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Peru Venture Capital Overview

As more Magma companies start to do business in Peru, we’ve gotten more experience learning about the Peruvian entrepreneurial ecosystem. I decided to publish a short overview of the Peruvian Venture Capital Ecosystem in hopes that it will help entrepreneurs doing business in Peru. Special thanks to Greg Mitchell, Managing Director at Angel Ventures Peru, who provided much of the research for this post. Thanks Greg! From the link:

VCs

Angel Ventures, a Mexico-based VC, has a local presence in Peru through its Angel Ventures Peru branch office. Angel Ventures Peru has sourced deals from Latin America for the regional fund, but the fund has yet to make an investment in a Peru-based company.

Accelerators

The Peruvian government, through the Ministry of Production has a program to support local incubators and accelerators.

Endeavor – Endeavor is a global organization that promotes high impact entrepreneurs. It arrived in Peru three years ago and has been a leader developing the ecosystem.

Wayra – Wayra Peru is part of the investment arm of Telefonica. They invest in startups generally with $50k + $25k of services for 5-10% equity on convertible notes. They prefer technology companies that can be Telefonica clients or have products that can integrate into its other solutions.

Latin American Entrepreneurs: Don’t Be Scared of the US Market

I wrote my monthly column in the Chilean daily El Mercurio about some of the interesting startups from Latin America that are starting to do business in the US. An excerpt from the English translation here (full English and Spanish versions:

A few weeks ago, COPEC, a Chilean convenience store and gasoline service station chain, acquired Delek, a US convenience store and gas station chain with 348 US locations for $535MM. COPEC has operations in Mexico, Colombia, Peru, Ecuador and Panama, but this is their first foray into the US market. It’s an important step for Chile because it shows that both big companies and startups alike shouldn’t be scared of the US market. In fact, they should view the US market as a big opportunity to expand outside of their home markets.

For way too long, when Chilean companies large and small have wanted to expand out of Chile, they’d look at Peru, Colombia and maybe Mexico. But we’re recently seeing a big change, both by startups and by big companies like COPEC.

It’s important to show Chileans that they shouldn’t be scared of the largest market in the world and that there are opportunities to diversify outside of Latin America. At Magma, we’ve seen a multitude of entrepreneurs pitch and many of them are scared of the US. They think that the market’s too big. That it’s too competitive. That all of the problems are solved in the US and that’s its difficult to compete from Chile. In reality, it’s a lack of confidence.

Guide to Recruiting and Retaining Latin American Startup Talent

I wrote a blog post on my personal blog about how to identify and retain Latin American talent for your startups. It’s a bit different than recruiting in the US and I figured that the things I’ve learned running Magma for 2+ years would be helpful to other startups. Some highlights:

One of a founder’s most important duties is Identifying and recruiting top talent. Finding and convincing the best people to work for your startup can be the difference between success and failure. There are hundredsofgreatresources on how to find great talent in the US, but Latin America is very different. US strategies don’t usually work in Latin America.

Recruiting for startups in the US is difficult because the market is extremely competitive and well developed. But it can be easier because many people want to work at a startup because “startups are cool.” Sometimes they even pay well.

Many US workers choose a mission driven company that aims to change the world, or a company that offers workers the opportunity to work on interesting problems, rather than the company that pays the most or has the highest brand recognition. Additionally, structural advantages like recruiters and well developed stock options plans showcase startup opportunities and push more people to take a risk with a startup.

In Latin America, it’s different. It can be difficult to recruit for startups, but not because of competition from other startups.

Read the rest of the post, How to Identify and Recruit Latin American Talent on my blog.

Photo credit: Founderlist

Highlighting Latin American Startups

I wrote a blog post on my personal blog highlighting some of the top Latin American startups from the region. From the link:

When I meet with US and European entrepreneurs and investors, they frequently want to know what startups are doing well in Latin America.

There are generally three types of startups that generally do well:

1. Latin America based startups solving problems for Latin American market

2. Startups that target the US/European market and have a Latin American back office

3. Brazilian startups that generally target the Brazilian market

Each niche has their own pros and cons, but at Magma, we invest in a subset of the first niche: B2B startups that are based in Latin America and serve Latin American companies and the second niche: startups that target the US/European market, but have their back office in Latin America.

I’ll leave Brazil’s burgeoning startup scene aside for now and focus on some of the most interesting startups I’m seeing in Spanish speaking Latin America. Post in the comments if there’s a startup you think I should include.

Read the rest of the post to see a list of top Latin American startups.

Chilean Venture Capital Overview

I wrote a guide to Chilean Venture Capital on my personal blog that I hope is helpful to entrepreneurs looking to startup in Chile. From the post:

Lots of entrepreneurs ask me about Chilean investors and venture capital firms. Here’s my list that I usually send them. Hopefully it’s helpful.

Private Investors

Magma Partners – We’re the only fully private investment fund in Chile. We invest early stage and like to be first investors into companies. We’ll do initial investments of $25-$75k and can follow on with up to $250,000 per company. We like two niches:  B2B businesses in Latin America and companies that have their back office in Latin America, but whose primary market is in the US or Europe. 26 investments in 2.5 years. $5m fund. Presence in Colombia, Mexico, USA.

Public-Private VCs

The Chilean government, via CORFO, offers venture capital funds incentives to invest in Chile. For every $1 funds invest, CORFO can match an additional $2 or $3 with low interest debt that they forgive if you fail, but you must repay if you’re successful. Here’s the full fund list across all industries. These are the more startup focused funds.

Read the full overview of the chilean investment ecosystem on my blog.

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.

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