Posted: June 4th, 2011 | Author: ahurtado | Filed under: Macro Environment, posts | 7 Comments »
I am Anthony Hurtado an American intern at ArpexCapital. Prior to joining ArpexCapital I lived in São Paulo, Brazil where I briefly studied at PUC-SP while interning at Raymond James & Associates. Currently, I am a student at Georgetown University. I will periodically contribute to this blog.
In the US and European ecosystem, a “mobile” revolution, driven by smartphones, is underway. It is unclear, however, whether the same mobile revolution will occur in Brazil: 82% of the Brazilian population uses pre-paid chips in place of mobile plans and Brazil is the second most expensive place for someone to use a cellphone, due to layers of taxes and fragmented industry fees. If you were to look at the decision by Pontomobi, Brazil´s largest mobile marketing company, to bypass Mexico and Argentina and instead expand into Europe due to their more advanced tech infrastructure, you would probably conclude that Brazil’s current boom won’t include mobile.
Nevertheless, I have found many reasons to believe in an imminent Brazilian mobile revolution. The chief reason is the Brazilians themselves. In the land where a new iPhone costs anywhere from 2.5-12X more than in the US, sales are up! The new Class C in the last eight years has increased general consumption nearly seven times over. Mobile phones and other tech products make up a significant portion of this new consumption. App-heavy, Android-based phones are the country’s fastest growing cellphones. Despite having sky-high tariffs on smartphones, smartphone sales are up 85%! In the overtaxed mobile environment, 15% of Brazilians already have a smartphone. By 2014 that number is expected to be 45%.
Moreover, while there is an endless amount of legislation and regulation of cellphone minutes, ubiquitous promotions by telecom carriers greatly minimize the actual costs incurred by many Brazilians. These promotions already include the mobile Internet space as seen in, e.g., TIM’s latest promotion of a month’s free Internet when you buy a TIM pre-paid phone.
The question is not whether Brazil will experience the mobile movement but which Brazilian companies will do the best job of harnessing it. With this in mind, Pontomobi´s Europe play now makes sense. It is not that the company is abandoning Brazilian mobile marketing, rather they´re preparing for its next stage, which is currently being realized elsewhere. Their move to the developed markets demonstrates that the Brazilians who progress Brazil´s mobile sector to its next stage may not be in Brazil right now. They will return to Brazil and the mobile revolution, when it hits Brazil, and will combine many European and American (and Asian) lessons with indigenous business and technological standards.
It’s coming: the worldwide mobile revolution will soon hit Brazil, The Country of Tomorrow Today.
Posted: May 23rd, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, posts, Random Posts | 4 Comments »
I once got advice from a successful businessman in Rio Grande do Sul: Leave business in Brazil to Brazilians.
I haven’t taken his advice, although there is a lot of wisdom in it. I guess I like to do things the hard way and, anyway, since I love Brazil and my wife and kids are dual citizens, I’m involved in this country no matter what.
The businessman’s point, however, is well-taken: business in Brazil is indirect, complex and multi-layered. Each of those layers represent ways to lose money.
Some Gringos ask, “Can’t you just get a good lawyer to navigate?” Not really. You need a good lawyer, yes, but you also need a good and honest business partner, a good and honest accountant and a willingness to be present and vigilant yourself.
Few people can find that combination, which makes doing business here highly risky. On the other hand, for those who do find those resources, their businesses operate in a fertile market with high barriers to entry.
Even if one overcomes the bureaucratic/structural challenges to doing business in Brazil, however, cultural differences present a persistent challenge. So I am going to highlight a few historical/cultural differences that may help Americans to better understand Brazil and vice versa. (Unfortunately, since I have not done business in other than those two countries, I cannot include, e.g., Europe and Asia in the comparison).
· Both the US and Brazil are immigrant countries but the two “melting pots” have produced different cultural outputs.
Anglo-Saxon religious refugees founded the US, while Portuguese monarchs founded Brazil. The former brought Protestantism, capitalism and a suspicion of centralized authority – religious or governmental – to the US. The latter brought a strong Catholic culture, suspicion of individualism and profit-seeking, and centralized authority to Brazil.
These differences remain important. In Brazil, businesspeople, even young entrepreneurs, must overcome societal suspicion of individualism and profit. In the US, businesspeople and especially entrepreneurs get cultural support, often to the point of hero worship (see, e.g., Steve Jobs and Mark Zuckerberg).
Anyway, don't flaunt wealth, or a desire to attain it, in Brazil. A little humility goes a long way.
· Despite historical differences, the popular cultures of the two countries have converged.
American movies, TV, music and even sports are extremely popular here. I am still, after many years, surprised by the pervasiveness of US pop culture in Brazil.
At the same time, Brazilian culture has increasingly strong influence in the US. For example, Brazilian cuisine, sports, fashion (and fashion models) have a strong cache in America right now.
More generally, both countries have strong “consumer cultures”, both are heavy online and mobile users and both are early-adopters of new technologies.
These cultural similarities between the US and Brazil have a big impact on venture capital, as a given startup can potentially address the market in both countries (see, e.g.
Foursquare) . In addition, a business idea in one country can be cloned in the other (see, e.g.
Peixe Urbano).
At the same time, a business in one country can fall victim to a competitor from the other (see, e.g., several Brazilian startup competitors to
LinkedIn that will not survive). Keep that in mind and check to see what competitors in the other country are doing.
· In Brazil, historically, the far left is seen as a liberator, the right as a threat. In the US, the far left is seen as the greatest threat.
To be honest, I am not sure how to draw the direct connection between this point and business, much less venture capital but I feel it is deeply important to understand.
Many Brazilians have not forgotten that, during the Cold War, the US often aligned itself with brutal right-wing dictators in Latin America; a lingering resentment remains and can easily be connected to a separate perception of Americans as arrogant and spoiled.
On the other hand, most Americans believe we fought the Cold War, at the risk of nuclear annihilation, to preserve liberty against a totalitarian ideology. For many Americans, seeing a hammer and sickle on political campaign commercials (which happens regularly in Brazil) is equivalent to seeing a swastika.
This divergent political history heavily impacts the relationship between Brazil and the US and between individual Brazilians and Americans. I guess I hope that, by understanding our mutual histories – why we think the way we do – Americans and Brazilians can sympathize with each other and overcome differences.
More generally, by understanding basic cultural similarities and differences, we can do business more successfully with each other.
Posted: May 7th, 2011 | Author: Ted Rogers | Filed under: Macro Environment, posts | 2 Comments »
In the US, from 1994-1999, the Internet drove the “the greatest legal creation of wealth in history," according to
John Doerr of Kleiner Perkins.
First, broadband. In 2010, less than 20% of Brazilian households had broadband. The Brazilian government’s National Broadband Plan (PNBL)
aims to connect 72% of all households to broadband by 2014. If the PNBL achieves even 40% penetration in three years, it will bring a tsunami of new consumers online and create a wave of opportunity for entrepreneurs.
“Broadband” and “smartphones”, of course, relate to each other: telecom operators now sense an opportunity to provide mobile broadband services to households that never had fixed internet connections.
Third, entrepreneurs. When I began doing business in Brazil, people constantly warned me that Brazil did not have good entrepreneurs. I never believed it, because from the first day I stepped on Brazilian soil in 1999 I saw entrepreneurs navigating crushing inflation, paralyzing interest rates and confiscatory taxes to build successful businesses.
What did concern me, however, was the number of entrepreneurs. If there are only 30 entrepreneurs starting companies in Sao Paulo and Rio de Janeiro, we are all in trouble. A sustainable venture ecosystem needs depth as well as quality.
It’s like Brazil’s soccer program – at the bottom of the pyramid, new players of all ages from all locations constantly enter the system. They compete intensely for years and, eventually, the best players reach the top of the soccer pyramid. The result is a national team that has qualified for every single World Cup and has won five of them, more than any other country.
A venture ecosystem is like that, too. It needs a wide and deep pool of entrepreneurs at the bottom to achieve an Apple, Google and Facebook at the top.
Based on
statistics and, moreover, on anecdotal evidence from universities,
meetups and social media, I’m convinced that Brazil finally has that.
We are in a golden age for venture capital in Brazil, driven by broadband penetration, smartphones and a growing number of entrepreneurs.
Posted: May 2nd, 2011 | Author: Ted Rogers | Filed under: posts, Random Posts | No Comments »
All VCs have a targeted proflle for investment – stage, size, industry, etc. As mentioned in a previous post, however, VCs reject the vast majority of deals they see, even if those deals fit their investment criteria.
That’s because a good deal is difficult for a VC to pre-define. Investment decisions derive from intangible factors and the VC's intuition as much as from concrete analysis. A good VC investment is like obscenity: you know it when you see it. You also know when you don’t see it.
A previous post dealt with the characteristics of an investible team. This post addresses timing, expertise and the deal itself.
Timing
A good idea that is too early is a bad idea. A good idea is that is too late is a bad investment.
How do you know if a business is early, late or right? It’s often an intuitive call but if, for example, a rash of similar startups already launched and have a head start of nine months or more, it’s probably late. (Of course, if you can make a huge improvement over an existing company, it’s never too late to enter the market.)
On the other hand, if no business similar to yours exists, it raises questions as to whether you are too early. Specifically, WHY do no similar businesses exist? Ideas are commodities – if you have a great idea, at least five other people have the same one. If there is no comparable business in your market, maybe the market isn’t ready for your type of business.
Yes, entrepreneurs sometimes invent brilliant, non-derivative business ideas but these are the exception, not the rule.
In summary, good deals tend to come at the cutting edge of a trend but not before one.
Expertise
A VC can often dispense with the subject of timing if the entrepreneur and his team know their vertical deeply.
For example, if
Jack Dorsey pitches a mobile business, does an investor need to worry about timing? Not really. Dorsey knows the state of his market better than anyone. Nor does the investor need to worry about technical hurdles, team, competitive analysis, etc.
If an entrepreneur with no background in mobile pitches the same business, the situation has more friction: now, the VC needs to verify every assertion the entrepreneur makes. What are the technical hurdles for the product? Is the market ready (is he too early)? What is the competition doing (is he too late)? Can he build a good team (who does he know)? Etc.
Entrepreneurs with deep subject matter expertise make deals feel right. Lack of subject matter expertise makes deals uncomfortable, even if the entrepreneur has a good idea.
Deal Problems
Sometimes the administrative aspects of a deal, apart from the entrepreneur or business idea, create too much friction.
David Lerner has a thorough list of
commonly-encountered deal problems but, for example, no investor likes to see a complicated cap table. 30 investors, multiple classes of shares, strange option agreements, etc. will bring a lot of trouble in the future.
Similarly, no VC wants to inherit legal issues – an angry ousted co-founder, violations of non-competition agreements, tax liabilities, etc.
Finally, an over-shopped deal makes investors uncomfortable. It may not be fair but, if a company looks for an investment and doesn’t close after 9-12 months, outsiders assume something is wrong with the company. Often, there is a good explanation for why no investment has been made. If so, the entrepreneur should just explain the situation clearly and honestly – but know that new investors will feel skeptical.
This brings up a final point: even deals with problems can get done IF the entrepreneur communicates about those problems in a proactive, honest way. “The truth always makes sense,” so just say it.
On the other hand, if the investor senses that the entrepreneur is hiding something, it will destroy the deal and hurt the entrepreneur’s reputation.
Conclusion
It would help everyone if VCs could predefine exactly what they wanted to see in an investment opportunity but it’s not possible. The characteristics of an investible deal involve intangible factors and the VC’s intuition as much as the hard “investment criteria” listed on fund websites.
When it comes to a good VC deal, like a lot if things in life, you just know it when you see it.
Posted: April 25th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts, US Venture Capital | No Comments »
Two interesting posts came out yesterday addressing whether the venture market has entered a “Bubble”. Michael Arrington of Techcrunch believes not and contrasts the Bubble of 1999-2000 with today’s market. Fred Wilson takes a careful but, to my reading, contrary view, warning about current imbalances in the early-stage ecosystem.
Instead of opining one way or the other, I’d like to explore how the structure of typical venture capital funds contributes to Bubbles. Specifically, strict investment mandates and short investment periods force VCs to deploy capital even into inflated markets, which makes the markets more inflated.
First, the strict investment mandate: unlike a hedge fund, a VC fund cannot diversify into assets with less inflated valuations or bet against a rising market by, e.g., shorting stocks. The VC must buy (they are “long-only”) shares of companies within a relatively narrow range: if you raised a fund focused on early-stage web businesses in the US, that's what you must invest in. You can’t pivot and invest in, e.g., growth-stage cleantech businesses in Europe, even if that's a healthier market.
Second, most VCs have a limited time period – often only five years – to invest their fund. Therefore, they must participate in the market now, regardless of conditions. If a VC waits for the market to correct, he risks not deploying all of his investors’ (LPs) committed capital during the investment period.
LPs get upset if you don’t deploy their capital. Why? Because they pay you management fees to find good deals and invest, not to watch others invest. More importantly, if you don’t deploy their capital, you throw their asset allocations off balance. If an LP plans to have 6% of its money in venture investments, that’s what it needs to have, not 3%.
Portfolio Theory tells them that returns come from having the proper percentages deployed in different asset classes
NOT from individual investments within those asset classes. So they want their capital commitments invested, regardless of market conditions.
What will happen to the VC that says to his LPs at the end of the investment period, “Sorry, but we caught a bad part of the cycle. Valuations were too high so we only invested 30% of your money”…? I don’t know what will happen, actually, but I do know what won’t happen – the VC won’t receive another dime of capital from that LP and probably not from any other LP in the ecosystem; he won't raise another fund and his asset management firm will eventually cease to exist.
So, is there a Bubble? For many venture fund managers, the answer is, “It doesn’t matter.” They need to invest, regardless of valuations.
ArpexCapital is fortunate to have a bit more flexibility than the average venture fund. Our capital comes from a relatively small group of aligned individuals, including the fund managers. We all communicate regularly about our pipeline, the market and valuations, so we are on the same page about the decisions that the fund takes.
We have a targeted time period in which to invest the capital but not a strictly mandated one: if, at the end of that target period, we have only invested 30% of the fund, no one will complain. We also have more flexibility about the size and stage of our portfolio investments.
We will undoubtedly make mistakes – passing on high return deals and investing in busts – but I hope that our structure allows us to invest without the coercion that a typical fund structure creates.
Posted: April 20th, 2011 | Author: Ted Rogers | Filed under: posts, US Venture Capital | No Comments »
As Matt Harris of Village Ventures tweeted, yesterday was de facto national Kohort day. Techcrunch announced the company's Seed round, in which Arpex was fortunate to participate alongside a group of excellent investors. News of the funding spread quickly in the twittersphere, in part because Kohort's CEO, Mark Davis, has a large presence in New York's venture and entrepreneurial ecosystem.
Mark is a tornado of entrepreneurial activity: at various overlapping points he has worked at DFJ Gotham, founded both the New York Venture Community and Columbia Venture Community, earned his MBA at Columbia and authored one of the must-read venture blogs. Mark provides a real-world example of an "inevitable entrepreneur", as described in my last post. We wanted to invest in Kohort because of the idea, of course, but were sold because of Mark and his team. Here's to a bright future for them.
Posted: April 16th, 2011 | Author: Ted Rogers | Filed under: Entrepreneurship, posts | No Comments »
The average VC firm probably makes an investment in 1 out of 400 deals they see, maybe less. That means 399 entrepreneurs get turned away for every one that receives a wire into their account. Many of those 399 entrepreneurs bring deals that fit exactly into the parameters listed by VCs on their websites and blogs – so why are they turned away?
In reality, a good VC deal is difficult if not impossible to pre-define. I can give all the fancy descriptions I want: “an effective entrepreneur addressing a real pain point in a huge potential market with a capital efficient business model” blah, blah, blah.
The truth is, I define a good VC investment like Justice Stewart defined obscenity: I know it when I see it. I also know when I don’t see it.
So, rather than trying to define a good VC investment, I will describe what I see, and what I don’t see, when presented with a good investment. Today I’ll address the entrepreneur/team, in the next post I'll address the business itself.
Characteristics of an Investible Team
Inevitability
In a good VC deal, I sense “inevitability” in the entrepreneur. Whether or not I invest, whether or not anyone invests, this guy will find a way to succeed. He is moving and the world will move with him.
This inevitability manifests itself in energy and confidence. The energy derives from the huge opportunity he has discovered, the confidence from the planning he has done.
Non-Arrogance
Inevitability shares many of the same molecules as arrogance but is a completely different compound.
An “inevitable” entrepreneur believes in his vision but will do whatever it takes to win, even if it means admitting wrongs and changing course. He prioritizes success over being right.
On the other hand, an arrogant person doesn’t learn well – the person is afraid to be wrong and takes criticism as personal. He will ignore good advice and make the wrong decisions at critical times.
As an aside, it’s ok to be a jerk – not preferable, not necessary, but ok – a lot of successful businesspeople are jerks. But arrogance means being a jerk without a corresponding level of competence. That’s unacceptable.
Chemistry
The team has synergy, of course, but not necessarily “resume synergy”: this guy has a programming background, that guy has business development, etc.. It has chemistry: a healthy, competent group dynamic. Each person is an expert in their role; each has respect for the others; none has the desire to encroach on the others’ roles.
This doesn’t mean they like each other, it means they believe in each other.
On the other hand, it’s important that they not dislike each other.
Dislike among founders, at the early stage, bodes ill. It’s ok that Lennon and McCartney hated each other after the White Album but, if they had felt that way in 1963, there never would have been a White Album, probably not even A Hard’s Day Night.
If, when one guy is talking, the others are sighing, shifting in their seats and looking away, if one is subtly apologizing for another’s comments when it’s their turn to talk, I get very worried.
Summary
I heard about a study that attempted to define what characteristics make up successful sports stars.
The study came to the conclusion that the most successful athletes share three traits: first, athletic genes, second, effective training and third… no one knows. The third trait of the athletic star – character, will, personality, whatever – is indefinable. But it is what separates Ronaldo from a talented soccer player that can run the 100 meters in 9.8 seconds, gets the best training and still falls short.
Having had a brief and inglorious career in professional football, with a team that won the Super Bowl, I promise you that the difference between those who make the team and those who don’t is not athletic ability and it's not training: everyone has that. The people on the team have that third, indefinable trait and so does the team as a whole.
The same applies to great entrepreneurs and their teams.
Posted: February 24th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, posts, US Venture Capital | 6 Comments »
In addition to dramatizing the birth of
Facebook,
The Social Network illustrated the difference between the Silicon Valley mindset and the Brazilian mindset.
The movie’s basic conflict, and thus its drama, derived from the fight between
Mark Zuckerberg and his Brazilian friend and business partner,
Eduardo Saverin. Saverin insisted on monetizing Facebook quickly; he had invested $19,000 and urgently wanted to recoup that investment (in part because he felt pressure from his family). Zuckerberg ignored the revenue model and instead focused on growing the Facebook network.
Saverin was not wrong – his position was rational, highly defensible and reflected good business judgment – but Zuckerberg was right.
I believe that the perspective of Saverin is common in Brazil (and in most places outside of Silicon Valley) and is one reason why it will be hard to build the next
Google,
YouTube, Facebook, etc. here. We can do it and it will happen, eventually, but it will be tough. It will be tough because, when the next Google/YouTube/Facebook grows in Brazil, its potential may be squandered by premature insistence on revenue.
I know that sounds a bit crazy — don't companies want revenue? Yes, of course, but not at the expense of scaling the business early in its lifecycle. Facebook won because 1) it waited to generate revenue until it had achieved huge scale and 2) its investors supported that strategy. (
Peter Thiel funded Facebook even before its business model was certain – the ad model may seem obvious now but, at the time, the ad model for startups had been highly discredited by the dotcom bust.)
We, investors and entrepreneurs, need to consider the Zuckerberg/Thiel mindset if we want to build the next Facebook in Brazil.
Just to be clear: I am not dismissing revenue — I want it, I look for it, I love it in portfolio companies. The biggest venture returns in history, however, have come from companies whose revenue model was, at time of investment, highly uncertain or even non-existent. Furthermore, at critical times in those companies’ lifecycle, investors and entrepreneurs doubled down on growth, rather than insisting on profitability.
Posted: February 18th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, First Post, posts | 12 Comments »
I’m extremely excited to report that ArpexCapital has officially launched its venture fund.
Here’s an overview, followed by some explanation:
- ArpexCapital invests in early and growth-stage web-based businesses targeting the Brazilian market.
- We partner with driven, ethical entrepreneurs to build disruptive businesses.
- We seek to help build a sustainable, successful startup ecosystem in Brazil.
By “early and growth stage” businesses, I mean that our investments range from the concept stage (the business is still just an idea) all the way up to businesses that have revenue of $R15 million or even more.
By “web-based” business, I mean any business that uses the web to leverage its business model. This includes but is not limited to ecommerce/social commerce, e-financial services, advertising technology, and software-as-a-service (SaaS) businesses. It also includes mobile applications and geo-location businesses.
Our focus does not include device-based businesses (e.g., medical devices), biotech (e.g., pharmaceuticals) or cleantech businesses (e.g., renewable energy, etc.). These businesses tend to be capital intensive, technologically complex and dependent on intellectual property protection. These characteristics do not fit our profile.
We seek to partner with high-energy entrepreneurs that share our philosophy of meritocracy, accountability and “ownership”. A small group of partners capitalized ArpexCapital and all of those partners, including the fund managers, have entrepreneurial experience. We understand the immense challenges to entrepreneurship and we seek to use that experience to help others, including our invested companies.
We hope that our efforts contribute to the establishment of a sustainable startup ecosystem in Brazil and we look forward to working with the investors, entrepreneurs and businesses that have already started this process.
Vamos em frente!
Posted: January 21st, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts, US Venture Capital | No Comments »
I was going to write a post on the mad rush of VCs into Brazil and how that will inevitably inflate valuations to unsustainable levels, i.e., bubble now, crash later. But, it is what it is. After all, an asset is worth what someone will pay for it – nothing more, nothing less – so who’s to say what's an unreasonable valuation?
Better, however, to focus on something positive, like the fact that the world has become a global marketplace for web-based startups.
The previous post dealt with the globalization of startups. Experience tells me that a startup should focus locally first and expand internationally only when they have sufficient resources to do it but there are major exceptions to this rule, especially for web-based companies.
As opposed to a device company, or a cleantech business, a web-based company can launch instantly in a geography-independent way (i.e., world-wide), with little additional cost. Physical borders no longer matter. Now, the biggest hurdles are language and culture.
Even the language hurdle, however, is disappearing.
… perhaps three billion people are online, or around half the entire population of the earth… English and Mandarin dominate the online conversation with close to 500 million speakers online and more than a billion offline. Also growing in online influence: Spanish, Arabic, Hindi, and Portuguese. What’s interesting is that these languages also seem poised to drive cultural trends globally. Looking at average GDP and Internet penetration by language, we can map out a geographic playbook for any Internet startup to prioritize how they lay the online smackdown on the planet, and use geographic arbitrage to move the point of innovation, production, and transaction to optimal locations.[emphasis added]
For more info on this topic, see p.5 of this 2009 report on global language trends by MyGengo, a 500 Startups portfolio company.
Dave makes two critical points about language: first, that a startup can use hard data about language, GDP and internet penetration to determine exactly where it wants to focus its company and, second, that startups can access increasingly cheap sources of translation (through, e.g., MyGengo). The language issue is disappearing.
The reduction of the language barrier strengthens the case that startups should consider targeting multiple countries (after analyzing factors like competition, culture, etc.). The startup can use hard data about languages to optimize its geographical markets and then access cheap resources to translate its product into the necessary languages.
