Latin America Venture Capitalists: Searching for More Than Just a Good Idea

It is a known fact that Latin American entrepreneurs embarking on startups are constantly on the lookout for financing to back their business ventures, with the hope of …

“The most important thing is the work force,” states Hernan Fernandez, cofounder and Managing Partner at Angel Ventures.

It is a known fact that Latin American entrepreneurs embarking on startups are constantly on the lookout for financing to back their business ventures, with the hope of making the enterprise more profitable and boosting its growth on both a local and a global scale. It is equally true that the organizations that possess said funds are also on the lookout, but as it turns out, being an entrepreneur with a good idea for a venture is not enough – they want someone who goes above and beyond, showing commitment and good business vision.

According to the Latin American Private Equity & Venture Capital Association (LAVCA), in 2013 alone, Capital Social and Venture Capital firms provided US$8.9 billion of financing, investing in 233 regional projects – the highest amount in six years, (showing a 13% increase on the previous year).

Without a doubt, these firms are seeing the value of investing in new businesses.  For example, Intel Capital, (the Venture Capital unit of this technological giant) has been in the VC business for over 20 years and has invested in over 1,300 companies spread over 56 countries.

On a global scale, the number of corporate investment units has doubled over the last five years, (rising to 1,100 units) and at least 25 of the 30 firms making up the Dow Jones Industrial Average have one.  According to Global Corporate Venturing, the $6.4 billion that said units have invested up until this year is 60% more than the amount invested in 2012.

As you can imagine, entrepreneurs are queuing up, business plans in hand, hoping to obtain the financing they need to ensure the regional or global business projection they are dreaming of. However, experts agree that it is unlikely that a startup be granted financing on its first attempt.  They point out that having a good idea is often just not going to be good enough.

So what criteria do these VC organizations take into account when taking the leap of faith and investing in a startup?

Business Passion

“The most important thing is the work force,” states Hernan Fernandez, cofounder and Managing Partner at Angel Ventures, an organization that looks to help entrepreneurs and emerging small and medium-sized enterprises (SMEs) to get financing from Angel Investors. “If the team has good credentials and its members have worked together on the startup for a reasonable length of time, they are much more likely to achieve a noteworthy result on their endeavor,” he says.

According to Fernandez, a startup should include at least one General Manager or CEO, one Marketing Director, one Technology Manager and one Finance Manager. “A startup involves a lot of sacrifice, and seeing teams larger than this is unlikely,” he states.

Rogelio de los Santos, General Manager at Alta Ventures – an organization investing primarily in areas relating to the Internet, software as a service [SaaS], mobile computing, security, communications and health – states that particular emphasis is given to the person in charge of the project; analyzing his skills and the way in which he reacts to both good and bad news. “We try to make sure that this person is able to get us from point A to B as promised,” he says.

Given that Alta Ventures invests at an early stage, they place a lot of importance on the value proposition – making sure that it will be attractive to the target audience and will have an impact on its respective industry or sector. De los Santos also explained that the business project should have a potential global reach and good opportunities for growth.  “We try to help them make their value proposition stand out. We help them get the competitive advantage by giving them access to our technology and the help of our qualified staff,” he adds. “We aim to assist in the creation of a business that will stand out; one that will be a significant player in the industry in twenty years from now. We don’t just want it to expand; we want it to make money and generate value for the company.”

According to Vincent Speranza, National Director of Operations at Endeavor, they put emphasis on people rather than companies. “We believe that it is important the individual has the passion, leadership skills, vision and ambition needed to create a scalable business. Next on the list is an innovative business model, and finally, we confirm that the business is at a turning point,” states Speranza. “We believe that a business model can always be modified; the passion one feels for their business is much more difficult to manipulate.”

Staying Focused

Of course, innovation is crucial and most VC organizations value it highly. According to the experts, innovation can manifest itself in a variety of ways. De los Santos states that innovation can be found in business models and in the development of proprietary technology. “Conditions vary from one sector to another. You would be mistaken in thinking that one type of innovation will be successful in all circumstances,” he assures. “We try to identify value propositions whose innovation sets them apart from the rest and put them, (as far as is possible) ahead of the competition.”

Hernan Fernandez from Angel Ventures emphasized how a startup is rarely granted financing on its first attempt. However, there are certain elements that businesses such as Angel Ventures look for when considering the proposals of those seeking financing. “It is important that the entrepreneur be focused. We invest in teams, not ideas. Ideas may have value, but if the individual starts to explain how he has three projects in the pipeline he is demonstrating a severe lack of focus and it is unlikely we would do business with him.”

Similarly, Fernandez states that an entrepreneur should never be passive; putting the business on hold until he has the necessary financing in place. “Of course, capital is extremely important to the survival of the business, but a successful businessman is the one with the ability to swing it,” he states. “Starting up an enterprise isn’t a full time job; it’s a full life job.”

Making the Most of Experience

As an accelerator and promoter of high impact entrepreneurs, Endeavor has started working with a network of mentors, mainly managers from big businesses, who provide the entrepreneurs with up to three hours of consulting services. This has proven to be of great help to the businesses they support. “Entrepreneurs likely to benefit from the abilities and experience of a mentor are assigned one by Endeavor; enabling them to continue to grow,” explains Vincent Speranza.

Once the mentors and the different advisory boards are convinced that the business is ready to receive financing, Endeavor helps them use the investment funds to find the needed capital. “We have a system in place that allows us to make the best possible investment fund available to the entrepreneurs,” he states. “Endeavor is a platform in charge of putting people in touch with one another; we don’t invest directly.”

With a capital fund of $70 million (provided by Mexican, American, European and Institutional investors), Alta Ventures offers three levels of investments.  According to Rogelio de los Santos, they firstly invest in businesses that have a clear view of their value, the client profile they are targeting and the business model they are planning on using to help them to grow. “We are allowed to invest between one and three million in this type of business,” he explains.

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They also consider investing in businesses that are still in the ‘formative stage’, that is, ideas that they feel have the potential to prosper. They are allowed to invest anywhere between $100,000 and $500,000 in these types of enterprises. “Finally, we consider investing in businesses that are already experiencing growth, providing an injection of capital of between five and seven million dollars in the first application.”

The ongoing support they provide is also significant.  According to de los Santos, they aim to actively participate in the business’ administrative board as well as its corporate governance.

A Better Class of Entrepreneurs

“I don’t believe that Mexico is lacking entrepreneurs; they just need to be of a better class,” states Vincent Speranza from Endeavor. Remember that when Endeavor started operations twelve years ago they talked little of entrepreneurialism as being the answer to a country’s economic, social and cultural dynamism.

Today, the definition of the term ‘entrepreneur’ has become somewhat clouded, which has lead to the need to differentiate between genuine entrepreneurs and those merely claiming to have entrepreneurial skills. Endeavor talks a lot of high impact entrepreneurs. “A high impact entrepreneur is one that is able to build a successful business, while at the same time having the ability to reinvent it if needed and being willing to invest time and money in its ecosystem,” states Speranza. “We measure the multiplier effect they have on their ecosystem as this has a positive influence within said ecosystem.”

According to de los Santos, entrepreneurs and those heading up startups should think big and adopt global business practices. This, he states, involves improving their skills, building on their knowledge and better positioning their businesses in their respective markets: “There is more and more enthusiasm and interest being shown by entrepreneurs when it comes to going out and raising capital and developing projects that require additional infrastructure in order to be successful.  And nobody is going to be able to put a stop to this trend as there are more and more people wanting to write their own personal success story.  Entrepreneurs need to get out there more and prove that they can make it happen, not just to their local and regional peers, but to the global ones.”

Hernan Fernandez from Angel Ventures highlights the importance of being able to identify the lifestyle entrepreneurs; those that see entrepreneurialism as a lifestyle choice. These are usually those who take a year out to raise capital for the launch of their startup, with a view to returning to their previous position if the venture is not successful.

“You have to be able to differentiate between real entrepreneurs and those that are not really committed to the venture,” states Fernandez. “You have to take into account where they are coming from, whether this is their first of second round of financing and whether their business has proven traction. There are a large number of entrepreneurs looking to set up their businesses and the more entrepreneurs there are, the more we will benefit.”

The Next Google

Technology startups receiving financing from VC funds include successful enterprises such as metroscubicos.com, well-known within the real estate sector; clikonero.com, from the electronic sector; Ondore, which is involved in social media analysis and monitoring; Clip, a mobile payment platform; and Enova, which is involved in educational technology. And this number is constantly rising.

Investors agree that it may take a while to see another startup that will have a long-term impact comparable with Google or Facebook. “We have our current stars and we are able to anticipate which business will be most successful, but until we are able to see how a full cycle pans out, with the capital being returned to us in full, we are all on level footing,” states Hernan Fernandez from Angel Ventures. “Up until the last peso is invested, we will focus on returning the money and trust placed in us by these investors.”

“The next three or four years will prove crucial in determining the future.  I refer to aspects such as the demographic growth of the country, the consolidation of macroeconomic areas, the structural reforms, the effect of mobile telephones and the Internet, as well as the average age of consumers.  I believe that there are many factors that encourage optimism when it comes to entrepreneurialism,” concludes Fernandez.

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