Old School Venture Capital

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.