This article is adapted from our print issue on entrepreneurship in Latin America. To see our AQ Top 5 list of young entrepreneurs, click here.
Raising venture capital (VC) is never easy, no matter how innovative the idea. Here are five steps to consider before taking the plunge.
1. Ask yourself if VC is right for you. Before going directly into fundraising mode, take some time to learn about the venture capital industry, including what types of businesses it funds and why. Brad Feld and Jason Mendelsohn’s book Venture Deals is a great place to start. VC isn’t the best approach for every business, but it can be an amazing resource for building high-growth companies that are technology-focused, are solving a problem in a big market, and have the potential to scale rapidly. Companies that have benefited from VC range from household names like Google, Apple, Facebook and Amazon to Latin American success stories such as MercadoLibre, Netshoes, Globant and Open English.
2. Do your homework — create an investor map. Too often, entrepreneurs consider a few minutes of reading funding news on Techcrunch their VC research. But taking the extra time to identify the most likely sources of capital through an investor map pays off. Start by researching funds that invest in your sector, then benchmark companies similar to yours to determine who has invested in them. Every investor mapping exercise is different, but most are built on three vectors, or principal characteristics: the sector it belongs to, the stage of development it’s in, and its geography (target market). The goal is to identify the best matches among possible investors. Ideally, you and your potential investor should match on all three vectors, but aim for at least two.
3. Figure out what “smart capital” means for you. These days, everyone is talking about raising smart money — the notion that investors bring more than just the capital to a partnership — but the term can mean different things to different businesses. Ask yourself, and your cofounder(s): “Other than the money itself, what are we looking for with this round?” Brainstorm the skills, relationships or expertise that you feel might bring maximum value to your company over the next 12 to 18 months. Then use your investor map to narrow down the prospects who can best help you meet those needs.
4. Help investors connect the dots. In Silicon Valley, you often hear that “VCs invest in lines, not dots.” Translation: No matter how impressive the first pitch meeting, it’s just one data point. Before making the decision to fund you, an investor needs to gain more familiarity with who you are, how you run your business, and how you think. For Latin American entrepreneurs, that will often mean frequent getting-to-know-you visits with potential backers; and unless you’re near the region’s major capital sources in São Paulo or Mexico City, that in turn means a lot of air miles. Once an investor shows real interest, take it to the next level. Nurture the contact by keeping them informed of your progress; send monthly or quarterly updates. In other words, the more data points you can give prospective investors, the easier it will be for them to eventually connect the dots into a line that might just come with a check.
5. Broaden your horizons. Silicon Valley is not the only — and not always the best — source of venture capital for Latin American startups. In my experience, roughly 80 percent of the Valley’s VC firms don’t look outside the region for investment opportunities. But just a few miles north in San Francisco, globally minded firms like Lumia, Rise and Amadeus have bankrolled some of the region’s most enterprising startups. Endeavor has helped many Latin American companies raise money from VCs based in New York, Boston, Miami, London, Madrid and beyond. Closer to home, Buenos Aires-based Kaszek Ventures invests across Latin America, and Mexico City and São Paulo are now thriving regional VC hubs. Don’t be afraid to think outside the Valley.
Wherever you go to raise funds, remember that most international investors — particularly those in the U.S. and Europe — aren’t likely to get involved in rounds smaller than $5 million. Whether you’re based in Monterrey, Medellín, or Montevideo, initial rounds of capital from regional angel and seed funds are an important signal to later VC funders.
Taylor leads the Silicon Valley office of Endeavor and serves as the managing director of Endeavor Catalyst — an innovative coinvestment fund through which Endeavor can invest into its portfolio companies.