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Navigating Venture Capital in Latam

We had our first VC panel navigating Venture Capital in LatAm, together with angel investors, associates, and partners from VC funds. Learn more about the current investment market, projections, dilution, knocking on the door to VCs, and much more.
Venture Capital
July 11, 2022
Navigating Venture Capital in Latam

We had our first VC panel navigating Venture Capital in LatAm, together with angel investors, associates and partners from VC funds. We discussed the current investment market, its causes and its consequences, as well as received advice regarding investment round tickets, projections, dilution, knocking the door to VCs and much more.  

In our VC panel we had, Iván Pérez, from Invest in Bogota, who moderated the conversation. Our mighty guests included Ariel Russo (K50 Ventures), Alejandro Echavarria (Marathon Ventures), Alejandro Troll (Brazil Ventures), Luis Miguel Pazos (Kukua Ventures), and Ali Jammal (First Check Ventures). 

In this blog, we’ll share some of the highlights of what was discussed during the VC panel. 

  1. Current investment Market: are we f&*$ed?
  2. Avoiding valuation traps
  3. Prioritizing sales efficiency over growth
  4. Investment rounds: How much to ask for?
  5. How to improve the chances of getting funded?
  6. How to knock the door to VC’s and Angels and not get kicked out.
  7. Bonus advices.

1. Current investment Market: are we too f&*$ed up?

We all know it’s been a hard year for Startup founders who are looking for funding, while everyone keeps speculating the market will keep going down. But what do experts have to say about this?

In hindsight, 2021 wasn’t the best year for Startup investment, the majority of American funds have already spent a lot of their dry powder in overvalued startups, and they still haven't seen their full return yet in a market that keeps adjusting itself and punishing extremely high valuation.

According to Ariel Russo, from K50, it’s going to be a tough year for funding. VC’s will continue to invest, but they’ll have to do so with more discipline & focus. 

Why discipline? Russo believes that VC’s will have to dedicate more time to the companies that make part of their portfolio, not only in terms of helping them overcome the current market situation, but also, being able to keep demonstrating that the investments they’ve made have a permanence in time. 

Alejandro Troll, expressed the same feeling as Russo’s: he thinks that the analysis from VCs will be more acute and rigorous according to each type of company. However, he believes that within the short term -6 months to 1 year- there will be no lack of available capital, meaning that funds that have already been funded and have the capital ready to deploy must do so in a timely manner as they have strict timelines in their funds they are required to follow. 

Ali Jamal
  • "The last couple of years have been crazy for latam companies in venture. But the market won’t affect LatAm too much. Same valuation should apply, even if the markets are down. It shouldn’t affect early stage founders at all."

Although the future is not entirely predictable, we can take these experts’ opinions to make something almost certain: the market is constantly evolving and VCs will tend to be more meticulous when funding. 

2. Avoid being in a valuation trap

Alejandro Echavarría was the first to mention the “valuation trap” concept during our VC panel, after mentioning that the majority of VCs are young and only a few of them have lived market’s downturns. 

Alejandro Echavarría
  • "Valuation trap: majority of VC are too young and just a few have faced the downturns of the market."

He believes that there’s not a necessary correlation between funding and success: the point is to try to mitigate the impact and attract long-term investors that add extra value to the startups.

Ali Jammal, for instance, added that the same company’s valuation should apply, even if the markets are down. 

Jammal’s personal market point of view came with bonus advice: understanding what your company’s value is. In both good and bad times, he said, investors will try to get a larger portion of your company or round. So, regardless if the market situation is difficult or not, what’s important is knowing your company’s value, and staying true to it.

So, what to take on regarding being on a valuation trap: beware of over-valuing your company just to get funding, but beware also of under-valuing it just because the market is difficult. 

Avoid being in a valuation trap by giving your company the value it deserves, whilst remembering that funding doesn’t necessarily mean success - sales efficiency does.

3. Sales efficiency over growth

So far, we’ve covered two important topics, one related to the current investment market in LatAm, and the second one related to avoiding valuation traps. 

Now, one of the aspects that founders care the most about is growth. Founders think that in order to raise capital, they need to show huge numbers in terms of growth. So, what is better when you’re an early startup: should you care more about selling or growing? 

For this ever-evolving Startup scenario, Luis Miguel Pazos recommends founders to measure their projections in terms of sales, retention and user acquisition. He mentioned that investors will ultimately be checking on how close the business stays to such projections. 

Russo added a view of his own. He believes founders today must give priority to the runway: maximizing profit with growth initiatives and aggressive growth strategies that don't jeopardize cash flow. 

A steady growth and finding your product-market-fit are essential to startups especially in the early stages.

Tip: Stay realistic in the numbers and projections your businesses make - they have to make sense to different investors and angels. 

Then, at the end, what’s better: sales efficiency or growth? We saw some differences here, but it’s crucial for you to keep in mind what’s best for your company. Having growth and revenue is important, but having sales efficiency is even more. A steady company has a closer relationship with product-market fit than with growth.

Alejandro Troll
  • "Growth and sales efficiency: it is the work of the entrepreneur to find it in a healthy way."

4. Investment rounds: How much to really ask for?.

Despite the current market situation, VC’s will continue to invest. They won’t stop, even if there’s a down trend in the Startup investment market. It’s still a metrics market.

More than before, VCs and angels will keep the founder, business model and size of the market in mind. Markets may go up or down, but the important pieces are the founder(s) behind and testing the metrics and reaching the milestones.

Founders should base their rounds on the growth expectations - making realistic projections and mapping out what they need for the next stage. More than giving a concrete number, we want to emphasize on the importance of creating reliable metrics and projections instead of going for crazy numbers that might scare angels and VC’s.

The important thing is to have a way to prove your product-market fit, or to be in a good position to continue raising for the next round.

Ali Jammal also started explaining that it’s much faster to raise capital nowadays, because there are a lot of VCs and angels around, hence creating more options within the ecosystem. However, he believes founders will now face a constant battle between having the cash they need, versus preventing dilution. 

Remember to prevent too much dilution. Keep in mind that it’s better to continue to own your company, to know your worth and to keep those numbers in mind when going on investment rounds with VC’s and angels.

Ali Jamal
  • "In both good and bad times, investors are trying to get a larger portion of your company or round sometimes. People will use what’s happening in this downside to take more of your company."
  • "Understand what your value is. It’s much faster to raise capital because there are a lot of VC and angels around, there are more options. It’s easier to raise and you don’t need to have too much dilution at the early start. It’s the battle between having the cash you need vs. preventing dilution."

Keep in mind that:

The cap table will continue to evolve but, as a Founder, it’s important to understand how your cap table could turn out to be - as that would help make more efficient decisions in the future. It’s not only about what you currently have, but also the projections you sit on. 

Angels shouldn’t have more than 25% in seed stage (pre-seed included here), or around 50% or less in series A. 

5. How to have better chances of obtaining funding?

Another interesting point we discussed is related to how to get better chances of obtaining funding. We know there’s capital available for founders to access it and continue growing their companies, but is it easy to get the capital? And even better, how can you have better chances of obtaining it? Let 's see.

There are 3 aspects that will give your startup better chances of obtaining funding: 

  1. If it generates revenue.
  2. If it saves costs. 
  3. If it reduces risks. 

Once more, Echevarría from Marathon Ventures, mentions how important it is to have revenue and sales efficiency over anything. Product-market fit, he says, is even more indicative of a “good” company, than growth itself. 

It is the work of the startups to find a healthy balance between growth and sales efficiency - but without forgetting to be reliable: having such balance between growth and sales efficiency is about also being reliable on the metrics and projections that you make. 

Luis Miguel Pazos
  • "It’s about being reliable on the metrics and proyections that you make. Make projections contemplating your sales, retention and user acquisition. How close are you from those projections?"

Ok, so being reliable on your metrics and projections can be easy to say. But how can founders apply it in the real world? What advice can they take to make an adequate proposal?

Rely on a fair metric that avoids the company from burning capital in the future without growing its revenue in a positive percentage . What does this mean? For pre-seed and seed businesses, it means finding the right product-market-fit that could stand out against possible competitors. 

Good VC’s and angels care about a few things: the founder, the problem that you’re solving, and the long-term relationship they can build with you.

-   "Show you’re passionate about what you’re building."

-   "Have numbers that make sense and focus on problems that are big enough for you to have your portion of the cake (hopefully a big slice)."

-   "Build long-lasting relationships: No one will invest in someone they don’t trust/believe in. Make sure you build a relationship with them that can also benefit you both in the future."

6. How to knock the door to VC’s and Angels?

Imagine a VC fund and an angel receiving tons of messages per day. Who do you think they will pay more attention to? Think about it. Would you do business with someone you don’t really know?

One of the points that they all agreed with was that they prefer to receive warm intros from accelerators like Pygma and/or people they already know.

VC’s and Angels prefer to get into calls with referrals from connections and people in their network. Cold intros could also work, but the best founders can do is to connect with those in the ecosystem and try to get help from them in getting an intro. 

And what about female founders? How can female founders get connected with funds and angels?

Ali Jamal
  • "If it’s a product or company that women are most likely to understand, then go for women angels and women VC’s. If not necessarily, pitch men likewise and reach out."

Men are trained to be more aggressive in that sense and women could be more aggressive, so if you think you’re aggressive as a woman, try harder.

There’s a lot to take in from this VC panel. Some of the main takeaways are to make realistic projections and to avoid having your cap table too ‘dirty’, by having too many low-value investors that offer nothing else than money. Also, remember to stay away from valuation traps that can make you lose capital instead of gaining more.

In terms of growth, it’s good to have it (after all, its an essential part of any business), but keep in mind your sales efficiency and your process to avoid running out of capital too soon and having to raise another round. Be smart in your decisions.

If you’re already connecting with other VC’s and Angels in the ecosystem, keep it up. But if you’re still struggling with this, we have our second Pre-seed Batch with open applications, in which we can help you connect with our network of VC’s and Angels. 

We also help you make sure your cap-table is in order and that you’re well equipped to go to your investment rounds. 

Contact us if you’re looking to be part of a community of founders and experts, we’ll be happy to connect you and help you with your Startup challenges. 

Apply to our acceleration program here!

Bonus advice:

Luis Miguel Pazos
  • "Have flexibility in your roadmap."
  • "Better to have quality over quantity in your cap table. Optimize your team and the people that you have around so that they can help you along the way. Have the flexibility to make pivots based on the problem you have."
Ariel Russo
  • "Expectations have to be lowered by founders and have to be aligned with your cap table. Max 4 founders per company."
  • "It’s ok to take a 5 or 10% dilution, if it gets you enough cash to get you to your next milestone. Don’t take a huge round if you don’t need it."
Alejandro Echavarría
  • "Knowing the benchmarks for dilutions are very important for you, make it realistic. Saving dilution will be a huge savior for later on. Knowing how much dilution you should take in a particular round is super important."
Alejandro Troll
  • "Plan ahead, be prepared, and be organized."
Ali Jamal
  • "Build something really cool. If you focus on building the right thing, VC’s will look for you."