At the turn of the 2010s Finland was in the middle of drastic market change as Nokia’s mobile phone business was in dire straits, soon to be sold to Microsoft and eventually shut down. At the same time venture capital activity and volume in Finland was really low – approximately 200 investment rounds and 80 million euros annually! Many previous Finnish venture capital funds had shifted towards growth or buyout stage or shut down their operations and less than handful of VCs were active in the market.
Market change and lack of early-stage financing made the Finnish government to launch an accelerator program named Vigo, which followed to some extent Israel’s successful Yozma program. Target was to foster VC activity and ecosystem and create new VCs to Finland. Program can be considered to reach its goal as the most successful venture capital fund of Finland, Lifeline Ventures, saw daylight via Vigo accelerator and also other new VCs were born. The need for venture capital financing started to get wider acceptance and bad experiences gained during the dot-com bubble and financial crisis were fading into background.
For me this market turmoil opened an opportunity to jump into venture capital business, that had been a vague plan since early 2000 when I got to work with the venture capital rounds of Detection Technology (Nasdaq First North), Hantro (merged with On2 Technologies and then acquired by Google), Ekahau (acquired by Ookla) and many more. My venture capital journey really begun in 2011 when I started to raise a fund that became the first special fund to be managed by Butterfly Ventures. During the previous ten years I had supported portfolio companies and funds raised by others but building and running own funds is entirely different game.
Public money and asymmetric model
In Finland and Europe most venture capital funds deploy also public money. In addition, the public sector has been active in supporting the growth of VC and startup ecosystems, as can be seen for example from the Vigo program.
Butterfly Ventures’ first special fund – that resembled a special purpose vehicle – had a new angle called asymmetry. In the asymmetric model public funds are used to attract private capital by giving preference to private capital when distributing proceeds. Asymmetric model was new in Finland, but not in Europe. Despite the direct opposition of many officials in the ministry, we were able to create the first asymmetric fund in Finland with our first fund investor, City of Oulu. Unwavering support from Juha Ala-Mursula was invaluable in this process. Later this asymmetric model was deployed by the government-controlled fund of fund, Tekes Venture Capital, that convinced private investors and institutions to invest into Finnish early-stage venture capital funds.
Butterfly Ventures has deployed public money in all its funds and combined it with private capital. In the first special fund this match was made at the portfolio company level but in later institutional funds at the fund level. Public-private-capital ratio in the first special fund was more than 1 to 2, so each public euro triggered more than 2 euros from private investors, and in the following institutional funds the share of private capital has increased.
Entrepreneurship
Being a venture capitalist is not a job, it’s a career.
As it often takes years before you start to see real results of your fund, VC manager needs to commit for a long period. This is not self-evident for all and players who want to see results fast will not be in this business for long. Our founder team decided to look at this card and concluded that after 10 years we will know did we have any success.
In 2016, the fourth entrepreneur minded early-stage investor, Tanya Horowitz, joined the Butterfly team. Tanya had moved from New York to Stockholm a few years earlier and was managing an early-stage pilot fund with her US located business partner David Mendez. We first made a co-investment with Tanya and after some turns Tanya became an essential part of the Butterfly team while Dave moved to run Techstar’s operations in Netherlands.
If you are new in venture capital business and willing to build a new management company, prepare for a normal entrepreneur’s journey. At least in our case, very same building blogs and stamina are required that our portfolio company founders must have. In the founder team of Butterfly Ventures, we had experience in making VC investments, doing tech business and running companies from startups to listed ones and this experience matched our investment focus and investment strategy. As our first special fund was small in the start – so small that experienced VC managers recommended not to do it – there were periods when we were not able to pay salaries to ourselves and our office was a windowless warehouse.
From the beginning it was clear that we want to expand our geographical presence and opening Swedish operations and later operations in the rest of Nordics and Baltics – New Nordics – was part of the playbook. Our presence and capability to invest outside Finland has developed fund by fund and today our team consists of 7+1 players located in different parts of the New Nordics and we have portfolio companies from almost all New Nordics countries.
Co-investors and coaches
Our first special fund was raised during 2011 and 2012 and is a co-investment fund. Co-investing became part of our DNA. It has been a great advantage to have many different co-investors over the years and collaborating with co-investors brings great addition to daily work with startup founders. Operating with co-investors gets you also to challenge your own views and methods and makes you humbler in a positive way. Today we have closer to 300 co-investors, from business angels to UHNWIs, investment companies and other funds, and we hope to get many more during the coming years.
Some co-investors have made a big impact on me personally and professionally. Sami Lampinen has been a great support and role model for many years, Staffan Helgesson’s cool headedness was admirable and Juha Hulkko’s very personal take on early-stage investing has made me to think what is essential in venture capital. It is not only about profits even though business must be profitable in the long run, and we have fiduciary duty towards our investors. One needs to understand and appreciate the challenging work of entrepreneurs and founders and provide support while chasing big dreams. Sometimes the interests of one founder or team member are not aligned with the interests of the entire company and rest of the team and then it is our task to react.
It has not only been co-investors and startup founders that has taught us a lot. In 2016, with our new extended team, we were able to raise our first institutional fund and get Tekes Venture Capital as the cornerstone investor. Recently deceased Esko Raunio and his colleague Petri Serenius from Tekes Venture Capital became our coaches for the next development stage. Sometimes it was “tough love”, but Esko and Petri supported us in turning into real VC managers after running our previous special and pilot funds. In our second institutional fund this same coaching role was taken by representatives of Tesi and Saminvest.
Life is not all roses, and with about 100 portfolio companies and 300 co-investors there are also personalities that you just cannot get along with or who even become your ex-friends. As we are allocating capital, and many times decide not to allocate anymore, it is evident that some feelings will be hurt on the way. This is an unfortunate side of our business but if disagreements make you lose trust in people or setbacks turn you cynical, you need to get out of VC business. In addition to accepting the long run, avoiding cynicism was another joint decision of us founders made more than 10 years ago.
First institutional fund
Fund agreement of our first institutional fund was signed at the end of 2016. During the previous three years with our first special fund, we had tested different focus areas from content to platforms, learned what did not work and in 2015 decided to focus only on companies whose sustainable competitive advantage comes from technology that is not trivial to make. Our team’s experience was mostly in this domain, and we had gained our first success with these kinds of companies. We should have chosen this focus from the start, as the failure rate with other investments was staggering high, but obviously this was a lesson that we needed to learn in a hard way.
We did not know how to effectively communicate our new focus to fund investors and Esko and Petri from Tekes Venture Capital were challenging us to clarify the message. Thanks to Atomico’s great report – State of European Tech – we found a name for our focus. We became deep tech investors with an additional appetite for hardware. Our focus was unique at that time and when we used our portfolio companies as examples to explain our focus, representative of one major Finnish fund investor said that “Finally a fund whose investment targets I can understand”.
Investments from this first institutional fund started in 2017 and results are still to be seen. We have made some early exits – and early failures – and many portfolio companies are gaining great momentum as we speak, but it will take some more years to see whether deep-tech companies of this fund will succeed. Unfortunately, success is not only dependent on the founders’ capabilities and capital available. Development of macro environment may have a big effect and with this fund we have witnessed big changes in macro environment and seen too closely how geopolitics got back to business. In 2021 when Covid started to be under control we enjoyed a very good exit market and made half a dozen positive exits within a 12-month period. All this ended already in 2022, and the exit market was shut down during 2022-2023 and has not yet opened properly. During these years there have also been very few bigger rounds. Geopolitics have also caused headache – “smuggling” Finnish portfolio company’s Russian tech team to Finland after the war in Ukraine broke out may sound funny, but consequences of that operation could have been devastating if failed.
We had participated in the impact investing discussion already before our first institutional fund, as after Nokia’s meltdown one of our tasks was to enable the creation of new businesses and jobs around Nokia’s heritage. In the early days it was not clear how impact is defined or how it could be measured. During the investment period of this first institutional fund, we started crystallizing our message and position in the sphere of impact investing.
Second institutional fund
Surrounding crisis that we cannot influence has been a factor in our fund raisings. Our first special fund was raised in 2011 and 2012 during the meltdown of Nokia’s mobile phone business. Fund raising for our second institutional fund, on the other hand, started early 2020 and was put on hold in March 2020 as Covid seized business. Towards the end of 2020 we restarted fund raising, enjoyed positive market sentiment and aimed for the first closing towards end of 2021. Earlier mentioned exit activity in 2021 supported fund raising.
As often, the first closing took a bit longer than estimated and we did not have signed documents in February 2022 when war in Ukraine broke out. For a while it was uncertain whether we could make the first closing at all as we started to lose interest of some US and European fund investors. Luckily, firm commitments of Tesi from Finland and Saminvest from Sweden did not fade away and we signed the fund agreement in June 2022.
During all this drama we forgot to celebrate that we were the first Finnish venture capital fund who was able to get powerful Swedish fund of fund, Saminvest, onboard. We had started expanding to Sweden already in 2015-2016 when Tanya joined the team, were strengthening our team outside Finland and now having a Swedish cornerstone investor to our fund was an achievement. We turned into true Pan-Nordic – or New Nordic – player with the team located in Denmark, Sweden, Estonia and Finland.
Covid and changed geopolitical landscape made the deep tech focus of our second institutional fund more relevant than we anticipated when we started fund raising in the beginning of 2020. But technology is not enough as such, it also needs to have an impact and enhance sustainability. The world needs big breakthrough technologies that will help to manage climate crisis and challenges brought by aging population and to protect democracy. This is our mission also in the future.
Lessons learned and next steps
Venture capital is a service business and people business. VC managers need to serve well both their clients – founders / entrepreneurs and fund investors. The biggest success was when the founders of our exited portfolio company invested in our next fund. Despite all the ups and downs we have had during the run, mutual respect continues.
Barrier to enter venture capital business is high as you need to convince other people to give their funds, or funds managed by them, for you to decide. Another barrier is to get access to relevant deal flow. In Butterfly Ventures we have tried to redeem the trust of fund investors with long-term and systematic work and secure access to relevant deal flow with our geographical location enabling efficient leg work added with structural cooperation with technical universities and research institutions.
In my opinion this business is more for curious minds than know-it-alls – big ears are better than big mouths. There are big egos also in this business – maybe more than in many – but I prefer a kind and humble approach. Being kind does not mean that you are soft and being humble does not mean that you cannot have well-argued strong opinions. Good manners are always appreciated as no-one wants to work with a**holes.
If you want to go fast, go alone but if you want to go far, go together. This applies to the greatest extent to venture capital business. Having good co-founders and openness to expand your team and share upside is essential. We have been fortunate to find good new team members and look forward to them playing an even bigger role in the future of Butterfly Ventures.
Venture capitalists are assigned to take risks and find breakthroughs that may have a big effect. It’s not too difficult to take risks but assessing and analyzing the outcome in the distant future is. Sometimes fulfilling this assignment resembles getting to the moon with a moped that you need to convert to a spaceship on the way. But you won’t know if you don’t try.
– Ville Heikkinen