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Doing Business in Latin America SUP Academy Talk

Apologies for the poor audio quality. Hopefully its still useful.

Here’s the show notes:

0:00 – Introduction: My story

Exchangehut, Entrustet, WelcuStartup Chile, How I ended up in Chile.

4:30 – Magma Team Overview + Introducing Beatriz Cereceda, our Entrepreneur in Residence

6:30 – Magma portfolio + What we do and how we’re different

11:00 – How to raise money in the US as a Latam company

15:30 –  The types of businesses you should think about starting in Latin America

B2B Examples: Pricing CompassMyhotelDeentyFounderlist.laAmberads

18:30 – More examples: Companies with their back office in Latam and sales in the US/Europe/Asia

Examples: ArchdailyPropertySimpleBankityMaker.doKetekaAmberads

20:20 – Why social startups should be in the US, not Latam

20:45 – Advice for doing B2B sales in Latam, focused on Chile

24:00 – Copying/Cloning in Latam + Adapting to local realities

29:45 – Why acquisitions are less common and for lower multiples in Latam

32:40 –  Q and A – How does Magma make money investing in Latam?

35:30 Whats the sales cycle look like for B2B companies in Latam?

36:30 – How do we decide how much equity we ask for?

37:30 – Are there accredited investor requirements in chile? Are there active angels? Founderlist.la.

39:00 – Is there a startup bubble in Latam? Worldwide? How attitudes have changed in Latam since 2010? Note: I misspoke on this answer saying MRR when I meant ARR.

2010. Chantapreneurs and serial contest “winners” starting to fail.

40:30 Is there a US startup bubble?

Photo Credits: Daniel EcklerEduardo BeltranElvis KennedyRichard HurdGarrett ZieglerGerard Van der LeunMark HunterDennis Yang

Investor and Advisor Behavior in Latin American Can Make Startups Univestable

We see many startups each year that have problems with their cap table that can make them uninvestable. Many times, its a founder who isn’t working but still has a significant chunk of the company.

Other times it’s investor and advisors with big chunks of the company, but not providing value. I wrote a post on my blog about what startups can do to avoid these pitfalls and how investors should behave to avoid making their investments uninvestable.

From the link:

One of the recurring problems we see with Latin American startups at Magma Partners is founders with too little equity. In the past two weeks, I’ve seen three cases where the full time founding team has 7%, 10% and 25% ownership after only one round of fundraising. Two companies had raised less than $100k, one had raised ~$200k. When we see companies with this structure, we tell the founders directly that it makes their company uninvestable. It’s especially true if the founders think they’ll need to raise even more money in the future, or plan to move to the United States. Every company is different, but founders should have at least ~70% at this stage, or even more if they plan to compete on the world stage.

We see five common causes:

  1. No Vesting – Cofounders who have left own significant equity
  2. “Part time cofounders” – People who aren’t full time who own significant equity
  3. “Advisors” – Companies with large numbers of “advisors” or “advisors” with significant of equity
  4. Unsophisticated investors – Raising money from people who view startup investing like investing in private equity or small businesses
  5. Investor Malice

Let’s unpack each one.

Read the full detailed post about founder, advisor and investor cap table mistakes in Latin America on my blog.

How to Come Up With Startup Ideas

My latest El Mercurio column was about how to come up with startup ideas and how many would be founders get this piece wrong. Paul Graham’s how to get startup ideas is the foundation for this post. A version of this post originally appeared in Spanish with the title Cómo encontrar ideas para emprender. From the link:

Lots of people dream of starting their own business. They want something of their own, to be their own boss and to try to build their business into something big and successful. As an investor, I meet with hundreds of hungry potential entrepreneurs looking for capital to start businesses. Their ideas run the gamut from small businesses to scalable tech startups. Their funding plans cross the specturm from VC, friends and family to bank loans.

The vast majority of the best Latin American companies that I see come from people looking for solutions to problems they’ve seen close up in their daily lives. Paul Graham, the cofounder of Y Combinator, the world’s most successful accelerator, put it extremely directly:

The way to get startup ideas is not to try to think of startup ideas. It’s to look for problems, preferably problems you have yourself.

Startup Valuations Created By Government Investments Aren’t Real and Can Hurt Startups

The Chilean government, via CORFO, has been seeding the entrepreneurial ecosystem to help build startups. They’ve done a great job, but there can always be room for improvement. I wrote a blog post about synthetic valuations created by government and government backed incubators and accelerators and how they can hurt startups. From the article:

The Chilean government, via CORFO, has tried to seed the Chilean startup ecosystem to get it to grow more quickly. There’s always room for improvement, but overall, they’ve done good work and the ecosystem has grown. The three main programs CORFO has to support startups are:

  • Startup Chile – $20m ($40-25k depending on exchange rates) equity free grants
  • SCALE – $60m (89k-120k) equity free follow on grants
  • SSAF – $20m, then $40m (89k-120 total) follow on either direct or via incubators for 7% option for up to three years

CORFO awards many SSAFs each year, most via incubators that use CORFO’s money to “invest” in startups. These startups pass a selection process, then get $10-20m upfront, and then if they make it through each incubator’s unique process, they can get the $40m follow on. The incubators put the startups through an acceleration process, which can either be helpful, neutral, or in some cases harmful to the startup, depending on the incubator’s skillset.

Each incubator has slightly different terms, but most are a total of $60m in exchange for a 7% option for up to three years. Some take a percentage of the startups sales in addition or to replace this equity. Others have buyback terms where the startup can buy the option back for a bit more than the original “investment.” Many of these options last for 2-3 years.

The incubators’ options bring up two questions I won’t address in this post:

  • Should incubators with little (or no) skin in the game get equity in startups they “invest in” or select?
  • Should these incubators get equity? And CORFO, and by extension the Chilean taxpayers whose money is being “invested”, get nothing?

And two issues that I will address:

  • Incubators give startups CLP$60m (between US$89k-120k, depending on exchange rate) for 7%, creating an implied post money valuation of CLP$857m (Between US$1.2-US$1.7m, depending on exchange rate).
  • Incubators’ options have 2-3 year terms and most don’t have private money triggers that force the incubator to convert to equity.

Read the full post about how government money valuations can hurt Latin American startups.

Tips for Foreigner Entrepreneurs Doing Business in Latin America

I wrote a blog post about how to do business in Latin America that I think will be helpful to entrepreneurs, especially non Latin American natives. It’s a modified version of a talk I gave to Startup Chile.

When Startup Chile invited me to share my advice for new foreign entrepreneurs doing business in Latin America, it gave me an opportunity to synthesize the things I’ve learned over the past five years living and working in Latam. After coming to Startup Chile with a startup that did business in the US, teaching entrepreneurship at Chilean universities, starting a Latin American property business, starting my own ecommerce startups and meeting hundreds of entrepreneurs looking for investment via Magma Partners, I’d gotten a pretty good feel for the cultural differences between Latam and the US.

When I first got to Chile in 2010, I knew there were cultural differences, but I just worked under the impression that if I worked hard in the same way I did in the US, I’d be successful, like I had been in the US. Working hard helped, but there were many cultural misunderstandings that hampered my progress.

Read the full post about doing business as a foreigner in Latin America on my blog.

Invested Partners makes bold move in tech sector

Far far away, behind the word mountains, far from the countries Vokalia and Consonantia, there live the blind texts. Separated they live in Bookmarksgrove right at the coast of the Semantics, a large language ocean. A small river named Duden flows by their place and supplies it with the necessary regelialia. It is a paradisematic country, in which roasted parts of sentences fly into your mouth.

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Charge US Prices with Latin American Costs

My latest El Mercurio column is about one of the business lines that we love to invest in at Magma Partners: companies that have their tech teams in Latin American, but sell into the US market. A version of this post originally appeared in Spanish as a column in El Mercurio, with the title Startups: vender a precios de Estados Unidos con costos chilenos.

The internet’s magic is that you can connect anywhere with any part of the world from where ever you are. We notice it when we talk with friends living in other countries, connect on social media, look at photos from around the world and keep up to date with the latest news from all corners of the world. We’re really living in a global world.

Tech startups are also global. A startup’s market can be the entire world from day one. But many Chileans only think about technology businesses from the US and Europe that have gotten to the Chilean market.

We’ve all heard about foreign startups that sell into the chilean market and many chileans have made purchases from sites like AmazonAsosBook Depository,Aliexpress and more. But the vast majority think it’s impossible to do the opposite: sell in the US from Chile.

Read more about how we see selling to the US market from Latin America as one of the biggest opportunities in Latin America. If you’re an entrepreneur thinking about this business model, we can help you. We’d love to hear from you!

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Far far away, behind the word mountains, far from the countries Vokalia and Consonantia, there live the blind texts. Separated they live in Bookmarksgrove right at the coast of the Semantics, a large language ocean. A small river named Duden flows by their place and supplies it with the necessary regelialia. It is a paradisematic country, in which roasted parts of sentences fly into your mouth.

Continue Reading

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Far far away, behind the word mountains, far from the countries Vokalia and Consonantia, there live the blind texts. Separated they live in Bookmarksgrove right at the coast of the Semantics, a large language ocean. A small river named Duden flows by their place and supplies it with the necessary regelialia. It is a paradisematic country, in which roasted parts of sentences fly into your mouth.

Continue Reading

Edtech Startup Edoome Launches In All Chilean Public Schools

Portfolio company Edoome recently secured a partnership with the Chilean Ministry of Education to roll out their product to all chilean public schools. I wrote a more detailed analysis of why this is big news on my personal blog. From the link:

Edoome (AngelList profile), a social learning management platform that turns classrooms into an online community so teachers, students and parents can communicate and collaborate easily and securely, just signed an agreement to launch Edoome in all of Chile’s public school system. In the next few months, 200k+ teachers and 3M+ students at 12,000+ Chilean public schools will start to use Edoome, making students’ and teachers’ lives easier and better. The majority of teachers who use Edoome save more than two hours of planning and preparation time per week, letting them focus on what they do best: teaching students.

This agreement is a big step forward for Edoome, as it brings an entire country’s education system into the Edoome platform. In addition to this agreement, Edoome has been growing quickly in Mexico, Spain, the US, Ecuador and Colombia over the past 6-12 months and now has more than 75k teachers and 150k students using the platform.

You can read the full post about why we’re excited Edoome is now part of Chile’s public school system.

 

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