An Interview with Hernán Fernandez from Angel Ventures

Meet one of the most influential investors in Latin America

Contxto – Last Friday, I spoke to one of the most influential opinion leaders and investors in the Latin American startup ecosystem—that is according to TechCrunch—, Hernán Fernández, Founder and Managing Partner of Angel Ventures. He shared some of his experience, advice for founders, and predictions for the upcoming year of 2019!

Scroll down and find out what Hernán had to say to us at Contxto.

H: Of course, and you’re welcome!

Well, briefly, I’m Mexican, I did my MBA at MIT, and my Law degree at ITAM. It is kind of an unrelated background, but there are many lawyers getting into the tech ecosystem nowadays.

My approach to entrepreneurship started back in MIT when I enrolled in contests like Venture Mentoring Services, MIT $100k Business Plan Competition, etc.

And that’s when I had my first encounter with the industry.

H: So, I graduated from ITAM as a lawyer and I loved it. It was an excellent school, but the career path was very limited in terms of value creation.

Lawyers are invited to the conversation once the deal is made, and they’re just setting everything up formally. It’s an operative role.

But no one ever asks lawyers the “why” behind the deal. Why should Coca Cola buy Jugos Del Valle? It was something more like: “Okay, we already decided to buy Jugos Del Valle, now let’s bring the lawyers in to finish up all the paperwork.”

I didn’t like to be left outside of the negotiation and the strategic discussion. That’s how I set my mind to start an MBA and get into the business side of matters. Once at MIT, my whole perspective changed, the entrepreneurial ecosystem fascinated me and being there was an incredible experience.

Back in Mexico, I worked in consulting a bit. It helped pay the bills, but I wasn’t really happy. My heart was in entrepreneurship.

I kept my MIT network and connections, so I jumped into it and started Angel Ventures with my first partners.

In the next years there were some changes and now Camilo—my current partner—joined us and here we are now. We launched our most recent fund last year.

H: Yes. Currently, we have operations in Mexico City, Guadalajara, Bogotá, and Lima.

So, four offices in three countries.

Our thesis is to invest in the most innovative companies across the region. This could be done by either investing in local companies trying to launch in other countries or foreign companies looking to start operations in Latin America.

Why these countries, specifically? Well, we’ve found that if you add up the Pacific Alliance countries as one economy, it’s much larger than Brazil itself—around US$2.3 trillion’s worth in GDP.

They are all Spanish-speaking economies, they have independent central banks, and they have the most solid democracies in the region. And that’s why our platform is ideal for connecting these countries.

And we’ve seen some success cases, right?

Companies that successfully managed to expand operations into these other economies because of similar characteristics. We’ve seen it with Cornershop, the Chilean company that successfully landed in Mexico. Rappi started in Bogotá, but one of its largest markets is Mexico, etc.

It’s way easier to find these cases of synergy in these countries than, for example, in others like Brazil—a very different market—. It has been trying to expand into other Latin American economies, and there are very few cases of Brazilian companies successfully doing so.

We started in 2008, as a platform for angel investors.

At that time, a lot of individuals that were getting into the startup ecosystem approached us. I’m talking about big companies’ CEOs, CTOs, CMOs that were literally receiving their end of the year bonuses and didn’t know where to invest that money other than real estate and franchises.

So, these investors started to develop an appetite for tech startups, and at the same time, many people needed the money to fund their companies. So basically, we organized one of the first angel investment networks in Mexico to try to allocate that smart money.

Between 2008 and 2012, there was a trend where High Networth Individuals saw our already solid processes and our ongoing startup pipeline. So, they—unable to join every single project they liked—asked us to manage their capital and to invest it for them.

That, for us, confirmed the need for the fund. We managed to raise our first fund in 2008. It was a US$20 million fund with over 53 individual investors and family offices, as well as institutional investors, such as Nacional Finaciera, Mexico Ventures, and Banco Interamericano de Desarrollo.

So it was pretty diverse in terms of LPs, but also in terms of startups. We invested in great companies such as Clip, IguanaFix, Clickonero, ösom, etc.

H: Sure. Well, in terms of Guadalajara and the other offices, even though the spirit of Angel Ventures is to share pipeline, network, and know-how with one another, every office is managed independently.

For example, at Guadalajara’s accelerator, of course we help them with back-office and distribution, but the project is entirely managed by their office.

Same goes for the Peru office. There we launched a platform for boosting female-founded startups, championed by the Banco Interamericano de Desarrollo, and obviously, all other offices became satellites and support platforms. They still run it.

All offices share the success of the Pacific Alliance Fund, and we clearly, have LPs from all those countries.

Now, about B2Link, one of our LPs, is a sovereign Korean fund so it made sense for us to launch a highly successful Korean company in Latin America.

Cosmetics is the second largest industry in Korea, just behind the automotive industry and even ahead of electronics.

Latin America is a great option for B2Link to expand since the proportion spent on cosmetics by Latin Americans per capita. It is significant enough for them to look over here for expansion.

From the macroeconomic trends, it made sense to enter the Latin American market, and they are well positioned. They already have deals with Costco, Palacio de Hierro, and it has been considered one of the next Korean unicorns.

H: A little bit of both.

Angel Ventures made sense to the company. We met at an event about Korea in Latin America, and B2Link mentioned they already had the Latam market well analyzed, but they didn’t necessarily know how to attack it.

So, the meetings started a year ago and we finally closed the investment a few days back.

H: I think there are great entrepreneurs and amazing companies in Latin America. However, one reality for me is that Latin America is not an innovation hub per se. It is not like Silicon Valley, or some parts of Europe.

I’m not saying there’s no innovation happening here, but the nodes are not interconnected enough to claim it is an innovation hub.

I think Latam has a lot of talent, but many times that talent ends up being hired by other innovation circles out of the region, and that’s something that might take years to change.

However, something that is true and noticeable is that consumers are becoming more and more sophisticated, and they look for more and better ways to access goods and services. That’s definitely a great opportunity for founders.

What I think it’s interesting is that we’re already discovering and identifying the first wave of Latin founders that are going to drive the ecosystem further. Companies such as Konfío, Rappi, Kueski will set the pace for future entrepreneurs.

We’re starting to see Sequoia’s and Accels‘ venture rounds in these companies, but the reality is that although these companies are innovative, they’re not necessarily unique.

These companies have equivalents in other parts of the world.

You know what? I might even challenge you to find a company in Latin America that does not have a simile in another location.

So, it’s going to be tough for these companies to become unicorns, because they’re going have to have something unique and disruptive to offer.

I think there are other emerging markets we should turn to look for opportunities. India, for example, has more solid innovation than Mexico, in similar issues. And it would make sense to follow a similar path, rather than trying to replicate a company that is already in Silicon Valley.

Today in AV, we’re following closely what’s going on in more comparable economies (India, Southeast Asia). And interestingly enough, companies in India are lining up behind big companies in the US to become the next unicorns.

Latam has to look for other similar economies, where there can be innovation and technology more suitable and adaptable to out local issues, instead of always turning their heads to Silicon Valley or Israel.

H: Well, I think Megarounds are still going to continue, and we’re going to see foreign investors participate in these rounds, and I’m talking specifically about Sequoia and Softbank.  Sequoia did a small investment in Rever, but we’re going to see much bigger rounds.

I think we’re going to see much more consolidation. Without the INADEM, we’re going to see a more difficult fundraising process for seed stage startups and even small-sized Venture funds.

There’s going to be a market adjustment and many of these startups are going to either merge with one another or ultimately, die. So definitely, we’ll see more active M&A deals.

Not just startups, but funds are going to have a harder time, too. We’re going to see a rearrangement from the 56 funds that were created with the INADEM’s support. In three years we might see half of them.

I’m not saying it is either good or bad, it’s just a market correction.

I also think the AFORES are going to invest a bit more. The effects of Venture Capital are starting to gain attention in Mexico, and it is not a fashionable trend anymore.

These new investors might give fresh fuel to the funds, but with greater responsibilities, too.

H: Hopefully! I think every fund would love to reach IPO status in their portfolio companies, but it’s not that easy.

BIVA’s entrance is healthy to the ecosystem because it creates competition. However, even though I’d like to tell you: “Yes, it is going to improve”, I am still not sure it’s going to happen anytime soon.

I think that we’ll see some, but it’s going to remain short in becoming the trigger we’d like to, in terms of Venture Capital.

Private Equity clearly will find a better fit to this.

For venture backed, cash-flow negative startups, IPO is still a far option.

H: I might be biased, but Clip is my go-to answer. But also, Konfío and Grin are interesting and promising cases as well.

H: We have a very active website and social media accounts. But be aware that we get a lot of emails of entrepreneurs trying to pitch us all the time, and sometimes it’s just impossible to reply to them all.

What I always tell founders is that the best way to reach us is through other founders that have already worked with us.

I widely trust any founder from our portfolio, so it’s a pretty effective pre-filter. They know we value our time, their opinion and they know how we usually work.

If a founder of our own portfolio introduces us to another founder, absolutely we’re going to listen to them.

That’s undoutedly the best way a founder that doesn’t know us, can reach us.

H: Well, mistake number one is trying to pitch many companies at once. That’s very stressful to see because it shows a lack of commitment.

As a VC, you don’t wan to see full-time founders. You want to see full-life founders.

You need to see if it’s someone that is completely enthusiastic about their project, or just in for the money/fame.

If you see a founder that comes up to you and says: “well, I have three ideas I want to pitch you, and one of them is Gasolineras VIP, the next one is selling flowers online”, you immediately identify the person is not committed to a project and they’ll jump out when the smallest obstacle arises.

My job isn’t to brainstorm ideas, my job is to analyze real projects.

And also, if you’ve been in working in your startup for over a year and still haven’t left your 9 to 5 job because of the risk, how do you expect us to assume that risk if you don’t assume it yourself, first?

H: Firstly, find yourself a co-founder. We think that the first person you have to convince is your business partner. If you’re not able to do that, you’re done.

We also go kind of Chinese Proverb here: “If you want to go fast, go alone, but if you want to go far, go together”.

Secondly, always budget for six months of runway. It will give you enough time to reach your next funding goal.

H: “Hard Thing About Hard Things” by Ben Horowitz, for sure! But I’m currently reading “Finding the next Starbucks”, and it’s pretty great, too!

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Definitely a controversial interview, full of unpopular opinions and major statements, but also full of wisdom and extremely useful advice.

Make sure you check out what Angel Ventures is up to, here!

– VC