About Adam Komarnicki

Chief Customer Officer @Fundacity LinkedIn: br.linkedin.com/in/adamkomarnicki Twitter: @AKomarnicki and @Fundacity

We have moved this blog to blog.fundacity.com

We have migrated our blog and no longer post here. No worries, we keep writing and you can now find all the old and new posts on blog.fundacity.com 🙂

Advertisements

Accelerators are not VCs: how should they approach portfolio management?

In the previous post we suggested that startup accelerators should behave more like investors, noticing that many of them could do a better job helping their portfolio startups. Just to summarize, the root of the problem is that they often lose regular contact with their graduates after the program. As they stop receiving regular updates about the progress of these startups, it means they simply cannot help even if they could. The main reasons for not staying in touch regularly are:

  1. Securing a successful exit for portfolio startups is simply not one of the key objectives for many accelerators, especially those backed by public or corporate money.
  2. The operations of most accelerators are focused on the… acceleration process – collecting and reviewing applications, acceleration program, organizing demo day – all of which are very time and resource consuming. As a result, insufficient resources and attention are usually devoted to following what happens with the graduate companies.
  3. Most of the information gathering process is done with tools that were not designed for this particular purpose (email, Dropbox, Excel). It makes managing the process time-consuming and inefficient, each time more so with the ever-growing number of graduates. By the way, we recommend you read this post, even though Fundacity was not mentioned there yet as a solution. (We are working hard for Marcin to revisit;)

Are only the accelerators to blame here? You could argue that it is in the founders’ interest to update their investors too, right? Yes, but think of the cost/benefit analysis they are likely making. Why would they spend time preparing regular updates to their investors if this information is given little attention and rarely acted upon? OK, let’s see how this situation could be improved.

The right focus: are all accelerators investors?

Not all accelerators are judged primarily on the number of successful exits.

The classic accelerator model involves taking a great team with promising idea, giving them office space, enough cash not to worry about such trivial things as food and accommodation, equipping them with knowledge, mentoring and contacts to grow their business during the duration of the acceleration program and then presenting them to investors on demo day. For all of that, an accelerator takes usually 6-10% of startup’s equity (most often in a form of convertible note) hoping for a nice return on investment when it becomes the next big thing.

However, in the last few years the accelerator business model has been evolving quite a lot. One clear trend is that now there is much more vertical specialization, a topic we covered in one of our earlier posts. Take Startupbootcamp as an example: they run a network of accelerators focused on FinTech (London), Internet of Things (Barcelona), Smart Transportation and Energy (Berlin), etc.

Another interesting trend has been an emergence of corporate and government funded accelerators. Unlike privately funded startup accelerators, which look to make money on exits, the primary objectives of those are often different.

Government-funded acceleration programs, especially popular in Latin America, are created to attract talent and promote technology entrepreneurship among their young populations. To become more attractive to founders, these programs often don’t take equity in the participating startups, which means they have no interest in their success post graduation. However, even if they do, the long-term benefits for the funder (growth of equity in startup portfolio) are not aligned with the incentives for the administrators of such programs. These are often private organizations, such as university incubators, that have no equity in participating startups, which means their main interest is in maintaining the flow of money to the program. As a result, their focus is limited to managing startup selection, distribution of funds, delivery of the acceleration program itself and, last but not least, making sure it looks good to the public, now.

Corporate accelerators vary in their approach to acceleration programs, but their general objective is to engage with startups to boost internal innovation and stay in touch with latest trends in technology. The successful exit of a graduate of their program is not necessarily crucial to meeting these objectives. At the end of the acceleration period, the corporation behind the program is thus likely to either acquire the startup, or simply lose interest in its future.

Just to summarise – as long as return on investment is not the primary objective of entities that fund accelerators (LPs), they will not focus on it either.

The right focus: accelerators are not VC funds

Accelerators need to rethink how they can best deliver value to portfolio startups.

Even if portfolio growth is one of their key objectives, accelerators have two types of limitations that hinder them from helping their portfolio startups as well as VC funds can do. The first limitation comes from the structure and value of their investment. Almost all have convertible notes that usually give them right to less than 10% of equity. As a result, they have no board seats and often no explicit right to information. The second reason is lack of sufficient internal resources that can be involved to deliver valuable support. Much of accelerator staff focuses on administrating the acceleration process and mentoring is often “outsourced” to external mentors.

Throwing into the mix a large and fast-growing number of graduates, it is clear that accelerators cannot apply the VC model for portfolio management. They simply have no capability to provide active engagement at high level of detail. What kind of model should they apply then?

We argue that the accelerators should be focusing not on rocket growth of their portfolio startups, but rather on increasing their chances of survival by helping them secure the next round of funding. Then VCs can take over and do what they are supposed to do. Aren’t demo days supposed to achieve that? Well, we all hear stories about those amazing demo days: excited media trying to identify the next big thing of the batch, investors queuing to talk with the leaders of the Google/Facebook/YouNameIt of tomorrow. The fact is that only absolutely top accelerators (mainly in the US) can organize such events. Most of demo days outside of big tech hubs don’t end up with immediate investment offers and the interest and attention of investors is not easy to maintain – there are just so many sources of deal flow these days. So, the next day most of founders go back to basics: coding, hustling and growth hacking (or so they think;).

The main focus for accelerators should be to thus help their portfolio startups raise funds after Demo Day. How to do that? They needn’t do much more than what they are doing now:

  • Match mentors with graduate companies, not only the current batch;
  • Present all startups to investors and potential clients at regular events;
  • Collect startup KPIs relevant to raising the next funding round;
  • Increase the likelihood of connections by promoting all their startups via social media, events, workshops, or in a newsletter send to accelerator’s stakeholders; and
  • Never stop thinking about portfolio startups.

The key is simply shifting focus from the current batch to all startups in the portfolio. There are some good examples out there. Take hub:raum – a Berlin-based incubator backed by Deutsche Telekom. It is in fact one of their main objectives to take their portfolio startups to another round of funding. As an incubator they don’t have cohorts to showcase during demo days, so instead they organize so called Investor Days. They invite selected current participants, as well as graduate companies, to present their progress and give them chance to meet investors.

Another example is SixThirty, a FinTech accelerator based in St Louis. As some of their graduates leave St Louis after the program, Matt Menietti, the accelerator’s Venture Partner, makes sure he knows very well what they are up to. He asks them to send regular updates, with the focus on information and metrics relevant specifically to fundraising.

We will cover how to set up reporting from portfolio startups in the next post. Stay tuned and don’t be shy about sharing this post on social media if you liked it 🙂

Startup accelerators need to behave more like investors

Accelerators are still a relatively new type of startup investor, most of them having little or no record of returning money to their own investors, especially outside of the US. Seed-DB, a database of seed accelerators and their companies that tracks exits of accelerator graduates, lists only around 20 exits from non US-based accelerators. The leader is Seedcamp (UK) with seven exits; Nxtp.Labs (Latin America) and FounderFuel (Canada) are tied second with three exits each (disclosure: Nxtp.Labs is an investor in Fundacity). The non-US total number of exits is lower than Techstars or Y Combinator have each.

US-based accelerators dominate the whole list and there are good reasons for that. First of all, their graduates have the best access to later stage investors and corporate buyers, which are often other well-funded startups, although in that case the exits are often talent acquisitions, called acqui-hires, which usually return peanuts to investors, if anything at all.

There is however another factor in play. It usually takes a lot of time before a successful exit can happen and US accelerators are simply the oldest. Y Combinator was founded in 2005 and Techstars Boulder in 2006. London-based Seedcamp was founded in 2007.

Recent years have seen a huge growth in accelerator numbers outside of the US, as it has become much easier to start up and scale from anywhere in the world. At Fundacity we focus on emerging startup ecosystems (which is basically anywhere outside of the US), speaking with many of these accelerators on a regular basis. So far their focus, understandably, has been on selecting and accelerating startups. It takes time to find a niche, build a brand and develop the ability to attract the best startups. In the meantime however many startups have already graduated from their programs, some more successful than the others. As the portfolio of graduates mature, accelerators’ LPs will be increasingly interested in seeing returns on their investment. The question “How are you making sure my investment portfolio is growing?” is and will be asked more and more often.

One could argue that accelerators are limited in their ability to impact the growth of their portfolio. The first limitation comes from the structure and value of their investment. Almost all have convertible notes that usually give them right to less than 10% of equity. As a result, they have no board seats and often no explicit right to information. Another limitation is related to their modus operandi, which requires accelerator staff to deal with many administrative tasks such as managing office space, coordinating mentors, organizing Demo Days, etc. That leaves less time and resources available for mentoring, which is largely “outsourced” to external mentors anyway.

Indeed, making the right connections is where the accelerators can add the most value to their startups. This is even more true in emerging startup ecosystems, where accelerators often act as local startup hubs, which means they can usually easily get in touch with people who can help their portfolio startups. They do that very well during the acceleration programs, but that support often ends after the Demo Day, even though the needs of these startups remain largely the same. All of them welcome introductions to potential mentors who can help the startup grow operationally and to investors for capital necessary to execute.

It sounds very reasonable and I am sure you think this is something that must be happening. Well… The first step for accelerators to be able to help their portfolio startups grow is to actually know how they are doing. Unfortunately, the communication line after the end of the acceleration program often breaks.

(Not) staying in touch

At Fundacity we regularly speak with accelerators from around the world and ask them about how satisfied they are with knowledge about their portfolio startups. We started asking about it during the customer development process for our portfolio management tool for accelerators. The message was very clear – “we think it’s very important to stay in touch but we don’t really do it well enough.”

Actually, on the scale 1-5, the usual answer we get is 2 or 3 and that usually sounds quite optimistic. No wonder, it’s not easy to keep in touch with startups after they graduate from acceleration program, which is due to the combination of available resources vs. ever increasing number of graduates. Let’s expand a bit on this point:

1. Focus and resources. The key accelerator activities and resources are focused on the following process: selection, acceleration, presenting startups during the Demo Day. Then it starts again. All of these activities are operationally time consuming and require immediate attention due to clear deadlines. As accelerators need to control costs, they usually have no additional resource dedicated to keeping in touch with portfolio startups, so this task is pushed down the list of daily priorities. We sometimes see a junior associate, or even a marketing person, performing this role.

2. Large number of graduates. Depending on the program, one cohort comprises usually 10 to 20 startups. For a 2-year-old accelerator this can mean even 50+ startups to deal with. Even though there are reporting tools available on the market, there are rarely used. First of all, many accelerators simply do not recognize portfolio management important enough to spend money on, so they end up relying on email communication and Excel to record the information. As collecting and formatting information this way is very time consuming (e.g. there are different formats of updates, need to send reminders to slackers), it usually ends up not being done well and provides limited actionable insights.

No wonder that accelerators also encounter pushback from founders, who do not see the much sense reporting to accelerators about their progress if they receive no value in exchange. All this leads to situations where updates are rare, not consistent and depend too much on founder good will, rather than on habit and mutual benefits. It shouldn’t be a surprise to hear stories how accelerators found out in the media that one of their startups raised additional capital.

There are however many good practices in that space and the accelerators that break this cycle are the ones that will benefit the most. We will describe how it can be done in the next post.

Launching a startup accelerator – fundraising and lessons learned

These days seems like everyone is opening a startup accelerator or incubator, even Disney has one! To the wider public they may all be similar, but there are surprisingly many differences in the way they operate. At Fundacity we provide selection and portfolio management tools to many accelerators, seeing first-hand their various operating models and approaches to helping startups grow.

We are really excited about the evolution of accelerator business models and their modus operandi and share our observations on this blog. Our last post was about launching a startup accelerator, where founders from Brazil, Australia and United Kingdom explained how they decided to start up and how they validated the initial idea. Today we continue their stories, explaining how they raised funds and what lessons they learned from their journey.

Raising initial funds

Accelerators don’t scale.

Rishi and George, the founders of IncuBus Ventures, heard that a lot when pitching their idea to various angel investors. Most of them were not interested in making a large investment, preferring instead to deploy capital into businesses that can scale and provide larger returns, faster. It was very disappointing, but there were still other funding options to consider. Government grants were quickly ruled out, as IncuBus Ventures did not fit the strict requirements of any of the current programs. The next option the founders explored was online crowdfunding, as people investing via such platforms don’t focus that much on financial returns, often simply being interested in backing a project they believe in. That seemed well aligned with IncuBus focus on helping young entrepreneurs start up. They ran the first campaign via IndieGoGo, but it turned out that reward-based crowdfunding was not a good fit for a startup incubator.

What did however work was equity crowdfunding, for which they used a platform called Seedrs. That campaign attracted some of the angel investors who were approached at the beginning, as well as a number of professionals working in the City, London’s financial district. IncuBus Ventures takes a small equity stake in each of the incubated startups, which made becoming its shareholder much more attractive to investors than any t-shirt or free bus ride that could be offered as a reward at IndieGoGo.

Acelera Partners fundraising process was more straightforward, although by no means easy, mainly due to various challenges presented by the daunting Brazilian bureaucracy. The post-accelerator was funded by an investment fund that had been raised initially from Microsoft, Qualcomm, Banco Espirito Santo and local development agency AgeRio. The biggest challenges when creating the fund were related to getting relevant approvals from Brazilian Securities and Exchange Commission, which required hiring a fund manager, fund administrator, an auditor and a technical advisor.

The most obvious source of funding for Venturetec Accelerator were telco, banking and media corporations based in Asia Pacific region, as they would be one of the main benefactors of the accelerator’s program. Another option were the corporations from other sectors, but already interested in startups and trying to get access to the most promising ones by sponsoring hackathons, startup events and competitions. Even if it wasn’t that difficult to arrange meetings with their top executives, securing financial commitments without a prior track record in that space was a different story.

As the corporate decision making machines tend to act slowly, Venturetec founders seek to establish closer relationships and demonstrate their knowledge in the area by providing consulting services to staff of internal corporate innovation labs and accelerators. The new approach to fundraising also includes the plan to raise separate funds with each of the regional financial centers: HK, Singapore and Australia. Similarly to the case of IncuBus Ventures, government money is not yet a viable option, particularly in Australia.

Overall, attracting private funding for startup accelerators is not that easy. Even though corporations are increasingly more ready to open their wallets, it’s often the governments that are stepping up to fill this gap. This trend is the strongest in South America, where Chile (Corfo) and Brazil (Apex and CNPq) lead the way, as well as in Europe, where more EU money for startups is becoming available. In Asia, Singapore seems to be most committed to building financial foundations for a strong local startup ecosystem at seed level.

However, as demonstrated by the example of these three accelerators and the number of others being created around the world, there are many ways to get creative and raise capital outside of public funds.

The journey

Everything takes more time than you think.

Any entrepreneur quickly notices that the world around them moves too slowly compared to their own pace and building anything is a longer process than expected. In these particular cases, at least it’s a fun journey. Goncalo from Acelera Partners couldn’t stop smiling when he was telling us about his experiences to date and it’s not only because as Brazilian he smiles a lot in general. For Goncalo, the particularly rewarding part of building a business focused on the startup community is that it’s full of very open and positive people. At Fundacity we couldn’t agree more. If your job consists of talking every day to people who have big plans, are excited about their job and are often on a mission to change the world – it’s simply contagious.

Rishi from IncuBus Ventures enjoyed this part a lot too and his advice is to talk to as many people as you can and then more. The startup ecosystem thrives on connections and networking, providing perfect conditions for serendipity. Even the most random of contacts may lead to a great insight, epiphany or a new opportunity, so best make sure not to leave any connection unexplored.

Trey, the founder of Venturetec Accelerator, particularly enjoyed the validation stage of his journey. He had a very clear vision for his accelerator and knew that the buy-in from corporations from the very beginning would be the key to success. One of the most satisfying moments on the way to the launch was seeing positive and sometime even enthusiastic reactions when he presented that vision and his plans for Venturetec. The second best part was building a network of mentors.  Many high-profile people in corporations he spoke with were very interested in participating. That meant mentors in the program would have the exact profile as potential buyers of products created by startups in Venturetec’s acceleration programs. Finally, seeing entries from high quality startups to the first program was the moment when it all came together.

Lessons learned

What would they do differently had they started now again? In addition to giving himself a strong booster of patience, Trey says he wouldn’t go to media as early as he did, expecting faster progress on many fronts. He would also devote more time to all these less fun admin things that unfortunately need to be done. Goncalo would communicate more. Actually, the expression he used was “over-communicate” – explain his thinking and plans better, in more detail, to more people. This is in line with Rishi’s advice about giving serendipity a chance.

So, there we go. If you want to launch a startup accelerator:

  1. Find a niche in the market to stand out,
  2. Network and over-communicate to make sure no opportunity and contact is left unexplored,
  3. Be patient, but persistent, as things always take more time.

If you liked this post, have additional questions or would like to feature your story in the future posts, let us know in the comments below of via our Live Chat at Fundacity.com.

We will be continuing the series about best practices from accelerators worldwide. Sign up to the blog to make sure you don’t miss anything new.

Launching an accelerator – where to start

These days seems like everyone is opening a startup accelerator or incubator, even Coca-Cola has one! To the wider public they may all be similar, but there are surprisingly many differences in the way they operate. At Fundacity we provide selection and portfolio management tools to many accelerators and incubators, seeing first-hand their various operating models and approaches to helping startups grow.

The concept of startup accelerators is still evolving and we want to capture the most important trends by sharing some of our observations and best practices used by incubators and accelerators around the world. We have already written about the importance of finding a niche to attract the best startups and today’s post will be about launching a startup accelerator, through founder stories from a Brazilian post-accelerator (Acelera Partners), a London-based incubator (IncuBus Ventures) and an accelerator from Asia Pacific (Venturetec Accelerator). Each of them has a different profile, founder background and own view about the best way to grow the next big thing.

Let’s see how they started.

Idea

It all starts with the problem.

George and Rishi, entrepreneurs from London in their early twenties, had been involved in the London startup scene for some time as founders and organizers of startup events. What they were missing in the ecosystem was an offer designed specifically for young people, like themselves, which focused on young people who were interested in starting up and looking for guidance how to do it. However, most of the accelerators seemed to be for people with prior business experience. They also saw the lack of focus on developing young entrepreneurs who ultimately are the reason behind the success or failure of a startup. Hence, IncuBusLDN’s focus on building better entrepreneurs via a tailored personal development course as part of the incubator. The initial idea was to create a co-working space for young entrepreneurs. To save rent costs, Rishi and George came up with an idea to set it up on a red double-decker London bus, conveniently fitted with wireless Internet, meeting rooms and mobile – in case they needed to relocate. However, they quickly realized that providing just a co-work wasn’t enough to make a difference to young entrepreneurs and that’s how the idea of the ‘entrepreneur incubator’ was born. The problem turned into a mission.

Trey Zagante is on a mission too. He wants to build a bridge between corporate and startup world in Asia Pacific region. Originally from Australia, while completing his MBA, he became very interested in the rise of accelerators, the movement started by Y Combinator in the US. Later he got involved as mentor in AngelCube, a Melbourne based accelerator and part of the TechStars Global Accelerator Network, as well as in Founder Institute, while working for a large tech company operating in Asia Pacific region. During that time he noticed that a typical three-month acceleration program was not very well suited for enterprise startups that often need to deal with very long product development and sales cycles. For that very reason they may have difficulties to demonstrate enough traction to investors during Demo Day, especially that the only traction that really matters for them is revenue.

At the same time, Trey noticed that many corporations in the region were increasingly interested in connecting with startups to boost internal innovation. Not only that, but corporations were becoming more open to sourcing products and solutions from startups. You no longer had to be a big tech corporation to have another huge corporation as a client. Venturetec Accelerator was born from merging these two observations. It focuses on enterprise startups that sell to telecoms, media and finance companies. The participants spend six months in the program, do not need to attend it in person and what they get is funding and revenue focused mentorship from and introductions to the very type of people as their clients.

In Brazil, the problem identified by Franklin Luzes was still different. While working for Microsoft he noticed there was a funding gap for startups that finished acceleration programs, but were not ready yet to receive VC funding. Many quality startups were dying as a result. His investment thesis was to start what he describes as a post-accelerator, which helps startups that are already generating revenues to scale their operations and grow faster.

So, there we go: an incubator, an accelerator and a post-accelerator. Each different, but each started to solve a real problem. This resembles the advice mentors give to founders – find a problem first and then the best way to deal with it.

Validation

Get out of the building.

Each of the three profiled ventures started with an innovative business model, so the only way for the founders to validate their ideas was by following Lean Startup principles and talking to people, lots of people.

Rishi and George were already known in the London startup ecosystem, having founded startups, worked in some and organized various startup events for startup entrepreneurs. That was a good start, but not enough. Rishi: “Don’t be afraid of chance encounters. You just don’t know which one may take you in an interesting direction.” That’s exactly how the idea of an incubator developed; from the conversations they had with other young entrepreneurs and… basically anyone who would listen.

Obviously, it’s not only the number of meetings, but also their quality that counts. The best ones often start from introductions to the right people. Trey says that for Venturetec, one of the most important people during the validation stage was Felix Lam, a member of the Hong Kong Business Angel Network and the chairman for The Hong Kong ICT Startup Awards 2014, roles that make him one of the most connected people in the local startup ecosystem.

Even if you don’t have the access to all the right connections from the outset, or can’t find someone as pivotal as super-connector Felix Lam, there are ways to build your own network of contacts.

Acelera Partners wanted to focus from the beginning on attracting more mature startups to their post-acceleration program. However, the founders quickly realized that to be able to select the best ones in that stage, they would need to get to know them much earlier. They decided to participate in Startup Brasil, a government program for early-stage startups, which also turned out to be a great way to enter the ecosystem – make valuable connections, promote their brand and validate the idea. Finally, to finish building the whole supply chain for their fund, they became a shareholder in one of the top accelerators in Brazil – Aceleratech.

To validate an idea, the Lean Startup movement not only advocates taking fresh air by talking with people outside of the building, but actually recommends building something to test reactions of future users and customers. Venturetec’s MVP was the soft launch of their program, while they were still fundraising. In the meantime, Trey was also relentlessly networking with key stakeholders of the future accelerator – particularly media, finance and telco corporations – to validate his key assumption about their interest in startups and willingness to get involved in the accelerator.

It’s clear from the experiences of these accelerator entrepreneurs that there is no such thing as talking to too many people when starting up. It may even be truer for an accelerator than a startup, as the numbers of stakeholders for them is higher. A SaaS or a marketplace startup first needs to validate their idea with prospective users, whereas a new accelerator needs to talk to all stakeholders right from the beginning: funders, startups, other accelerators, government, corporations, etc.

If you want to find out how they raised funds and what they learned from their experiences, please see the second part of this post here. To make sure you don’t miss the next posts about accelerator best practices, please sign up to our blog.

Profile of Brazilian angel investors – who they are, what motivates them

Last week we interviewed Cassio Spina, the founder of Anjos do Brasil, the largest angel association in Brazil. Cassio shared with us his thoughts about what it means to be an angel investor in Brazil and gave very useful tips for people who are interested to get involved in angel investing. Following on that interview, we would like to share some more data about the current profile of angel investors in Brazil.

Anjos do Brasil say that in 2013, 6.450 individuals made angel investments in Brazilian startups, providing them R$619m for growth. That means each of these investors contributed on average R$96k (c.US$43k) to their local startup ecosystem. Overall, angel investment in Brazil increased by 25% compared to 2012 and everyone hopes that trend will continue, given the important role that angel investors play in the startup ecosystem.

The high number of angel investors cited by Anjos do Brasil does not mean all of those people are actually angel investors. Dealbook.co, a crowd sourced resource for tech deals in Brazil, suggests this number to be closer to 200. People involved closely in the local ecosystem say the number of experienced active angels is much lower.

What’s the profile of the average Brazilian angel investor? Well, it should be no surprise that most of them are men. In fact, around 98% of them. The average angel investor in Brazil is 44 years old, most of them are professionals or entrepreneurs, although rarely in tech. This is because startup ecosystem is still young and there are not many people with relevant experience and profile, such as entrepreneurs with successful exits, who could become professional angel investors, . However, some of the successful angel investors in Brazil are foreigners such as Fabrice Grinda or Florian Otto, founder of Groupon Brazil.

Anjos do Brasil data suggests that most of people who made angel investments in 2013 devote around 20% of their time to startups. It shouldn’t be a surprise that they only make on average a bit more than two investments per year. Nevertheless, they look into the future with optimism, planning to almost double this number in the next two years.

The startup ecosystem of Brazil still lacks transparency and it’s hard to keep track of what successful entrepreneurs are currently working on. Therefore, for angels with limited time available to investing, it is difficult to have a good enough deal flow to make more investments. There are more problems still. Brazilian angels cite high taxes and a difficult legal environment as an important barrier to invest more. One of the biggest problems relates to a risk of investor’s liability, as highlighted in the World Startup Wiki for Brasil. Basically, if a portfolio company fails and does not have enough assets to repay all creditors, the government will look to collect the debt from the angel investors and founders. Angels that invest in limited companies (Limitadas, or LTDAs) are the most at risk.  For S/As, the local equivalent of a C Corp, it’s much more difficult to collect from shareholders, although shareholders with board seats in S/As may possibly be liable.  For those reasons, a lot of angel investors prefer to set up a foreign structure and use it as a vehicle to invest in Brazilian companies. That is both complicated and costly, so acts as a deterrent to many people thinking to start investing in startups.

What motivates Brazilian angel investors? Obviously, they hope for good returns on their investment. Interest rates in Brazil are falling, stock market is under-performing and real estate prices are peaking, so alternative investments such as startups are becoming more attractive for a large group of people. Many of them also want to apply their experience and expertise to new ventures, looking for personal satisfaction from growing new businesses. Others are excited to help grow a company that is solving problems they care about. Finally, there seem to be also patriotic motivations among a number of investors, who think it is important for Brazilian economy to promote these kind of businesses and they want to participate in that. Most of angel investors are interested in investing in IT (75%), mobile (50%), health (44%), e-commerce (42%) and entertainment (35%) startups.

We would like to thank Cassio Spina and Joao Kepler from Anjos do Brasil, as well as Drew Beaurline from Construct for sharing the data and insights with us.

 

Obrazek

Angel investing in Brazil – tips for beginners

As we found out from speaking with Igor Mascarenhas and Andre Barrence about the Brazilian startup ecosystem, a number of active Brazilian angel investors is rising. To find out more about angel investing, we have caught up with Cassio Spina, who is an angel investors and a founder of Anjos do Brasil, the largest association of angel investors in Brazil.

Cassio SpinaGood morning Cassio, thank you very much for finding time in your busy schedule to talk to us. More and more people seem to be excited about opportunities to invest in startups. You are an experienced angel investor. What personally attracts you the most about it? 

I am really happy to see that more and more people want to invest in startups. This is very good for the Brazilian startup ecosystem. As far as my motives go, there are two sides to this. The most important is the fact that I simply like being involved in creating new companies. There is just so much pleasure seeing a startup grow and knowing that I contributed to it with money and advice. The second aspect is financial. Startups are types of small businesses that can grow very big in fairly short time, so there is a huge opportunity for good returns on investment.

What return do you aim for when investing in a startup?

There are some projects with a great return (50x the initial investment), but there are not many of those. That’s why in the US they are referred to as unicorns. On the other hand, let’s not forget that not all startups are successful and you end up making a loss on many investments. What I can realistically expect is a return of 5-10 times on my initial investment, which should cover the losses and still make me good money.

How does a typical day of a professional angel investor like yourself look like? 

There are many activities I need to do pretty much every day and they can be divided into two types: sourcing new deals and taking care of my portfolio startups. Almost every day I evaluate new startup investment opportunities that are presented to me, often listening to pitches from enObrazektrepreneurs. I also speak a lot with entrepreneurs from startups, in which I have already invested, helping them whenever they have questions or need advice. I tend to be in touch with each of these startups every few weeks, to see how they are doing. My focus is always on helping them grow their business.

These are the things I really like doing, but there are many other I am not a fan of. That includes dealing with Brazilian bureaucracy, reviewing contracts, or resolving conflicts between startup founders. All of this is a part of my role too.

Could you give some advice to someone who is interested to start investing in startups? What are the most important features of angel investor?

In simple terms, the role of a business angel is to add value to the startup. Obviously, one way of doing this is through their financial investment, but the role of advisor and mentor can be even more important. The combination of both is called “smart money” and angel investor who can provide that needs to have relevant professional experience, knowledge and contacts in the area in which the startup operates. Good set of soft skills is also very important. I would emphasize an open approach and collaborative attitude. Also, an angel investor must be ready to accept risk and the fact it’s the founders who need to deliver. You just can’t be overly controlling and tell the founders what they need to do.

Can anyone become an angel investor?

I think everybody should have a chance to invest in startups, but it takes time to become ready to lead your own investment. First of all, you need to learn well how the process of angel investing works. The devil is as always in the details. Only with that you can start to recognize which of the opportunities presented to you may turn into valuable deals. It all comes with time and experience, as there are many things that need to be considered and looked at. A good way to start is to connect with experienced angels and gain experience while investing with them. Also, in this way you can reduce your risk and build foundation to become more successful later.

What kinds of startups do you like investing in? Is it possible to find startups with great investment potential in Brazil? 

Oh yes, there are many great startups in Brazil and I am always on a lookout for opportunities. Since I have lots of experience in technology I usually invest in startups with this kind of products.

How do you perform due diligence to find a great startup? What do you look for in particular?

At this stage you invest primarily in people, so the most important for me is the entrepreneur’s profile. I work only with people who I believe can take the project to the next level and who have the capacity to transform their companies into successful businesses.

Then I look at the opportunity. There needs to be a big problem that they solve and the solution proposed has to be both innovative and difficult to copy. I am looking for startups that can build a competitive advantage to raise entry barriers for competitors that will want to enter later. Finally, I look at how big the market is and if it can be monetized.

Do you think investment in startups can be as accessible to individuals as investing on the stock exchange? 

Angel investing is not yet popular in Brazil, but I think it should be exactly like you say. However, for it to happen, we need first to inform these new potential investors about opportunities in startup investing and teach them about the process. It takes time and the investment has to be easy enough to execute for novices. I would also welcome changes in law. We need better regulations protecting investors and create a friendlier environment to invest, something like they have in the UK or the US.

What is your most successful investment?”

I am proud of ZOEMOB. They offer individuals and families the means to help protect, monitor and remotely manage personal information and details that may have a significant impact on their personal and professional lives and on their relationships. It’s a great team and I feel there was a clear need for their product.