ArpexCapital

Resources for Entrepreneurs in Rio de Janeiro

trogersxyz — Sat, 18 Feb 2012 12:21:09 +0000

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.

Five Myths About Venture Capital

trogersxyz — Wed, 08 Feb 2012 10:01:04 +0000

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.

c. Seven of the top eight venture bloggers are not in the Valley. The lone member from northern California is Paul Graham of Y Combinator.

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”.

Incorporating in the US: LLC or C-Corp?

trogersxyz — Sat, 28 Jan 2012 12:16:19 +0000

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.

Urgency

trogersxyz — Wed, 25 Jan 2012 14:32:31 +0000

Back in the early ‘90s, I had a brief and inglorious career with the Washington Redskins of the National Football League. It officially lasted only two and half years but it was a formative experience and I learned a lot in a short time.

I have found that much of what I learned in sports applies to business. For example, what I learned about the characteristics of successful athletes also applies to entrepreneurs.

Innate talent matters in both cases but less than you think — the most physically gifted athletes are often not the best players. I believe talent comprises about 1/3 of what it takes to succeed in sports or entrepreneurship. Talent derives from genetics and no player or entrepreneur has control over it.

Another 1/3 of success comes rigorous training – physical conditioning, skill development, study of the game and other things that the individual can control. The player or entrepreneur must maximize his potential in this 1/3 in order to have a chance of success.

The last 1/3 of a successful athlete or entrepreneur comes from… I don’t know. No one does. It has to do with energy, belief, destiny, love for their profession… (That last one really matters – how many people don’t love their job but still make it to the top 1%? Not many.)

I can't define this final 1/3 but it often manifests itself in two traits: inner focus and urgency.

By inner focus, I mean that all of the person’s being is directed toward the goal. Even when he is not visibly working toward it, his being is pointed toward the goal. He does nothing contrary to it. All the elements of his life fit into the pursuit the goal (not the other way around).

In that sense, pursuit of athletic or entrepreneurial success may seem to be a selfish endeavor. It doesn’t have to be, but one must surround themselves with people that support the goal and understand the sacrifice needed to achieve it.

Less obvious than inner focus, great athletes and entrepreneurs posses urgency. I don’t mean hurry or imbalance, just urgency. They live a half-step ahead of the world. They anticipate what must be done and do it. Proactively. They don’t wait, they don’t procrastinate.

Sports has a tempo, a momentum. So does entrepreneurship. An entrepreneur’s urgency pushes the tempo and maintains forward momentum in his business.

One can sense whether an entrepreneur has urgency. For example, they ask for help but don’t wait for it. They move forward irresistibly, believing the world with eventually follow. (It often does, proving the old saying, "Move and the world moves with you.")

Of course, inner focus and urgency are necessary but not sufficient traits: you also need the first 2/3 of the equation — talent and training — but inner focus and urgency are unique traits exhibited by almost all high-achieving athletes and entrepreneurs.

The Best Venture Capital Blogs

trogersxyz — Sat, 21 Jan 2012 10:41:06 +0000

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:

1. Fred Wilson, AVC.com

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.

2. Mark Suster, Both Sides of the Table

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.

3. Brad Feld, Feld Thoughts

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:

a. David Lerner, Venture Studio

David’s “vlog” – he does short video interviews – is a great way to hear directly from entrepreneurs and investors and to learn from them.

b. Paul Graham Essays

The founder of Y Combinator. ‘Nuff said.

c. Roger Ehrenberg Information Arbitrage

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).

Brazilian Startups: Turbulence Ahead?

trogersxyz — Fri, 06 Jan 2012 11:02:13 +0000

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.

That’s why I believe that the cultural and legal punishment of failure is the greatest threat to innovation in Brazil. In Silicon Valley or New York, even if an entrepreneur fails, he is usually respected and even rewarded (the only thing not forgiven is unethical behavior); when a company fails, it dies quickly but the entrepreneur lives on to apply his experience to a new business.

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.

Predictions for 2012

trogersxyz — Sat, 17 Dec 2011 16:03:27 +0000

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.

2011 Was an Amazing Year

trogersxyz — Mon, 12 Dec 2011 12:49:32 +0000

Last week I was one of many speakers at a BRNewTech event, the meetup organized by Bedy Yang, Flavio Pripas, IN Hsieh and Marco Fisbhen.

Each of us were asked to speak about 2011 and make predictions about 2012. Below are my notes about 2011:

Kudos to Bedy, Flavio and Marco for creating BRnewTech — it is not the only startup community in Brazil but it is the biggest. It serves the critical role of providing community for entrepreneurs, investors and other members of the ecosystem here.
Honestly, things changed so much and so rapidly in 2011 that it is hard to remember 2010. 2009 is a distant dream. As recently as 2010, many people questioned where there was a place for venture capital in Brazil, in part because they questioned whether there were enough entrepreneurs. That now seems like a ridiculous concern. Anyway, 2009 and most of 2010 was about private equity. 2011 has been about venture capital.
I estimate 3x the number of investors and 3-5x the number of entrepreneurs in the market this year over last year. That's incredible.
2011 marked the year that the Brazilian ecosystem completely integrated with the American ecosystem — prior to 2011, they were two distinct ecosystems, now investors and entrepreneurs overlap in a very thorough way.
2011 was the year of the clone. In prior years, many businesses were similar or derivative to businesses in the States but they were organic/native to Brazil. In 2011, most new businesses were exact copies of businesses in the States or Europe.

The Death of Apple

trogersxyz — Fri, 25 Nov 2011 15:37:25 +0000

My two cents about the death of Steve Jobs is that it will coincide with death of Apple over the next three to five years. The decline will have nothing to do with Steve Jobs’s passing, however, but with the limitations of the Apple business model.

Jobs did with Apple what Steve Case did with AOL, only better: he built a magnificent “walled garden”, an extraordinary — but closed — ecosystem. Eventually, like AOL and like all walled gardens in the information age, Apple will die: no matter how innovative a single company, its innovations cannot keep up with the innumerable innovations outside its walls.

AOL provides a great example of a closed system: it used a proprietary programming language (Rainman) and limited usage to those who paid monthly subscription fees. Business partners had to pay upfront and guaranteed fees for a place on the AOL platform. AOL was the king of Web 1.0, yet it died a quick death with the ascent of Google's "open" platform; today AOL walks the earth as an harmless corporate zombie.

Apple does the same as AOL did: it uses a proprietary programming language and limits usage to paying consumers, i.e., those who purchase its hardware. As such, Apple walls its garden not with subscription fees but with devices: the iPhone, iPad and Macbook, etc. (At least with business partners, Apple follows the revenue share paradigm.)

Apple has succeeded because, over the last eight years, it has built some of the most elegant, sophisticated devices in the history of mankind. Consumer have devoured them. Its best hope for the future lies in continued domination of devices, such that its operating systems become the world’s default operating systems, much like Windows did at one point. That’s unlikely, however, thanks to Android, HTML5 and the multitude of companies innovating and price-cutting in mobile hardware.

Right now, the big winners of the next five years appear to be Google and, surprisingly, Amazon. Google is a beautiful, open platform but AWS has pushed Amazon's platform even deeper than Google's.

Imagine the access to data that Amazon has, imagine the services it can begin to offer through AWS? Amazon may one day be the most valuable company in the world, due to the openness, and depth, of its AWS platform.

As for Apple, over the next five years, its share of the device market will shrink and with it the Apple platform and the company itself.

“Walled gardens” are beautiful but, because they are shut off from the innovation outside their walls, they don’t endure. Just ask AOL.

The Cost of Failure is Too High

trogersxyz — Sat, 12 Nov 2011 12:21:54 +0000

I can’t tell you how many times I’ve heard that “Brazil doesn’t have enough good entrepreneurs”. I’ve never believed it. Brazil has plenty of entrepreneurial talent. Many of these entrepreneurs choose non-entrepreneurial paths, however, because of the high risk of starting a business in Brazil.

Specifically, punitive Brazilian bankruptcy laws make the cost of failure so high that many people prefer not to even try the entrepreneurial path.

Bankruptcy laws are complex but suffice it to say, declaring bankruptcy in Brazil causes many years of problems for an entrepreneur. Basically, he cannot take ownership of another company for at least two years and active threats from the bankruptcy loom for at least five years.

Of course, the cultural stigma of failure also hurts but that is a concept of the mind rather than a tangible problem like the liabilities that arise from bankruptcy.

In my opinion, most great successes derive from failure. Henry Ford went broke several times before succeeding with the Model T. Steve Jobs failed with Lisa and NeXT, and Bill Gates failed with “Traf-O-Data” before forming Microsoft. Failures serve as critical experiences for entrepreneurs, lessons from which they can “iterate” to better ideas.

Unfortunately, onerous bankruptcy laws force entrepreneurs to stay with losing ideas. Instead of closing their companies and applying their experience toward new and better projects, entrepreneurs get trapped in failing businesses — they simply can’t afford to close them because the cost (and stigma) is too great.

This “failure trap” has a devastating effect on innovation – it prevents agility and hobbles the entire venture ecosystem. Gates might have spent his career on on Traf-o-Data and Steve Jobs on the Lisa computer if they could not cut their losses and move on to Microsoft and the Apple II.

We are succeeding despite this trap but imagine the innovation Brazil would have if it were eliminated.