By Patrick J. McGinnis
If you’ve been following the Latin American early stage markets over the past year, you have probably noticed an emerging trend: although the number of venture capital firms in Latin America remains small, companies that are either operating in the region or were born in the region are raising money in increasing numbers. A group of promising companies has turned to angel rounds, often led by successful investors with proven track records, in order to raise their first significant rounds of investment capital. Moreover, a number of these companies have come out of incubation programs like NXTP Labs in Buenos Aires or 21212 in Rio that prepare them for the angel community. With these angel funds in hand, start-ups have the ability to prove out their models and gain the traction required to raise a Series A round.
The present funding environment speaks to the fundamental belief by Latin tech investors that there are compelling deals to be made. Moreover, it speaks to the creativity of both funders and entrepreneurs in putting together rounds that are tailor made for the circumstances in which each company was born and now lives. Unlike in the United States, where one can theoretically raise a round by spending an afternoon on Sand Hill Road or passing a hat on the corner of 19th and Broadway in New York, these entrepreneurs often put together investor groups that span geographies.
These rounds of capital also show that entrepreneurs typically select angels who understand their story and can add-value in specific ways. Angel rounds often have a “social” element as well. Specifically, the rounds are filled with investors who come from the networks of their founders and lead angel investors. Specifically, the lead investors in a round often call upon (or more typically send an email with a deal summary to) a network of like-minded individuals with whom they have participated in other deals over the past few years.
Over the last month, I’ve had a chance to talk with a few entrepreneurs and angels about what’s happening at the moment in early stage fundraising in VC. As such, I present their perspectives of the protagonists of these stories – the entrepreneurs and the investors themselves.
InBed.me: From Latin America to General Assembly to the World
I first heard about inBed.me in late October 2011. I had gotten to know the team behind NXTP Labs in Buenos Aires, where I later became an investor. Ariel Arrieta and Gonzalo Costa of NXTP suggested that I meet with an entrepreneur named Diego Saez-Gil, who was based out of General Assembly in New York along with his co-founder Alex Torrenegra. Diego and I made plans to meet on Saturday, October 31, and I trudged through an early New York snowstorm to a coffee shop in the West Village to hear the inBed.me story.
In essence, inBed.me (inbed.me) is a social booking site. It focuses on the hostel market and gives travelers who are staying in hostels (many of which are students) the ability to book rooms, share their bookings with others, and see who else will be staying at the hostel they have chosen. This functionality allows travelers to meet and make plans with fellow travelers even before they trip has begun. As per its tagline, inBed.me’s team believes that “travel is not about the places you visit but about the people you meet along the way.”
Since my first meeting with Diego and my decision to invest in the angel round, something interesting happened: inBed.me attracted significant interest among the angel community, and not just the angel community investing in Latin American start-ups. I realized that something had changed when I got an email from a New York-based friend who mentioned that he’d heard I knew the inBed.me team; he wanted to know why I hadn’t showed him the deal. Then I saw the investor list and realized that two other friends were investing. In the end, inBed.me raised US$1.2M in an oversubscribed round.
So what was the secret to inBed.me’s fundraising success? First of all, the founders leveraged their pre-existing networks such as Start Up Chile, Start Up Weekend New York, and NXTP Labs to approach a diverse group of investors and build a truly international round. Although inBed.me is run by two entrepreneurs from Latin America and has an office in Bogota, it is headquartered in New York and, as a travel company, caters to the global market. As a result, Diego knew that inBed.me needed to be international from day one. In total, the current inBed.me investor group combines institutions and individuals that are based in seven different cities (New York, Paris, Madrid, Amsterdam, São Paulo, Buenos Aires and Boston).
Once word of inBed.me hit investor networks and momentum started to build, Diego was then in a position to select a group of investors who could most directly help him to execute on his business plan. The individuals are either startup founders with deep Internet-related experience or investment managers. For example, Diego brought on Javier Tenessa and Mauricio Prieto of eDREAMS/ODIGEO, the largest online travel agent in Europe, for their experience in the online travel industry. Similarly, he wanted to work with CAP Ventures and Ventech due to their e-commerce experience in Latin America and Europe, respectively.
Of course, having such a large and geographically dispersed group of investors presented a series of logistical challenges. Rather than trying to negotiate with each group individually, Diego selected a lead investor who negotiated terms on behalf of the round. His lead investor came via one of his earliest investors, Alex Oxenford (a founder of DeRemate and OLX), whom Diego refers to as a “heroic Argentine entrepreneur.” Alex introduced Diego to Fabrice Grinda, his partner in OLX, and Fabrice elected to lead the round. With a highly credible lead investor who is a well-known entrepreneur and angel investor, the round coalesced around the terms that Fabrice negotiated with the company.
Now that the funding round has closed and Diego is fully focused on execution, he believes that the depth of experience of his investors will be a differentiating factor for inBed.me.
Restorando.com: Building a Bridge to Silicon Valley
Like inBed.me, Restorando has also raised money from a group of international investors. Restorando (www.restorando.com) is an online booking engine for restaurant reservations (think Open Table in the United States). Its recent US$3.2M Series A was led by a venture capital firm out of Silicon Valley, along with other Latin America-based and international investors. Recently, I had the chance to sit down for lunch in Buenos Aires with angel investor Santiago Bilinkis and CEO Frank Martin (the reservation was made via Restorando, naturally), to get their thoughts on fundraising.
Anyone who has been in the Latin American early stage market for the last decade is familiar with OfficeNet, the successful office supply company founded by Santiago Bilinkis and Andy Freire that was sold to Staples in 2004. With that success under their belts, Bilinkis and Freire moved on to new ventures and began to work with young entrepreneurs. On several occasions, Santiago and Andy were approached by Restorando’s founders, Frank Martin and Franco Silvetti, who wanted to start something and were looking for mentors. Impressed, the OfficeNet founders agreed to work with Frank and Franco to develop a series of ideas. As they whittled a list of five ideas down to one, Restorando emerged.
After an initial seed round in 2010 led by Bilinkis and Freire, Restorando raised $500,000 of additional capital in 2011 in a round that included Atomico and Kaszek Ventures. Most recently, Restorando announced in February 2012 that it had raised US$3.2M in a round led by Emergence Capital Partners.
The Restorando team learned several key lessons as it sought to raise capital from Silicon Valley. First, investors in the Valley are looking for stories that are centered on Brazil. It was important to them that Restorando focused its business on the Brazilian market, even though it does have presence outside of Brazil and is led by an Argentine CEO.
Second, and most critical, Bilinkis believes that the Restorando story shows that Silicon Valley is now open to companies from Latin America. During our discussion, Bilinkis noted that just a few years ago, Silicon Valley investors were known to only invest in companies that were based within 50 miles of their office.
Restorando was able to get meetings with every VC firm it approached. Even firms that weren’t quite yet ready to make an investment in Latin America wanted to take a meeting and understand the opportunity at hand. In the end, Restorando chose Emergence as its lead investor, which was joined by existing investors including Atomico, Kaszek, and Storm Ventures.
With the round now closed and Restorando focused on execution, Bilinkis believes that the Latin America venture capital paradigm has shifted. With new entrants from Silicon Valley, the culture of Silicon Valley will demand more from investors in the region. Specifically, he noted that the Silicon Valley investors impressed him with rapid follow up on their meetings and with plain vanilla term sheets. He contrasted this with some Latin investors who are slow to respond and propose punitive terms, both with respect to valuations and investor rights. As a result, he believes that at least for premier deals in the region, Latin American VC’s will have to adjust their practices in order to compete. Otherwise, they risk being left behind.
What Comes Next?
Of course, every funding story will be different since every entrepreneur or investor pursues a unique path to deal making. This is especially true of a market that is still evolving and where the ecosystem of entrepreneurs and investors is changing rapidly. Still, the stories presented above show that the ecosystem in Latin America, from angels and VCs to accelerators, is working. As investors from the United States, Europe, and other regions look to play on the Latin American stage, the options for both entrepreneurs and investors will only continue to expand.
Growth Capitalism is a regular column in the Latin America PE/VC Report from Patrick McGinnis. McGinnis has been a private equity and venture capital investor in Latin America and the emerging markets for over a decade, first at Chase Capital Partners/JPMorgan Partners and later at AIG Capital Partners (now PineBridge Investments). He is the founder of Dirigo Advisors and is a co-founder of Real Influence. Patrick is actively involved in the Latin technology space, with investments in NXTP Labs (www.nxtplabs.net), InBed.me, and Altodot. He also sits on the Board of Directors of The Resource Group, a global BPO company. Fluent in Spanish and Portuguese and an avid traveler, he blogs about travel at www.huffingtonpost.com/patrick-mcginnis. He can be reached at email@example.com