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.

Can Brazil become THE startup hub for Latin America?

Fundacity is preparing to launch a new service that will enable Brazilian investors to co-invest small sums of money in local startups, together with experienced angel investors. This way more people will get access to exciting startup investment opportunities than it’s currently possible and their investment will help provide liquidity to the best Brazilian startups to accelerate their growth.

When preparing this offering we were asking ourselves obvious questions. Is Brazil the right country to do it? Is now the right time? Are there enough of good startups to invest in?

To answer some of these questions, we sat down with André Barrence and Igor Mascarenhas.  André is a president of SEED, a special program created by the government of the Brazilian state of Minas Gerais to transform it into “the most important birthplace and acceleration hub for tech entrepreneurs in Latin America”. Igor is an angel investor and also coordinates activities of startup accelerators that take part in Startup Brasil program.

Fundacity: Andre, Igor, thank you very much for meeting with us. The initiatives like SEED and Startup Brasil are ambitious, but whether you can deliver results will depend a lot on the political will and financial support. How does government support the growth of the startup ecosystem in Brazil?

ObrazekAndre Barrence: Thanks for having me here. Yes, you are right. Entrepreneurship has always been on the agenda of politicians and there have been many institutions created to support it. What changed recently is that the government is becoming much more involved and supports creation of various new programs that help entrepreneurs in different stages of growth. That means startups can now benefit from acceleration at early stage, like through SEED, and you also have a great program like Startup Brazil, which is for more mature startups and provides them with more opportunities to receive follow-on funding. However, this is just the beginning in terms of creating necessary conditions to grow the whole startup ecosystem. Government support for startups is essential, but what we really need is the involvement of private investors. Private capital in Brazil is currently not very interested in startups. There are few reasons for that. Many potential investors are simply not familiar with the opportunities around, neither with the legal framework related to investing in startups. It’s also a question of changing their mindset. Private investors are well aware of risks, but don’t often realize about the huge potential of such investments. We need to help them develop both this mindset and understanding.

Another side of growing the ecosystem, where government needs to be involved more, is the development of education focused on entrepreneurship. Now everything happens separately. Students learn from other students, startups from startups and investors talk mainly to other investors.

The biggest missing connection is however the one between startups and investors. SEED is very much involved in creating such links, but the government should do more too, taking example from the best practices from abroad. I particularly like how they do it in the US, Israel and New Zealand. In South America, Chile is currently ahead of us, but it won’t be long until they have to settle for the second place, behind Minas Gerais, haha.

ObrazekIgor Mascarenhas: I agree with Andre. There are many new programs supporting startups on national and regional level and this is great. By the way, among interesting local programs it is worth also mentioning Startup Rio. These programs not only provide financial support to startups, but also help with people development. The prime focus now is on seed stage to grow the ecosystem from the roots up.

So you really believe that Brazil can become a startup hub for South America?

IM: Brazil is a giant market and already a hub for many sectors in South America. The country is changing very fast and attracts more and more foreign investment. I don’t see why we wouldn’t become a tech hub, even in the next two years. There is certainly a potential for that.

AB: It’s not really the question if we can, we simply must and we will. We have all the potential that is necessary: big market, fast developing economy, talented and creative people and, finally, the government support and money.

What we miss is the culture of entrepreneurship and innovation and this is what we must focus our efforts on now. We need to change the culture to succeed.

How do you see the growth of the startup ecosystem in Brazil in the next 5 years?

IM: We are now working hard to build foundations for faster growth of the startup ecosystem. First of all we need to make a change in how entrepreneurship is perceived. We want it to be a viable career option for young people. Five years ago being entrepreneur was something crazy. Today you can see young people who understand what entrepreneurship is about. They are often children of entrepreneurs, so they have more support from their parents, they know more about programs available and what’s right for them. I wouldn’t say it’s widespread yet, but definitely a clear trend. All that means that the future potential entrepreneurs will be more prepared to start their companies

Another big change needs to be made around providing financing to startups. We already have angel investors, seed money and other funds but in reality the level of liquidity offered to startups is still relatively small. We must work to create initiatives introducing and supporting private financing. Finally, we must create an environment where investors will be able to have an exit and thus create the cycle of investment.

AB: The effects of everything we do now will bear fruit in the coming years. We have invested a lot in development of startups and many of them will grow substantially. With that, we will also have a new generation of experienced entrepreneurs, who will have relevant experience to help other startups and who can become role models to cultivate the culture of entrepreneurship.

I think one of the most important things that will happen as a result of having a bigger number of more mature startups in the ecosystem, will be the development of a second stage financing for startups. The startups will have much better funding opportunities because, amongst other things, the perception of entrepreneurship will change. There will be more people involved in startups, so more private investment will be available.

Can Brazilian technology startups help solve some of the problems Brazilian economy is facing today, like in healthcare and education?”

AB: Yes, I think there are many public problems that can be solved by entrepreneurs. Some of the most pressing and complex ones are in education, health and agriculture. In education for example, in addition to giving students computers, we should focus on ways to improve quality of teaching. There is also a lot of innovation that can improve our health services.

Startups of course won’t solve the problems by themselves only, but as they are focused on looking for technological solutions to problems, they can help others innovate.

IM: There are many great examples of startups that are already doing this. For example: EvoBooks is developing a new study model.‏

Appprova‏ has a mobile application platform that enables high school students to practice for their university admission tests. In Brazil private schools have better preparation system than public and this application creates a chance for public school students to prepare better. In health, ‎ProRadis‏ helps in make health sector more dynamic, improving work efficiency. Memed thinks that many problems in Brazilian healthcare are related to badly written prescriptions. You know, bad handwriting that is difficult to understand. So this app connects patients, doctors and pharmacists to create digital prescriptions.

Today we already have various startup related initiatives focusing on solving public problems. For example, in March we organised Rio Favela Startup Weekend.

Is it possible that a Brazilian startup of today becomes a future global company? What is the biggest Brazilian startup success story to date?

AB: Of course they can, they have all the potential. There are success stories already. Not many people know about it, but for example Akwan, a search engine developed in Belo Horizonte, was sold to Google in 2005. There is also Easy Taxi, a mobile app that started only two years ago in Rio and now, backed by Rocket Internet – the biggest e-commerce incubator in the world, is available in almost 30 countries worldwide. They have already raised $32m in funding.

Another Brazilian success story is Samba Tech, now the biggest provider of online video solutions in Latin America.

All of them have succeeded because they had a mix of an interesting business model, committed entrepreneurs and forward-looking investors. There are many more Brazilian startups with these key ingredients in the making.

 

Find the right investor for your startup

We are continuing our series on “Hacking your fundraising”. We have already written about where to find the investors if you are an early stage startup and what you will need to give and what you should expect to get from your investor. This time you will find out how to decide if you have found the right investor for your startup.  We will focus on angel investors and accelerators, as they are the most common investors in early stage startups.

Human factor

Signing a contract with an investor is a bit like getting married. You will need to start sharing, meet regularly and commit to many things you may not always feel like doing. Although you are marrying rich, don’t forget it’s almost impossible to get a divorce with your investors and having a no-strings-attached relationship is not an option.

Like with any relationship, times might get tough when things are not going as planned – a fairly common issue in Startupville. It is therefore important that the relationship is based on mutual respect and understanding. A great investor will help you brainstorm when things are bad and will stay out of your way when you need the space to figure things out. For that very reason make sure you select your investor carefully and not go for the first one that flashes you the money. How to do it? Do your due diligence. In addition to using Google search, you can and should:

  • For angels: Ask them to put you in touch with a few of their portfolio companies. You should even go as far as selecting the founders you would like to talk to yourself. Try to go for the successful and the ones that did not go well. In the latter case, you are likely to find out more valuable information, because hard times present a better test of anybody. If the angel investor refuses to give you these contacts, this is a clear warning sign. Surprisingly, very few startups do this.
  • For accelerators: Talk to graduates of their programs. The list can be easily found on their websites. Best reaching out directly to the founders through LinkedIn. Simply ask them if they would do the program again. No response from a number of founders may be a warning sign.

Human factor is much more important when you look for an angel investment. In case of accelerators, you will deal with more people and the relationship will be intense for a relatively short period, during the program.

Terms of investment

In general the most heatedly debated terms in a term sheet relate to valuation. However, whilst financial terms are very important, the devil lies in the details, legal details. Investment terms, presented to you by investor in a legal document called term sheet, are a good indication of the relationship you may have in the future. Some things to be especially careful about:

  • Board seats. In general, if you agree to have investors on your board, make sure their vote is in line with the amount of equity they have.
  • Additional equity not linked to amount invested. Sometimes investors will offer non-cash benefits (e.g. mentoring, office, advisory) in exchange for equity. It is a normal practice for accelerators, but need to be checked more carefully when analysing an offer from angels. We wrote more about it in our previous post.
  • Valuation caps. This is an important point when your investor doesn’t get equity, but rather receives a convertible note for their investment. It is a very common practice when funding early stage startups. You can read more about it here.
  • Trigger events and conversion mechanics for a convertible note.
  • Reserved matters – list of really important matters where the investor has veto rights. Common examples include hiring and firing of key staff and raising additional funding. This means that without the investors’ consent the items cannot be approved by the rest of the board even if they form a majority.
  • Anything that looks weird.

The term sheet and related documents will be overwhelming. This is normal, so it’s better to ask and perhaps look stupid than not ask and actually be stupid. If you have questions about the investment terms like: “Why is your fund registered in British Virgin Islands?” or “What does it mean that you want to cap…?” – ASK. If they are honest, they will be understanding, open and not defensive. Remember, the deal will not fail because you ask questions.

Please do not treat the above as legal advice and, if unsure, show your term sheet to an experienced lawyer or another founder, preferably one who has raised capital from professional investors before.

Additional value

One of the things you should be doing your due diligence on, is how much you will get from the investors in addition to money. The most valuable are mentoring and introductions.

Mentoring

Accelerators are all about mentoring and most make the network of available mentors their key value proposition. That’s great, but mentors are not created equal. Study the list carefully and think if you would be excited to work with some of them. Then, while doing your due diligence, find out how much time mentors will actually have for you and how the mentorship works. The best arrangement is to have a small group of mentors work with you consistently through the whole program. Some accelerators (e.g. Techstars) organise mentor-startup speed dating at the very beginning of the program, which is something founders generally like.

Angels can and should offer mentoring too. If your prospective angel investor has already made investments in your space (not in current competitors!) and/or has operational experience running startups, there is a chance their mentoring will be useful.

Introductions

Your investors should help you grow your network of contacts through introductions. This means introducing you to other investors, potential clients, potential hires and anyone who can help you grow your business.

Even if you don’t secure direct introductions to investors from your accelerator or angel investor, you should not hesitate to name-drop to get introduced yourself. Never underestimate the power of brand and social proof, especially that investors, as a group, are famous for having herd mentality. What it means in practice is that when they see another investor already interested in you, they will more likely look at you with more interest themselves. That works even better, if it happens to be a name they already know well.

Thanks for reading and stay tuned for more. In the meantime, we would love to hear from you in the comments below. You can also subscribe to this blog and receive notifications when we publish something new.