Posted: September 12th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, US Venture Capital | 6 Comments »
I attended a get together organized by BayBrazil last night. Lots of members of the Brazilian startup community are in town for TechCrunch Disrupt and the atmosphere was great. I expect the same at the StartupiCon event on Thursday night.
It’s fun to see hard-working Brazilian entrepreneurs (and investors and mentors etc.) in the Valley/San Fran environment – there is something energizing about it, it provides a morale boost. Anything seems possible here and entrepreneurialism is king.
The amount of quality Brazilian startups here proves how dramatically the startup ecosystem has improved in the last few years. Several of the pitches I saw last night would fit seamlessly into the Y Combinator Demo Day I saw last month.
One big cloud hangs over my optimism, however, and there is insufficient discussion about it: the customer market for Brazilian startups remains small.
I am not talking about the size of the Brazilian economy, which is huge. I am talking about the number of people who use and PAY FOR new online products and services. We hear a ton in the news about the large size of the Brazilian market, the growth of the middle class, improving infrastructure, etc. — all true, all important — but the real size of the paying online community in Brazil is still extremely small.
Yes, people buy shoes and clothes online but, outside of that, we still don’t know when and where other parts of the online market will grow, nor how big it will actually be.
For the moment, the market for new online product and services is thin.
It’s true that startups face less competition in Brazil – in any given niche, there may be two or three competitors versus six or seven in the US – but the true market for those three competitors is proportionally much smaller than the market for the seven competitors in the US.
It is better to have seven competitors in an addressable market of 50 million users than three competitors in a market of 10 million users.
I don’t think anyone, including me, truly knows how large the online market will be in Brazil, what will people pay for (outside of normal retail goods), nor when they will start paying for it.
I am an optimist (come to think of it, maybe that what is in the air this week: optimism) but a lot of positive assumptions about the Brazilian online market remain unproven.
Posted: September 11th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 3 Comments »
A war of tweets broke out between Dave McClure, Fred Wilson, Mark Suster and some other high-profile VCs this week.
The subject involved Convertible Notes and whether different investors in the same convertible note should have different valuations.
In sum, Dave thinks they should, depending on when they invested in the note and how much value they bring to the company.
His point is that 1) an investor that comes in first deserves a discount for “leading” the round and 2) later investors in the same round often enter when the risk of the investment has lessened.
Regarding #1, I can see how an investor that has the courage to jump in first and “lead” a round should get a discount; only, however, if the company is having trouble getting others to commit.
Regarding #2, can a company reduce its risk so quickly that, during the funding process, the valuation changes measurably? I guess so: notes are held open for a long time nowadays and, logically, if the risk profile changes, the valuation should as well. But this approach can make things very complicated (imagine eight investors in the same round with eight different valuations).
There is also the argument that certain VCs deserve a discount because of their brand, i.e., a ” big name” investor has a positive effect on a company’s value and that VC should therefore get a discounted valuation.
Again, this feels awkward but makes logical sense. Using the public markets as an analogy, if Warren Buffet buys a stock at $10 per share, the perceived value of the stock will immediately rise and subsequent investors, even ones that invest ten seconds later, will pay a higher price.
The bigger message of the debate is that, although we VCs like to think of ourselves as edgy financiers of creative destruction, it is now our industry that is being disrupted. At the moment, it is Paul Graham, Dave McClure, AngelList, etc. but soon it will be… who knows? I do know that all of venture capital’s established practices will be thrown on the table, spotlighted and battered with the mallet of innovation. Best practices will endure, all others will die.
Regardless, there is no need to worry about missing the action: in the venture world, “the revolution will be
Posted: August 21st, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 4 Comments »
In these days of multiplying startups, it’s useful to divide companies into three categories: features, products and businesses.
A feature is less than a product and nothing close to a business. Using LinkedIn as a very rough example, the “advanced search” that you get with an upgraded account is a feature.
A product is more robust than a feature but not enough to be independent business. An example of this would be LinkedIn’s “Talent Finder” product for Recruiters. Good stuff but, on it’s own, not terribly differentiated; it would not make an interesting investment.
A business is LinkedIn. It’s a huge platform of information on top of which the company builds products (with cool features) for which many people pay.
A lot of features can evolve into products and eventually into businesses — the problem is that it takes time and a lot of other people are doing the same thing.
I had an “uh-oh” moment (kind if like an “ah-ha!” moment but bad) a year ago when I looked at the “Share This” button and saw at least fifty “sharing” products (read: features), all with cool names, probably all with hardworking entrepreneurs, tech talent and many with investments from angels. How could there be enough users, I thought, for even half of them? How could there be enough acquirers for more than a few of them?
Two years later, other than the Tweet, Like, LinkedIn and (now) the Google + buttons, most are gone or somewhere out there “pivoting”. The same fate awaits most of the features and products that are currently masquerading as businesses.
Weak features/products die from lack of usage; strong ones get extinguished by stronger competitors. If a competitor has more resources (money, developers, users, etc.) and they can build the feature, they probably will. And they probably will before you scale enough to beat them and before they need to buy you at an interesting price.
Of course, there is an alternative to win it all or die. Look at the offline world for analogies. Below the Fortune 5000, there are tens of thousands of good business that generate cash for their owners but will never “win” their markets, scale or have an exit. The same will exist in the online world: below the Internet 5000, there will be thousands of decent businesses — the online version of restaurants and dry cleaners.
Below those businesses, however, there will be tens of thousands more that die, just like in the offline world. The business pyramid is narrow at the top and wide on the bottom.
Despite some recent posts (like this one) that might seem negative, I’m not. Evolution (of species, economies, businesses, etc.) works in cycles, often with periods of explosive growth followed by periods of large-scale extinction. In the Information Age, these cycles tend to happen quickly, one after the other (think fruit-flies, not mammals). The Internet ecosystem is in a period of explosive growth; at some point there will be an overpopulation problem, a shortage of resources (customers, users, money) and we will have large-scale extinction. The strongest businesses will survive and, hopefully, the entrepreneurs and investors that didn’t make it will start over and try again.
Regardless, despite the ebbs and flows of the startup ecosystem, there is ALWAYS a place for good businesses, offline or online and there are lots of those being built everyday, in Brazil and elsewhere. Many of those online businesses address large markets, are capital efficient, can scale quickly and have quality teams. If you fit that description, I’d appreciate the chance to talk to you.
Posted: June 18th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | No Comments »
There is a new accelerator for startups that want to enter the Brazilian market. The first part of the program would take place in Silicon Valley/San Fran, the second part in Sao Paulo.
The accelerator is for internet-based businesses from, well, anywhere: Brazil, America, doesn’t matter. It seems like companies would receive fairly intense assistance, which I think is a good idea, given the challenges of doing business in Brazil.
Even if you are not accepted into the accelerator program, there may be co-working space available in the Valley/San Fran and perhaps in Sao Paulo. This would be good for learning, networking, etc.
If you have an interest, they have a signup page here.
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:
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”.