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the rise of “super angels” and of angel investing as a professional asset class, that information would now be so outdated as to make the book useless.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.
Posted: December 12th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | No Comments »
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.
Posted: November 25th, 2011 | Author: Ted Rogers | Filed under: Random Posts | 10 Comments »
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.
Posted: November 12th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 12 Comments »
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.
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.
Posted: November 9th, 2011 | Author: Ted Rogers | Filed under: Random Posts | 6 Comments »
Every startup scene has it cafes: Palo Alto has
Coupa Café, San Fran has
The Grove and New York has…
Starbucks (on every corner). Below I posted my vote for the two most relevant coffee locales in Sao Paulo. I probably have a bias because our offices are nearby but I’ve spent time in other areas of Sampa and I'd still stick with these two.
Av. Brigadeiro Faria Lima, 2996 – Jardim Paulistano
Octavio is king of the business breakfast/coffee/lunch. On any given day, the place is packed with businesspeople circled around laptops at the low-slung tables. Many of them – entrepreneurs, investors, journalists – are connected to the startup scene.
The Good:
Solid Menu. Octavio has a simple but satisfying menu of breakfast, lunch and dinner. If you want heavier fair,
Rubaiyat, one of the best steakhouses in Latin America, sits right next door (ironically, Rubyai is not Brazilian
churrascaria but rather a steakhouse with Argentine roots).
The Coffee. Octavio’s building resembles a giant wooden coffee cup. It should. Octavio offers great coffee brewed in every manner ever invented by humans. Previously, I favored the
chorreador method, where the waiter pours hot water through a sack at the table. Now, however, Octavio has a
Clover machine. For those who don’t know, that’s a new device that essentially grinds and presses each individual cup of coffee. They are rare – only a few Starbucks in the US have these machines – but for my money they give you the best cup of coffee.
The Wifi. Free.
The Bad:
The Service. The service sucks. It pains me to write that but it’s true. The staff is friendly and skilled but there are just too few of them. If you have spent time in food establishments in Brazil, you will find that ironic: most places have too much staff, often more than staff than diners. Inexplicably, Octavio has far too few. It’s maddening. On good days, you will only get slightly annoyed at the negligence. On bad days, you can wait 45 minutes in between contact with an Octavio employee. Often, you have to stand up and go find one but, alas, there are usually three or four frustrated customers ahead of you doing the same thing.
Hours: it opens at 7:45am. That’s late for a coffee house. 5:30am is optimal. 6am is ok. 6:30 is pushing it. 7:45? Even in Sampa, where people party late, that’s excessive.
Anyway, Octavio Café is still the best – I love it and will keep taking meetings there until the day it closes. I once spent eight straight hours taking meetings there. It was a great day.
Rua Amauri, 286
I doubted whether Starbucks would find success in Brazil. Bringing coffee to Brazil is like bringing soccer to Brazil – it’s already here and it’s better.
Yet, Starbucks has thrived. The one on Rua Amauri seems busy all the time. You may wait a bit longer for your coffee but otherwise the experience compares to visiting to any Starbucks anywhere, which is to say, great.
I think the crowd skews younger at Starbucks and, if you took a poll, you would find a higher percentage of customers from the startup scene at here than at Octavio. Many of the customers come from just across the street at the headquarters of IG (one of the Brazil’s largest portals).
The Good:
It’s Starbucks. Good service, good coffee, good seating.
The Bad:
Mediocre food options. Starbucks offers good sweets but there’s not an ounce of protein in the place, unless you count the stale, overpriced nuts at the cash register.
Hours: I don’t remember what time it opens but I do remember trying to get there early in the morning (6:15ish?) and it was closed.
The Wifi. Not free.
Anyway, if you are in Sao Paulo and want to run into a VC or entrepreneur or, maybe, just work on your laptop in a place that has the startup vibe, Octavio Café and Starbucks Amauri are good bets. They may soon become the Sampa equivalent of Coupa, Grove or, well, Starbucks.
Posted: October 31st, 2011 | Author: Ted Rogers | Filed under: Entrepreneurship | No Comments »
I have often counseled entrepreneurs to focus more. I have never counseled them to focus less.
Like so many things in venture capital, however, “focus” is easy to see but difficult to define. How does one distinguish between an entrepreneur that is expanding intelligently and an entrepreneur that is losing focus?
Mostly, I think it is a function of timing and relevance.
Regarding timing: at the beginning, keep your goals simple and singular. Prove and stabilize one business model in one vertical before expanding into another vertical.
Then, consider relevance. Is the new vertical truly relevant to the core business? Ask yourself, how well do you know the new vertical? Are you a member of the ecosystem? Do you personally experience a pain point in that vertical that you can address? If yes, it’s relevant. If not, you are losing focus.
As an example, take one of our portfolio companies in the games space. They started as a developer of mobile games; for a year or two, they focused on churning out games. Over time, their games became more sophisticated and more successful and, eventually, they produced several massive hits on iOS and Android.
The company needed to use mobile ads to fully monetize their user base and they soon became experts in the mobile ad space, which led to a realization that a huge opportunity existed in mobile ads, especially connected to mobile games. They decided to dedicate resources to developing a mobile games ad platform.
So, a young company with limited resources pursued two lines of business simultaneously. Is there a focus problem? No.
There was/is no focus problem for two reasons: first, because the company won the market as a games developer first, before expanding into developing an ad platform. Second, the ad platform addressed need in a relevant market that the company understood extremely well.
Had the company STARTED by pursuing on two lines of business, there would have been a focus problem. They would have chased two rabbits at once and lost both of them. Instead, they caught the first rabbit (successful games development) then turned to the second (mobile ad platform).
In sum, stay extremely focused in the beginning, then expand into new verticals only if they are highly relevant to your core business.
Posted: October 22nd, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 4 Comments »
Clones have overrun Brazil.
The country is currently awash in copies (“clones”) of US business models.
As recently as 18 months ago, “cloning” in Brazil was still relatively new or, at least, much less widespread. Now, it is rare to find a Brazilian startup that is not an intentional copy of a company in the US (or, in some cases, Europe).
The speed at which US startups are cloned is remarkable: a company from Silicon Valley receives attention on Techcrunch one day, the next day two clones form in Brazil.
Is there anything wrong with this? Absolutely not. In fact, in many cases, a clone has less risk because the concept has already been proven in the US; even if the concept has not yet been proven in the US market, it often has the imprimatur of smart money investors.
In fact, one of the first questions VC investors ask a Brazilian entrepreneur is whether a version of their company exists in the US. If no model exists in the US or Europe, it raises a concern. This may be unfair but, because the pace of technological and business innovation is higher in the Valley and New York, it makes sense that good ideas would normally arise there first.
Here are the good and bad of clones as I see them.
Good:
- Reduced concept risk: the clone starts out with a model that already has some market or investor validation.
- Reduced strategic risk: a roadmap for market penetration has often been written by the initial innovators; the clone just needs to follow the formula.
- Exit strategy: in many cases, the clone has a more obvious exit: in the event that the predecessor in the US wants to expand into Latin America, it will often be easier to buy the clone than start from zero in Brazil.
Bad:
- Competition: there is a disadvantage to not having your own innovative idea. A truly innovative idea creates a distance between the startup and would-be competitors (example: Twitter) that can greatly increase the chances of success. By definition, clones don’t have that distance.
- Execution: because the company does not have an innovation advantage, clone entrepreneurs have less “margin for error”: normal entrepreneurial mistakes can cost a clone its life. Just ask the dozens of "group buying" companies that started early enough to win the market but now are out of business. The best cloners are the best executors, the best executors are the best cloners.
- Execution in Brazil: “Brazil is not for amateurs” and most foreign businesspeople learn the hard way that doing business in Brazil is very, very difficult. For example, logistics and managing the supply chain for an ecommerce business in Brazil is much harder than in the US…
- Capital: investment capital is a helpful weapon for startups but, in the case of clones, it is essential. Money pays for rapid expansion (marketing, hiring, etc.) that creates the needed distance from competitors. Lack of money means you will be left behind.
- Value: the most valuable companies are not clones. Apple, Google, PayPal, Facebook, Twitter: they were “derivative” – everything derives from something before it – but they were not clones. A clone is a copy: these companies innovated to win their markets.
Expanding on this point: the most valuable, sustainable companies tend to be platforms and platforms don’t lend themselves to cloning. Most clones choose B2C ecommerce businesses for a reason: they are relatively simply to copy. But that also means the barriers to entry are low: to win, you need to spend a ton money on marketing and execute, execute, execute. Building a “platform” (see the companies in the previous paragraph) requires more than money and execution.
Exit type and value is also different: platforms can IPO, clones usually (not always) need to be acquired. The former usually results in greater returns than the latter.
In sum, there is absolutely nothing wrong with clones. Clones can make great investments for VCs and many clones in Brazil will make a ton of money. We will be investors in some clones. There are downside risks to cloning, however, and an entrepreneur should understand them before launching a clone.
Posted: October 20th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 2 Comments »
I thought I'd share an internal email that I sent to the Arpex team today — it was in response to a longer email from one of our partners in which he shared his perspective on venture investing in today's environment.
I agree with what __ said and would add the following perspective:
– venture capital investment works in cycles — the current cycle in Brazil is becoming a bubble, in the US it is already a dangerous bubble
– in a bubble environment, there is a deal frenzy, with VCs scrambling to invest in the latest hot company without full consideration of business model or valuation
– i remember very well the "Dot-com" bubble and can name 30 companies from Web 1.0, with great teams, great investors and a lot of "buzz" — these were companies I wished I could invest in — that went bankrupt within two years (2000/2001)
– now, in Brazil, there are many companies that have investor interest and lots of buzz. As opposed to Web 1.0, these Web 2.0 tend to have less capital requirements and burn less cash — this is a good thing BUT, in many cases, these companies are not truly companies, but rather a single application or feature masquerading as companies. This means that it is unlikely that they will ever grow to a size necessary to achieve a meaningful exit. They are especially unlikely to achieve a meaningful return if we invest at a high valuation.
– in bubbles there are always many smart people who say there is no bubble and explain why "it's different this time". It is never different. Yes, technology changes, business models change, tactics changes but business principles don't change — a good business is a good business, a weak business is a weak business. the former will survive and the latter will eventually die.
– the best investments are in companies that don't need investments
– the best investment are in verticals that we understand well — become an expert in a given vertical and you will find (or create) good businesses in that vertical
– Arpex's managing partners are different people and therefore sometimes we do not think exactly the same about what deals we like –that is a good and important thing. We will always, however, come to an agreement before we allow Arpex to invest. So, while I probably take a more US/Silicon Valley perspective in the style of prospecting and the type of deals I like, we all agree on the companies that we invest in.
– I learned this principle some years ago and it has ALWAYS been true and always will be true — it is probably the most important principle of investing: Great deals don't find you, you find them.
Abs,
T
