Sakari Pihlava – TALKS WITH PETRI
Venture capitalist Sakari Pihlava talks about the future of the SaaS business model, how to make a career in VC, the dangers of pricing and what to do with YouTube.
Sakari Pihlava is a General Partner at Vendep Capital that invests in early-stage B2B software companies.
Sakari has 20+ years of software business and venture capital experience from startup to IPO in Europe and the East Coast of the United States. He spent 6 years at F-Secure and built a new encryption product line, which grew to €17 million and 42% of total sales at the F-Secure 1999 IPO. Since then he has spent 4.5 years at TVM Capital, a trans-Atlantic venture fund with more than €1 billion under management in Munich and Boston and 3.5 years at Efecte, a leading Nordic IT service management company, before coming to Vendep.
Sakari’s background is especially strong in enterprise software having worked during his career with all publicly listed security companies and their Founders in Finland.
(NOTE: The text may contain errors, misconceptions and even comical unintended contexts. Please use it only as a reference to the actual audio conversation from where it has been transcribed.)
Petri: Hello Sakari, how are you doing? Are you in your fancy office where it is probably one of the best views in Silicon Valley of Finland, Espoo?
Sakari: Thanks Petri. And thanks for having me on your podcast and unfortunately no. I’m looking at a pretty nice view but at home. We’ve been working from home since the start of this whole current virus quarantine. We will not return except maybe for small meetings and things where we have to personally go in and sign documents for the authorities.
I think we’ll, we’ll stay out of the office for the whole summer.
Petri: Do you actually need an office anymore?
Sakari: That’s a good question. Our business is a lot of teamwork and you actually have to meet. In most cases, you have to meet the teams you invest in just to build a relationship. And just to get a read that people are really passionate about their idea and their business, and just to get a better feel of what you are committing to from both sides as these are 7-8 year commitments when you are a seed investor. We still have to have an office and we still have to have meetings where we talk business with the founders.
Petri: I take you haven’t done any deal without ever seeing the actual founders?
Sakari: So far not. Even the current deals that are further along they are with founders that we have met or tracked for a little while. If we make an investment in the coming months, it’s highly likely that we’ve met the founders and tracked the founders for a little bit. Your next question is probably would you make a deal without ever meeting the founders?
The world has changed and with the current technology that is out there, you have so many interactions with the founders, with the teams that are presenting ideas to you that it’s perfectly doable. We’ll see many deals, maybe even later stage deals done without really physically meeting with the founders over the next 6-9 months. But when we can, and it’s safe to meet people, I think everybody will prefer having a face to face meeting.
Petri: Can you actually invest outside of Nordics because that’s the new reality nowadays that everybody’s like a hundred milliseconds away?
Sakari: We can and we have. We have one of our teams in the US, and that’s the Alphasense team. We’ve invested in AlphaSense when the R&D was in Finland but the team was in the US. We’ve done investments into Uploadcare and Xolo that are not located in Finland.
We have some teams that are almost completely remote, such as Hostaway and Appfollow where only a small portion of the team works from an office or offices. And one of the offices happens to be in Finland but yes, we can invest in teams that are not in the Nordics or in Finland.
We actually cover these days the Baltic countries and Finland with a pretty fine-grained comb. We have a person who does research for us right now both in Finland and in the Baltic countries.
Petri: What type of a SaaS company makes you excited?
Sakari: It’s still a very much B2B where the entrepreneurs can pitch an idea that we feel has initial early metrics that we can look at and they have customers that we can call and verify the product-market fit. If the team is really passionate about their idea, their product that gets us excited, meaning passionate about the product, product-led growth, something that can be taken to the larger European or US markets that still gets us excited. We don’t invest in all of these ideas due to competitive situations or just differences in opinion. As you know, investors always have an opinion and it’s not always the same as what the founders have. We still have to have conviction and both sides have to come to terms that we want to take that journey together. But product-led growth, B2B SaaS companies that have initial metrics, we look at a lot of those companies.
Petri: Vendep started as an accelerator less than 10 years ago. What did you learn? What’s the difference from that time where you are now?
Sakari: The story is actually quite exciting and this is something that not many people hear these days anymore. And we don’t share the lessons learned from the early days that often we mostly share lessons from the current companies. I think the story is worth telling, so I’ll spend the next five minutes walking you through that.
Let’s go back, first of all, 10 years to 2010. At that point, I was working for a company called Efecte which was in IT-service management. I had run channel sales for Efecte. There was a similar turn of events, not coronavirus but downturn in events in 2008 and it continued to 2009.
And a lot of that channel building activity was scaled down. I took products, including product management and marketing and R&D, to run. So I was back at a place where I’d been once before at Data Fellows and I was looking for new opportunities and I met Hannu Kytölä and Jupe Arala who had put their companies together in 2010 to form an accelerator. And this was a perfect opportunity because they both wanted the same thing as I. I wanted to return to venture capital where I had been prior to Efecte. I think March.
At the end of 2010, I had decided to leave Efecte and set up my own company, which failed in three months. Then met Hannu and Jupe in March and we had many chats over the two and a half month period that then led me to join them. And like I said, they had already put their companies together and formed an accelerator.
The idea was that will take in a company, not companies, one company at a time, and we’ll build the software product for that company. Be it the founder and the people he recruits or be a company that doesn’t have anybody, it could be an idea created by also one of our friends. And we would just form these companies. Hannu and Jupe had done maybe 20 of these companies already. And we continued to do maybe 10-15 more. So we have 35 companies in Finland and 3 or 4 in the US that way. We set up an R&D team and then started building the product and the entrepreneur then took it to the market. And this model had a significant flaw in our opinion.
The flaw was that when the product was ready, it could be that the entrepreneur no longer really had a passion for that product. It was really hard to measure the commitment to an idea when you don’t really have to pay. We paid for the R&D and that was the only investment when you don’t really have your hands-in product development you don’t have to take the risk of actually living with almost no money or raising money before the product is there. Our model in that sense was almost too good. The entrepreneur could second-guess and many times second-guessed his idea. Some of the entrepreneurs obviously pivoted, gained good product feedback but a lot of them came up with another idea and then continue it their ways.
We decided very quickly, in 2013 we had already a fund but we decided late 2011, that what we want to do is really just built a pure venture capital company in Finland. And that’s what we then did. Hannu had launched the Vendep brand in 2002 with his own angel investments. It was a well-known name and we had a really great team at that time. It was Jupe Arala, Hannu Kytölä, myself and Juha Litola, an extremely talented software architect CTO. And we formed a team of the first fund, which was called Vendep Startup Fund, a 5 million base round from private individuals and then Tekes Pääomasijoitus by the end of 2013. Alphasense was the first investment we made from that fund and we continued to make another nine investments of which one has already been sold.
And besides AlphaSense we have Leadfeeder and Giosg from that portfolio that have grown extremely nicely and raised follow-on funds and will provide great returns for the fund.
Petri: You mentioned, you’ve been in the VC before as well in the East coast, in Central Europe, and now in Finland. How did you end up in the East Coast and what happened in between?
Sakari: My career was from early on focused on software product companies. I studied in Aalto computer science and my major was software systems. And then my minor was international business or marketing strategy. And I was always interested in software products.
Microsoft was the company that I idolised. I thought that it’s the best company in the world and they have the best strategy. Maybe not the best products but they have the best strategy in shrink-wrapped software products and the OEM-model that they had for a long time before the Office suite.
What I wanted is to go to a similar company. And I ended up working for F-Secure these days, Data Fellows. Risto Siilasmaa hired me in 1995. And I worked at F-Secure till 2001. And at that point, I decided that now we’ve been part of the late startup. I was employee number 28 from the late startup to the IPO-cycle. What I wanted to do was I wanted to see how these companies get created that go to large markets and are backed by VCs. I thought that that would be a superior model for a small country to bootstrapping as our home market is so small.
I really wanted to get to the VC business, did an MBA and use that year to really contact every single VC in Europe. And that year was 2002.
Not many people know. I mean, all the VCs know who are from that time and there aren’t that many, they know how tough a year it was. And I still remember 2003, I started early 2003 at TVM Capital.
We still saw the first maybe six or seven months companies from that time that had been able to survive somehow. We didn’t have a lot of co-investors at that time, we had a 128 million Euro fund and we invested half into hardware-based based high-tech and the other half into software. I was an associate and then a resident enterprise software expert for the investment team in Munich first two and a half years, and then two years in Boston. And really loved that time and worked mostly on A- and B-rounds.
Less B-rounds but mostly A-rounds and that was my jump really into VC. I still remember the recruiting process. These days we’ve hired associates. We have a great guy called Tim Felin in our team. The list of applicants is long and it’s tough to get into the industry because you have such a short time window. Before funds are raised usually you recruit partners and after funds are raised or during funds are being raised to recruit associates. I was told later that there were two candidates, a German into a German fund and a Finn into a German fund and the Finn was then selected. I heard a number that was close to a hundred applicants.
I really lucked out. I had another position. It was more of a partner type position in a smaller fund but luckily I didn’t get to go there because I think I learned so much at TVM capital. It was a large firm with life science, these days doing private equity. I had the chance to really travel in Europe, all over Germany, in Boston and New York.
And really see what the VC business is like. And that really sparked me to then do whatever I can when I returned to Finland to get our kids into this school system, to really start my own VC-fund with a couple of friends. That was what it ended up being but really to do everything to get back into the business.
The order was Germany, Munich first, and then Boston.
Petri: One could imagine that you would then just move on to the West and go to Silicon Valley and really get into the epicentre of things.
Sakari: Our thought process was such that when we left Finland in 2002 it was really a decision. We have two sons at that point. It was really a decision to take a bit of a break from work. My wife was a researcher at that time and she wanted to go back to back to journalism.
She started freelancing when we were abroad and now works for Lääkärilehti in Finland and she’s a journalist. Her career turned out great. We really made a conscious decision to get our kids back into the Finnish school system by the time my oldest son would be nine and youngest would be seven.
Then Maiju, our daughter, was born in Munich as well. She wasn’t of school age but our sons were in the German school system and then in a private German school in Boston. And that was the reason we didn’t stay in the US or go to the West coast or start building careers in the US. We really wanted to get the kids to the Finnish school system and to grow up in an environment, which is very much the environment where we had grown.
We live 35 kilometres outside Helsinki. You can’t call this countryside but I’m looking at a field and it’s a nice small town called Kirkkonummi. Pretty much wanted to set up our life this way even before we started our tour of Switzerland, Germany and the US.
Petri: You are part of the technology history as well. When you were doing your thesis you were looking for some companies to sponsor your thesis, and get to the corporate world. Can you elaborate a bit on how that happened?
Sakari: There’re a few aspects to the story but thanks for putting me on the history map. I think you are as much part of the history, maybe even more with your Trema days and other stuff you’ve done in Finland especially. I have a relevant part in the security product history in the sense that when in ’95 I asked Hannu Turunen and Ilkka Hiidenheimo, founders of Stonesoft, at that time that, hey, could I do my thesis for you guys?
I was a consultant for the Finnish tax board doing SQL forms and various other small SQL programs and things for the tax board. I asked, could I work for the research department, which was at that time developing security and database products? And they said, no. I said, okay, thank you.
I started then looking for an opportunity to really work with software products because that was my passion. Then I went back to the university and talked to my professor Reijo “Shosta” Sulonen, who then said: Happy to help, what do you need help with? And I said, could you help me contact shrink-wrapped software companies in Finland and help me do my thesis for them?
And he said I can help you with the contacts. There aren’t that many but what would your thesis be about? We came up with the idea that I will pitch that I can help you guys improve processes related to software development. And we found four companies. Brossco Systems had a product called Voyant, which was in the business intelligence, a very advanced viewer at that time. It was able to do cubes and all kinds of data slicing.
I pitched to them that I could help to organise their product team for growth in a more structured way. I had some background. I had read books and only really worked for anybody but Stonesoft. I pitched to Mika Sorvettula, the CEO and founder, that this project would cost 50 000 Finn marks, which is, let’s say 9 500 euro.
Shosta told me that you have to raise 50 000 Finn marks for this project to work. We can get the rest of the money then through the school. I was paid maybe 65 000 or something like this. I pitched this and my heart was pounding when I waited for Mika to respond and I don’t know what he saw in me but he said, yes.
He committed to 50 000 Finn marks. And then I went to three other companies. I went to, it was called JKO-Action Oy at that time, Promentor Solutions Oy later and was sold to a language school. They have very advanced language teaching applications.
Then I pitched to Data Fellows, and then I pitched to Stonesoft. But I only pitched 5 000 for each of those companies. So 10% of the price, and they still all thought about that for a long time. I still remember. I think Risto Siilasmaa took a day to think about the price.
Petri: You mean that it was too expensive?
Sakari: I don’t think it was too expensive. I think it was just thinking of the opportunity cost. If I come in and work with the guys. There’s time that goes into improving things that he was not sure that I was great at improving but he finally said yes. And then, later on he said that you seem like a sensible guy, why don’t you come and work for us and create a second product line in addition to anti-virus for us.
Me being part of Finnish history, I was a member of the Data Fellows team in a security company. I licensed technologies from SSH. I had worked for Stonesoft, which was a security company. Then later on I worked as a sales consultant for Nixu that is also a security company. All of these companies have been publicly listed. I’ve been part of all of the publicly listed security companies in Finland. But my part in the history and you might be referring to what Finns know as the fights between SSH and Data Fellows.
That contract was the one that I helped Risto Siilasmaa and Tatu Ylönen broker. That story still has a knife in my heart that I don’t want to go into that too much.
Petri: I don’t think that’s important. I think the important thing is that you put together Risto and Tatu in the first place. You were the initial person to put these two listed and widely-known companies’ founders together.
Sakari: If you continue on this path, Risto is part of Finnish tech history. He’s done many great things and lately was the chairman of Nokia.
Petri: By the way, he has an excellent book. If somebody hasn’t read the book, it’s in English and called Transforming Nokia.
Sakari: Paranoidi optimisti in Finnish. I read the book and I can warmly recommend that book. If we mention one thing about my time at F-Secure, being part of that history and the company that Risto helped to create, I think that is a very special time in Finland. Those were the days when we started creating an industry that was exporting software and software products.
And there haven’t been many companies as large as F-Secure yet out of Finland and the software exports have grown. And now, as we are SaaS investing our SaaS companies export from day one. I’m really proud to be continuing this history. But in ’97 we already started SaaS.
The anti-virus was SaaS all along but we started to experiment selling security products through operators. Telia, or Sonera at those days, was our first partner. That’s also part of the history and the business model where you take a software product and turn it into a service.
We took products that weren’t initially services but we tried to push all kinds of products into the channel. Later on, it was clear that they have to be anti-virus like products where you don’t need so much support. There’s a clear need to buy that subscription. These days people can buy SaaS but I think those days, it wasn’t so easy for people to commit to a monthly fee or service fee.
Petri: Yeah, it was probably even difficult to get the payments at that time.
Sakari: Through operators, it was quite easy. But having a customer to pay for monthly something that they used to pay for only once was a difficult thing to do.
Petri: You were the product lead or you had an instrumental role in generating almost half of the F-Secure’s revenues at that time when they went to the IPO.
Sakari: When I was hired in ’95, Risto asked me to create a second product and I did. I mean that the product line was access control. And when I started full time four months later in January of ’97, I told Risto on our first or second meeting that this is too complex. And he just lifted the phone, called the people who were part of the project and terminated it and said, hey, what now?
This was maybe a bit later than January but let’s say early spring. And I said I have one idea. And that idea was that I had seen a fax where Tatu Ylönen had registered his company called SSH. Then I brokered the deal between Risto and Tatu. That’s how I became the first product lead or project manager or product manager, whatever you want to call it.
I don’t even remember our title probably was project manager but I became the product lead for that product line, which then span into five different products. And then later on, we recruited more people and in two years I became the head of product.
I took the overall responsibility for running all of the engineering inside Data Fellows at that time. At that point, I had to choose whether I wanted to be a product manager or lead people and processes.
I took the challenge of building the organisation out. We built it to 260 people internally and some 40-47 with a couple of subcontractors. That was my run at F-Secure. I was responsible for maybe three and a half million of costs every quarter.
The product lines that I helped create, from the SSH product, they grew to something like 45% of our revenues before the IPO. I still remember that SSH was 12 million. And all the other products were maybe 4 million. I don’t remember the prospectus anymore exactly. But it was about 45% of our revenue at the time of the IPO.
That was a quite successful addition to the product line at that time. Obviously, they’ve changed. The products are no longer there. They were sold to Pointsec in Sweden, and then later on Check Point bought PointSec for a very good price.
That was actually the same value that F-Secure was on that day. Pointsec made a really good exit with those products and their own products.
Petri: Was Mikko Hyppönen already working for Data Fellows when you joined?
Sakari: Yeah. At the time of my thesis project, Mikko was running support back then. Mikko ran many things like support at that time. Mikko’s research team was part of the products for many years. I worked with Mikko from ’95 or even earlier because of my thesis but from 1995 to 2001, and he’s a great guy. He’s an amazing person.
Petri: Just recently Mikko tweeted that he had recently joined Data Fellows and he was supposed to present something and his presentation was on his home computer. He needed to get it for the meeting. He was supposed to be the presenter. Another thing was that he didn’t actually have a car at the time, so he borrowed his boss’s car. And if that was not hard enough or sort of embarrassing enough, what happened later was. He actually crashed the car. Imagine you’re the guy who was supposed to present in the meeting, then I need your car. Then the good news is I have the presentation but the bad news is your car is wrecked. The car was Risto Siilasmaa’s. I guess that’s before your time.
Do you have any stories during your career where you were not laughing at the time?
Sakari: I’ll tell you two just to give you an idea of what working for Data Fellows was. We were encouraged to make mistakes and learn from mistakes. I think here the only mistake was, to crash the car but it was the right thing to do to get the presentation. And Risto Siilasmaa rewarded people for doing the right thing.
Two stories from the F-Secure times. One is that I came a bit late. It wasn’t a Monday morning. It was during the week but let’s say Tuesday or Wednesday. so I’m coming in late and get to the door.
And there’s immediately a person saying that, hey, Sakari people wait for you downstairs. And I was like, what’s going on? I go downstairs and there’re people I’ve never seen, which later on became clear that we’re communications persons and legal persons. So what we had done is we were experimenting the previous month with a new anti-virus update technology from Israel, which was really clever sending small deltas. We had made a mistake. We always tested things internally first at that time. I’m sure this is done much better these days and we improved in this greatly but this just shows how early it was in the software time.
So we tested it, of course, in the lab. Did some regression testing, tested it ourselves. And then there were initial customers that we sent the product out. Maybe 200 of them I don’t know how wise this is but that’s how we did it. Those customers, all of them, were shut down because of this mistake.
We were in a crisis. We had to mobilise every every single person who knew how to uninstall and install our software and patch the fix. We had to mobilise those and go to customers. We did this within a few days but it was basically one of the most awful days for for all of us.
And we thought it would be a much bigger crisis. I think we ended up in the news, not the TV news but in the news with this. And then the second time wasn’t as drastic but it was something that typically happens in the product organisation. You are in a rush to release something new. In this case, it was a VPN product and we wanted to support all of our customers.
Even all the technologies, and there was a version of windows 95 that we needed to support. There was a driver technology that was really ancient and not many people knew how to do it. We didn’t have people inside so I offered to speed this thing up and to purchase this from outside from a small Finnish startup and made the contract.
And they were very adamant about having a spec to which they want to confirm. And I learned that this is the biggest mistake you can do program against specs. I think what you always have to do is you have to actually verify it in the real world. So we gave them a spec and they sent us a product that conformed to this spec.
It turned out so that when you have other products installed on a computer, it’s a Windows spec but it’s not what happens in real life. And the driver did not install and it could not be used. It was hooking into the wrong places. I called the guys and I said, hey, we have made the payment. It would probably take you another week. We can pay for that to fix this. And they said, sorry, no, we are raising funds. We have to concentrate now on our own product, we will not make that fix. I said I can’t believe this. We are in real trouble, we have to release our product and we would pay for this, a week or two weeks is not going to make a difference. And they had only developed this product like four weeks but full time, they did nothing else because it was so critical to us. I told Risto this same story, and he said, I can’t believe this, let’s drive there. And we drove a bit like racing, I think obeying speed limits but trying to see who was there faster.
And when we got in, Risto sat down, the guys told him the story. He said he can’t believe this. And the guy said, well, we are not going to deal with any more code for you guys. And that was it. We were amazed at that point and Risto again said to me what do you plan to do?
And I said, well, I don’t have an idea this time but we’ll figure it out. We figured that we have to actually recruit the guy like this and Mikko and Ari Hyppönen and many others who had good contacts through anti-virus research into the low-level developer community. We posted this advert and we found a guy, Joern Sierwald in Germany. A great guy, amazing guy. I think he lived four years or five years in Finland. He saved us. He developed the drivers and saved us.
Those are the two crazy stories from my history. A lesson learned don’t ever give somebody a spec, always reserve the right to get a working product and make sure that you know who you work with understands and is flexible in really serving the customer’s need, not the spec because that turned out to lose 800 000 Finn marks.
And I think that’s the most I’ve ever lost into thin air that could never be recovered and never be used.
Petri: Did you ever find out the reason why they did that? Did they know from the beginning that the spec doesn’t actually really work and that’s why they wanted it that way? And that’s why they refused to fix it?
Sakari: I’ve run into similar people after that. You can test that a little bit. I think they had integrity, in their own opinion they had very high integrity. But during the development, they must have realised that this is not going to work because they didn’t have to install the product and they didn’t have to install it into a real-world system.
And I think there maybe their integrity wasn’t very high. They didn’t let us know. They just finished the product against the spec. I don’t like that they could have told us that this is never going to work. Of course, then they wouldn’t have gotten the money that they needed to raise funds and develop their own product.
I suspect that they sincerely initially took the product project and trusted that we have done our work. Like we had but the test harness of the spec flew out of the window the first or second time they did installations and they should have let us know because we had no way of knowing early on.
Because we didn’t have the capability. We didn’t have the early products. It was such rapid development and a small project, only one month. We did not really take care of talking to them every week or even every day. During those days, you didn’t have daily builds. You had weekly builds, so we would get a weekly build.
But we had probably said in the contract that for the first two weeks or three weeks, you don’t have to send us a build because they had to do so much development. It was so different at that time.
Petri: You’ve been pretty much your whole career in products in one way or another, or at least interested in those. What have you learned? What kind of wisdom can you pass to the guys who are building something or considering doing something?
Sakari: I think early on if you have a passion for something like I had for software products, I think it’s key to change your career so that you get a chance to do what you thought you would be kind of built for, you would be passionate about. If you don’t do that, you start doubting yourself that I should I have changed. And then there are many things that change you, you have maybe kids or you have somebody to take care of, or you have a mortgage and you need to stay in your job.
As life goes on you start building things that make it harder to do these things. The younger you are or the younger I was, I thought I did many things based on what I had wanted to do. And I was a really hard-ass about these like leaving Stonesoft and not taking no for an answer.
One thing I would do differently would be that I would set up the company that I set up in 2010. I would set up a company earlier on. Why? Even though you don’t have maybe all the knowledge the chances of success are not higher or lower. It’s so much about the team you build, the idea you have the timing and the opportunity then.
it’s not the experience you gather. It can maybe increase your chance of success a bit at certain times but I would encourage people to do and try things they are passionate about, or that have a high risk at a younger age. That’s the first part. Generally, I would like to advise people who are looking into getting into the VC industry to really think about what you can bring to a firm. Some people can set up their own firm and that’s fine, or can start small, like we did with a 5 million Euro fund and create a track record. You still have to find the 5 million euros. It’s not easy but maybe you can start with a million.
I would encourage people to do two things. Think about what you can bring to this industry and find a firm that would take you on into a salary position because I think that will give you the status that you are actually a member who is expected to contribute. And if you are doing a job where you are great like I went into TVM being an enterprise software expert. What I contributed was all of those things that I had learned through the F-Secure IPO. Not all people have a lucky career like that but every one of us has some lessons learned and some relevant industry experience that we can contribute to a VC. There are so many VCs, so many firms, so many specific areas that we can contribute to.
I would try to get a salary position where I can contribute my knowledge in a VC firm and then use that to either to move to another firm or to take the next step inside that firm. If that’s a firm that supports my passion but it’s really hard to get in. If you get an internship position, the challenge there is that VC is a long-term business.
And in a few months, it’s really hard to contribute or to show that you have things to contribute. And you can maybe do a functional thing or a little bit of deal flow but you don’t have time to show that you can really contribute to the team. That’s what I want to share. I’d encourage everybody to contact us and all of the firms but please write down what you can really bring for the team. Not just that, I’m a great guy. We get applications like that all the time but we don’t get applications that really outline that here’s how I can help you.
Petri: You mean applicants are saying that I’m good at these things but they are not saying that, hey, you can get these amazing benefits if you hire me?
Sakari: We hired Artis Bisers into our team early this year. We always have a salary position for a student. Artist is not a student. He is actually somebody who’s who has a great educational background. And he’s already a pro. He was looking for a position that he could take on in between jobs or maybe for a future career.
Artis has done a lot of research for us in the SaaS space. He was able to pitch himself through the things and people and companies he had met at Techchill, as a perfect candidate. And he did a great job and he’s had that impact on us. He’s been even more impactful than what we thought. We really like these types of applicants. We have only one part-time position open. We are not hiring anybody if that person wants to continue with us but that’s the way to get into our firm.
And I think to many other VC firms, show your impact. This is what I could do. Ask for a salary position, not an internship for a month or two months. Because then you might not have time to show how valuable you are.
Petri: How would you advise someone who has a startup or doing SaaS to choose which way to go bootstrap, angels, or really consider taking VC in, and how to pick the right company?
Sakari: SaaS is great because I think you can exactly plan your path the way you want. If you are a person who wants to take on the world, for sure. Let’s say you’re on your drawing board, at that point you have to consider, is the world going to wait?
And what is my world? I’m referring to the market if it’s a niche. If your world is large, still these days the best choice is to raise VC funds. Raise some angel funds and clearly get onto the path of raising seed, series A, series B and so on and plan your company that way.
The choices you make doing it this way are choices where you try to go after the largest market. You do a lot more strategy work, you focus a lot more on metrics. If you are that type of a person who is capable and willing to do all of this by any means, plan a VC-backed business.
But if you are not meaning that you are not sure yet what you do. You are happy with a good standard of living and more kind of the entrepreneurial company that serves a local business and your family, then bootstrapping, maybe raising some angel money…but at that point where you have not made this decision to create a project that raises funds, I think your best choice is to recruit good people, advisors, and first make up your own mind.
Because it’s your company if you want to own 100% of it or 60% of it or 51% to control it till the end, then build that kind of a company. But don’t then enter the VC path before you have decided that this is a project and you are willing to raise funds and recruit other people.
Even at some point changing my job from say CEO to the chief product person or marketing person or another role, because what VCs need to do, is to create companies that have a chance of returning their fund. And that means that you have to raise further funding grounds.
And you have to try to grow to be as big as you can. And ultimately you have to have a liquidity event within the lifespan of a typical VC fund, which is 10 years. Or if you’re into the investment period, maybe, 7-8 years. Now I’m talking about seed investments. I would advise first to figure out what you want to do if you’re not sure, then don’t raise VC funds.
Petri: You see a lot of deals. You do a lot of deals, you structure deals. What are things to be concerned about? And what can go wrong from the founder’s perspective?
Sakari: These days, I tend to talk about two things. The number one thing that we test is this commitment that I said. We test that the founders are on the same path, that they are planning to raise that next funding round, and they understand that VCs need a return. What we do during those discussions, we both set a plan. Call it the business plan or a part of a business plan but we set a plan. These are the improvements that we want to make to create value over the next 12-18 months.
Typically they are two categories: personnel and product-related. Sometimes you have to grow the market. So you have to make lots of changes. For instance, if you have to enter the US market to really be in a billion-dollar market, then that could be even a larger change than just personnel.
It could mean the founders have to move or things like this. Let’s say that over the next 12 months, these are the gaps in the team, let’s hire. These are the gaps in the product, or that we lack a second product or modules to upsell so that we can not pop our hair off. So let’s do all of these things.
And with those things that we’ve decided, these are the metrics, or this is the goal where we want to be, and this is the amount of money we likely want to raise to then do the next leap. We set a vision where there’s a short term 12- 18 month goal, metrics, team where you want to be.
And then a bigger goal but not that long term, maybe two or three years out where you want to be after the series A raise. We all look at the market and look at the company the same way. In the short term, these are things we execute on. These are the issues we solve, In the long term, this is the vision we are now looking at. These are the scenarios that we estimate that we’ll plan out and we’ll keep taps to change them when, competence, release products or markets change but that’s roughly how we do it.
Petri: You are a product person. You’ve seen so many products. You’ve been building so many products. What have you learned?
Sakari: I’m really passionate about the product. I think these days, I’m trying to read as much as I can about product-led growth and still learn about products. It seems that you always have something to learn but I can for sure tell a couple of lessons.
Right off the bat, is that the best product doesn’t always win.
If you are the competitor to the category leader, you can’t say that you have the best product because the customers have already elected to use the product that the category leader has. What you can do, if you want to be the better product, you can differentiate yourself.
And get those customers that feel that your product is a better fit for them to jump from that market leader or category leader to your product. What I’ve learned is that the best product is really difficult to define but it is relatively easy to figure out how to differentiate yourself on the market from the other products and then price and set the product to the market differently.
What our companies do today and how you differentiate with the product the easiest is typically just by the sales process. If you have a competitor that sells their product for a 100 000 you know, why don’t you start selling your product at 30 000 with self onboarding to the customer segment that doesn’t want the 100 000 product but wants a lot of those features. That way you differentiate and carve out maybe not the largest portion of the market but you call out a portion of the market that is available to you and can be differentiated for. There are many other things.
So the first one was that the best product doesn’t always win.
The second is that pricing is really an atomic bomb. Once you start pricing, it’s really hard to go back. If you increase prices, do it to a small group or test it out for a few weeks but don’t commit to things before testing out. And certainly, when you give discounts, control the discounts and don’t lower the whole product and make it too good at a cheap price. It’s really difficult to go back to your existing customers with a higher price and that’s how you can destroy a lot of value by lowering or increasing the price to a too long period or to too many of your existing customers. Those lessons anybody can believe instantly and product organisations typically run into them.
Then finally, if we look at marketing, this is a more difficult thing to explain but generally, I would say that all marketing should lead to some kind of a call-to-action that proves to the customer in ways in which he expects, say a demo or trial or a video or content piece. That he will get the value he’s looking for from your product and that he gets it at a specific point or with a specific use and he can get there.
This to me in marketing is key. All of the other marketing to me is soft brand type marketing that does not lead to an easily measurable revenue or conversion metrics. I like marketing that is hardcore: calls-to-action, get to this demo, take this free trial, and drives the customer to a point where the value is clear and sales can convert them or the product itself convert the customer to a paying user or paying customer. And I think those things are key learnings from the product teams to me still these days. Lately what I’ve been digging into more and more, and we have a webinar now coming up in August about this is pricing.
Setting the right pricing is so difficult. But there are good tools to do this, and I’ll be talking with one of our company chief product officers about this in that webinar. Pricing and monetisation to me, over the past 9-10 months has been really eye-opening. Patrick from ProfitWell has really been the guy who’s produced content and explained it so that it doesn’t feel soft. It’s fact-based, and it’s really key to your success.
Petri: Where is the SaaS market going? We just entered to 2020 with a bang. What can we expect in the next 5-10 years?
Sakari: I’ll just tell you what we are betting on. We are betting on those countries like Finland, Estonia, Lithuania and Latvia, which have engineering heavy education and cultures, and people are really proud of their work.
They rather don’t go to sleep if the customer is not happy but make the product right or get the right answers to the customer, just to make sure that people are satisfied. I think countries like these will create great SaaS products for international markets.
SaaS will be a great equaliser in the software world. US companies will still dominate and will acquire a lot of companies but I think they will acquire a lot more companies from Europe than they have before, because of SaaS. And that is because the products are all very international from day one. Most of them are in the English language.
Most of them sell to US customers, and that they are built with great engineering teams. SaaS will create great benefits to the European countries. And I think we’ve seen this. Accel does reporting on SaaS companies every year. You can already see it in the reports.
There will be a whole new class in product-wise. If I was younger myself, I would be building a product organisation again. It would be my dream to have all of the analytics, all the onboarding people, all of the things that a multitenant single product can give to a product organisation in terms of analytics and visibility to the customer and the way you can react to the market needs. SaaS is going to change the way also other companies are built. Lessons from all the metrics, all these things will go into other industries and will benefit them greatly.
Petri: Are you saying that SaaS is going to eat the world?
Sakari: Software and SaaS are going to eat the world. Yeah, absolutely. This is the way service businesses should be run. I think we just have a great product because you don’t have to deliver anything. Software’s very different. It’s harder to take this into other industries. I just saw a recruiter to sell their service as SaaS. It doesn’t make me laugh.
It actually makes me think that if they will be a winner. If that’s the way you now give a happiness guarantee you charge a success fee over several months and not in one goal, that’s a great service. That’s somebody who’s committed to providing me with the best person to my VP sales or VP marketing position. So, I think SaaS will go into other industries.
Petri: What is your favourite word?
Sakari: Oh, it’s sauna. I go to sauna every single day.
Petri: What is your least favourite word?
Sakari: Coronavirus, for sure.
Petri: What turns you on creatively, spiritually or emotionally?
Sakari: Mostly creatively these days but I think I’ve watched more YouTube during the coronavirus time than ever before. We stay home during the evenings. I get many creative ideas from YouTube.
Petri: Have you created some crazy stuff and now you’re starting your own YouTube show?
Sakari: I am not as skilled as some of the guys. There’s a channel called Stuff Made Here. I spent last weekend watching all the videos and I was amazed by the basketball board. A backboard that just makes every shot go in. But two things that I’ve created with instructions from there is a 3D printer.
I bought a kit but still built all the levelling equipment, everything, all the electronics, as it was explained in YouTube and it worked great. Then I’ve built a set of stairs in our garden based on a YouTube video. They turned out a bit heavy but the design is great. YouTube is just amazing.
Petri: What does turn you off?
Sakari: Today, politics, for sure. It just really turns me off. I have become even more apolitical than ever before but I just don’t know what to do. That just turns me off.
Petri: What is your favourite curse word?
Sakari: I don’t curse a lot. I had that kind of an upbringing but if I do, I seem to say hitto or damn that’s it but I don’t curse.
Petri: What sound or noise do you love?
Sakari: I love quiet sounds like wind, ocean sometimes even just your air conditioning if you get this little humming noise. I think those just calm me down.
Petri: What sound or noise do you hate?
Sakari: Traffic. I don’t like it, that’s why I live outside Helsinki. I don’t like traffic.
Petri: What profession, other than your own, would you like to attempt?
Sakari: Something where you discover things, you can tinker, figure out and then you get that feeling of discovery. I would probably be still a programmer and do data science.
Petri: What profession would you not like to do?
Sakari: Surgeon. Open heart surgery, any surgery, actually. I’ve met several surgeons and the stories they tell. I’m not built for that.
Petri: If you could be a co-founder of any startup in any era, which one would you choose?
Sakari: I would have loved Bill Gates to have called me and say, would you join us as a late co-founder? So I still feel that from my youth, that Microsoft was the company to be at.
Petri: Any final words for the audience?
Sakari: I wish everybody good luck with the current situation, stay healthy and lead with passion. Do whatever you are passionate about and do it today!