Fundrasing for Startups outside the US — AMA Adrian García — Carao Ventures
Caya and Adrian Garcia from Carao Ventures, discuss about the challenges and best practices when fundraising for startups outside the US.
Caya: Our guest for today is Adrian García. He was a board member in my first company and he later went on and co-founded Carao Ventures which is both an accelerator and soon to become an investment firm in itself. They invested in Slidebean and concurrently in FounderHub in our 800 K seed round back in 2015. First question: why do you feel Latin American startups fail or are less likely to raise investor capital?
Adrian: Well, there’s a variety of reasons but I think one of them is that some startups that we’re seeing are trying to copy large established startups in the US or Europe. So, eventually, that’s not going to be that competitive for them and might be a little bit of a problem. So in startups even in small countries or emerging regions in the world like Latin America, they need to build something that is truly differentiated and innovative because if they grow a lot, then they’re going to be competing in other markets including developed markets: U.S., Europe, Israel. I think the company has to really have something innovative on a global scale.
Tech Startups outside the US
Caya: Should tech fundraising for startups aim for the U.S. market or is it OK just focusing on the Latin American market?
Adrian: We have seen companies that have been really successful focusing on one particular market. It could be one country, could be one city a lot of startups start in San Francisco or New York and they stay there until they have critical mass. It depends on what you are building. The actual problem could be something that a lot of people face very similarly. But take the example of building accounting software. So accounting is something that has very specific rules in each country and each state in some places. So maybe it’s going to be hard to build an accounting software at a small scale when you have to figure out where do you wanna start: in the U.S. or a Latin American country or some other place in the world. So there’s really no right answer for fundraising for startups.
The challenge when fundraising for startups is after they tackle the first market is where they go where to go next. Because if they are really successful at the first market it might be because they really learned and know the customer really well. But the customer in some other part of the world might be very different. So, it depends.
Aiming at a larger market
Caya: I guess that this applies to our own country when fundraising for startups. We see startups that launch in Costa Rica that are focused in the Costa Rican market with the expectation to eventually translate or copy this model into the rest of Central America or other countries in Latin America. What’s the best approach in this case when fundraising for startups? Should you aim at an initial larger market or is it okay to start with such a small country?
Adrian: So going back to my first comment. If you end up deciding to start out at a small country in an emerging region of the world or a mid-sized city in the U.S. or Canada or Europe. The founders have to think about how are they going to be innovative in the long term, or at least in the medium term because let’s go back 20 years and then my friend and I decide to start an email hosting company. So we’re going to post email and we’re going to provide and sell email accounts. So that might be good in the beginning and we might launch in the US with some marketing online or locally in Costa Rica or some other country handing out flyers.
The problem is that Google will eventually arise later and it’s going to be incredibly competitive and cheap and have a lot of other options. So again and there’s no right reason for it. It’s OK to start in a small country like Costa Rica or similar one because it’s going to be your pilot market.
Choosing the right customer
Ideally, the suggestion is that the place you decide to use as your first test market you’ll have to study the end consumer. You might be in a place that does might have a lot of customers that are your ideal customer profile. So you might want to move to the US if that’s the case. Because people use technology a lot more or are targeting a problem that does not exist in Costa Rica, for example.
Software that has something to do with snow or ice. It definitely wouldn’t apply here so you definitely have to move. So it depends on the problem you’re tackling but it’s not a problem at all to start in a small place. But you do have to study all the competitors in other places, not only in the US. There might be a super cool company in Estonia that is doing something similar. You have to familiarize yourself, adapt and learn from all the similar things that are happening around the world.
The right time to approach investors
Caya: When should a company approach an investor?
Adrian: So first of all when fundraising for startups from an investor, an angel or VC is normally the last stage of a relationship or the last stage of some initial part of a relationship with such investors. So your initial goal is not to raise money from an investor is to build a relationship with them. So taking part in these communities, going to your local meetups, and most importantly getting references. I put my LinkedIn profile in the Slack channels.
For example if you’re looking at investors that you want to meet, it’s ideal that you find someone that can make an introduction because that investor might feel a little bit more comfortable rather than through LinkedIn or a cold email or something like that, because I think that that email has been sent to other thousands of folks in a lot of places.
Traction
In regards to traction when fundraising for startups, that’s going to be question number 12 or 13. There’s a lot of initial questions that investors try to tackle first. Who are these people? What are their references? What is their experience? Can they produce? This is very important but: can you produce and write it without typos a succinct email or presentation on Slidebean or something that makes us think that you really care. And it’s not a one-liner saying “Hey let’s meet in your office. I’ll swing by tomorrow”.
We want to see high-quality interactions. It could be from a Slack channel or an e-mail that is very well written and thought of. It doesn’t have to be long. It doesn’t have to be a hundred slides but a very good solid presentation. All these communication aspects are really important because it creates the first impression in an investor. Even with the best reference, after someone introduces a startup to us and they send us a two slide presentation with typos and font number eight, that’s going to be not that great. So it’s a combination of everything. Going back to the traction question: it depends on the product you’re trying to build.
Which are the most important numbers?
You can have one hundred customers that are in every customer is a contract of 10000 dollars per year. And that’s going to be great but you can have one hundred views on your website. I mean there’s no real number. It depends on the KPI you’re trying to follow. Having views on your website is okay. Having followers on social media is better. Having real people that have interacted with your product, even better. Real people that are not your cousins or your neighbors or your friends that are intrigued by your product. That’s much better, right? So you gradually advance in this problem market-fit. I’m sure investors don’t ask for specific numbers.
What Investors Seek
They just want to see that you’ve talked to real customers, that you’ve tackled the problem and that you were advancing in getting those two things together. It’s better to have 10 real customers that are paying you, that are happy with your product…That’s very fast.
So first of all when fundraising for startups from an investor, an angel or VC is normally the last stage of a relationship or the last stage of some initial part of a relationship with such investors. So your initial goal is not to raise money from an investor is to build a relationship with them. So taking part in these communities, going to your local meetups, and most importantly getting references. I put my LinkedIn profile in the Slack channels.
Warm Intros
If you’re looking at investors that you want to meet, it’s ideal that you find someone that can make an introduction because that investor might feel a little bit more comfortable rather than through LinkedIn or a cold email or something like that, because I think that that email has been sent to other thousands of folks in a lot of places. So in regards to traction, that’s going to be question number 12 or 13. There’s a lot of initial questions that investors try to tackle first. Who are these people? What are their references? What is their experience? Can they produce?
This is very important but: can you produce and write it without typos a succinct email or presentation on Slidebean or something that makes us think that you really care. And it’s not a one-liner saying “Hey let’s meet in your office. I’ll swing by tomorrow”. We want to see high-quality interactions. It could be from a Slack channel or an e-mail that is very well written and thought of. It doesn’t have to be long. It doesn’t have to be a hundred slides but a very good solid presentation. All these communication aspects are really important because it creates the first impression in an investor. Even with the best reference, after someone introduces a startup to us and they send us a two slide presentation with typos and font number eight, that’s going to be not that great.
Your Market-fit
It’s a combination of everything. Going back to the traction question: it depends on the product you’re trying to build. You can have one hundred customers that are in every customer is a contract of 10000 dollars per year. And that’s going to be great but you can have one hundred views on your website. I mean there’s no real number. It depends on the KPI you’re trying to follow. Having views on your website is okay. Having followers on social media is better. Having real people that have interacted with your product, even better. Real people that are not your cousins or your neighbors or your friends that are intrigued by your product. That’s much better, right?
You gradually advance in this problem market-fit. I’m sure investors don’t ask for specific numbers. They just want to see that you’ve talked to real customers, that you’ve tackled the problem and that you were advancing in getting those two things together. It’s better to have 10 real customers that are paying you, that are happy with your product…That’s very fast.
Valuation and traction relation
Caya: Let’s talk a little about that relation between traction or that company stage here in Latin America and compared to the U.S. How does that stage relate to valuation? How do you value a startup in this stage?
Adrian: Valuation, of course, is a tricky question. The valuation of any asset is basically the price at which someone else will buy your assets: a building, a car, stock certificates or a percentage in your startup. The challenge there is to meet the demand. So you’re supplying the market a potential investment in your company. So number one: where’s the demand? We talked before about to meet and interact with investors and then you have to talk to them and you have to send documents, interact a few times and then you say “what number do I put in my valuation slide? This can be 500K, 1 million, 5 million. I don’t have a clue. Do your homework. Investors are going to have very fixed ideas sometimes with some flexibility in what the value of a company is when fundraising for startups.
Your Startup Valuation
It has to do with the quality of the founders, it has to do with how much money have you already raised. It’s basically matching supply and demand. My first very generous and actually very superficial advice there is that if you google “startup valuation” there’s a really nice infographic that appears there that most of you or some of you have probably seen. I like the part where they estimate a little bit in certain ranges. OK. If your startup has just started and it’s you and your friend and you are doing it full time and your friend is not then it’s probably zero to two hundred thousand dollars in valuation. Or if your startup has customers that are yearly paying you in a recurring way every month, your product exists, it’s in the market, your startup is worth between two hundred thousand million.
The value of a company
I think they explain it in more detail but the value of a company is very subjective at the early stage. So you have to picture yourself in the range that would be acceptable to an investor. And ideally combining that with how much money you have already raised.
You can have an outrageous scenario where you don’t have a product built you are alone maybe with someone else that is sort of helping you out but you’re really persuasive really highly connected.
You founded five companies in the past and so maybe you can pull off a 10 million pre the million pre-money valuation, or let’s say just 10 million. With only a presentation and your contacts. It depends on how well connected you are. Where you are situated. Where you are raising money. But try to put yourself in certain brackets and try to test and figure out where are the comparables to the value you’re trying to get to. “Is my startup worth 100K dollars? Do I have a product built? OK, maybe it’s a little bit cheap. Do I have 1000 customers paying me $10K a month maybe one thousand dollars a valuation is really low? So how about 10 million?”
So you try to fit in one of these buckets and ranges of valuation. In all these databases that are available online, you can find startups in almost any sector or similar sectors that you are in. You can find 5, 10, 15, 20 startups.
Find your peers
When fundraising for startups, try to compare yourself to all those companies in a similar sector with similar geography, a similar product and then maybe you can have a better idea how to fine tune your value and the best test is a conversation with an investor that is going to eventually lead you to a strike price where the supply and demand meet and that’s your valuation. It’s so subjective. In some instances that getting into very technical details specific negotiation with an investor might be counterproductive because it’s basically assumptions over assumptions. So you’re going to be trying to hone in in a range where both parties feel comfortable with. And lastly it’s counterintuitive definitely but you’re not trying to maximize valuation. You’re trying to find the optimal valuation at which an investor would be interested in investing in your company.
Non-Fundable Companies
Caya: What causes a company to be a non-fundable company? Where can those companies go if they need money?
Adrian: Good question. The first company in which venture capital started in Boston was called American Research Corporation. It funded products related to the military that were highly promising for other uses. Venture capital was created to fund high-risk, high reward companies. So if your company is a business that is trying to sell a physical product or to sell online on Shopify Amazon or something like that, maybe there are alternatives to venture capital.
Venture capitalists looking for a high return and they’re willing to take a high risk as well. So if you have a small business, I think a piece of good advice is to figure out all the seed capital grants, soft money, non-dilutive capital that are available in your city or in your country. I’ve seen medium-size cities in the West have really interesting seed capital not deluded grants that are available so, try to find those, see if they apply and utilize those first because those are going to be cheaper than taking I mean that giving out a series of your own company so normally that’s a good way to start. A physical business?
Is it a complete no-no for venture capital?
Not necessarily. There’s an interesting case of fundraising for startups in California. Some of you have seen this company called Blue Bottle coffee. They have really good quality coffee. But it’s a coffee shop or chain of coffee shops.
Some funds invested in this company because it has really promising e-commerce parts and bundles and things that they sell showcasing at their store. A competitor of Lululemon, the yoga clothes called Outdoor Voices also received venture capital. They sell yoga clothes and gym clothes but they have a really promising and much bigger online site where they sell their stuff besides their physical stores. So not necessarily because you’re selling a physical product you’re going to be out of this financing possibility but there is there has to be part of this story that is compelling to Angel or venture capital investors in regards to high growth.
But the e-commerce, of course, is that if it’s a software product sold online to the world that’s a lot easier to answer. But there are very specialized venture funds for each specific industry biotechnology hardware startups. There are other sectors called Heart tech. So if you’re building machines or you know things that are really difficult to build. There’s an interesting trend. There’s an interesting accelerator fund. So they invest their funds. If I’m not mistaken 20 years that’s 20 years of life. So imagine our space industry. Oh, of course, they are things that are highly complex. There are even investors for that.
Fundraising for startups from Crowdsourcing platforms
Caya: Is pre-seed funding from crowdsourcing platform still a thing? Or has it lost its clout in regards of fundraising for startups?
Adrian: I don’t think so. I love Wefunder.com for example, one of the co-founders studied with me and it started with only high tech software companies but now I love it because they have a craft beer and cookie companies next to space exploration technologies and other fields. So I believe there was a boom some years ago. Of course Kickstarter and all these platforms for fundraising for startups like Indiegogo.
But then I think once the gold rush settled each of those platforms pivoted or focused on the verticals or the sectors where they saw they had a demand. So we found that as I said now was a really interesting combination.
Wefund.com
I love it, I check it almost like a magazine. “OK, What’s available in Wefund today?” I recently invested in a cookie company based in San Francisco and they just make cookies that they online. I think it’s similar to cryptocurrencies. We’re not going to talk about crypto today but imagine that crowdfunding is just in the first stages of development although we might think today that the world moves particularly fast. Yes, it does. But as it moves fast and changes happen and all these platforms evolve I suggest that you search for the crowdfunding platform that applies to your geography.
I know that Israel, for example, has a lot of really interesting crowd investing or crowdsourcing platforms for fundraising for startups. There’s an issue still with money. How do you get the money if you’re using Kickstarter? Most probably, even Wefunder are U.S. based corporations so if you’re sitting in Argentina or South Africa it might be difficult to do that. Unless you can also set up a U.S. corporation. FounderHub is helping in that regard. It’s sort of linked together some of the resources that are available to start a company globally.
Crowdfunding platforms
Caya: Now I actually speak a little bit from my own experience. We successfully funded a Kickstarter campaign for the company I mentioned that Adrian was a board member. That’s actually how we met. We launched the Kickstarter campaign and he reached to us. Wreally like about Kickstarter which is still alive we don’t hear a lot about Kickstarter projects anymore but it still exists and a lot of companies and projects get funded that way.
I think that the real value of Kickstarter for fundraising for startups is that it validates your idea, or your concept, or your product with a bunch of people. You’re asking people to pay in advance or to donate or wherever you want to phrase it you’re asking people to give you money in exchange for the promise of this product. And that is a fantastic validation. The Kickstarter story got us a lot of press back in 2012. Maybe it’s not as press-worthy anymore but it got us that initial credibility to raise the little money that we raised with that company because again you reprove yourself that a few hundred or a thousand customers are willing to give you money for it.
Wrapping up
Adrian: I would say that crowdfunding is also a good experiment and exercise to promote your company. The bar has been raised a lot because there’s been scams and parties that have not been successful. So getting a project accepted at Kickstarter today is much harder than it was some years ago. And also in all these other platforms, of course, there’s a lot of people contacting you. What products or services or software on these platforms.
You really have to think about what pictures, copywriting, fundraising for startups… So it’s a lot more competitive now to be successful in these platforms. And that’s OK because again it’s an early exercise in promoting your product. Some people are worried about launching early on Kickstarter and some of these platforms because some people might copy you and actually produce your product before you actually do it yourself. So if you’re doing something highly innovative that is a physical product maybe try a different channel. But in general, I think we’re seeing it as a natural development of these crowdsourcing platforms and it’s going to be exciting to see how it develops in the future.
Caya: Thanks a lot for being with us and for actually coming into the office.
