Nick Kingsbury (Amadeus Capital Partners): We are a DeepTech investor, so we do like things with solid IP and outstanding technical teams behind the product.
23 Feb, 2021
Daniel Blandón is a managing partner at Simma Capital. It is an early stage and growth stage micro VC in Latin America, Colombia. Before Simma Capital, Daniel was working in INVX, an investment vehicle that he founded in 2014 and since then invested in 11 companies in Colombia. At Simma Capital, they are in the stage of fundraising and already started investing in early and growth-stage companies that are cofounded by outstanding teams, are scalable, have solid unit economics, and are connected with Colombia and the rest of Latin America.
I was always interested in investing. From an early time in my life, I used to invest in different kinds of assets. It was something that was inside me. In 2010 we met with foreign friends and started investing together. We do our best but it was not enough because we didn’t have enough money to diversify. We invested in different financial asset classes, such as real estate, stock exchange and even lent the money. And in 2014 we met a serial entrepreneur from the US who was in Colombia. He saw a huge opportunity in eCommerce and wanted to do a startup in Colombia. We were introduced to the opportunity. We didn’t know how all this kind of startups works at that time. And we decided to end up investing in him. After that we founded INVX and we saw a huge opportunity in Colombia at that time.
Colombia is at a very early stage in terms of VC. There were a lot of entrepreneurs trying to pursue opportunities, but on the other hand, there were not enough investments. It was a huge opportunity for us to go to this asset class. We decided to start and focus 100% on the startups. We knew that it is important to diversify, but we didn’t have the way to do it. We also invested in the Next Super Labs that is one of the most active funds in Latin America. We started doing 1-3 investments per year to support the best entrepreneurs in Colombia. For example, Rapit – the first Colombian unicorn, our first investment and also a very successful company. There are eight startups that are doing very well. That is our path.
We invest in the early and growth stage and are focused on the entrepreneurial teams. We think that people make difference in this asset class. We are agnostic to the industry and the reason is that we think that the opportunities in Colombia and Latin America, in general, are all across the different industries.
We are very initial to have a focus on any specific niche. We always do a top-down analysis and try to see what industries are more positive. For example, at this moment we are very positive in fintech, SaaS, healthtech and probtech. Despite that, we are open to any kind of industry.
We don’t have any specific industry that I can say that we never will invest in. I think every opportunity is different and we are very flexible. This is one of the key parts of being in venture capital.
However, there are some industries that we like, but we don’t see good opportunities in Latin America now. For example, hardware and robotics are something that I like, but we think that their business model is difficult. Even more, if you are located in Latin America you are competing with all around the world. That is one of the possible issues that will force us to pass on investment right now.
Agritech is also very interesting, but we have no expertise in that field now and we see that opportunities in this industry are very difficult to do because there are a lot of uncertainties and variables in that specific industry. We prefer to stay apart, but it doesn’t mean that we are not going to invest in that industry in the future.
There are three reasons why we are focused mainly on Colombia and Latin America. The first one is that we see a lot of entrepreneurs do great things now and no one is backing them. There is a huge opportunity in terms of investment.
The second reason is the network we have built. The difference in this asset class is access to the best deals and entrepreneurs.
And the third reason is we are early-stage investors and the value added is very important. The way we have built our spot in Colombia and LATAM we have access to very good experts. Using our business connections, we can help our entrepreneurs. In contrast, for example, in the US there are good opportunities but we don’t have a facility source there. These are the three reasons why we are focused on Colombia and the LATAM region.
Our first investment Rapit was unusual and not because of the business model or the entrepreneur. It was rare because we didn’t focus on what we think now is important. Even so, the company is doing very well and is very successful, but when the founder made his presentation only in PowerPoint, he was a solo entrepreneur and he was in Colombia but didn’t speak Spanish. It was very unusual. Later we saw him as a very good entrepreneur and he is doing very well. We’ve done the investment, but maybe now we wouldn’t have done it.
We invest in the early stage. In terms of rounds, we are investing in seed, post-seed, or pre-series A and sometimes in series A. The reason why we chose those stages is that we think that in a country such as Colombia, where there is no infrastructure for startups, a startup that is already in a pre-seed or series A has a huge competitive advantage compared to ideas that are just in search. We see that the risk for a procedure is very high and we see that the companies that are in that state are already structured. Also, they are racing rounds of bigger than $1 million and it makes a difference that they haven’t lost and is more likely to be successful. That’s the reason why we decided to be in those stages. Our average checks are around $28-50K or even up to $100K and we prefer to be in rounds that are bigger than $1 million.
In INVX that we are still investing in, our checks are between $25-50K and we invest in 1-3 companies per year. In Simma Capital that we have already started, the idea is to build a portfolio of 25-30 companies in the next four years. We are investing something between $50-100K and we expect to have a follow-up around $1 million on the best companies.
We are flexible but we have four different criteria for the team. We are looking for teams that are composed of 2-3 entrepreneurs who ideally have a different background. Also, we focused on the market size and we are looking for markets that are potentially a minimum of $1 billion in Colombia. Then we are looking at traction and if there are enough data to see if the product that the company is offering has good traction. We analyze important metrics. The last criterion is that they have developed a business plan, are racing at least $1 million and are getting all the money that they need the best. We invest in rounds that are bigger or equal to $1 million and a team gets all that they are asking for and they complete all the rounds.
We invest a small amount compared to the round that companies are raising and we are not very sensitive in terms of the percentage of the company. We are not focusing on that. It’s not relevant for the amount of money that we invest. Of course, we are focused on the evaluation, but we are not targeting any specific ownership and we are not looking for control or any kind of rights that are different from the normal ones.
Simma Capital is expected to be a 10 years fund and we think that the next could be in between 2-10 years with the average time 6 years. That is our expectation, but in Latin America it might take a little bit longer for a company to do exit.
Because of that our fund is targeting at 3-4x return over all fund. Of course, it depends on their risk and the stage, but we are looking at something between 5X in five years or 10X in seven years, that is a blind 40% grown evaluation every year. That’s our target, but consider the risk and the probability of failure we target to get 3-4X overall. What do you want to see in the company’s product?
We are not very focused on the product. It doesn’t mean it’s not important. The product could get us some biases, so we try to see more data. Of course, we prefer to work with SaaS or something with a recurrent revenue, but we don’t have strict restrictions or limitations about the product. We are more focused on the traction and the project macro fit rather than on a specific product.
We are mainly focused on five qualities. The first one is resilience. You have to be open to changes and have a positive view of what is a startup. The second and maybe the most important is integrity. The quality and ethics of the entrepreneur are very important. The next one is leadership skills when all team is capable to lead a startup to become a huge company. The fourth one is adaptability when the team has the capacity to adapt because during a startup journey you have to pivot your plans and dreaming and you have to make changes and improvement for most of your time. Are you able to do that changes to be successful? And the last one is the execution. It’s a challenge that we see in most of the teams. They need to have the capacity to execute and to transform ideas into real businesses.
The first company we invested in was a solo entrepreneur and he’s doing very well now. I would say it’s a successful sorry. Also, we invested in a solo entrepreneur recently. It is not the ideal option and fully depends on who the person is, the team that he is leading and other people around. We think that it’s much easier and better to have a partner who completes the skills that are missing. Practical experience and studies show that companies are more likely to succeed if they have more than one entrepreneur. But we think that in this kind of asset class with a lot of uncertainty there are exceptions to the rule and there are solo entrepreneurs who have good potential and need to back on them.
We could be very fast in our decisions. We understand that in rounds where we are not leading we are co-investors and we have the maximum 10% of the round. It’s also one of our values in our companies that we don’t want to waste the time of entrepreneurs. Normally we would take one meeting with founders and if we like the startup we start our evaluation process.
Our research and due diligence are based on references. We are talking with a lot of people who are different from the entrepreneurs. We think that they can give us very good views about who entrepreneurs are and what their business is. We like to talk to clients, investors, friends and people that have worked with them. That gives us a better view of the entrepreneurial tool. At the same time, we are not taking their valuable time which they can spend on raising more money or developing the company.
Usually, we have 2-3 meetings with startup founders. We think that is enough to have an idea of their vision. Then we complement it with all our references. The evaluation process could take 1-2 months. After that, we present all information to our investment committee which makes a very fast decision. The whole due diligence takes up to two months after the first meeting.
Usually, we were doing 2-4, but starting from this year our target is to invest between 6 to 10 per year.
We have around 1,100 applications, which I prefer to call introductions, and we have invested in 16 of them. Our success rate is around 1-2% because we don’t want to go deeper into all the opportunities that we see. We consider around 100 deals and then do due diligence on 30-40 of them. Finally, we invested in 16 companies. That’s pretty much all our numbers.
Our main resource is references from people that are also investing, who are also working on VC and they already made an investment or they like the company. I would say that is the most effective way to find a company when a previous investor reference to us. If we know him personally and we have good business relations then we know that it’s a very good reference.
The second one is news monitoring. We are constantly looking for news about events and companies that are getting some attention from the public. We contact them and start an introduction. This method works very well for us. And naturally, the best company that we have in our portfolio came from this source. That is Rapit. We found them through public attention. Using our network we started a conversation with them.
All other sources are less common and not so efficient. It’s difficult for us to receive requests via LinkedIn or email. That provides us asymmetrical information because usually, we know nothing about those founders, their teams and startups. It’s very difficult for us to advance in that round. We get a lot of cold emails and in most cases, we ignore them because it’s almost impossible to know someone in 1-2 months. Anyway, sometimes it could work for us too.
There is one big red flag for us and it is when we find that the entrepreneurial team is lying in anything. When they show that they are not very interested we don’t want to make business with them. That’s completely a red flag and we stop any kind of negotiation. We might like a company, but trust is more important for us.
Also, there are a lot of issues that we call yellow flags because these things are not a deal-breaker, but they are also important for us. Sometimes we see that the startup team is not prepared and they don’t know enough information about their own company. Sometimes important information is missing or the terms could be changed at the last moment when we already showed our attention. We don’t like it and could even stop negotiating after that.
I think that there should be a balance in everything. Too many conferences is not a good way to spend time. Ignoring conferences is also a bad idea because there are many positive things that you can take from a good conference. You have to be selective and choose a good conference where you could learn something. But networking is even more important than the conference itself. It’s a place where you could meet investors, entrepreneurs and people from the government.
I would focus on conferences that are good for networking. Speakers who are talking about their success are also important, but you can see them in other places. Focus on networking and prepare in advance.
In March when all these COVID fever started we start thinking of what is going to happen to us and our companies. We think that this is a crisis is will have a negative impact on VC and investments will decrease. That is what we see in the economy now. However, we are very positive about tech and if there is a winner in this crisis it is definitely a tech. For example, in Latin America, the ecommerce and credit card payments are growing dramatically. And no one wants could imagine such a boom before, it was a very slow trend, but now people are forced to do it. People are learning that this is a very efficient way to work, sell and buy things.
A global pandemic is going to be like a catalyst for some new habits that didn’t exist before and we are positive about it. That will open good opportunities in the future, but at the same time, the number of deals will decrease. The opportunities that we can access have more chances to face success, but we would see fewer of them and it’s going to be less money around. Investors who have the money will have a huge opportunity because now we see no more evaluation or at least the same valuation as in previous years. Also, our portfolio companies that were growing 2-3 times before COVID, are now validating if they are winners in this crisis.
We feel very positive and even decided to invest more during this time, because we know that there would be good opportunities. Companies that are doing well might need money for growth and you could buy cheap equity in them. To find that opportunity you need to be aware and have a relevant brand. Now that is cheaper than before.
The crisis of 2008 has some similarities with the pandemic crisis in terms of venture investments. In a crisis like this, investors still have money, because they raised them before it. We think that they are going to invest that money into opportunities right now. Maybe we will see some difficulties in raising money or there would be less money around in 2021 or 2022. Something that is warning us is the evaluation that companies are taking in the US. They are growing at 50-100% above comparing to pre COVID time. We are worried a little about all because that can affect all of the VC industry.
In terms of opportunities, most of the best startup companies, like Google and Amazon, are doing well in crisis and some of them even were created in crisis. We think that the crisis is our window for opportunities. We worry about valuations that are happening right now in the US market with tech companies because this can have a negative impact. We think that the industry is going to be in the right way. There is still money to invest but 2021 and 2022 might be difficult years for investments.
I would say that often it is related to entrepreneurial finance. A lot of entrepreneurs don’t know the numbers of the company. They don’t know how they are going to be profitable in the future. They think that the idea per se is enough to sell a good company. They don’t focus on making a good business, a financial model with good numbers, the projections of important assumptions of their model. Usually, they have this weakness.
Then there is something that is more local in Colombia and Latin America. People don’t prepare for an interview and a speech. When you meet the entrepreneurs, you feel that they didn’t do their homework to investigate who we are, what kind of companies we support and they just do a generic pitch that is not very emotional. They don’t know who are they pitching to. I think that’s a weakness because it’s not a very effective way to raise money with investors.
I will choose Bill Gates. He is the one that I know the most of them, I admire what he did in Microsoft, what he is doing with his foundation and all the philanthropy he’s pushing right now. I like a lot of his story, the way that he built Microsoft and that he’s very technical. If you would see him ten years ago, he was looking like a nerd with no social skills and then he was able to learn that skills and tool and he developed a kind of leadership. For me, he is an example that you can learn everything. Even if you are not a social person you can build a big company. Also, Microsoft is a company that has done a lot of good things for the world. They have developed a lot of very valuable things. So, I will stay with Bill Gates.
I will tell you about the three most breakthrough startups in Latin America. I would like to start with Rapit. It is the first unicorn in Colombia and we had the opportunity to invest in them. It’s a very special company for me not only because we were part of them, but also because they change the mentality of entrepreneurs in Colombia. They show to other entrepreneurs that are disposable to build a big company that there are opportunities even in such a country like Colombia and if you have ambitions and execution ability you can create a big business. That has been a catalyst for entrepreneurs in Colombia.
Next is Mercado Libre in Argentina. That is the most successful tech company in the region and they started in 1999 with a business model that is similar to eBay, and now they become one of the biggest companies in Argentina and Latin America. It’s a very successful marketplace all around the world and in our region.
And the last one is Neon from Brasilia. It’s a neobank which is a unicorn company. They are doing very well. For me, the main message lesson from this company is that you can disrupt an industry that is very dominated by a few players. In this case, banks in Brazil had oligopoly and these very big companies fail to a startup that was able to disrupt the whole industry. In the end, this is the beauty of the startups and the way that they can change the normal life and do better things. These three startups are a good example and I am happy that we have them.
I am very happy now and I love what I am doing. I admire entrepreneurs and working with them is very fulfilling for me. Entrepreneurs are very optimistic and are full of energy. They are people who want to change the world and it’s good to work with them. I love to be an investor because I don’t have the skills for being an entrepreneur. It is amazing to hear all the ideas and to know the business plans that all entrepreneurs have and to learn from them in different industries. That is why I feel very happy with what I am doing.
And to answer your question about changing the industry, it’s not something that I would be looking at in the nearest future. I’m creating my life project with my plan. I just switched from working at a hedge fund before SIMA capital. It was a very good job, to be honest, but I was not 100% happy. It is very similar in terms of investments, but it is completely different in terms of the people that you are working with. When you are in a hedge fund, you are working with prices in front of a computer, but you don’t see the impact of what you are doing. When you are investing in an entrepreneur and you see that they are building something it’s completely different. It’s more tangible, even both of them have an impact on society. There is a huge opportunity in Colombia and Latin America. There are not enough investors and I think we are creating a path to become a leading VC fund in Colombia. I hope I hope we can build something bigger than what we are doing right now.
I am more a book person, but I don’t tend to read the whole book. I am focused on specific parts of the books and I go through them many times and for me, it is easier to take a message from a book than from a video. Usually, I don’t read novels or science fiction and prefer to read technical books and move in the way that I tend to be updated.
I really like the book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld. That is one of the best books to understand what is a VC and the relationship between an entrepreneur and a VC. Also, I like Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor, a person from Andersen Horowitz. That’s a very good book. And the last one is not about entrepreneurship or startups, but I think it is a very good book: How to Win Friends & Influence People by Dale Carnegie. I would recommend that book to everybody.
You have to trust yourself and be confident about yourself for 100% that you are doing something that makes sense. And from that, you have to build a narrative, a story that is intriguing and when you tell this story to investors, be very convincing that you are building something big and something that is going to work in the future. When you will be working on your entire narrative you have to be 100% confident that your story matters.
My second advise – be prepared. When you have generic meetings, they are usually not successful, but when you personalize it, you are going to have a connection with a person and that makes a difference. Be prepare for a meeting and make research about people that you are meeting with.
And the last advice. When you are building a startup, you have to be clear of your plans and ambitions. Even if you are just a pre-seed or a seed company that is raising small checks, you have to be aware that if you want to become a good startup, you have to aware of your decisions from the very beginning to stay on your path. It means you have to be aware of the evaluation that you are having and investments that you are taking into your company. It’s important to know how much of your company you are giving up because this might be costly for you in the future. Even if you feel that you just starting if you want to follow the path of a startup you have to be very aware of all the decisions that you take in terms of finance and investments because that’s going to make a difference in the future if you want to become successful.
For me, that is a very easy question. I would like to get back to my origin. That’s Medellin in Colombia. I think that’s the best place in the world for the people that live there for the things you have to do. I lived there for more than 18 years for all of my childhood. The weather is perfect and everything is very tasty. Of course, there are a lot of problems, but that’s the best place in the world. I have a plan to come back in the future.