Julie Maples (FYRFLY Venture Partners): We invest in data, intelligence and enterprise software that is not really sexy part of the market.
24 May, 2020
We had an opportunity to talk to both Hernán Fernández Lamadrid and Camilo Kejner from Angel Ventures about their fund and their preferences in investing.
Hernán Fernández is a founder and a managing partner at Angel Ventures, the leading Angel Investment Network in Mexico. Hernán started out as a lawyer but got fascinated by entrepreneurship, which resulted in him becoming one of the most influential investors in Latin America.
Camilo Kejner is a managing partner at Angel Ventures. Prior to raising AV’s first fund, he was a board member, a chief operating officer, and a consultant for several startups in the technology and retail sectors. Camilo has also held several management positions in the entertainment industry.
Hernan: We started back in 2008 as the first professionally managed angel investor network. So, between 2008 and 2013 we only followed exclusively this model. It was more of a matchmaking service between high-net-worth individuals or people that were considering for the first time investment into a startup and companies or founders that were coming back to the country. Also, Mexico has been attracting international talent mainly from Latin America for several years now. Nourishing these trends and following these individuals trying to replicate the models that were successful in the different parts of the world and bringing them to Mexico at the point, and to then to Latin America, we were able to fund more or less 19 startups with a round of 30 million.
And then, at some point, we saw that we already had a significant pipeline, we had a very excessive community of angel investors that were already hinting to us that they wanted to participate into returns that didn’t necessarily implied break investments, more focused on the ones they call fund methodology. And lastly, they were able to secure an investment form the Inter-American Development Bank at that point. So, that was a good cue for us to change the model from an angel investor network into a fund model. That was actually about the same time that Camilo joined for the First Fund, and we were able to raise 20 million, which was a big fund at the time from both international investors and also a broad range of family offices and individual investors from Mexico, but also the US and other different parts of the world.
Out of that fund, I would say, some of the most well-known success stories include Clip, one of the largest fintech companies now backed with GA, Softbank, and some others. And the Kueski which is the largest online microlender in Mexico. So we rolled early fintech attainment with reaping benefits. Other than that, we had 21 portfolio companies, and many of them still operating and having good traction, a good path towards a decent exit. But I would say that the two mere hits that we have are Clip and Kueski, and I guess that would be the clue for where we are today in terms of Pacific Alliance Fund.
Camilo: We’ve noticed during the time that we were beginning to think about divesting from Fund I, we had the opportunity (a lot of it driven by just virtue of being in the right place at the right time) to meet with a lot of international investors and the big tech companies that were starting to create their own internal VC arms. And what we were hearing was that yes, Mexico was showing some really good early signs and yes, it was great that we had had two hits with our first fund’s portfolio, but the market that they saw as really meaningful in the region was Brazil. And for a number of reasons Brazil had a lot of issues, namely most of the big international managers had been to Brazil between 2010 and 2012, and it hadn’t gone well for anyone. That was an adventure that did not end well. So they were a little bit skeptical about Brazil.
And what we figured was if Brazil is the market that is interesting, but they are skeptical, and Mexico is showing some good signs but it doesn’t have on its own enough size, what should we do to provide a good counterbalance to Brazil in the region? And so we focused on the Latin American region called the Pacific Alliance which is comprised of Mexico, Columbia, Chile, and Peru. It is a free trade agreement with a free movement of goods, people, and money; fairly easy in a lot of verticals to replicate a working business model from one market to the next, at the same time, there are longstanding democracies with independent central banks. And one thing that is very important specifically in Latin America, which is that the economies are interconnected but not interdependent, meaning: if you have an economic catastrophe that is unique to Mexico or to Columbia, or to any of the four markets, it doesn’t necessarily drag the other three markets along with it. And that provided a very good buffer and a very good measure for risk mediation. Because if you can create companies that are regional within the Pacific Alliance, you have a very solid structure with very solid entrepreneurs and teams in a place where, if you have a disruption of business or if you have a macroeconomic issue in one of the markets, you can continue to operate fairly normally in the other markets. That is, of course, Coronavirus exclusive.
And we decided to create a fund where the thesis was to essentially focus on creating companies that are born regional within the Pacific Alliance and where we can provide potential acquirers a turnkey solution in key verticals to become a regional player in Latin America in one transaction.
Camilo: we invest in technology-enabled business models and that are mainly in one of six areas of focus: one of them is retail/e-commerce, health and biotech, fintech, of course, agricultural business and businesses that are key to the base of the pyramid, food tech, mobility and other technology-enabled solutions like smart cities, IoT, etc.
Camilo: So, with the second fund we moved a little bit up in the stages that we focus on. We will still make some early-stage investments, but we’re not doing anything that is e.g. pre-MVP level. We mostly focus on leading series A and series B, and that’s the core focus. We will exceptionally make some earlier investments.
Hernan: It might sound very cliché, but we really like teams, particularly teams that have a proven track record of working together, even if it was a failed startup or whatever, but we like people that stick together in good times and bad times, and we don’t like to see them all go kicking like a one-man-show kind of startups. And then, obviously, we are looking into the competitive landscape and we like to see replicas of business models throughout the emerging markets that have enabled us or motivated us to dig beyond Latin America. And we have seen that there are several comparable emerging markets like Southeast Asia or the Middle East and North Africa and Latin America. Whereas we might see that places like Israel or Silicon Valley are more deep tech-focused, but what we see in the regions is that there is a true personal advantage and there might be more technology-enabled business models that you would see in different parts of the world.
And we like founders that are aggressive, but yet, at the same time, that are also more down-to-earth, that they are coachable and hopefully that they understand, e.g. in these scenarios of crisis that sometimes hard decisions need to be taken and to sacrifice things like perks of company culture towards the survival of the company. So I think that this COVID crisis will be a very important test for many of these founders, and a capability to survive will pretty much guide them through the rest of their founding life.
Hernan: I’d say anyone who tells you otherwise will be completely lying. I think it’s pretty much hitting every single phase of venture capital etc. In our case, our fund is still recently new one, we have a broad base of VCs from investors, so I think that for the time being, we are still taking a look into new investments. However, we are certainly being more cautious in terms of which companies or which industries might be more affected by the COVID crisis, or which teams or which companies are being more resilient. Obviously, our current focus right now is our existing portfolio companies and understanding how we can weather the storm together, and that there might be some companies that cannot make it out.
But yes, we are still open to new investments in these new scenarios, etc. Certainly, it’s not going to be the same conditions that we were seeing even last year where there were some crazy variations going on and companies were only focusing on growth. That tone had significantly calmed down during the past month, but now it just became very dramatic and I think that most companies today will be more in survival or stealth mode for significant months before growth can keep them up again.
Camilo: Let’s focus on what ‘review’ really means. A thousand companies come through our pipeline meaning companies who look for us and companies that we identify as companies that we are interested in. Now, after a very quick review, between 3 or 4 hundred of those companies don’t fit the thesis or they are not at the right stage, or they don’t have the right geographies or industries in focus. Let’s say, we end up with 600, and these are very rough numbers. We end up taking a more in-depth look at about 150 companies a year that we bring to sectorial committees. We have one investment committee for each area that we focus on. And out of those 150, we will maybe bring 10 or 12 to our investment committee which is our final decision-making mechanism. And we will make between 5 to 8 investments a year, maybe less – 4 to 7. So, it’s a very wide funnel at the entrance and it gets very, very small at the end.
Camilo: It depends. If a company comes into a pipeline at the moment in time in which we already have pre-set dates for investment committee meetings, then it can take 45 days, that’s the minimum. If the dates don’t align that well, it could take between 60 and 90 days from the day we meet them to the day we make a final decision and fund the company.
Camilo: We attend a lot of industry events all over the world because companies could be focusing on Latin America, but they could be based anywhere. And obviously, by virtue of having been around for so long and having funds of significant sizing for Latin America, we are, I think, an obligated stop for any company looking for funding in the region. So it’s both: companies reach out to us, but also we are very active in mapping out the ecosystems and looking for companies that might be interesting to our thesis.
Camilo: As I said, in this fund, we are focusing more on series A, so about 3 million dollars seems to be the sweet spot. We’ve done somewhat smaller initial checks and we’ve done somewhat larger initial checks, but 3 or, I’d say, 2.5 million seems to be the sweet spot.
Camilo: We take the time to do the initial meetings and to get to know the team. Because, obviously, we are making a number of subjective decisions as well as the objective ones. So, we try to determine very quickly whether that’s a team or entrepreneur that we feel comfortable working with for the next 6 to 8 years. So we take those decisions very carefully because we have had bad experiences in the past and, obviously, we know we will continue to have bad experiences every now and then, but we try to minimize that. If we can avoid all the subjective pitfalls that come with selecting an entrepreneur, we want to try and do that as much as we can.
So, red flags are entrepreneurs that are non-cooperative and that do not take feedback well. I’m talking on the subjective side, entrepreneurs who seem to be a one-man show with no team or no intention to create a team. Those are red flags on the subjective side.
On the very objective side, we have thousands of data points to compare distances with. And so, whenever we are talking to a team, and the acquisition cost doesn’t make sense or the marketing expense doesn’t make sense or the unit economics doesn’t make sense. Those are red flags.
We are obviously willing to be flexible, but if you take a look at a business, and we can’t imagine and the entrepreneur can’t make us become comfortable with how that business has a path to profitability, we probably wouldn’t make that investment either. So, there are numbers of red flags, both subjective and objective, and we try to look for everything.
Camilo: Not exactly. I would say we would invest into a one-person startup if that person showed very clear indications, and we probably would put it into a term shit that they have to put together a team and they have to reward that team properly with equity. If it’s a single-founder company, but the founder shows all the signs of someone who understands that they need a team around them and they are willing to reward them properly, we would invest. But if it’s a single founder, showing no signs of understanding that as a single-founder company he is only going to get so far, we probably wouldn’t invest.
Hernan: I’d say yes. We have been pioneers in Mexico in venture capital, so it certainly has come with a lot of pain. We have done so many mistakes and we have found people that were very skeptical of what we have been doing and of the potential success of venture in Latin America. So, that has been the downside. On the good side, there are people that are very supportive. I think that we have been part of a movement that has created recognition for entrepreneurs that are thriving in the country, and we have certainly made a name for ourselves in this industry and I’m confident that we are just seeing the tip of an iceberg, and we will certainly reach a critical mass of wealth and entrepreneurs in suburbs that will dramatically change the economy of the country. So, in that sense, I think, it’s good, it’s come a high price of opportunity cost has been very high, but we are still betting on the future and the success. But I, for one, am certainly happy about where we are today and very excited about the future.
Camilo: You have to love what you do. No two days are ever the same, and so that in itself is amazing. We have different backgrounds, I had a high-profile corporate career before partnering with Hernan. And it’s certainly a lifestyle decision. It’s not a lifestyle decision that I will ever regret. This is more fun than I’ve ever had at work and, potentially, more rewarding. In the short term, obviously, it takes away all of the security, all of the safety you have with a regular job: you get paid, and if you have a high-profile job like I did, you get paid very well. But in the long run, the opportunity for upside is obviously tremendously bigger than working for somebody else. And it’s a lifestyle decision that allows you many, many liberties and it also presents many, many challenges, but overall, of course, it’s great fun and I love my job.