve built a team of tech specialists, growth hackers, UX and UI designers, product owners and investment managers. Together, we build the product. The founders work with us, and that’s when we invest our sweat equity.
After that, in the ideal scenario, we follow up with Veq, which is our seed fund. If a startup succeeds in commercialising an idea and proving metrics, Veq could be the next step. Tickets of 500 000 euros are the sweet spot. At that stage, you should be recruiting your own team and focusing on the road map in the long term.
In my experience, the final product is usually very different to what it was in the beginning. I think around 95% of the startups we’ve invested in pitched a different idea to what they have now.
Flexibility and knowledge from others are important to be able to work iteratively and find the right product to solve the problem people are willing to pay money or time for. Once you’ve found what is sometimes called product market fit, when you see customers starting to appear and you don’t even understand what’s going on anymore because things are working – that’s when you should start to phase out Vntrs.
You should be building your own team because you now know that this is your product and these are the features that your clients want. Then you need capital to recruit people and build a long-term team.
We can help from a very early stage to the point when a company can call itself a scaleup. Each case is different. Some startups have gotten further and want to develop a new business area, which is basically like a new startup within a scaleup. We can work well with those too. Situations vary but we usually work with the early stage to seed stage.
What do you look for in the startups that you invest in?
The team is very important. If you asked someone on the street, many would say that the idea is key but it’s the other way around. The idea is 1% and execution is 99%. As I said, the idea often changes with time until you find product market fit. So, if I have to choose between idea and team, or team and idea, I will definitely go for team and idea. Because the team will be able to improve the idea and find the product. But to find the right team is challenging.
It’s very important for people to be humble and aware of their challenges and abilities, and not to believe that they’re capable of everything because they aren’t. They should know how to prioritise their work and time and practical aspects. Also, the team should not depend on just one person. That can happen but it’s a huge risk because so many things can occur, like illness.
Teams should be diverse. Not just because we want the world to be more diverse, but because we see great value in it. Startups with a diverse team are more able to understand different perspectives, which will be vital at a later stage when they’re growing. So different backgrounds and personalities. And the team should have a healthy dynamic.
Those are things that we notice when working together in the Vntrs studio, and they’re important if we want to invest. If three people are each going in a different direction, you’ll never get further. You need a good culture and team dynamics.
We don’t invest in unethical businesses. We like the win-win between a commercial idea with potential that also creates a positive impact on people or the planet. Something that adds value and improves things in the world.
If you invest in a business, you invest in a person. It’s like marriage. You need to be able to get along and work together in the long term. If you don’t work together well, you’re in for a constant headache.
Why did you choose Estonia for your first office in the Baltic states?
We hired someone to evaluate the ecosystems and found that Estonia was the furthest advanced in this sector. It’s home to more startups but also – once many ex-founders and ex-employees have bought their first car and big house, they start to invest in other startups and give back to the system – they inspire and support the next generation of founders.
These things are happening in Latvia as well but my feeling is that we’re about five years behind our northern neighbours. Latvia just needs more time. It has several startups with big potential that will grow, and this will create the same ripple effect that it did in Estonia.
What do you see as Latvia’s strengths and weaknesses?
Latvians love to complain about things being bad in Latvia but I’d like to argue the opposite. I’d say that the state does a lot but people might not know about it.
PR and marketing is the weak spot. Latvia hasn’t succeeded in building the strong brand that Estonia has. The startup laws themselves are favourable. Support programmes exist, and the Investment and Development Agency of Latvia (LIAA) and Altum [the state-owned development finance institution], are planning more. In that way, I’d say Latvia is an ideal place. It has the talent and the universities. It’s hard to find anything bad to say.
Estonia is very advanced on a global scale. However, compared to other countries in Southern Europe, for example, Latvia too is very advanced in terms of the startup sector. Things will only improve with time.
That might be the stereotypical Latvian way – we’re not that good at talking and PR. We’re doers. But, realistically, global thinking calls for both.
Certain structural challenges also affect startups, like demographics. Birth rates are too low and people are moving away, which isn’t fostering Latvia’s economic growth.
I also find that Latvia is not a low-cost country in tech. Neither is Estonia. I feel that some people in Sweden think that they are but, realistically, salaries for senior developers are only slightly lower in the Baltics. Obviously, the difference in salaries for shop assistants and other professions is bigger.
Why haven’t you invested in any Latvian startups yet?
The Vntrs brand isn’t yet well known and sweat equity is new in Latvia, so we haven’t had a strong deal flow yet. However, I’ve now met several startups through the Latvian Business Angel Network and the LIAA side event at Slush. Things are happening.
As you look ahead to opening a possible third office in Latvia, you must be thinking about recruitment. What kind of people work for Vntrs, and what makes the studio an interesting employer?
We are aiming to recruit people. Everyone who works at Vntrs invests part of their salary into our fund, which invests in the startups. In this way, we ensure that everyone who works for us is incentivised in the startups, too.
I imagine that it might be difficult to hire senior programmers or product owners in Latvia because people aren’t used to investing money. I feel it in Estonia, too. People are used to getting their salary and putting it in the bank only for inflation to eat it all up. The average level of financial literacy in the Baltics is quite low.
Our value proposition is – we scout people who might be ready to go for a CTO position in a startup where they would likely work for a low salary but get employee stock options. If that startup ends up like Spotify or Printful, that’s a great deal but… With our model, you get a market salary but invest part of it in a multi-asset fund. Of course, that means dilution. You won’t become a millionaire if one of them turns out to be a success, but you’ll get a good return and you won’t take on as much risk.
This is great for people with families or mortgages. That’s our sweet spot. We need a specific type of person. The stereotype is that many programmers value remote work and challenging technical problems, however, in our setting we need people who are interested in solving the business problems using technology and love to engage with the founders on-site to create a strong dynamic. We want people to be more emotionally involved in the product they’re working with and to be ready to invest in the idea.
That could be a challenge in Latvia and was in Estonia but I believe that’s how we’ll find great people for us who’ll go on to become founders themselves. They’ll learn a lot about startups and funding.
I’ve worked a lot with classic outsourcing. I feel like too many people in Latvia focus on the “Latvia is the land of cheap labour” angle but that’s not a great way to pitch Latvia because there will always be cheaper countries. Then they argue that Latvia is closer.
Speaking of outsourcing and tech, this is one of the reasons why we founded Vntrs. If you are, say, a major bank, then it makes sense to open a shared services centre in the Baltics because you have a clear road map and specific things that need to be done. In that case, the staff costs really are lower. But if you have a startup, it’s very important for your team to be properly incentivised.
I learned this with my first startup. You land your first client, which is great but they say “I need this, this and this” and you haven’t even thought about it. The client is so important that you need to make the changes. If, at that point, you’re outsourced, and they don’t understand the product, the risk of having to go back to square one is big. In some situations, if the outsourcing company is only incentivised by invoices, they might focus on growing the scope rather than decreasing the complexity. With the sweat equity model, however, everyone has an incentive in that the startup actually succeeds with its business.
The bigger the project grows, the more we want to find an easy way to solve the problem, so that the startup can attract the next round and recruit its own people. We don’t want to grow a project if there’s no particular demand. That’s key. I get reminded of this all the time.
We recently had an electrician installing some wiring at home. He asked how I wanted it, so I said “I don’t know but what would you do if this was your home?” Some people don’t want to make any suggestions or take on any responsibility. This is what we want to tackle with the sweat equity model. We want people to think like “what would I do if this was my startup”, not “I will just execute the task set by the founder who themself doesn’t know what we need.”
For Latvia to grow, it needs to move away from the mindset of “we can do what others can for less money” and the situation, in which other parties determine how things should be done and the cheap labour just takes care of it. We need to foster our own creative abilities and businesses for the brains to stay in Latvia and the country to develop.
Obviously, nothing is black and white. It is good that such service centres exist and provide work but homegrown startups working from here and exporting are vital.
How has the current geopolitical climate affected investing and the sweat equity model in particular?
We saw that in Sweden, maybe not so much in Latvia, when it was previously “relatively easy” to get your hands on capital, many startups emerged with a lot of money. Investors focused on traction. This led to being able to throw money at any problem. I’m exaggerating but many of these scaleups have a culture of perks, high salaries and an aggressive growth strategy.
Now, investors have changed their focus to profitability. They want to see the runways being extended or companies being able to sustain themselves without external financing. For those scaleups it’s like a Titanic situation – you have to suddenly change the culture and commitments to something else than everyone signed up for. If you were the manager at a company like that and you were told you had to let go of 20% of your team, take the perks away from everyone else and announce that the next five years will be all about the grind, not growth, to reach profitability, then the team will feel like you’ve been lying to them. You’ll struggle to regain their trust. I think the startups that had it good in those years will struggle.
At Vntrs, we’ve always been more focused on validating the idea fast to see whether customers are ready to pay for it. It’s less like the American way of thinking that the money will come with the IPO and that it’s important to grow, grow, grow. Our strategy has paid off in these times but I’m humble to say that we don’t yet know how things will look in five years from now. Many startups don’t have a lot of money and can’t afford to recruit people, so our model appeals to them.
There is one particular category – medium to large startups – which were focusing on one thing but now the investors have changed their perspective and so they’re struggling to adapt. We can help them reach profitability via the sweat equity model. This involves working with data, analysing and prioritising. Our model is a lot more attractive now.
This “vintage” of startups, born in these tough times, will be one of the best if you look at the long term.
Lately, a lot of seed stage funds have focused on the Nordics, Baltics or Europe. Many record funds were created recently, and the way they work is that they need to invest the capital within a certain amount of time. This means that the money hasn’t disappeared, and the strong startups will get it but investors are avoiding startups whose path to profitability isn’t clear and who you can tell will need a lot of money pumped into them.
Have you noticed any cultural differences to keep in mind when doing business with other Baltic and Nordic countries?
Every Nordic country has its differences. The Finns, Estonians and Latvians are more similar in that they’re more direct. Swedes are more polite. I’m more used to the Swedish ways since I grew up here.
In Sweden, we have a more obvious culture of consensus. For me as a CEO, it’s important to get people’s approval in a meeting, so that I feel that everyone gets the point and is on board. In the Baltics, however, I feel that it’s more a case of “if Kristaps has spoken, then that’s how it is.” I’m exaggerating, but I do feel that people are more likely to say something only if they disagree with you.
The Danes are a bit more into bargaining. Estonians and Latvians will accept the price you offer. Well, you can always bargain, but it happens more openly elsewhere.
In addition to your work at Vntrs, you’re involved in the Mastercard Lighthouse Massiv programme, designed to help fintech, social impact and sustainability-focused startups scale through partnerships. Why is that important to you?
I believe that there is a huge need for entrepreneurs to engage in solving some of the biggest problems we face on Earth. The way I see it, the truly sustainable models are not dependent on external financing, but can sustain themselves by having a strong commercial model in addition to their positive impact.
The EU is working on regulations that will create new requirements, mostly for financial institutions but also major companies, and smart solutions are emerging. This could be a cool niche for Latvia. Ideas related to energy and tech with the potential to improve the planet and be commercialised.
Latvian startups can apply to Lighthouse. It’s often the startups whose clients could include banks that get the most support.
How and where can Latvian startups reach you?
I’ll be at TechChill and Latitude59 but you can also just reach out. Even though I’m often quite busy, I’ll get back to you eventually and have an extra big heart for Latvian founders who I want to help on their journey.
We work the same as most VCs. The first step in our process is to get to know the founders and the idea. We discuss how we might work together and then run a workshop during which we challenge the startup idea to see whether it will work, how far they’ve come and how we could help. Last but not least, the startups pitch to our investment committee, which makes the final decision.
This interview was originally published by Labs of Latvia and is reproduced by kind permission.