The Underestimated Latin American's Founder's Guide to Raising Venture Capital
February 23, 2021
It’s never been a better time to be an entrepreneur in Latin America.
Funds like a16z, Sequoia, Softbank have all planted the flag, sharing their thesis. Funds like QED, who have been in Latin America for years, are generating great returns. Global investors are pouring billions into Latin American startups. Since we started investing in LatAm, VC has increased 30x from $500M in 2014 to at least $15B in 2021.
But as we see more mega-rounds, many assume it's easy for founders to raise money. For some founders it is. For everyone else, it's still really hard.
Capital is abundant for ~10% of Latin American founders and really hard for everyone else. These elite status founders are able to pull in millions of dollars at high valuations, sometimes with only a powerpoint, or reach $250M-$1B valuations in under 12 months.
The hottest elite status startups receive fast, momentum based follow ons between $20-$100M within 3-9 months of raising their first rounds. Many Magma companies have been able to access these capital markets, using the money to build their teams and solve LatAm’s biggest problems even faster.
For the rest, while easier than 3 years ago, and much better than 8 years ago, raising even $1M is still a big struggle. There are still not enough Latin American funds operating at a high level, making decisions quickly, and providing support to portfolio companies.
“A significant number of smaller Latin American funds and Family Offices take a really long time to decide if they’d like to invest, do massive amounts of due diligence compared to check size, and would not be competitive if there were better funds investing."
On the other hand, many US funds have more or less outsourced their early LatAm investing to YCombinator, preferring to invest at much higher valuations at demo day than go early with LatAm funds or going direct, making it seem like YC or bust for LatAm founders.
It’s easy to get discouraged, feel depressed, burnt out or think it’s all unfair if you have better traction and better growth than the elite status founders that are raising big rounds. Don’t be.
Imagine trying to jump on the soccer field with Messi and Ronaldo if you’d never seen a soccer game before, and you didn’t even know you couldn’t use your hands? You’d be terrible!
The same is true for fundraising: Most underestimated founders don’t know the rules to the VC game or maybe have an idea, but have never practiced before.
As Deepak Chhugani, founder of Nuvocargo puts it, “Founders need to learn the unspoken rules of fundraising and practice skills to be good at it. Most importantly, founders need to understand the psychology of investors and VCs' business model.”
While VCs certainly have some bias, most are making rational decisions for themselves and their firms. Most US VC’s still don’t have enough experience in Latin America yet to diligence underestimated founders, and default to networks they know:
2nd time successful founders
Foreigners in Latin America
Harvard/Stanford and other elite university grads
Whomever YC chooses for their batches
The person writing the check isn’t going to get fired for investing in these “elite status” founders, even if the startup fails, whereas the investor could have pushback in their firm if they invest in an underestimated LatAm founder that doesn’t work out.
The good news is that you can learn the game. Most of it is not even that hard, the information is just not just widely published, and many founders are flying blind.
Here’s our playbook for raising money as a Latin American underestimated founder.
VCs are basically trying to figure out three big things:
Is this team capable of winning?
Is this market big enough?
Why is this business going to be successful now?
The rest of the questions are all variations on these three themes.
If you have better traction than another company in your industry and that company has raised a huge round, it doesn’t mean they’re better than you are. It means they’re better fundraisers than you are. Learn the game and you’ll be more likely to raise.
Learn to communicate directly
VCs, especially US VCs, want a direct answer to a direct question. Many underestimated founders, especially Latin American founders, struggle to communicate directly, concisely and figure out what VCs are really asking. It's even harder in your second language.
As Daniel Bilbao, founder of Truora and an active angel investor and mentor says, “Latin Americans love giving long answers. We can turn a short story into a novel. This doesn’t work with VCs. YC tells founders they have 15 seconds to answer the question and nothing more.”
The Intern Group’s cofounder Johanna Molina found a successful strategy, “I remind myself before the meetings to be direct, since going straight to the point was my biggest struggle. I even have a sticker next to the camera that says "less is more" to help remind me.”
While 15 second answers might be a bit exaggerated for a 30 minute first VC meeting, practice plus media training will help.
One of the best investments I ever made was top tier media training during my 2nd startup. Those lessons have now compounded for 12+ years. Great media training will teach you communication skills, spend time listening to your interviews and sales pitches and give you an after action report to help you improve. If you have a great trainer, you should see very fast results.
Remember that you only have 30 minutes (or even less) to make not a good, but a great impression. Be direct. Practice, practice and...practice more.
Improve your English if your English isn’t great.
I dream of the day that non-English speaking founders will be able to raise at the same rates as English speaking founders, but we’re not there today. Unfortunately, many/most VCs, even Latin American VCs who speak your native language, will be hesitant to invest in non-English speakers or poor English speakers. You don’t need to be a native speaker, but you should be almost as good at selling your business in English as Spanish.
Some of this is rational: if you can’t explain your business well in English, it's harder for a VC to understand it deeply and therefore even harder to invest. The big fear is that most big check follow-on investors are global and don’t speak Spanish or Portuguese, which will limit your growth and access to follow on rounds.
Veloz’s Catalina Gomez’s strategy was to “hire a native English speaker who helped me choose the exact right word I wanted to say in English. It helped me get my message across so there wasn’t anything lost in translation. We practiced over and over, and he corrected my pronunciation and asked questions, which I wrote down and practiced answering in English so that I’d be ready for the sharks!”
Some of this is irrational and unfair. But it's how the world works right now, whether we like it or not.
Invest in English classes, spend time in the US if you can afford it, or find ways to force yourself to practice English.
Build a compelling story
Believe it or not, VCs are human too. Humans love stories. Use stories to help make your point.
As Softbank’s Shu Nyatta puts it, “The whole world runs on good storytelling. It’s not optional to be able to tell your story or your company’s story in a clear and compelling way to employees and investors. It’s critical. All successful companies are also good storytellers.”
Good stories are even more important in Latin America. Many US VC (and some wealthy-background Latin American VC) haven't ever experienced the problem you’re solving for themselves. Use examples that compare and contrast with the US reality that your audience understands. It’s your job to make your potential investor feel the problem.
Global66 cofounder Tomas Bercovich spent time with Chile’s Peruvian immigrant community to truly understand how they were sending money back to family members in Peru. “It was really important to understand where they lived, what they read, how they thought in order to solve their problems, and we shared this story with investors when we were raising money.”
A good hack here is to answer the question: What does your client’s process look like before they use your product, and what does your client's life look like when they use your product instead. I generally ask founders these questions in first investment calls if I’m struggling to understand the problem and solution.
Traction is table stakes, showcase it and emphasize your ambition and growth potential
As Platzi co-founder and CEO Freddy Vega puts it, “Underrepresented founders can't raise money on dreams and a prototype, we must have metrics, revenue and traction. This may cap our ambition at first, but it also gives us a higher empathy for making products that go beyond the techie bubble and improve the lives of a huge number of people. Our ambitions can be higher than just a valuation.”
If you have amazing traction, show it upfront in your presentation and in your pitch. Then hammer it home that you can grow 10-100x from where you are today. You need to prove that you can continue to grow and be a big winner.
Avoid abusive deals…if you can
Unfortunately, there’s still not enough venture capital in Latin America, and underestimated founders who don’t have a network can sometimes be stuck with unfair, and sometimes abusive deals. Family offices and some VC funds: please don’t screw up cap tables for underestimated founders. You should know better. You’re most likely wrecking the cap table which will make follow-on investors much more likely to pass, and hurting your own returns in the process.
If you can avoid taking an investment from someone taking a huge chunk of the company for little money, or trying to get control with a small check, do everything you can to not take it. Look for other options. We understand that sometimes it's your only offer on the table and you have to take it. But understand that accepting bad terms could make your business uninvestable for most VCs.
Why is it uninvestable? Because founders could lose the incentive. Because follow-on investors will have to spend a bunch of timing trying to fix the cap table. Because you will lose decision making power soon if you get bad terms or a bad captable and follow-on investors want you to make decisions, not previous investors.
If you absolutely need to take money from someone offering bad terms, try to get them to think long term. Explain to them that this might be short term good for them, as they get more equity, but long term they are sabotaging the company, and explain how it could affect both their investment and the company in the future.
We’ve seen that some investors gave bad offers out of inexperience or ignorance and later down the road are open to fixing the cap table. Most people are not bad actors. They’re not trying to take advantage of founders.
Try to lay out for them beforehand why this won’t help both the investors and the company in the long term. If they’re really not willing to reconsider, I’d ask myself if this is an investor that I want to have on my cap table and work with, but we totally understand needing to do whatever it takes to make sure your company doesn’t die.
Get founder angels to invest + make warm intros to VCs
Connect with successful founders who invest in startups and get them on board, even with small checks. These founder angels help provide social proof to VCs. If you can get a respected Latin American fund on your cap table that has a history of its companies raising follow-on funding from the US, it also helps.
As Influur’s Alessandra Angelini put it, “we raised a small round from founders, influencers and Magma who helped give us credibility with clients, made intros to investors, and provided advice that helped us grow faster.”
The strongest intros to VCs come from a founder from the VC’s portfolio, then someone on your cap table who might know a VC
Share your outlier personal story
In our experience, the vast majority of underestimated founders have an incredible personal story. Yana’s Andrea Campos, who build what’s now Latin America's largest mental health app, taught herself to code and built her MVP after a programmer left the company and refused to give her the code, burning through the modest budget she had for the then-bootstrapped startup, and forcing her to start from scratch.
Billpocket’s Alejandro Giuzar built one of Mexico’s largest fintechs on ~$1M investment after getting rejected by 100s of VCs.
Prometeo’s Ximena Aleman went from journalism to fintech and raised her seed round while pregnant and has become a leading voice for open banking in Latin America.
These stories help showcase your grit and stick with VCs, making them more likely to invest.
Practice, Practice, Practice
A good pitch is like a standup comedy routine. Your first one likely isn't good. Take notes on what lines do well, what gets people interested and remove and rework the ones that don’t.
The Intern Group's Johanna Molina's advice is to "Practice your pitch 100 times. It helped me be less nervous, pitch more directly and learn the parts of the business people loved and the parts of the pitch people didn't understand or didn’t resonate with."
Try to take 5-10 VC meetings with your second choice VCs, friendly entrepreneurs and angels to start, and incorporate the feedback into your pitches so that when you talk to your top choice VCs you’ll be better. It’s like a comedian starting their tour in a series of smaller towns and ending in New York. The New York show will have all the lessons learned, best lines and issues worked out.
Design Matters: Don’t be a brand new Tesla engine in a 15 year old junker’s body
You may have an amazing company that runs like a brand new Tesla, but if your online presence and deck look like a 15 year old beat up car, only the most diligent VCs will look under the hood.
Most VCs look at your deck for 2-5 minutes and check out your website to decide if they should take a meeting with you. Spend the money to invest in amazing design for both your deck and your website so you get to your first meeting. $1-$2k completely changes the perception of your business. It’s table stakes.
Hire elite status employees to complement your own strengths
VCs want to know if they can trust you to build a business that scales 10-100x after their investment. Part of that is recruiting and retaining top tier talent, especially at Series A and later.
Make a list of your best talents. Make a list of where you’re weak. Hire 3-5 employees who VCs consider elite status to help build out your team.
Obviously, these team members need to contribute to the business, you shouldn’t just hire someone for the logo on their resume. But you need them to give US investors more comfort to trust you with a big check.
The two biggest reasons a VC will reject a high traction underestimated founder is some variation of:
“We love you, but your team is shit” or “we can't trust you with the keys to a multimillion dollar car.” Most VCs won't tell you that to your face, the ones that do are worth their weight in gold and are telling you the truth.
Hire someone ex-Mercado Libre/Rappi/Cornershop/Uber/Nubank, Harvard/Stanford, Goldman/Mckinsey, etc. People with this background can work anywhere; they have their pick of jobs. VCs think: If you can convince top people to join you, you must have something special.
Be prepared to hire a recruiter and to “overpay” for them. Most underestimated founders come from capital scarcity backgrounds, both in their personal lives and in their startups. It can be extremely hard to pay someone more than you’ve been making or more than you’re making as a founder/CEO. But it's worth it if you can get someone good.
You’ll be more likely to raise your round and do it at a higher valuation. Remember, you own the biggest chunk of equity, so you’ll make the most money on this deal if it works out by your equity going up in value exponentially. You are running a marathon not a 100 meter sprint.
Stop being a one person show: delegate to your team
At the start of any startup, founders have to do everything. YC famously says “do things that don’t scale.” This is the right advice at the start, but many underestimated Latin American founders hold onto too much control and don’t delegate enough to their teams, which will not work by Series A.
Most underestimated founders hold onto control for a mix of reasons:
Their teams aren’t good enough to delegate to
Their traditional family office investors tell them they shouldn’t delegate
Controlling everything has gotten them to Series A success, why stop now?
All of these are rational when you don’t have any money. But when you raise your first money, even at seed, try to start delegating to other people on the team. You should be trying to recruit people who are better than you at the thing you are delegating, but even if the person is 80% as good as you, you should probably be delegating so that you can focus on the most important parts of your startup.
By Series A, many founders need to pull the emergency brake to “stop the train” and bring in more senior people to help build the foundation to raise a Series B.
Recruiting and landing senior people, especially when you’ve had to stop the train is really hard, so underestimated founders need to start working on it early in order to build a scalable business that a US VC will invest in.
Ask yourself Reboot founder Jerry Colonna’s key question:
“What behaviors or beliefs have gotten me to this point in my life, but are no longer serving me?”
Make that list and start making changes and delegating.
Don’t take it personally: Your self worth doesn't equal your startup’s valuation
While it can hurt to see elite status founders raising big money while you struggle to raise anything, don’t take it personally, Don't let it get in your head. You are not your startup. Your self worth should not be tied to your startup's valuation, especially compared to others in the market. Run your own race.
Remember, elite status founders raising money makes it easier for everyone else by paving the way for more people to be successful in Latin America.
Try to keep a process based mindset to learn and understand. The good news is that if you're successful, you will be an elite status founder in your next company and pave the way for more investors to believe in underestimated founders.
Also remember that fundraising is a skill. The market is saying that they are better fundraisers than you. Not better people than you. You can improve your fundraising skill, and you need to do it. Don’t bury your head in the sand or refuse to get better because you don’t think it's fair.
Come talk to us. We know your pain.
We love to meet and invest in underestimated, non-elite status founders. Even if your startup is not a fit for our thesis, we’ll be happy to give you feedback on your business. The best way to get in touch with us is by writing a Magma Memo. Nearly 30% of the startups we fund come in 100% cold from these Memos. We’d love that number to go up in the future!