Latin American startups need more quality deals from investors

Today’s Soapbox opinion comes from Juan Luis H Conde, Principal Partner at Novus Concilium.

Contxto – Good news from LAVCA, folks. They just reported the performance of Latam’s Venture Capital industry during 2019 with a seven-page document full of data, information, and flashy graphs. The major highlight is the amount of US dollars invested in the region. It reached record-breaking numbers! 

Naturally, these are positive signs for a region where VC is still incubating and has yet to see returns from the money invested in previous years. However, I noticed something. There is no data regarding the quality of the deals that happened last year. That’s unfortunate.

By “quality of deals” I mean the actual terms negotiated by founders and investors. Of course, I don’t mean to pry on private information, but at least some high-level statistics regarding the clauses used in each deal, the average of the valuations per stage, or the number of board members requested from the startup, would have been nice.

Why do I insist on this? Well, in my experience, Latam has a long way to go when it comes to quality in VC deals.

It isn’t strange to come across local (and unsophisticated) investors hammering down valuations to take a 60 or 70 percent stake in the companies they fund; filling series seed term sheets with drags and tags, even if they only invest a few thousand dollars.

Or they force founders to raise party rounds, build bureaucratic corporate structures or (worse) form a seven-person board of directors to manage a small garage/pre-revenue startup.

The investor-founder balance

This is a recipe for disaster. What’s the point of investing in a company that you are actively sentencing to death? It’s nonsense! Investing in a startup is not a zero-sum game, investors shouldn’t “beat” founders while negotiating a term sheet.

Investing in startups is, rather, a game of perspectives, where the best possible deal must be reached, to benefit all parties involved. Quality deals and standards help investors and founders strike a balance in the force. 

First, because founders don’t want to lose control of their companies and, honestly, they shouldn’t. After all, they are the ones who know the product, understand the market, and have the vision to dent the universe.

Also, they are the ones who manage the business and execute every strategy on a day to day basis. This, besides being heavily time-consuming, requires founders to be free enough to move fast and break things (a.k.a reinvent markets).

Second, we know investors must protect their investments but this doesn’t mean taking over the companies in which they invest. If investors don’t believe that the founding team they are backing can get the job done, they shouldn’t be investing in them in the first place.

So, while they aren’t going to be in charge of running the company because it’s not their (core) business, they need to control certain aspects of it without taking too much power from the founder. This means being clever enough to strategically position some checks and balances without interfering in the day to day operation.

A few intelligent and well-placed clauses might just do the trick without crippling the founder’s freedom.

Third, founders and investors should be careful not to mess up the cap table, particularly if they feel the company will need to raise a later round to keep growing. The whole point of creating value is to set up the conditions to make “fast growth” possible, not to prevent it.

Percentages, valuations, and preferred share rights should create a comfortable scenario for the company to grow and to motivate a later investor (if needed) to jump in like a hungry person over a plate of pastor tacos (which also come in a vegan version). 

Balanced investment as the fast lane to success

Balancing these interests is not an easy task. It requires a true pledge from the VC industry (including common businesspeople turned Angel Investors). One by which the whole industry commits to train more, study more, and learn more about the best practices to build quality deals.

To achieve this required level of sophistication, we must look up to Silicon Valley. Before you roll your eyes, please note I’m not suggesting creating a new Silicon Valley in Latam, that would be a waste of time.

What I’m suggesting is we take the fast lane to success. This means finding the best practices, those that have been curated for half a century, adapt them, and apply them to the specific realities of our different countries.

But ye be warned!

The easy way out would be to trick ourselves into thinking Latam is so unique that we don’t need to learn from others, especially those who have been successful at the very same thing we are trying to achieve.

Naivety will take us to the insane path of creating funding aberrations such as equity crowdfunding pools or choosing to swim with sharks, instead of focusing to create a healthy VC industry.

After all, as we say in Mexico, you cannot cover the sun with one finger. Sooner or later we must face the harsh truth: Quality deals matter over quantity of dollars to create successful Venture-Backed companies.  

Conde is a Mexican jurist. He has a law degree from Universidad Anahuac and an LL.M from UC Berkeley. He’s the founder of Novus Concilium, a law firm specialized in representing technology companies. He has been named one of the “Most Disruptive Digital Lawyers in Mexico”, by Foro Jurídico magazine. Moreover, he also was recognized as the “Best Dressed Lawyer” by the Berkeley LL.M class of 2015.