We love investing in both elite and underestimated founders at Magma Partners. If you are building a great startup, please reach out, we want to hear from you and learn more!
Latin American startups are booming. So is the venture capital ecosystem. Seemingly every day, LatAm startups are raising big rounds from VCs writing their first checks in Latin America or doubling down on the region. It’s never been a better time to be a Latin American founder.
But founders from different backgrounds and geographies experience the VC funding market very differently. Elite Status Startups and non-elite status startups are terms coined by Pear.vc, a top tier US-based VC, to describe these different experiences. In Latin America, these Elite Status and Non-Elite Status, or Underestimated founders as Arlan Hamilton coined them, might as well be on different planets when raising capital. Underestimated founders have much less access to capital and get much lower valuations than elite status founders when they raise.
We know how hard it is to raise capital for any business and how frustrating it can be if you see others raising at high valuations with little more than a powerpoint deck and you can’t get your raise done at any valuation, even if you have traction. It’s not fair. But it is unfortunately the reality of the market right now.
This issue is near and dear to my heart. My Wisconsin friends and I experienced life as non-elite founders when we tried to raise money for our startups back in the US. And even as a white gringo in LatAm, I have a similar experiences today trying to raise money for Magma Partners as a “non-elite status emerging manager,” as the mostly US-based VC industry calls us. We know your struggle.
Some of the divide between elite status and underestimated founders is rational. Many elite status founders are more polished and have more background knowledge than their underestimated, non-elite status founder peers. But many elite founders do not have much more than their elite background, and their underestimated peers have similar or better insight into the market or have found ways to do more with less.
Elite Status & Underestimated Valuations in Silicon Valley and Latin America
This graph is a bit out of date, as Silicon Valley valuations have gone up significantly (2-5x) since Pear.vc put it out, but the premise is still correct. The difference between elite status and underestimated valuations might be larger today than before. The graph tells the story of why Magma invests in both elite and non-elite startups.
In Latin America, if someone has some elite status boxes checked, they can likely raise at Silicon Valley or close to Silicon Valley valuations from Day 1. If they have all the boxes checked, they might be able to raise at $35M+ valuations with 2-3 co-founders and a powerpoint, and upwards of $100M with minimal traction if they’re coming out of YC.
Underestimated, non-elite status founders, might have to raise capital at 98% lower valuations at pre-seed than their Elite Status peers, which can translate to as low as a sub $1M valuation.
The disparity between valuations and access to capital for elite status and underestimated founders continues at Seed. Most underestimated founders, even if they have (significantly) more traction, are still not yet on the radar of US VCs and may not have access to Latin America’s VC ecosystem. We’ve seen instances where non-elite teams have massive traction, but they’ve been told they’re not a fit by 50+ VCs. They might not even get a first meeting with many investors because they don’t fit the elite status pattern.
It continues at Series A. When elite status startups are raising $10M-$30M+, their non-elite peers, even if they have more traction, may still be raising 90% less money at up to 90% lower valuations than their Elite Status peers.
If you’re underestimated, you can have massive traction, but many US and Latin American VCs will not invest until you’ve hit escape velocity, likely at Series B. I had to tell a founder in our portfolio, "unfortunately your traction doesn't matter to most US investors until Series B." I don’t like that the market works this way, but that’s how it works in 2021.
I’m not calling anyone out or saying anyone is a bad person or bad investor by mostly investing in elite status founders in Latin America. It’s completely rational for US VCs who are getting to know Latin America to invest in founders where it's easier to do founder references or founders where US VCs have more contacts in common with the Latin American founder.
As the old saying goes, “nobody got fired for buying IBM.” The same is true in Latin America. If a firm’s early foray into Latin America goes wrong, hardly anyone will complain about investing in an elite status founder. Many US funds are mitigating risk until they truly understand Latin America. It’s not the path I would personally take, but it’s rational for many investors.
What it feels like to be Underestimated
Underestimated founders, you’re not alone. It’s not hopeless. If you keep on executing and building a great business, eventually the rest of the world will notice, even if they’re late to the party. You are not alone. These four founders have raised $150M+ in venture capital and are building the future of Latin America. They started as underestimated and were able to break through to hard work, grit and persistence.
When you start raising money, it seems like everyone you meet either went to Stanford, Harvard. I didn’t have that opportunity. Even though we had better traction than many of our peers, better KPIs, and more experience, raising money seemed like it was much harder.
At times, my entrepreneurial life and my dream felt relegated to mere scraps of what it actually was because we weren’t able to raise. You can have moments where you start believing that maybe you don't have the capabilities to make it happen, but you have to push through.
Fundraising as a first-time, Latin American, non-ivy league founder was an uphill path to build credibility around my story and convince people of my potential. It's like trying to make friends when you are the new kid on the block.
It took me almost 4 years to make US investors believe in me, even though my team and I had built a significant business. Fundraising for and building an overlooked startup forces you to become the best possible operator you can be by being scrappy and building your dream with constraints.
We spoke to 50+ investors. The general feedback was that they needed to see more traction, but we had more traction than many of our elite status competitors. I was surprised and it left me with a big question mark. What's going on here!?
Not having Ivy League credentials and network was a challenge. It was really difficult to raise money in the beginning and I wondered what others were doing that I wasn’t.
Tips for underestimated founders
First, 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. Here’s some quick tips that we think help:
Get founder angels to invest
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.
Design your deck
Having a professionally designed deck is a low cost, high impact way to get noticed. It might be the highest leverage, lowest hanging fruit you can do
Work your narrative
Understand what VCs are looking for and tell your story in a way that is understandable to them
Showcase your traction
Get a feel for the metrics that VCs are interested in, and showcase your best 2-3.
Get feedback from VCs to learn and start a relationship
Even if investors are not investing, don’t take it personally. Start a relationship and give data so that your data points become a line.
If you use Steve Martin’s mantra, “be so good they can’t ignore you,” you are much more likely to succeed.
What makes us more likely to invest in underestimated founders?
In addition to all of the criteria we look for in a great founding team, we look for one thing:
Traction, Traction, Traction
Did you build a business, and just continue to execute? Do you have a real business that can continue to scale, but VCs have not been interested in investing? Or keep saying no?
After traction, we ideally want to see some of the following:
Startups might be bootstrapped, or they might have raised a small amount of money relative to competition, generally from angels or family offices.
One of the most compelling stories which caused us to invest in an underestimated founder was that the startup was 50% the size of the largest, well known competitor, but had raised 95% less venture capital.
An outlier personal story or overcoming adversity
One underestimated taught herself to code to build her product after a male programmer stole her initial down payment to build the app. Another moved from Venezuela for a better life. Another had three failed startups before he was successful.
We like to look for founders in second and third cities of big countries, or in the rest of Latin America outside of Mexico and Brazil.
We're happy to meet entrepreneurs from outside Latin America's big two countries, and have invested in 15+ countries in Latin America.
If you are an underestimated startup with high traction, we’d love to talk to you. Fill out our Magma Memo and we'll be back to you shortly with feedback and questions. Even if we can’t invest, we will do our very best to help.
If you’re a VC or an LP and interested in learning how you can support Latin American underestimated founders, please reach out, we’d love to hear from you. You can also read about why we invest in both types of founders in the second post in the series.