Posted: April 3rd, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | No Comments »
LAVCA recently hosted an event at Monashees for venture capital fund managers, limited partners and service providers.
Most of all the VCs currently active in Brazil were in the room, which was cool, and it made for an interesting discussion.
One of the things we discussed was the size of a typical venture fund’s investment portfolio in Brazil, to whit: it’s smaller than in the US. That matters, because small portfolios increase risk (it concentrates the fund in a smaller number of companies, so if one fails it disproportionately impacts the fund.)
Portfolios are smaller in Brazil not just because funds are smaller here, nor because there are less companies per investor. It’s because, on average, an early stage company requires more time invested by the VC. One fact everyone learns in Brazil, the distance from business conception to market penetration is greater here than in the US. It takes more time, more resources, more perseverance.
Add to that the fact that many entrepreneurs are building a company for the first time and you will see that VCs need to spend more time per company than a VC in the US does.
In the US, the VC can make portfolio construction decisions assuming that, for most of his companies, a board seat plus a phone call every couple of weeks provides sufficient support. This allows them to put together a portfolio of investments numbering 30+ companies relatively easily.
In Brazil, if a VC puts together a 30-company portfolio in a short period of time, he will spend his days and nights putting out fires, fielding panicked phones calls and wishing he had gotten a job at Petrobras like his parents advised.
What’s the solution? Time and experience, both for entrepreneurs and investors. Aside from that, for early-stage investors, some form of shared space, incubation, acceleration, etc. is more than an interesting strategy, it’s essential. In the majority of cases, an early-stage investor in Brazil needs to be proximate to his companies until those companies achieve stability. Of course there are exceptions, and thank goodness for them. In general, however, I think early-stage funds will find that some form of shared space with most of their startup portfolio companies is a must.
In a way, that’s cool. At the LAVCA event, an attorney from K&L Gates, who has been in the business for many years, made the point that what is happening in Brazil is “old school” venture capital. In the early days in Silicon Valley, the pioneering entrepreneurs and investors did not have experience or examples to follow. They were joined at the hip in a new, risky, experiment. By necessity, the VC often took quasi-management roles – business development, operations, HR, etc. – to help his companies survive. Things are like that now in Brazil. It’s tough but it’s fun and, in some ways, it’s how early-stage VC should be.
Posted: March 20th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
In the last post I discussed whether a Brazilian startup should have a presence in the US.
Even if a Brazilian company decides it should have a presence in the US, however, it has an additional choice to make: Silicon Valley or New York?
In the last few years, New York has gone from an interesting but secondary market for startups to a viable and, in some cases, preferable alternative to the Bay Area.
Lots of factors have led to this but, when you think about it, New York is a logical place for a center of entrepreneurship. It might be the most vibrant city on the planet. In the US – think Ellis Island/the Statue of Liberty – NY symbolizes our immigrant roots and the promise of America: come here and make your life. It won’t be easy but, in NY especially, anything is possible.
NY says, “This country, this city, is an opportunity. The rest is up to you.” That is the primary message great entrepreneurs want to hear.
In addition, and this may surprise some people: people from the east coast of the US very often want to stay there. A great entrepreneur coming out of school in Boston, NY, Philadelphia and DC would often – most often – prefer to stay on the east coast. Before, that wasn’t a choice, now it is and many will take it.
What about customers? It is a world center of advertising, financial services, fashion, retail, media and publishing (and other industries that I will remember about two seconds after I post this blog…).
… in the most prominent example of a technology company shifting its focus toward New York [emphasis added]… Google now has about 2,750 employees in New York City, a 38% increase from 2010, the company told The Wall Street Journal. That's faster growth than for the company overall, which expanded 33% from 2010 to 2011.
"Many of the most talented and creative engineers and scientists in our field of computer science want to be here…there's a critical mass in the city," says Alfred Spector, the vice president of research and special initiatives based in Google's New York office.
Google's expansion in New York—once seen as too expensive for tech start-ups—has helped fuel a perception that the city is in the midst of a technology industry boom. It comes as Facebook, Hewlett-Packard and other companies expand their New York presences, and Cornell University moves forward with an engineering campus on Roosevelt Island.
Look, New York will never be Silicon Valley. Only Silicon Valley will be Silicon Valley – an exquisite center of sharing, innovation, mentorship, and technology.
But NY may be the only city that can honestly say it doesn’t want to be: NY doesn’t follow anyone or anything – the world follows it.
When it comes to an entrepreneurial ecosystem, what will NY be? I’m not sure. I only know it will be unique, vibrant, wildly successful… and place that Brazilian startups must consider if moving to the US.
Posted: March 10th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship | No Comments »
I just got back from a couple of weeks in NY and Silicon Valley. The NY startup ecosystem is booming and Silicon Valley is, well, Silicon Valley – cutting edge, best of class and incessantly innovative.
Several Brazilian entrepreneurs were visiting at the same time and we had some conversations about whether Brazilian startups need to connect with SV or NY.
My thinking has evolved on this issue: several years ago I watched two executive teams from promising Brazilian startups take weeks away from their companies to hang out in Silicon Valley. It had no impact other than to hurt their companies. Maybe they met some people and increased their network but, so what? Their companies lost ground in Brazil and missed a window of opportunity.
Running a startup takes obsessive focus and jaunts to SV or NY can be a distraction. On the other hand, an understanding of trends in the Valley and NY can serve as a competitive advantage for startups in Brazil.
Here are some rough guidelines:
1. For a startup whose partners and customers are in Brazil: monitor developments in SV/NY online and by, maybe, going to one conference a year. But focus, focus, focus on your core market in Brazil. That will determine your future.
2. For a startup that has important partners, e.g., technology providers, in the US but whose customers are in Brazil: take more frequent visits, perhaps quarterly, network with companies/people in the industry and perhaps attend an extra conference. The primary focus, of course, should remain on your customers in Brazil.
3. For startups dependent on customers in the US: you probably need a physical presence in the US, either a satellite office or even your headquarters. I don’t mean a situation where your core customers are in Brazil and you hope to, someday, penetrate the US market. There are many companies like this and my advice is to stay in Brazil and focus. If your future depends primarily on US customers, however, then your company should probably be there. This is especially true for B2B companies as opposed to B2C.
This last point (#3) is tricky: in the first place, why are you building a business in Brazil that serves the US market? Brazil is a large and growing market, one that you know better than the US, so why are you building a business that serves US customers? What is your advantage in the US? You should have good answers to these questions before attacking the US market, much less moving there.
In reality, however, there are no clear rules on this subject. It depends on the specific situation of a given company (and, of course, Visa issues). For example, one of our portfolio companies is a games company that generates over 90% of its revenue from American users, yet they have no need to locate there. Another of our portfolio companies serves game studios all over the world; sooner or later, this company probably needs a presence in San Francisco in order to fulfill their potential.
If you have questions about your specific situation, contact me and I will try to offer feedback.
Posted: February 29th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, US Venture Capital | 6 Comments »
Many experts in VC will tell you that venture capital, like politics, is a “local” business. It’s true, of course: the VC needs to know entrepreneurs face-to-face; they need to know the market into which their companies are selling; and they need to build the local networks that lead to quality deal flow. In addition, it’s difficult to effectively assist portfolio companies that are not nearby.
On the other hand, social media and inexpensive voice/video conferencing services enable effective communication over great distances. That, combined with sufficient travel, makes successful, geographically-diverse venture investing very feasible.
In fact, the world of startups, and thus venture capital, is increasingly global. Online media is melding together various markets into one international popular culture – the same YouTube videos go viral in the US, Europe and Brazil; Jeremy Lin is as massive a cultural phenomenon in China as in the US; people in Lebanon follow the same Twitter feeds as people in NY.
Regarding language, for better or worse, English seems to have become a common language of business and culture. This is not unprecedented – for many decades, French was “the language of diplomacy” – if you wanted to travel in international circles, especially diplomatic circles – you needed to learn French. Perhaps someday soon we will all need to know Chinese or Portuguese – many Americans are currently scrambling to learn one or the other – but right now it’s English.
Aside from that, translation services continue to level the playing field. It’s recently become possible to “get by” in most markets despite not knowing the language. Google Translate functions imperfectly but well enough. Other services like MyGengo increase efficiency and accuracy in translation. US personnel in the Middle East use handheld devices to communicate instantly in Farsi or Arabic. A high-quality smartphone app for the rest of us cannot be far behind.
The most intractable barrier to the globalization of startups/VC is bureaucracy. By that I mean anything from shipping to taxes to trade barriers. (Perhaps “logistics” is a better choice than “bureaucracy” but you get the idea.) These barriers, however, cause problems mainly for companies that require physical fulfillment of goods or services. For a great number of companies, this is not an issue. Facebook, Twitter, Google and Skype serve as obvious examples of companies largely unaffected by logistics/bureaucracy.
In sum, the importance of "local" in startups and VC remains but the importance of global perspective has increased. The pace of globalization is accelerating, almost in the same proportion as the pace of technological innovation — it’s as if there's a Moore’s Law in effect for globalization. As such, VC funds that are built for global investing, such as DST, may have the greatest future success.
Posted: February 18th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 3 Comments »
More and more resources exist for entrepreneurs in Brazil. Below I list sources of support in Rio de Janeiro. Some of these sources provide capital, some provide mentoring and some provide both.
I’m sure I am forgetting some people or organizations; if you are one of them, please accept my apology, add a comment below the post and I will add your name or organization. I also know some people/organizations are planning to launch soon and I will add them as soon as they are operational.
Also, many organizations provide support in Rio from a base in, e.g., Sao Paulo. I will try to list them in another post.
Posted: February 8th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 5 Comments »
Myth #1 – Venture Investing is a Good Way to Make Money
As the chart below illustrates (courtesy of Flybridge Partners), unless you are in the top 10% of investors, venture capital is a very bad investment, both in gross returns and especially on a risk/reward basis.
For the top 5-10% of venture investors, VC is a spectacular way to make money… but only for the top 5-10%.
Myth #2– Venture Capitalists are Rich
A few VCs are rich but, again, only the ones in the top 5-10%. Almost all VC make relatively low salaries, especially compared to their peers in investment banking, hedge funds, consulting and other areas in which they might have made a career.
Unfortunately, because their investments will not pay off, that low salary is all most VCs will ever make. Carried interest from funding the next Google just isn’t going to happen.
In the far right column of the slide below, you see that the number of VC firms peaked in 2001 at 1883. By 2009, that number was 1188; in other words, 37% had gone out of business. By now (2012), the failure rate has probably reached close to 50%. How many industries do you know in the last nine years where nearly 50% of the firms have gone out of business? Not many.
If your primary goal is to make a lot of money, you are better off in investment banking or hedge funds, etc. Only do venture capital if you truly enjoy it.
Myth #3 – You Must Connect to Silicon Valley in Order to Succeed
a. Here is a list of several of the most valuable/successful companies in the last several years and where they were founded:
Facebook: Boston
GroupOn: Chicago
Living Social: DC
Demand Media: LA
Tumblr / FourSquare / Twitter: NY
b. The most successful venture fund in the last decade (2000-2010)? GRP Partners. Ever heard of them? Probably not. Know where they are based? Los Angeles.
Myth #4 – These Days it Costs Less to Build a Large Company
Wrong. It costs less to build a SMALL company. It still requires a huge amount of capital, as much as it ever did or more, to build a large company, even in the “capital-efficient” Internet space. The list below shows some recent winners and the amount of private (non-IPO) investment they raised:
Facebook: $2.34 billion
Groupon: $1.14 billion
Twitter: $1.16 billion
Zynga: $800 million
Dropbox: $257 million
AirBnB: $120 million
Myth #5 – Ideas Matter
Ideas are commodities. Even seemingly “original” ideas almost always derive from ideas already in the market and, if the idea is good, probably three or four people already have the same idea somewhere else.
Most great companies are not based on original ideas but rather improve on existing ones. Facebook launched two years after MySpace. Before Google, there was Alta Vista, Lycos, Yahoo and half a dozen other search engines. I could go on but you get the point. As Paul Maeder of Highland Capital Partners points out, even Einstein said he had just one original idea in his entire life.
So what matters? Execution of ideas. Who executes? People. Backing the right person is what matters, much more than backing the right idea. As Maeder says, the most important investment calculation is evaluating the entrepreneur and whether “the Force is strong in him”.
Posted: January 28th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
Last September, I posted on whether Brazilian startups should incorporate in the US and, if so, whether they should incorporate in Delaware.
This week, the Latin American Private Equity and Venture Capital Association had a definitive post by Juan Pablo, a shareholder in the Greenberg Traurig law firm, on whether to form an LLC (like a limitada) or a C-Corp (like an SA) in the US.
It is one of the first posts I have seen that leans towards forming an LLC (depending, of course, on the details). Most venture capital lawyers in the US will tell you immediately to form a C-Corp, because this is the standard practice in the US. As a foreign business, however, that maybe not be the best advice.
I advise a good read of Juan Pablo's post.
Posted: January 21st, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 8 Comments »
Recently, someone asked me to send them “… a list of books / blogs you recommend about VC (about the business, the economics of the business, history of industry, about portfolio strategies, etc etc).”
In reality, I see the choices as primarily between academic tomes, like Gompers and Lerner’s The Venture Capital Cycle and, essentially, blogs. In between, there are not many must-read books that explain modern venture capital.
Books don’t fit well with venture capital because of the speed at which the industry evolves. For example, if a book had been written four years ago about venture capital, the section on “angel investing”, if the author bothered to write one, would have focused on FFFs (friends, family and fools) and angel groups like New York Angels. Considering the rise of “super angels” and of angel investing as a professional asset class, that information would now be so outdated as to make the book useless.
The speed of evolution in the venture ecosystem lends itself much more to real-time updates in the form of blogs. We are fortunate to work in an industry of extreme transparency and one of the few industries in which the best practitioners openly share not just opinions but investment theses, strategies and tactics.
In sum, it’s hard for me to recommend taking the time to read a specific book about venture capital when I believe that the same time spent reading the appropriate blogs would provide more benefit.
Here are some recommendations for blogs:
If you can read just one blog, this is it. Fred updates almost everyday with interesting and important content. If you spent time going through his old posts and keep up with the new ones, you will understand venture capital very well. The comments section has become an integral part of the blog, offering insightful and often opposing viewpoints.
Mark has a different style than Fred, in that he tends to write longer, more detailed and less frequent posts (3x per week). Virtually all of his posts, however, are interesting and important. I like Mark’s style of writing and identify with his way of thinking. I recommend going through his old posts and subscribing to his newsletter to keep up with the new ones.
Brad infuses his posts with personal anecdotes, including his struggles with weight-loss but these only add to the entertainment value of what is an extraordinary VC blog. Brad also wrote one of the few books, maybe the only one on my list right now, that definitely should be read by both VCs and entrepreneurs, Venture Deals: Be Smarter Than your Lawyer and Venture Capitalist. If you want to learn all you need to know about deal terms in one day of easy reading, this book is it.
Brad also writes for another must-read blog, focused on educating the market about venture capital: Ask The VC.
4. You can’t spend your whole day reading (or writing) blogs but below are three more blogs that I try to read when I have time:
David’s “vlog” – he does short video interviews – is a great way to hear directly from entrepreneurs and investors and to learn from them.
The founder of Y Combinator. ‘Nuff said.
If you want to understand Big Data (you should) this is the blog to read. Roger also has great insights on venture capital from the perspective of someone who understands other assets classes (he was in hedge funds prior to VC).
Posted: January 6th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 4 Comments »
Projections about the Internet tend to overestimate short-term changes and underestimate long-term changes.
With that in mind, my long-term view on the Brazilian Internet ecosystem remains highly optimistic. Short-term, however, as I mentioned in the last post, I feel more conservative: in 2012, reality will bite many startups, as they find that the online market in Brazil has not matured enough to support their product or service.
For some startups, this will mean an extended period of anxiety, followed by successful market penetration; for others, it will require a complete “pivot” into another business model; for others, it will mean failure.
For investors, it will mean deciding which struggling companies should receive follow-on capital and which to let rise or fall on their own.
Of course, there will be wild successes this year but, as in any startup ecosystem, for every one successful startup, many will fail. That is the nature of a startup ecosystem and it holds true in Silicon Valley, Bangalore, Hong Kong or Sao Paulo. In fact, it is the nature of scientific experiment and of innovation itself.
Regarding the market: the reality is that, for all of the excellent fundamentals underlying the Brazilian venture ecosystem, the chasm between startup idea and customer adoption is still much greater here than in, e.g., the US. It takes more time and more resources (thanks to the bureaucracy) to cross that chasm in Brazil. This year we will witness the consequences of that.
Posted: December 17th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 3 Comments »
As discussed last week, 2011 was an amazing year for venture capital in Brazil. What will 2012 look like? The list below has some predictions:
- More Investors. I estimate that, in 2011, the number of VC investors in Brazil grew 3x and the number of entrepreneurs 3-5x over 2010. Amazing growth. In 2012, the number of investors (and entrepreneurs) will at least double (2x). Also amazing but it will result in more investors than the ecosystem needs right now and, therefore, the position of good entrepreneurs with good ideas will grow even stronger. For investors, it will mean more competition for deals and will likely drive valuations higher — higher valuations mean lower ROI.
- Reality Begins to Bite. In 2012 the market will begin to bump its head against the ceiling of reality; good times will become challenging times for many companies, e.g., some funded companies will begin to struggle and may not be able to raise follow-on financing. This is already occurring in the US, where many of the hundreds of companies that received funding during the super angel boom now cannot raise Series A financing. On the other hand, just as in the US, successful companies in the Brazilian market will raise capital easily and at high valuations.
- Bubble. The beginning of challenging times will not stop the flood of funding and new startups and, by the end of 2012, the Internet space in Brazil will be in a bubble. By "bubble", I simply mean that many companies will have received funding despite not being viable businesses and valuations will have reached levels that do not make investment sense from a risk/reward perspective. This is not necessarily bad — it's not good, either — it just is. Ecosystems don't evolve in a straight line upward, they grow by taking two steps forward, one step back, by "fits and starts", as we say in the US. Two years ago, most people thought VC in Brazil was a can't-win proposition, now people think it's a can't-lose proposition and they are pouring into the market. The market is somewhere in between and the will need to re-balance as best as possible over time.
- We Get Better. One of the benefits of challenging times is that they force entrepreneurs and investors to be better. I think 2012 will see the best startups and entrepreneurs hone their businesses, grow in sophistication and mature into viable long-term enterprises. Same for investors. That's great for the future of Brazil.
- Mobile Tsunami. Regarding predictions for what will be "hot" investment sectors, I have various verticals in mind but one dominate theme is mobile. The cloning of businesses in Brazil has become a science but at times the focus on cloning distracts from the larger trends. A mobile tsunami has hit the US and the US startup world has responded with a slew of "mobile-first" businesses, i.e., startups that only make sense as mobile business, rather than startups that are web-based with a mobile strategy. For the most part, the same has not yet happened in Brazil and I see it as an opportunity for good entrepreneurs. The same mobile tsumani will hit Brazil — I don't care what the doubters say — so it's a good idea to get there first with innovative businesses.
