Kalev Kaarna: "The purpose of the first meeting with the investor is to generate interest, not to get the investment."

Kalev Kaarna is the Venture Development Manager of the Superangel investment fund. Superangel is a pre-seed and seed fund established in the spring of 2018 by entrepreneurs and investors Veljo Otsason, Rain Rannu, and Marek Kiisa. Superangel's investments start from 50 000 euros and reach up to two million euros per one company.
In the interview, Kalev talks about why he believes that until Zoom and virtual reality cannot make us experience micro-emotions and body language, and feel the energy in the room, it would still be necessary to meet people face-to-face now and then. "However, I am sure that the way we consume information and make investment decisions will change radically in the coming years."

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

Name the three essential components of a good pitch and explain why they are important. What makes a perfect pitch?

I would ask in return, what is the purpose? What do you want to achieve with your pitch, and in what phase are you with your startup? If you're in the seed phase, your investor wants to hear that your team will get things done because plan A always fails in the early phase. Investor bets on your promise that your team will figure out how to make it profitable and scalable in the end.

In Series A, the investor bets on the market traction – the market is interesting, clients want to buy, and it's easy to sell. In Series B round, the investor bets on your turnover – you can scale, have figured out how to make money and tested it, and now you have to duplicate it and open the business up in different countries so that you could grow bigger. Therefore, depending on the phase, the topics vary.

However, regardless of the phase, the investor always wants to know and understand your clever solution to the problem. For that, you need to answer the questions:
  • How big is the problem? Specifically, how big is the market, and what part of it you can target. It should be in the billions.
  • Why are you interested in solving the problem? If the problem doesn't interest you and you are only doing it for the money, you won't last long. Or if it just seems like a sexy topic – I'm doing machine learning stuff because everyone is doing it. When you run into the first problem, you won't be bothering waking up early in the morning. But if you're emotionally attached to the topic, then you're much more likely to achieve something.
  • Why you and your team? There are at least ten other teams out there in the wild, doing the same thing in quite a similar way. Why out of those ten should you be the one winning this contest? What's your edge?
  • Why now? Startups often come up with ideas that could have been achieved technologically already 10 years ago. In this case, the investor always wonders why it hasn't been done before. If you don't know how to answer that question, it means you don't know enough about the market. And that sends a signal to the investor. You have to know the trend, what has changed in the customer behavior preferences, and why now is the right time to do it.
Answers to these questions will form a story that the investor wants to hear regardless of the stage. Lates on, each phase has its nuances.

Investors mainly invest in the team, not in the idea. If you have a good team, and for some reason, the idea fails, they can pivot and take on the next idea.

Yes, it depends. There are different investors. The founder of the American startup accelerator 500 Startups has said, that he invests in awesome ideas and technical solutions. Management can be replaced, but finding a fierce technological solution and idea is difficult. That's what he believes. But mainly, in the early phase, investors invest in teams.

Speaking of the importance of the team, another good example is Bolt, who launched when Uber was already on the market. Against all odds, they're outperforming Uber in several markets. The uniqueness of an idea often determines nothing.

Reid Hoffman has spoken quite passionately about this topic. In some markets, you have the "winner takes all" attitude, and in some markets, it's actually better to be second, third, or fourth because someone has tested the waters before. There are relatively few markets where the winner takes it all because most are not like that.

In many markets, including globally, there can be a dozen players with enough market share to do something great. The search engine market is one such market where the winner takes all. Also, Facebook seems to be one of those companies, but we'll see how it goes.

What are some of the biggest mistakes that rookie founders make while pitching their startup idea? What should they avoid?

It's important to ask, what do you mean by pitching – is it from the stage, or are you on an hour-long meeting with investors? If you're pitching on the stage or during the speed-date, you need to keep in mind that your pitch's first mission isn't to get the investment but instead to generate interest. If you're contacting the investor for the first time, you are not supposed to get a letter in return, saying, "Here's some money for you!". You're supposed to get their interest in return.

However, if you're able to introduce yourself a little bit longer, then generating interest isn't the primary goal. Then you must build the trust and confidence that you will be the one who will conquer the world and make the world a better place. Therefore, it must be understood that the first contact's purpose is to generate interest, not to get the investment, and the goal of the first meetup is to start building trust.
Another mistake is the lack of energy and confidence. You may have the best pitch deck and the best mentors in the world, but if you're insecure and the investors can sense that you don't like being here, you think, that you're not good enough, then your slides won't cut it.
The investor usually uses the exclusion method. In Superangel, we receive approximately 1000 applications every year from teams who want an investment from us. Every year, we invest in ten startups. So, considering the size of our fund, we're able to invest only in 1% of them. In other words, we are not looking for why we should invest in them. It wouldn't be physically possible.

Instead, we're looking for red flags for a reason why we should renounce this investment. If the founder doesn't have the energy, confidence, or excitement, I don't believe it. My gut, the sixth sense, tells me that something is off. And then, I will start looking for rational reasons why not to invest.

The third mistake is not being aware of your business weaknesses. In Scandinavia, the investment fund byFounders even recommends that your presentation should have one ugly slide, meaning a list of things that are out of shape and risky. The aim isn't to say that we don't know what we're doing, but rather to openly point out those weak spots where the investor could step in and help.

To show where you have the most growth potential and apply investor's knowledge to build your own business.

Exactly. For example, you do not have a skilled digital marketer in your team, but the business model expects growth in this field. In other words, scaling requires a brilliant person, and it would be necessary to use a network of investors to find him/her. That is an example of an ugly slide. You need to be aware of your limits and discuss them so that the investor can help you overcome those challenges.

Have you ever encountered situations where you have already known in the middle of the pitch that it doesn't matter what they're going to say next – you need to invest in this idea?

I haven't experienced the situation where we're through the third sentence, and I'm impatiently waiting to throw my money into the ring. However, there are situations where you're listening, and all of a sudden, you get interested. You think: "Oh, this is awesome! I'd like to hear more about it!". And that's a great start!

In Superangel, we have six T's – Team, Traction, Technology, Market, Excitement, and Impact. Excitement is crucial – are your eyes shining, is it something that I want to be involved with for the years to come and help to grow it up and big? Impact, as it helps to build a world where I want my children to live.

Now, when focusing on investing in the early stages, after you've got excited and interested, you need to talk to the person more personally to understand their way of thinking. The introduction of a company is a concentrated, well-written story that often doesn't show the mentality of the founders. As an investor, it is important to understand it.

You mentioned excitement. What are the areas that excite you the most?

I certainly understand the most about the products and services for businesses and the opportunities provided by algorithms. What kind of internal reflections and at what level the information movement can be happening – that's the most exciting for me.

At the same time, I believe in my heart that machine learning is not the right solution for everything. I liked when the co-founder of Pactum, Kristjan Korjus, mentioned his experience in different startups.
He said that his role as the leading machine learning scientist is to tell the business department that it doesn't make sense to solve all tasks by applying machine learning. There are much easier ways.
Smart solutions, where technology is used to take users' capabilities or experience to a whole new level, are inspiring. The goal isn't to improve things a little bit or make it 30% cheaper. Recently, Superangel has started to look towards DeepTech startups and research teams.

There are tons of exciting, science-based things that would be hard to come up with yourself – growing cells under zero-gravity conditions – which will open up completely different ways to approach things. Another example – space radiation travels the globe anyway, but you can use it to scan cars and suitcases and understand what chemical elements they are made of. How cool is that!

Sometimes things are cool because of how they are put together. HUGO.legal is a startup in our portfolio, and they have reached the phase with their legal bots, where they can build up the bot, focusing on the specific law issue, from the ground within a day. They are using an awesome method for that, enabling them to produce those bots and make the lives a lot easier for many people. It is their great mission to make legal aid available to everyone, regardless of status or your wallet's thickness. Thankfully technology enables us to solve such social issues.

Superangel has pulled entrepreneurs out of their comfort zone when it comes to pitching. They've presented their ideas while ice drifting, skydiving and explained them to grandparents. How do you come up with such ideas?

We're coming up with those cool ideas because Superangel is looking for startup founders who are a bit like honey badgers. Watch this video and you'll understand what I mean.

Honey badger is a die-hard animal who's eating cobras. When a cobra bites him, he gets a little bit dizzy, but the poison doesn't kill him. After a while, he wakes up and carries on. He attacks animals bigger than himself, and he is not afraid of anyone or anything. He is completely fearless and badass. He doesn't care whatever gets in his way while he is looking for food – he just goes for it!

We're looking for founders who have the same attitude and ability, and that's why Superangel has a slogan – Do you have what it takes? The purpose of these pitching campaigns is to allow early-stage startups to show that they have that something in them. Whatever is needed, I'll do it!

Do you plan to continue with those pitching events in the future? What has been your craziest idea that you have not yet dared to carry out?

We will definitely continue. We plan to do those stunts twice a year. We've had many different ideas on the table, related to both heights and depths, in different fluids and environments. We're planning to continue with the same vibe, for example, we want startups to introduce themselves to first-graders. After pitching to grandmothers, this is the logical next step.

How will the future of pitching look like, in your opinion? Will all events be happening through virtual reality in the future regarding Covid-19?

Covid has certainly helped to break down multiple mental barriers. Covid has done more in digitalization than anything else in the last ten years. It has been groundbreaking. At the same time, we've very clearly seen the boundaries of virtual channels. Your brain's ability to read micro-emotions and body language is seriously impaired. You cannot feel the energy in the room, and you're not getting the feedback.
Meeting in real life enables you to understand more easily which founder is a honey badger and which isn't.
But I certainly believe that the proportion of investments made outside of investors country or region will increase. Investors' courage to validate, get to know, and understand businesses through Zoom/Teams has changed significantly. The attitude of startups when recruiting has also changed, and it no longer depends so much on the talent's location. Plenty of activities are likely to take place over Zoom and in virtual reality if we focus on developing it.

Many founders haven't noticed that investors nowadays are watching slideshows on their smartphones and long before Covid-19. Plenty of people are consuming emails and other content from their phones. There's even a blog post on the Superangel blog, where I summarized Rainer Sternfeld's suggestion about making your pitch mobile-friendly.

The most complicated, but at the same time, the most logical recommendation was that you should focus on the title because it's the only thing that is visible for the naked eye while browsing on the phone. If you're reviewing your slide, keep in mind that your titles should tell a story about what you're doing. That's why it's a terrible idea to have slides with titles like "Problem," "Solution," "Opportunity," "Market," because that way, it's hard to understand what you're doing.

One fact about augmented reality. There are currently five to six companies actively researching and developing the next-generation augmented reality glasses, including Facebook, which bought Oculus seven years ago. The goal is the same for everyone – by 2024, we should have AR glasses, costing around 100 euros, available on the market. This will lead to a change in behavior and communication habits. It's currently hard to tell how this will affect investing, but it will certainly drastically change how social media is consumed.

Check out all the cool pitches Superangel has organized over the years!

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