We spoke with Yrjö Ojasaar, co-founder of Change Ventures, about the investment firm's focus on founders from Baltic countries and he shift in global trends towards climate tech.
Change Ventures has raised two funds totaling around 50 million euros, and its investments include companies like Veriff and Printify.
A few key takeaways from Yrjö Ojasaar:
"There's been overall world trend where we have externalized the environmental issue, to where we don't take into account, what is the effect, the long term effect on society on carbon on availability of materials on prices on any of that. It's sort of been accepted as well, that we'll put that down for a zero. And that's why virgin materials ... has been price competitive, we have now realized that the cost is not zero."
"We've been really hooked on this cheap energy, but it's been like getting energy from coffee. Instead of sleeping, exercising and eating well, I'll just have one more espresso. One more espresso. You get this quick boost. And then you need another quick boost, and you need another quick boost. But how long can you keep going without changing the fundamentals?"
"I think solar, wind, those technologies are going to have a much faster rollout, and more energy, more investment, more attention dedicated to them. And they're going to be much faster in scaling. So there are going to be positive impacts in the long run. And, of course, with electric vehicles and alternative energy vehicles, and even, you know, cold fusion and things like that. They're all going to get a boost from trying to unhook ourselves from the traditional petrochemical type of industry."
Tarmo Virki 0:08
Welcome to the NatureBacked podcast of Single.Earth. In this series, we're talking with investors about the vision of the new green world. My name is Tarmo Virki. And in this episode eight, I'm talking with Yrjö Ojasaar from Change Ventures on the Baltics startup scene and how he will be looking for further investments in the climate sector. Enjoy the show. Yrjö, thanks for joining us today.
Yrjö Ojasaar 0:35
Thanks for having me.
Tarmo Virki 0:37
Let's discuss a little bit what Change Ventures is? How was it born? And what's the story behind it.
Yrjö Ojasaar 0:45
You know, like with every venture fund, it's one of those weird origin stories because it didn't start at all like a normal European Venture Fund. It started as an American venture fund. Change Ventures One is a Delaware fund, 100% American money. And so it is not your typical fund where there's, you know, EIF, EBRD, government money, et cetera, et but it was the fastest way for us to get started also. So we were able to get going with essentially like, starter fund 6.5 million, make some nine investments. And based on the results of fund one, then we ended up raising fund two, which is a European fund, much more traditional in the vein of the European funds, where we have a lot of institutional investors, including EIF, EBRD, Finnish, Latvian, Italian, German, UK institutional investors, and about 50 million or so we're the largest seed fund in the Baltics now,
Tarmo Virki 2:09
What's the investment logic? What kind of companies you're targeting?
Yrjö Ojasaar 2:13
Well, our tagline essentially is investing in ambitious Baltic founders. And the thing that we do differently, really, is that we look at Baltic founders. That's essentially our geographic focus. These are the founders that my partners and I know the best. When we looked at the average time how long we know founders before investment, that ended up being in the median over four years. So we've seen these guys do maybe one or two projects already, often, you know, failing at the first or the second one, and only then we invest. So that's a different approach than some of these other funds in the Baltics that are looking at all of Europe, or maybe our specialist in terms of deep tech or something like that; we're a generalist. Still, the one common denominator is a Baltic founder core to all of them. And that's sort of our specialty.
Tarmo Virki 3:17
Is there such thing as Baltic? You know, Estonians, we really don't like to be Baltic.
Yrjö Ojasaar 3:23
I think we should be more proud of it. Because the Baltics actually have their own flavor. And it's an advantage. Because first of all, all the Baltic startups, I think, are born global in the sense that they right away recognize that look, you know, this is not, we have no home market. This is not a market on which you can build a business upon. There are not enough people, territory, markets, money, talent. And from day one, you have to be looking at international markets like the US, UK, Africa or you know, any other market for that matter. So I think we do have some very special traits for startups here. And I don't think we should be ashamed of it. In fact, part of the reason why I think the Baltics have been so successful is because we have our own path, instead of trying to be mini Stockholm, or instead of trying to be kind of Berlin, or sort of London. You know, let's go with what we're good at. And let's be proud of that and not try to play someone else's game. My partner Rait has, I think, the best analogy for this, if you remember, a movie called Cool Runnings; it was the Jamaican bobsled team. And, you know, they were successful not trying to be the Swiss bobsled team to replicate, you know, or the Swiss or the Swedes or the Austrians? They were good at being themselves. And I think it's the same way the Baltics should play themselves, not trying to be someone they're not.
Tarmo Virki 5:13
Cool. How do you cover Baltics - you and Rait are in Estonia, Andrius is in Riga, right? How do you cover Lithuania,
Yrjö Ojasaar 5:26
We have a senior associate, Gabriella, in Lithuania, in Vilnius, and she covers all of that market. So we have all of the Baltics represented. And again, that's an advantage that we literally have people in every Baltic state instead of trying to do it all remotely from Tallinn or Vilnius.
Tarmo Virki 5:53
Let's go a little bit deeper into what we are doing here at The NatureBacked, you know, talking about climate -- what have been your first investments in climate-related companies?
Yrjö Ojasaar 6:06
So far, we have made four investments that are directly related to climate; others may be indirect.
Those that are direct: from fund One Timbeter, it is a way of measuring industrial timber, cut timber basically, very exciting project, we can get more into details of how they're changing the world and what impact they're having.
Then from fund Two, we have three investments so far air Aerones, which works on wind turbines and cleans and repairs wind turbines; Kwota, which mints and verifies and trades in carbon credits. And we have Gelatex, which is an alternative meet startup.
Tarmo Virki 7:03
Gelatex pivoted, right? I remember they were doing something leather-related?
Yrjö Ojasaar 7:08
That's right. It was related to this space because they were trying to replace leather with gel-based materials. And in, in typical startup fashion, they were looking at these different opportunities and where their technology could be used best. And they realized that wow, in this alternative meat space, there's a real challenge. We can make patee, essentially. But most people don't like the consistency of patee; when they're looking for a burger, or when they're looking for a steak, they're looking for that mouthfeel. And what I mean by mouthfeel is literally the feeling in your mouth as you're biting into the meat, that there's a certain specific feeling and sensation, you're getting your mouth from, you know, the structure of the meat. And that's been the holy grail of that industry is trying to achieve, not just that the flavor or the color is the same, but also the sensation, the mouthfeel of the meat, and their technology is able to create these scaffolds or these layers that meat has, right. And so when you bite into steak made with their technology, it actually feels like steak.
Tarmo Virki 8:33
How far are they? When can we go to the restaurant and order a steak?
Yrjö Ojasaar 8:39
On an experimental basis, on a one-off basis, already. They're working with some of the largest alternative meat manufacturers in the world. And they're already selling products to them. And so it's already possible to do that. But in terms of going to your local grocery store and buying these steaks, I think it's still a good, you know, three to five years away.
Tarmo Virki 9:07
Kwota just recently published a pre-seed round of 1.5 million euros.
Yrjö Ojasaar 9:14
We just came public with that announcement. And it was a fairly large pre-seed, one of the largest pre-seeds in this region.
Tarmo Virki 9:24
The idea is that the guys came from the recycling industry -- the kind of garbage industry, or what it is called these days...
Yrjö Ojasaar 9:35
Tarmo Virki 9:40
Waste is the word I think most people would recognize -- and start to build, basically, a new world upon this.
Yrjö Ojasaar 9:49
Absolutely. And that's what got me. Well, a couple of things that got me really excited about this - and I was the deal champion for our fund on Kwota - one, the founders weren't just 19-year-olds going, hey, you know, we're gonna disrupt everything, we're gonna do everything differently, while they don't even know yet what they're changing. These guys had been working on C- level positions in Ragn Sells, one of the really large waste and environmental services companies in the world from Sweden. So they knew this industry; they knew how recycling is being done currently. And from that knowledge, they recognized what could be changed and what should be done differently and better. So that got me excited. And then, as I dug deeper into this carbon credits space, it became very interesting.
I became very interested in the economics of it, and it looked like the current carbon credit space is broken. And the easiest way to understand why or how it's broken is that 80% of the money from these credits goes to consultants, to the people setting up the tokens, verifying them over ten years going back and forth. And, you know, all of the procedures and, and all of the diligence, and all of the trading and all of that was eating up the money, so that only 20% ended up actually with those that we're creating, you know, these credits, so Kwota flips that economics of that, from, you know, 80:20 to 20:80, 20 goes to consultants, and 80 actually ends up with the projects now. And with that, they're hoping to dramatically increase recycling so that recycling becomes competitive with the use of virgin materials.
Tarmo Virki 11:53
80% sounds crazy. Do you know any other industry where 80% goes to consultants?
Yrjö Ojasaar 12:03
Lawyers? No, actually even there, in most deals, you know, lower is account to, you know, 5% or 10% of the most of an IPO or a deal. But if you think about it, it kind of makes sense; with traditional carbon credits, most of them are based on either land projects, whether that's land for agriculture or land with timber use. So you'll make the promise that look: I'm not going to cut down these trees for 10 years. So for 10 years, in the middle of the rainforests somewhere in Brazil, somebody has to go and regularly verify whether the trees have been cut. You know, how are they being grown? How what's what kind of harvesting is happening in this space? Or with agriculture? You know, are they using organic materials? How have they really changed? How has the soil chemistry changed over 10 years? Well, this is, you know, quite cumbersome and takes a long time. And it's a very involved process. Because Kwota guys are addressing recycling, first of all, it's not in the middle of a rainforest in South America or in Africa. You know, it's that whatever recycling facility in any country and these facilities are quite compact, and using modern IoT solutions, you know, having cameras on the facility, and using all the data that recycling facilities already have to give to their customers and to the government, they can really cut that 80% to the 20% for verification. So it's an entirely different model of verifying how new recycling is happening and, therefore, how these credits are controlled and verified, bringing a lot of transparency to this industry.
Tarmo Virki 13:59
Is there anybody else doing creating carbon credits based on recycling? Well, the guys are building the standard.
Yrjö Ojasaar 14:11
I think they're going to be one of the leaders in the industry. I mean, some recycling credits are already being done. Some of these are not on the voluntary carbon credit market. Most of these projects are actually related, you know, to the government projects, and it's a different carbon credits market when governments are buying and selling them. But in the voluntary space, they are pioneers; they're the leaders in this space. And we believe that you know, while forest and agriculture are about 100. You know, make up not quite 100% but let's say 90% or 80 85% of the market, then Kwota is going to increase the shareholding in terms of credits coming from recycling from one or 2% to 20 30% or more?
Tarmo Virki 15:09
When you look at the projects on your table, how do you treat climate? Is it somehow different compared to, I don't know, FinTech or SaaS, or what's the kind of their climate rolling your investment decisions?
Yrjö Ojasaar 15:28
To be very direct, I would say there is no difference because we are not an Impact Fund. So we have not told our investors that look, you know, we're gonna make investments and impact, or environment will be a big part of our decision making. So a project gets extra points for having more impact or extra points for having a larger impact on the environment. So for our fund, we've always told our investors who gave us money that we look at all projects equally, you know, whatever is the best project wins, right? That's where we put money. That's where we are different from impact funds. All of these investments, I mentioned Timbeter, Ardennes, Kwota, Gelatex, invested in the fundamentals and invested in what we see as an opportunity to do something revolutionary and bring back revenues to our investors. So in terms of modeling, in terms of its economics, there is no difference for us.
Tarmo Virki 16:37
Do you see the number of such projects increasing? Looking at the Baltics, I guess 10 years ago, there were not many environmental or climate-related projects in our region. Now you have four in the portfolio, and there's plenty more on the market. How do you see the trend?
Yrjö Ojasaar 16:59
Absolutely, the trend is increasing. I think that's very positive. There's been this overall world trend where we have externalized the environmental issue - we don't consider the effect, the long-term effect on society, on carbon, on availability of materials, on prices on any of that. It's sort of accepted as well that we'll put that down for a zero. And that's why virgin materials and the use of brand new materials have been digging up new materials all the time, have been price competitive; we have now realized that will the cost is not zero. In fact, with rising water levels, with changing climate, additional new dangers and risks coming from forest fires, flooding, from much stronger storms, all of these factors do have a specific cost, it may be difficult to calculate directly, but it's starting to be more and more quantified objectively. And in that sense, I think we as a society; we're becoming more aware of it. And we're being more careful in making those calculations. That creates an opportunity for a lot of environmental projects that 10 years ago, nobody would have maybe looked at and would have just scoffed at; oh, well, you know, that's nice to have, but it's starting to be a must-have a lot of these solutions, we realize that are absolutely necessary for us and this planet, and therefore, they're becoming economically viable.
Tarmo Virki 18:56
This trend is basically happening at the same time when the world globally is changing. So it's, it's a good point that it kind of puts the climate or impact-related companies actually on the same line with the classical startups, kind of equals the starting point.
Yrjö Ojasaar 19:23
I agree. I think there's a certain leveling of the playing field, in the sense that these environmental or impact investments were looked at originally as, as this special category, almost like, you know, a do-good type of project, almost, you know, like an NGO thing instead of a real economic venture scale thing, and that's changed and that's changed for the better. As you said, there are many really interesting projects in the Baltics as well. Quite a few exciting new ways that people are looking at recycling textiles, you know, fast fashion and trying to address some of the very serious problems related to those industries and address them in a reasonable economic, financial way. So that also those that invest in these projects can make a profit.
Tarmo Virki 20:33
As an investor in the Baltic region, I have to ask - do you see the current war having a bigger impact on the investment climate than 2014-2015?
Yrjö Ojasaar 20:50
Absolutely, in the long run, for sure. In the short run, everybody's sort of in this, let's wait and see holding pattern, kind of, let's see what Russia does. Let's see how Europeans react to it. But on the positive side, I definitely see that trends that maybe would have taken 10, 15, maybe 20 years to push through are now going through in 90% less time, maybe in three years. And what I'm talking about here is people realizing that LNG might be more reasonable than just buying energy endlessly from Russia or OPEC, from the Middle East. I think solar, wind, and those technologies will have a much faster rollout, more energy, more investment, and more attention dedicated to them. And they're going to be much faster in scaling. So there are going to be positive impacts in the long run. And the same, of course, with electric vehicles and alternative energy vehicles, and even, you know, cold fusion and things like that. They're all going to get a boost from trying to unhook ourselves from the traditional petrochemical type of industry,
Tarmo Virki 22:23
or removing, what's the beautiful word in English, the tit, or the?
Yrjö Ojasaar 22:31
I think maybe Germany is the most obvious example of this. We've been really hooked on this cheap energy, but it's been like getting energy from coffee instead of sleeping, exercising, and eating well, like, oh, yeah, I'll just have one more espresso. One more espresso and you get this quick boost. And then you need another quick boost, and you need another quick boost. But how long can you keep going without changing the fundamentals? Because the fundamentals are wrong. If all you're doing is surviving on espresso, right? You're doing something wrong, you know, with your basic promises. And the same way, I think environmentally, we've been using these hacks and shortcuts and the cheap ways of doing, but they are cheap only in the short run. That's because it's been cheap because we were externalizing the real cost again. We've been writing a zero where there's actual cost, but we're pretending like there isn't. I think the pretending has stopped for a lot of people related to the war. They weren't able to pretend anymore that there was no cost. There's a very serious real cost of these things.
Tarmo Virki 23:50
Cool. You know, something positive out of that tragedy. Always good to find those things. Looking into this year going forward. Do you have any big, big vision or target? What will 2022 look like for you?
Yrjö Ojasaar 24:15
Well, we still have investments to be made from our fund two. And we're continuing to look at very exciting Baltic startups. It is great to see how from the Transferwise, from Pipedrive a lot of the senior people aren't taking their money and running off to the you know, Bahamas or something and or buying islands and living somewhere in the Caribbean, but instead are going through the next project, the next project and at the same time even serving on boards of other companies and helping you know third and fourth companies with their challenges. So my hat's off to all of those entrepreneurs that don't just do a one-shot, I win, boom, I'm out, but are paying it forward are really helping this ecosystem and are doing, you know, their part in actually continuing this growth and the success story that the Baltics really are writing themselves. So thank you, all of those people. It's great to see you know, the Honeybadgers, all of Pipedrive guys investing, you know, Kisto and all of the TransferWise people investing and also, you know, taking part in projects, and the old Oh, geez as well, you know, it's great to see how things are going for all the Skype guys, you know, and seeing how Starship is doing and those projects, successfully raising money and innovating as well.
Tarmo Virki 25:57
I think that's a good point to wrap it up. Thanks.
Yrjö Ojasaar 26:02
Thank you for having me. And I look forward to making more investments in this space. And maybe I'll come back to talk about them with you.
Tarmo Virki 26:10
Absolutely. We'll do cheers.
Tarmo Virki 26:15
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Transcribed by https://otter.ai