How Venture Capital in Latin America DOESN’T work

11 comments

Perhaps the most shocking thing of knowing how Venture Capital in Silicon Valley works is to see the huge contrast with what happens in Latin America.

I am a friend of several of the people who lead or work at the main funds in the region. But back from my trip I could not help but feel disgust for how they carry out their role as VCs .

What is the problem? The problem is that Venture Capital is essentially about risk. All the VCs we met during the trip made that very clear. And here, nobody wants to take risks .

For me the root of all the problem is the small size of the funds. In a game with as much risk as Venture Capital, the only possible way to mitigate it is by diversification. Investing in many projects. In this way, a few big hits ‘pay’ for the failure of those who fail or at least do not take off. But local investors, being limited to a few investments, are trying by all means to minimize the risks.

To do this, they go to infinite lenghts to “pick the winners” . And to do that they violate all the rules that American VCs apply.

Thus, they require an absurdly high number of meetings to decide . While in the U.S. they typically require three that take place in about three months, the few ‘deals’ that are closed here virtually never require less than twice as many meetings and time, and sometimes much more than that. Luckily it has been a while since I needed to raise money from local VCs (and the process of Officenet 11 years ago was a pleasant exception to much of what follows), but accompanying the processes of other entrepreneurs I can see first hand the enormous wear created by the absurdly long local processes.

After each session, feedback is never clear . While in the U.S. each meeting ends with an unequivocal result, yes or no, here VCs always want to leave the door open to be able to tell you that they will invest, that they will not, or maybe just the opposite. That contributes to needlessly prolong processes that are destined not to close and exposes the entrepreneur to a very high stress even when things are progressing well. This is especially damaging when companies are in a situation of financial distress.

In their attempt to detect the “doomed to success,” in contrast to their American counterpart, the local VCS put an exaggerated focus on rates of return and financial projections. Instead of focusing on understanding the potential of ideas, they pointlessly try to guarantee an unguaranteable return for such early stages.

Finally, the most delicate of all. When after all this long process you get a term sheet, as they are finally taking risks, they try to cover their exposure to the extreme with term sheets that include all the clauses that Tim Draper explicitly said American VCs avoid. They Tie disbursements to the fulfillment of ‘milestones’, include liquidation preferences (rights to get their money before the rest) and worry a lot more about limiting risk than of aligning incentives.

I imagine that in their defense the local VCs can argue that the degree of ‘investment readiness’ (preparation for receiving investments) of local entrepreneurs is much lower, and that is certainly the case. But that could serve to justify the process lasting five instead of three meetings, not the extremely long times which Latin American entrepreneurs are generally subjected to. Neither the draconian clauses or the lack of clear feedback.

At this time of international turbulence, the local VCS should seriously ask themselves whether they have what it takes to play this game: a good eye for evaluating ideas and people, and tolerance to take a high level of risk (only mitigated by diversification). If they lack this second quality, they should rethink whether it is Venture Capital what they should devote their efforts to. And if their risk aversion is too high, I also recommend they also avoid being entrepreneurs. It is risky and you have to deal with VCs all the time!

Photo: lonely radio

insurancesitesfind » Blog Archive » How Venture Capital in Latin America DOESN’T work | Santiago … says:

November 2, 2008 at 8:30 pm

[...] I imagine that in their defense the local VCs can argue that the degree of ‘ investment readiness’ (preparation for receiving investments ) of local entrepreneurs is much lower, and that is certainly the case. … Read more [...]

Santiago B. says:

November 11, 2008 at 7:17 pm

Everyone, if you speak Spanish you can see plenty of comments on this post in the Spanish version.

Kragen Javier Sitaker says:

November 20, 2008 at 5:47 pm

Mirá, ¿dónde está la versión castellana? No veo ningún link.

November 20, 2008 at 5:50 pm

I think all of the bad practices you’re describing also exist among Silicon Valley VCs. I’ve had my equity wiped out by liquidation preferences, watched founders spend months and months being strung along, and I’ve seen Silicon Valley VCs show the same appetite for risk as a mussel. Maybe it’s a matter of degree?

November 21, 2008 at 6:27 am

Thank you for your comments, Javier. In trying not to idealize SV, I understand things there are not ideal. But you probably cannot imagine how much worse they are around here.

With regards to the Spanish version, every post in this blog is also posted at spanish.bilinkis.com, where the audience is larger and so is the number of comments.

However, I really appreciate having English commenters so please check the Spanish comments out but don’t switch!

November 22, 2008 at 11:33 am

Aha, looks like the post I was looking for is http://spanish.bilinkis.com/2008/10/vc-latinoamerica/ — maybe you could fix your blogging software to link it automatically?

Well, I haven’t really been involved with anyone seeking VC here in Argentina, so I don’t know how bad it is. Maybe you can tell some more detailed stories? Dunno how much that will help; presumably the problem is that there aren’t a lot of successful business deals here, not that there are a bunch of ridiculously unsuccessful ones. In any big city, you can find enough ridiculously unsuccessful business deals to fill a shelf of books.

But maybe the problem is something else, other than the things you’ve identified? For example, maybe potential employees are too prone to seeing management as their enemy, or protections for investors aren’t strong enough to keep management or other employees from absconding with their money Enron-style, or the really great techies go to Silicon Valley or New York or London to start their companies (leaving the dregs for the local VCs), or the business culture here is too focused on short-term advantage, or people don’t change jobs often enough to spread knowledge around the economy, or entrepreneurs here just don’t think of high-tech innovation as something that happens in Argentina, or something like that? Your blog post by itself doesn’t really explain why you think VCs are worse here than there.

I’ve met a bunch of people here doing interesting technical work here that seems venture-fundable, but not as many as I had expected. I want to figure out why that is.

Rafael Kemish says:

December 4, 2008 at 2:00 pm

I have to agree with you, after finding out about the three “VCs” here in Peru and meeting them I got extremely dissapointed about the risk aversion they have, they seem to get a different definition of Venture than people in the US, because they always look for medium businesses, with stable growth that need capital to grow.

Tomas Higbey says:

February 14, 2009 at 10:34 am

Much of what you mention here Santiago is the hardest nut to crack, culture. The reason the US is leading the world in terms of innovation and business is because of the values and mentality around business ventures. Therefore you are addressing some of the hardest issues to solve and it is hard to be optimistic. The best way in my opinion to change this is to begin an intercambio of VCs from Silicon Valley and with private equity and “VCs” in Latin America. This intercambio should be organized into virtual exchanges such as video conferences, internships and an official association to facilitate dialog between the two regions. This will also include setting up offices in each others respective countries to have people on the ground to observe, learn and act.

Zoe Ali says:

July 5, 2010 at 10:26 am

me and my friends have been into venture capital investments and so far the income is great.-:.

José Angel Yánez says:

February 5, 2011 at 12:08 pm

Any suggestion for Venezuelan startups?

A commodities addiction and the startup ecosystem in Chile « GIM South America says:

January 16, 2012 at 1:23 pm

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