Coming Out a Winner in the Wake of the COVID–19 Global Reset:

A Latin America Perspective of the Venture Capital (VC) Industry

The success of the VC industry depends largely on the ability of General Partners (GPs) to invest in start–ups and exit years later at great multiples (buy low/sell high). This is a long process, often spanning many years, of selecting companies in which to invest, nurturing them to increase their valuations, and harvesting value by selling stakes. Each VC firm claims to have a unique investment thesis to deliver “unfair” returns (or gains) to its Limited Partners (LPs or investors) and to themselves (via carried interest). Most VC firms claim to have their own ‘secret sauces’ based on objective and subjective claims:

Objective Claims:

  • Past Fund(S) Performance.
  • Geographical Focus: USA, EU, Latin America (LatAm), Israel, India, China, et al––as well as bridges among two or more geographies.
  • Industry Focus: Bio–Tech, Fin–Tech, Ed–Tech, Legal–Tech, Clean–Tech (Renewables/Green Technologies), Consumer Audiences, B–2–B services, et al.
  • Time Frame: Incubation/Acceleration Phase, Early Stage (Pre–Seed and Seed), Growth Stage (Series A and Beyond), etc.

Subjective Claims:

  • Track records/careers of partners.
  • “Private” or “privileged” deal flows.
  • Networks of relationships or relationship capital.
  • University degrees and alumni networks.

The on–going COVID–19 crisis and the ensuing global recession, or likely economic depression will create the impetus to disrupt industries untouched during prior crises. The coronavirus pandemic will have long–lasting human and economic effects and will cause a massive global reset, during which most societal behaviors will be forced to change by replacing old habits and customs with new ones. The purpose of this brief is to look beyond the on–going global reset caused by the ongoing pandemic, by analyzing the impact in the VC industry, and in particular the Latin American VC industry.

The current pandemic is impacting VC firms in 4 areas:

  1. Portfolio Companies: Depending on the industry or economic sector of operations their revenues are extraordinarily negatively impacted (tourism and hospitality) while in the other extreme positively impacted (virtualization of most services), affecting their valuations and runway (slide). A special case is the decision of making follow–up investments in current portfolio companies. This is a hard one as it may lead to down–rounds or even to accelerate their death in the event the investment committee decides to pass.
  2. Limited Partners: Their ability to timely respond to the request of wiring the committed capital. If capital contributions are not made, due to the impact of the current crisis on specific LP’s finances, it may lead to the reduction of the VC fund size.
  3. Quality of Deal Flow: VC funds will need to work harder to find solid, reasonably priced deals. While many companies will likely face down rounds, attractive companies benefiting from the current crisis will likely be deluged with both old and new money, enjoying well priced valuations.
  4. Exits: The current crisis will delay market activity for possible exits, deflating valuations. There could be exceptions, but, at large, the “irrational exuberance” for Unicorn–type valuations have been diminished.

LatAm VCs will need to re-evaluate their portfolio vis-a-vis to two essential realities:

  1. The economic recession/depression is likely to have a more pronounced impact on LatAm countries. LatAm economies are more vulnerable. This will affect the valuation of those portfolio companies which heavily depend for their revenues on domestic and regional markets.
  2. A depressed LatAm economic climate will impact portfolio company exits: Likely these exits will happen outside LatAm (this was true before, and even truer in the post pandemic times). LatAm startups that have strong customer base outside LatAm, particularly in sectors that have suffered limited COVID–19 impacts, will be in privileged positions. In short, truly global start–ups whose stakeholders––including founders, customers, technology, investors, and partners––are globally–minded will likely be the winners in in the post-Coronavirus times.

In addition, most funds today, in two to five years, will inevitably seek to form new funds to compensate for decreased levels of activities (and fees) in present funds. To attract old and new LPs as investors in these new funds, the performance of present funds is critical, placing additional pressure on VC firms. The current health crisis and the economic recession that will follow decreases the odds of a stellar performances. A possible positive outcome resulting from the on-going crisis, is the renewed impetus by established corporations to expand their Open Innovation initiatives, to mitigate the increased obsolescence risk, by adding to their innovation arsenal Corporate Venture Capital (CVC).

Potential attractive areas for investment are the opportunities that have emerged from the on–going pandemic. My proposed focus would be on the economic sectors that have not yet been disrupted––the oldest industries known to mankind that have remained prevailingly untouched: health care, education, law, government, and organized religion. My invitation would be to focus on the first three industries, as the last two cut through core beliefs about how society should be organized, making disruption less likely and more uncertain in the imminent future; moreover, they often depend on intangible parameters not easily quantifiable.

If there were ever a time necessitating strong leadership, this is it! Society is accelerating exponentially. In this environment, paralysis is not an option. Action is demanded. The unprecedented speed and magnitude of COVID–19 demands that VC firms focus on three things simultaneously: 

  • Nurture and support portfolio companies: Each company (startup) must survive and re–invent itself to maximize its potential by reimagining the future.
  • Increase transparent communications: Clear, fruitful exchanges among LPs, founders, and VC’s personnel will be more important than ever to minimize uncertainty and anxiety due to the on–going crisis.
  • Empathetically manage difficult choices demanded by these challenging times: Salary reductions, personnel reductions, and renegotiations of every possible expenditure must all be on the table. Everything and anything. Why? Because there are NO SACRED COWS, during these unprecedented times. As more Startups impose salary reductions to their staff, it opens again the opportunity to potentially offset these reductions with stock options, which is still and “incomplete assignment” in the Latin entrepreneurial ecosystem.
Every crisis passed and each one gave birth to a world of new opportunities

COVID–19 offers every company a once in a lifetime great global reset opportunity. Difficult as it is to survive and rise above the gathering global storm, re–inventing one’s firm is a must to come out a vibrant and dynamic winner and thrive in a reimagined future! This will play to Latin entrepreneurs’ strengths as their DNA includes disproportionate levels of resilience and adaptability making them able to prosper in the presence of extraordinary uncertainty and socio-economic instability.

Until our paths cross again amigo — Carlos B

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An Optimistic View of the Shelter–In–Place Order: 8 Weeks Later

I don’t think I truly understood what the future had in store when I published my optimistic blogpost at the beginning of the lockdown (March 17, 2020) in all San Francisco Bay Area counties in Northern California. Almost two months later, the health problems caused by the pandemic are perhaps overshadowed by the economic costs. This impact is overwhelming, across both the developing world and here at home, affecting many families whose jobs have evaporated or been furloughed.

I have enjoyed a particularly productive time, in part because I have been continually intellectually stimulated by business partners, students, and many close friends with whom I have not communicated in a while. I did practice most of what I preached in my original blogpost, and personally the net balance has been positive. However, I have to confess that I long for the social contact of my old routine, the livelihood of the office, the lecture hall at the university campus, the coffee shop visits, etc.––and of course the close physical proximity with my family and friends, characteristics of our Latin customs.

As our businesses close and the rules require all contact to became virtual. Inertia drove the first couple of weeks as the unfinished businesses, started in our offices, were completed or abandoned as the realization that they were useless. After a couple of 8 weeks laterweeks, the new reality started to sink in. The end of March, became end of April and now most of May. By now time has given the opportunity to rationalize this rushed behavior and evaluate what happened, with our lives, finances, work, and relationships.

I am particularly disenchanted of our political leadership, at all levels, domestically or internationally. I perceive a general inability on their part to communicate clearly the conditions that led us to enter a lockdown in the first place. Moreover, what has been equally absent are clearly established lockdown exit criteria. Unfortunately, none of the conditions that could have justified to enter and potentially exit a lockdown were not met: a) the availability of a vaccine, which will not available for a good while, b) a cure for COVID–19, c) the assurance that no a single person in a given geography is sick with the COVID-19 virus, and d) the availability of plentiful testing kits at very low cost, where anyone could be tested, as often as it may be required, on demand, with highly reliable results and those results available within seconds or few minutes. Now, the wheels of the world appear slowly to start moving again, motivated by economic imperatives, without meeting any the conditions identified above. This begs to answer: why did we go into lockdown in the first place?

Furthermore, while models predicting the casualties due to the coronavirus changed often (and still are) as assumptions changed, our leadership did not alert us of the economic consequences, although economic models are plentiful and more accurate. We learned the consequences from the headlines of the business journals as they reported unemployment claims, business closures and bankruptcies, etc. I resent this type of reactive leadership, which would be unacceptable in the private sector, with a total absence of transparent communication acknowledging what is known and what is unknown. Equally absent was an honest acknowledgement of the impact of the trillions of dollars in government rescue packages will have, on the ever–growing fiscal deficits and the cost to the generations to come. The economic damage is just one of many. McKinsey recently reported[1] that across 191 countries schools are shut down, affecting the education of future generation of 1.6B children. Some have continued their educations virtually with uneven results, as learning outcomes depend not only on access to technology but teachers’ ability to repurpose their educational material for the virtual classroom to an audience with an ever–decreasing attention span.

The reactive leadership of the political class will probably pass without great personal consequences. For many, the worst–case scenario is that they may not be re–elected, and they will be forced to cash out writing juicy memoirs, join the lecture circuit, and become talking heads in one of the news networks. For the rest of us, the private sector will have to deal with the economic fallout and households will have to deal with the financial and health devastation of COVID–19.

Yes, we have not overloaded most of our hospitals, as the lockdown slowed down the propagation rate of the virus. But this wasn’t impact–free, as many health care facilities were heavily underutilized, while others patients in–need were denied access as their very much needed services were postponed to privilege potential coronavirus patients. In the meantime, the economic damage of the lockdown we imposed upon ourselves is comparable to that of the Great Depression of 1929 or worse[2], and its net health benefits remain highly questionable. Moreover, some are predicting a second or a third peak of COVID–19 to be expected for late this year or early next year.

History will revisit for years to come what exactly happened to the planet earth during Q1 and Q2 of 2020 again and again. I think that some historians will agree with my perspective that this was a period dominated by the arrogance of mankind (in particular, those in leadership position) fed by the feeling of invincibility, who chose not to prepare for an announced pandemic. World leaders forgot their fundamental purpose to serve their citizens as they were too preoccupied with their own personal interests and short–term gains, succumbing to intellectual laziness to look beyond the horizon and behave as serving leaders. They all succumbed to the hyper influence of the continuous news cycle, and a media driven business that communicates what sells, producing a herd behavior racing to the bottom as no one wanted to be left behind and remain with an open economy. The end result was that fear of the unknown dominated our spirits, and we became perfect victims of ourselves.

It is high time that we regain ownership of our protagonist role in writing our own history and driving our own destiny. Probably this will require us to rethink the value of human centric enlightened leadership, with a sense of transcendental living for others and the future generations.

One thing I am certain of: as difficult as it is for humans to change their behaviors, we had produced a decade of changes in less than 10 weeks. I’m unsure if we are prepared to pay the cost for this global experiment. The invoices will be computed over the months and years to come, and as they come due, many will go unpaid!

Until our paths cross again amigo – Carlos B.

[1]https://mck.co/2xG26jq Charting the path to the next normal: If schools stay closed, how will people go back to work? May 11, 2020 

[2] https://on.ft.com/2WjufpW BoE warns UK set to enter worst recession for 300 years, Financial Times (5/7/2020)

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COVID-19 A Massive Global Reset? Part 2

Capturing the Opportunities after the 2020 Pandemic

“A crisis is a terrible thing to waste”

The objective of this second blogpost (Part 2 of 3), is to recognize that the on-going COVID-19 crisis and the ensuing global recession, will create the impetus to disrupt industries untouched during prior crises. Part 2 - Global ResetThe purpose of this note is to look beyond the on-going massive global reset caused by the ongoing pandemic, by inviting us to position ourselves and become protagonists in seizing the moment.

The great recession created the impetus for several deep-seated technological, economic, political, and societal changes, to create a combined effect of greater impact. In fact, the global financial crisis of 2008[1] happened while one of the most significant and impactful technologies of modern history was introduced: the smartphone[2].

Although the sharing economy, or as it was originally coined “collaborative consumption”, could be traced several years earlier, it was during the darkest hours of the Great Recession that two emblematic companies representing this new economy (Uber and Airbnb) were founded. During the years that followed, hundreds of Unicorns from all over the world[3], mimicking Uber and Airbnb, led disruptions across many industries, taking advantage of new technology platforms and the new post-global-financial-crisis socio-economic-political reality.

For all the impetus to create value attacking established incumbents (Uber vs. the taxi industry or Airbnb vs. the hotel industry), some of the oldest industries known to mankind have remained untouched. Some of the most important include: health care, education, legal, government and organized religion.

By the virtue of being among the world oldest, these industries or enterprises share a common set of time-tested characteristics:

  1. Meet a basic human need by addressing a specific market pain,
  2. Constitute the source of livelihood for millions of people around the world for centuries,
  3. Are resilient, as their survival has been tested over multiple recessions, wars and other local/global calamities, and
  4. Refined and enhanced their business models, over the past centuries, and benefitted the ever-improving protection afforded by regulatory agencies around the world. Furthermore, the cultural acceptance of these enterprises has continued to grow mostly unchallenged by society[4].

In this blogpost, it is recognized that the on-going COVID-19 global crisis will create the impetus to disrupt some of these five industries, as it unleashes its disruptive force which will be magnified by some deep seated technological, economic, political, and societal changes taking shape over the preceding decades prior the pandemic (to be published in Part 3).

Of all the potential traditional industries identified to be disrupted, the 800-pound gorilla is the health care industry. Indeed, the Coronavirus has exposed its shortcoming across most countries around the world. Here in the USA, the health care expenditures are dangerously close to 20% of the American GDP, while 30MM of the US population does not have any coverage, and the life expectations at birth underperform by 6 to 8 years when compared to the G7 advanced economies. Successful disruption to healthcare, would promise better outcomes for everyone at cost closely aligned with most other developed countries. I predict that enormous fortunes will be made by the successful entrepreneurs able to disrupt the healthcare in the USA and export opportunities to other markets around the world.

Education is another thought-provoking candidate across all levels (K to college) and in particular tertiary level education. Suffice it to say that over the last several years teachers across the US have held countless long and inconclusive faculty meetings and other forums to discuss the opportunity to transform our classes into virtual teaching/distance learning. Yet for the last few weeks, from elementary schools to universities, classes are being held virtually. Now, the discussion has stopped and, with limited or no preparation, we are all adapting to learning by doing, and migrated our classrooms to virtual classrooms[5] since the beginning of the on-going lockdown.

Organized religion is another interesting enterprise which remained untouched for the most part over centuries. My angle of attack does not touch the core beliefs of Christianity or Buddhism, but the way they are organized and deliver the religious experience to their congregations.

What characteristics could we expect of in the new normal after the global reset? These characteristics are organized in Macro-trends and Focalized-trends.

Macro-trends cut across multiple industries, markets and geographies and they include:

  1. Frugality: consumer behavior has higher appreciation that less is more, recession makes consumer more thoughtful about expenditures and more socially and ecologically conscious. Household long-term savings increases.
  2. Less mobility, more virtualization: society has becomes more tech savvy and better able to communicate/work/play/visit/etc. virtually. Better knowledge of Apps (software tools) running on an ever-cheaper hardware. Home become a destination, home improvements and neighborhood activities capture part of the traveling and entertaining dollars.
  3. Human Capital will be plentiful: globally, competitively priced and well prepared ready to work remotely, in particular from the most punished areas by the pandemic in the emerging economies. Home-office work-tools are perfected.
  4. Gig Economy will grow: workforce on demand become a suitable option for many corporations substituting in place of full-time employees. Certain benefits will become available and baked-in the rates such as health insurance, unemployment benefits, etc.
  5. Market will enter a long-lasting bear market: money will be available as they leave the public markets, and available to fund startups. Funding sources will be highly selective, favoring those startups which have embraced the opportunities surfaced by the pandemic crash course.
  6. Price competition will be intense: post-recession firms will compete fiercely for every single consumer dollar across all industries/geographies. Margins will decrease, creating impetus for seeking new efficiencies and productivity gains, giving an additional stimulus to technology solutions lowering costs, reducing labor and improving quality, creating a renewed urgency of digital transformation initiatives.
  7. Global (previously unknown/unheard) actors will become fierce competitors: global providers, in particular those services which are part of the New Normal, will compete aggressively for every new opportunity.
  8. Globally interconnected and interdependent value chains will continue to grow: knowledge and supply chains are not going away, but new safeguards will be required. Redesigning and simplifying multistep supply chains and include redundancies with emergency sources closer to home. Rediscover the “local advantage”.
  9. Overhead and bureaucracy becomes unacceptable: our days in lockdown have proven, we can thrive being self-sufficient without all the perks of our business offices setting and made evident redundant services.
  10. Optional features become a must in the Post COVID-19 world: transparency, ecological responsibility, simplicity become a requirement and not simply PR or marketing slogans.
  11. The pandemic increased our focus in dependable health care, and the resulting lockdown into virtual education (at all levels from Pre-K to College): both will be under scrutiny to deliver the best outcomes and the best price-performing solutions to everyone. Both will emerge (including broadband internet connectivity) as basic human rights.

Specific Focalized-trends are industry sector, technology, market or geography specific, and they include:

  1. New technological advances are quickly adopted as competitive weapons: Digital Transformation, 3D printing, AI/autonomous, 5G, robotics (soft/hard), find their way into products and services to meet the new market demand in the new normal, and making local manufacturing competitive again,
  2. Strong brands which strategically provide sense of belonging and emotional proximity: brands that embrace empathy and meet aspirations aligned with the new normal, will increase a brand attractiveness,
  3. The consumer behavior already changed: Are your product/services meeting the new demands which are part of the new normal? Some examples of this new products/services are shown below:
    1. Contactless e-commerce
    2. Drone and autonomous delivery
    3. Delivery-only services and parcel protection,
    4. Health safety protection gadgets
    5. Telemedicine, home tests, wellness devices/Apps, etc.
    6. Autonomous diagnosis
    7. Accessing virtual caregivers
    8. Speaker bot companions
    9. Virtual communication, celebrations, culture forming activities
    10. Autonomous/virtual education
    11. Virtual coach/mentor for life/study/work
    12. Technology supported communities
    13. Market driven kindness and branded relief
  4. US Healthcare system disruption will be unavoidable: the pandemic has affected everyone with or without insurance coverage. Renewed focus on outcomes and price/performance. It will require the breaking of the incumbent market lock by the key players (physicians, hospitals, big-pharma, insurance companies, and others) and realign the per capita expenditures to the rest of the developed world (around 10% of GDP)
  5. Disruptive redesign of the educational system: blending public/private, virtual/physical, local/global, specific skills vs. human enlightenment and citizenship, academic/ apprenticeships, with the goal of making the students employable for life. College and universities re-design their transactional business model to become a life-time companion for constant re-skilling and personal and professional re-invention during the professional journey[6],
  6. Planning and delivering the religious experience will be different: while the dogma will depend of each individual religion, the actual planning and delivery will rely more on technology, freeing religious personnel for the spiritual needs of the congregation.

Business leaders, as they navigate the on-going COVID-19 crisis, will need to adjust their planning horizons into three phases[7]. The specific duration is the prevailing wisdom today under “average” conditions, but they may be optimistic, if the worst predictions became real. The planning phases are:

  • Planning Phase 1: dealing with the Coronavirus health crisis (2020 and most of 2021), represents the time to overcome the COVID-19 pandemic. During this great global reset period due to health concern citizens have been constraint to live in isolation, causing great economic damage in the aggregate. Eventually towards the end of this phase, social activity begins to resume. This Phase is followed by,
  • Planning Phase 2: dealing with the global recession due to the economic damage inflicted by the Coronavirus health crisis and the societal lockdown (2021/2022 and possibly 2023), represents the time to overcome the economic recession, while consumption begins to rise after the quarantine is rolled back after the COVID-19 health crisis. At the end of this phase, society is healed from the health and economic woes inflicted by the global pandemic.
  • 2023 and beyond, represents the time to reach a new normal in the world economy, assuming that no other global crisis was triggered during the recovery process.

The world was looking for an opportunity for a global reset. The corona virus certainly offered one of epic proportions. Difficult as it certainly is to rise above the current global storm, it remains an absolute truth that the pandemic increases our dependency on technology. Furthermore, it does reinforce the importance of innovation & entrepreneurial ecosystem around the world and the leadership of Silicon Valley and its companies we have greatly depended on during this pandemic: Zoom, Twitter, Google, Facebook, etc.

Part 2 - Schumpeter

A well-founded survival of the current crises is only worthy if the firm can emerge vibrant and competitive post crisis. Otherwise, as Schumpeter’s writings remind us, if a firm is destined to die, the sooner the better, releasing its resources to new and more productive sectors of the economy.

The future is now, and the opportunity is ours!

Until our paths cross again amigo – Carlos B.

[1] The global financial crisis (a.k.a. The Great Recession) began in 2007 with a depreciation in the subprime mortgage market in the United States, and it developed into an international banking crisis with the collapse of  the investment bank Lehman Brothers on September 15, 2008.

[2] The first iPhone became available to consumers on June 2007 and the first Android Phone on October 2008.

[3] Unicorn population is dominated by USA (60%) and China (15%), with a total unicorn population of about 400 worldwide… Probably shrinking today.

[4] Consumers routinely purchase health services without an a-priori knowledge of their prices and their potential outcomes, even for the most established procedures.

[5] Included Physical Education (PE) which was always excluded from virtual considerations.

[6] As life expectancy surpasses 100 for the current millennials, retirement-age will likely be pushed past 75 years old. This will require five or more re-inventions in their 50+ years professional journey.

[7] There is no certainty of the depth, length of the disruption as well as the shape of the recovery.

 

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COVID-19 A Massive Global Reset? Part 1

Capturing the Opportunities after the 2020 Pandemic

“Luck favors the prepared mind….” Louis Pasteur

The purpose of this blogpost is to look beyond the headlights of this ongoing global crisis and the global recession that is certain to follow and to uncover great opportunities awaiting ahead. As all prior crises, this will pass. However, the world will return to a new normal, which will be significantly different than the one prior.

“For some organizations, near-term survival is the only agenda item. Others are peering through the fog of uncertainty, thinking about how to position themselves once the crisis has passed and things return to normal. The question is, ‘What will normal look like?’ While no one can say how long the crisis will last and how deep will it be, what we find on the other side will not look like the normal of recent years.”

Ian Davis, Managing Partner, McKinsey & Co, Addressing the impact of the global financial crisis in 2008.

This is a three-part blogpost. This one (Part 1), sets the argument why the new normal radically departs from the old normal from the world as we knew it last December 2019. Part 2 discuss the characteristics of the new normal, and the business impact, and Part 3 (aka Appendix) will be a collection of thought about societal pressure points which have been gathering momentum across the world over the last few decades.

Runway, runway and more runway. These days, this is the most over-used word by us at our Alaya partner’s meetings and by our portfolio companies, as well as by other colleagues’ investors and VC’s. This advice, to prepare for the inevitable recession, requires Startups to go into survival mode and freeze all variable expenses, which include team cuts, salary reductions, hiring freezes, curtailing marketing, traveling, office rent, and every possible expense. No sacred cows!

Part 1-1However, the goal is not survival for survival’s sake, nor is it an exercise unimaginable just a few weeks ago, to disavow or renegotiate all prior commitments and contracts just because the crisis enables us to. The purpose of survival for as long as the global pandemic

Normality is when society behaves according to collectively accepted norms and operating protocols. The coronavirus pandemic will have long-lasting human and economic effects and will cause a massive global reset, during which most societal behaviors will be forced to change by replacing old habits and routines with new ones.

Habits are highly effective in helping us work, look after our families and pursue our life goals. As the lockdown (or “shelter-in-place” as it is called here in California) is applied everywhere around the world for multiple weeks, the world will sustain a shock never seen on this global scale. A shock of this magnitude will create a discontinuous shift in the preferences and expectations of individuals as citizens, as employees, and as consumers. These shifts will impact our routines; the very rhythm of our lives will change significantly, particularly in how we communicate, how we live, how we work, and how we use technology. All these elements will emerge more clearly over the coming weeks and months to form a new and complex equation. Success will favor those firms able to lead in solving this equation.

As consumer habits and preferences evolve, enterprises able to solve this equation and position themselves to exploit it effectively will disproportionally succeed and thrive. Clearly, the online world of contactless commerce could be bolstered in ways that adapt to and reshape consumer behavior forever. But other effects could prove even more significant as the pursuit of efficiency gives way to the requirement of resilience—the end of supply-chain globalization, for example, if production and sourcing move closer to the end user. Opportunities to push the envelope of technology adoption will be accelerated by rapid learning about what it takes to drive productivity when labor is unavailable. The result: a stronger sense of what makes business more resilient to shocks, more productive, and better able to perceive and deliver what customers wants.

The physical analog business world is being decimated in the current crisis, particularly traditional analog businesses including hotels, restaurants and airlines during this crisis. The digital world, however, is thriving. We are surviving through this pandemic because of technology. All of us sitting in our home-offices have a potent window to the world through the internet connection to our smartphones, tablets, laptops and of course our TVs (and our favorite shows in NETFLIX).

The aftermath of the pandemic will also provide an opportunity to learn from myriad social innovations and experiments, ranging from working from home to large-scale surveillance. With this will come an understanding of which innovations, if adopted permanently, might provide substantial uplift to economic and social welfare—and which would ultimately inhibit the broader betterment of society, even if helpful in halting or limiting the spread of the virus. Some of these virtual services include:

      • Autonomous/virtual education
      • Virtual celebrating with friends and family members
      • Digital corporate culture
      • Home aesthetics
      • Health safety protection gadgets
      • Telemedicine, home tests, wellness devices/Apps, etc.
      • Speaker bot companions
      • Tech communities
      • Accessing virtual caregivers
      • Market driven kindness and branded relief
      • Delivery-only services and parcel protection,

Practice makes us proficient! Many of new habits save us time, are more cost effective, enable us to reduce generational divides, or simply make our personal and professional lives better. Clearly not every new habit is a net gain nor are they necessarily more satisfying, but clearly in the post COVID-19 world we will have a richer set of options, which will include blending the new with the old.

Looking back 18 months from now, trying to explain the market mood in the days prior to the pandemic, it is likely to appear that global markets were looking for an excuse to have a massive correction. In addition, multiple change vectors, which have been building-up pressure across the world (see Appendix), were looking for the appropriate gathering storm to release their accumulated energy over the last few decades. Together, the COVAD-19 pandemic presents a breakpoint, a non-linear disruption from the world as we knew it before this crisis started few months ago.Part 1-2part 1 - quote

The corona virus offered the opportunity of a Global Reset. Difficult as it certainly is, to rise above the current global storm, it is a must. But survival for survival sake is not an option, survival only makes sense if we can emerge from the crisis re-invented, vibrant and dynamic, as protagonist in a future we have actively participated to re-imagine.

Until our paths cross again amigo – Carlos B.

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An Optimistic View of the Shelter–In–Place Order

Conditions brought about by the COVID–19 pandemic here in the United States and throughout the world are forcing dramatic behavior changes that were unthinkable months or even weeks ago. We had a first taste of these conditions last year when we experienced multiple days of power interruptions, due to the massive fires, here in Northern California. However, those conditions, difficult as they were, were geographically targeted, lasted only a few days, and minimally impacted our social interactions (at least during the day). Additionally, those with economic means could “escape” to other areas away from the smoke and power interruptions.Optimistic View Shelter-in-Place

Now, these “escape” opportunities do not exist. We are all affected. All socioeconomic classes, ethnic groups, races, and religions are equally impacted, and no one can change the outcome. Furthermore, we do not have anywhere to go, as the COVID–19 virus pandemic is now global, and our movement is generally restricted. Fear also plays a role here, as the lingering threat of an invisible and highly contagious virus that renders powerful nations like China or Germany somewhat hopeless can be overwhelming.

As our businesses close and new edicts require many of us to work from home, we are forced to reevaluate and perhaps amend our behavior in multiple ways, and our routines are greatly impacted. Amidst all these changes, I propose we consider many positive aspects:

  1. We’ll have more free time. Many of our daily movements––including commuting, shopping, visits to the gym, movies, bars, coffee shops, et al––have been restricted by fiat, resulting in a net gain of several hours a day, available to be redeployed to other activities.
  2. We will spend more time indoors. Most of us will be spending inordinate amounts of time at home, giving us a unique opportunity to rediscover the people with whom we share our roof, or even those with whom we share walls or fences. We’ll have opportunities to reacquaint ourselves with all the stuff we have accumulated in our closets over the years and decide what we *really need*. We’ll be able to reconnect with our relatives, close or distant, who may be facing challenges during this crazy time. We have an opportunity to let go of our grievances, evaluate what is essential, and express our solidarity and genuine concern with others who need our support the most.
  3. Fear of the unknown will cause us to reevaluate relationships. The fear generated by this pandemic will impact all of us to some degree. Some of us may fear the potential health impacts, while others will also fear the financial and/or investment losses. As we all are impacted, it may be worth reevaluating our social connections and helping us to rediscover our communities as a new sources of strength, as the best antidote to our fears.
  4. Staying at home does not mean we have to be unhealthy. We don’t have to reduce ourselves to vegetative states. Actually, we can eat healthier (and more cheaply) at home than outside of our homes, we can also sleep that extra hour that was never available, exercise, and improve our lifestyles generally.
  5. We can use the extra time to reconnect with our inner selves, or our spiritual and religious beliefs, as most of us crave for meaning and purpose in our lives. Hopefully we will not succumb to binge watching Netflix…, enjoyable as it could be. I say this because it is my conviction that many of us desire, as Aristotle taught, “a life well lived”, which transcends ourselves by being part of something bigger, greater, and more perfect.

YES! Our lives have been disrupted, our world has been turned upside down, and it is likely that, in the wake of this pandemic, the world will not be the same ever again. I urge that we embrace this transformational opportunity proactively, and the net result will be healthier minds, bodies, and relationships.

Until our paths cross again amigos – Carlos B.

Note: Keeping a diary of our daily activities during this shelter–in–place order will keep us accountable of how we use our newfound daily free time.

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Completing The Latin American Innovation And Entrepreneurial Ecosystem

The Latin America entrepreneurial ecosystem has developed significantly during the last decade. Today, Latin American entrepreneurs can benefit from multiple financing alternatives from both public and private sectors. The Latin American ecosystem has proven to be a fertile ground for the creation and development of startups of great potential and substantial global impact [1]. Ecosystems across the LatAm region are maturing/gaining global recognition, and their compelling solutions are tackling world markets. Their innovations, product/service development capabilities, marketing, finance or supply chain management compete neck–in–neck with the innovations of far more developed ecosystems. Supporting this effort, investors (venture capitalist, angels, et al) have invested, often leveraging public funds in the ballpark of hundreds of millions of dollars.

For all this progress, investors are anxiously hoping that their investments will be rewarded with successful exits of their portfolio companies in the future, obtaining great multiples and promised returns to their LPs (limited partners). This aspiration has yet to fully materialize, and until it does, LatAm emerging ecosystems will remain incomplete [2]. Furthermore, frequent successful liquidity events across Latin America will have the effect of truly giving shape to LatAm entrepreneurial culture, compelling organic startup growth and attendant societal lifestyle changes.

Completing the LatAm ecosystem will require the development of a vibrant market of global buyers and sellers. This is a challenge not a single stakeholder can solve. The solution will emerge when, collectively, multiple stakeholders recognize the importance of the Exit issue––giving it the visibility/priority it deserves and working together to conceive a shared solution that “tropicalizes” best practices.

Supporting this transformation, our firm, Alaya CP, and Magical Startups are co–sponsoring a first gathering of its kind in Santiago (Chile) next week [3], which we hope to institutionalize as an annual LatAm event. Exit Day aims to collect experiences/insights and share best practices from international players tropicalized to Latin American ecosystems. Furthermore, we hope that Exit Day [4] will emerge as a convener of future buyers and sellers and an annual M&A forum for stakeholders in LatAm innovation and entrepreneurial ecosystems.

Our objectives are to maximize exit opportunities by:

  • Sharing insights and experiences among local and international Angels, VCs, and PE funds.
  • Collaborating to design and adapt best practices, as well as implement exit strategies for Latin American startups.
  • Convening and connecting Latin American sellers and global buyers.

The promotional brochure for the event consists of the following two images:

As I identified in my prior blog post [5], Latin America has made significant progress along most startup development dimensions, including product development, marketing, finance, and supply chain management. LatAm entrepreneurs aren’t just birthing intriguing conceptual/informal businesses, but are often creating full–fledged enterprises that are increasingly gaining global recognition. However, the ultimate testimonial for LatAm entrepreneurial success will be when exits become ordinary events.

Of paramount importance here is that entrepreneurs and VCs are aligned around their exit objectives, timing, and possible suitors. It is only after this alignment of mindsets that the hard work of managing successful startup exits can truly begin.

With these considerations in mind, I will briefly delineate steps for facilitating successful exits—which will be one of selected topics covered at next week’s Exit Day event. To ensure a successful exit, a startup firm must:

  1. Perform a readiness review 18 months before its intended time of exit. In fact, it is my view that startups should be “born exit–ready”. Moreover, startups should run due diligence simulations across all areas of the company need to meet the most exhaustive auditing standards. In particular, startups should ensure that they are complying with all accounting, tax, human resources, and legal guidelines in all jurisdictions where the they operate. This could be particularly challenging in Latin America, where legal guidelines are often loosely enforced by both local and national governments. This type of situation could become difficult to explain to global suitors or may require contingency plans that improve exit viability.
  2. Demonstrate future potential to possible new owners. Here, the founding team should focus on value–adding performance improvements that accelerate value creation while preparing for the exit and beyond.
  3. Search and identify venues where they may readily identify promising potential buyers. Successful firms have already reduced to a science—namely through a variety of sophisticated channels and marketing modalities—methods for efficiently acquiring customers for their products and/or services. Finding prospective buyers of companies, however, is entirely different: to be successful at this task, startups must be prepared to unlearn approaches for the former and become far more opportunistic.
  4. Prepare to disclose and actively manage unpleasant surprises and give forthright answers to buyers’ difficult questions. Startups that take this advice seriously may drastically improve their chances of awesome exit outcomes––namely by decreasing the risks of exit process derailment and ensuring that suitors will be able to appreciate the full values of their prospective investments.

See you next week at the Exit Day event, or until my next post… – Carlos B.

[1] There are several examples of Latin American Startups that have gained global recognition, including Mercado Libre, Despegar, Paperless, Globant.

[2] This topic is fully developed in my last blog post: https://carlosbaradello.com/2018/07/25/latin–american–innovation–and–entrepreneurial–ecosystems–will–be–incomplete–until–exits–become–ordinary–occurrences/

[3] Hotel DoubleTree, Av. Vitacura 2727, Las Condes, Santiago, Chile.

[4] We have secured the domain www.exitday.org, which will be the future web site for this event.

[5] https://carlosbaradello.com/2018/07/25/latin–american–innovation–and–entrepreneurial–ecosystems–will–be–incomplete–until–exits–become–ordinary–occurrences/

 

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Latin American Innovation And Entrepreneurial Ecosystems Will Be Incomplete Until Exits Become Ordinary Occurrences

Introduction: Incomplete Latin American Ecosystem

From Chile to Mexico over the last decade, the Latin American Region (LatAm) has joined the Global Entrepreneurial Revolution in full force. Inspired by entrepreneurial developments in Chile––including the now notorious Start–Up Chile seed/acceleration program launched almost a decade ago––comparable government–sponsored innovation programs have sprouted across the LatAm region. Enlightened public/private partnerships have included different actors in the ecosystems, namely two: (a) a myriad of new government regulations strengthening the emerging ecosystems and facilitating the formation of young ventures in the formal economy, and (b) the availability of venture capital from emerging funds and individual angel investors or groups thereof.

Over the past two decades, I have had the privilege to observe these developments due to my multiple connections with many actors in the public, private, and academic sectors across the region. Furthermore, the formation of Alaya Capital Partners [1] (Alaya CP or ACP for short) in 2012 and its sister US–based company, Sausalito Ventures, has enabled conversations with hundreds of potential Limited Partners, and probably thousands of founders of young companies, which consist of ventures still in their ideation stages to firms that are fully established. Furthermore, my location advantage of being based in the San Francisco Bay Area/Silicon Valley enables me to compare, contrast, and connect disparate trends and opportunities, bridging the ecosystems and exploring new opportunities across the Americas.

Alongside Alaya CP, there are approximately 50 VC funds in the LatAm region (45 of which are LAVCA [2] members), mostly in Mexico and Brazil. The emergence of VC funds in Latin America began in the early 2000s, and accelerated in the mid–2000s, particularly in Chile. Over the last 10 years, the pace has continued to grow and expand to all geographies, in particular Argentina, Chile, Mexico, and Brazil, and other parts of Latin America.

For all this progress, a critical element is missing in the LatAm ecosystem development: the exits.

The exit market continues to be immature for two reasons: reluctant international buyers and ill–prepared local/regional buyers. In this blogpost and the blogpost that follows, I will (i) identify the problem statement of the “missing exits,” which puts the sustainable growth of LatAm ecosystems in jeopardy, and (ii) refine the problem statement illuminating some potential solutions.

Problem Statement

Over the next 3–5 years, dozens of VC funds will have an approximate total of 100+ Latin startups that are “exit ready” and seeking potential buyers. If successful exits do not materialize significantly in quantity and quality over the next decade, this will represent a lethal blow to the embryonic LatAm VC industry. Its future development would be uncertain, as VC fund administrators will face increasing challenges raising future funds and persuading LPs of the attractiveness potential of their investment theses.

Problem Analysis

The diagram below illustrates the developmental steps of a venture, beginning with the venture’s idea phase and proceeding to its transformation into a fully–fledged business.

Stages (New)

The mortality rate diminishes monotonically as we move from the ideation phase (–2––mortality close to 100%) into each successive transformational phase, reaching a fully–fledged ongoing concern in the growth phase (3– with amortality probability greatly reduced). During the early formative phases (–2 and –1), the founding team borrows, begs, and “steals” resources and invests their sweat, with the hope that its effort will eventually translate into actual economic value. By Phase 0, family, friends, and angels (FFF & Angels) become the first investors of the emerging venture. Somewhere in between the validation and the growth phases (1 & 2) is the time when funds like Alaya CP and other VCs invest. Typical valuations of Latin Startups, require VC investments (or group of VCs) somewhere between $150K to $500+K dollars for anywhere between 5 and 20 percent equity in the emerging venture [3]. Once the product or service is validated in a specific market (after Phrase 2 and Phase 3), the venture may require additional funding to support its market expansion and possible global scaling (Series A and beyond). By the time the venture reaches Phase 3, the venture transformation is complete from an idea (phase –2) to an attractive business, and is now hopefully an attractive acquisition target [4]. This constitutes the exitor liquidity event, enabling all those who have invested sweat or money to cash out and hopefully multiply their initial investments by large multiples [5] for the FFF, Angels, and VCs. Of course, the founding team and the employees who received part of their compensation in equity, are rewarded handsomely here as well.

Refining The Problem Statement

The need to identify buyers (local, regional or global) and successfully complete transactions for dozens (possibly over one hundred) Latin American startups which will be “exit ready” over the next 3 to 5 years, with valuations somewhere in the range between $10MM to $30MM US dollars.

The next question is how such a high volume of transactions will materialize. It is important to recognize that their sizes ($10MM to $30MM US dollars) are out of the range of transactions usually processed by established/traditional investment bankers, whose processes are optimized for transactions which are at least one order of magnitude bigger (or more). Transactions over $100MM dollars can support fees in the range of millions of dollars to compensate the sell and/or buy sides investment bankers, lawyers, accountants, tax specialists, and other players supporting these transactions. Clearly, Latin American startup exits cannot support these fees as they would represent transaction costs in excess of 10%.

LatAm VCs are compelled to identify creative out–of–the–box solutions to support the quantity of transactions efficiently, with a new breed of investment bankers and all the supporting functions leveraging technology and innovative business models.

Finally, LatAm VCs need to work closely with their portfolio companies starting at the moment of investment to have them “exit ready” at all stages of their development. Their accounting and governance need to be in full compliance of the local rules and the USA (particularly Delaware) to be ready to global suitors. Latin American startup founding teams need to persevere in their journeys to develop their ventures to sell them, balancing the goal of monetizing their product/services (and generating greater revenue returns) with the goal of selling ownership of their ventures. The latter goal could be particularly traumatic for many Latin entrepreneurs, since they have a propensity to personalize their ventures (as their babies).

I am confident this challenge will be solved. The progress made so far in the development of entrepreneurial ecosystems across the LatAm region is without a doubt impressive. However, it is now clear that there is a need to identify efficient solutions enabling the completion of the key missing element of LatAm entrepreneurial ecosystems: the development of a market of companies leading to successful exits.

My next blogpost will identify solutions (and their sub–elements) to the challenge identified in this post––in particular the process of Completing The Latin American Entrepreneurial Ecosystem.

Until my next posting – Carlos B.

Deal Volume

[1] Alaya CP was the first venture capital fund formed in the interior of Argentina (outside Buenos Aires).

[2] The Latin American Venture Capital (and PE) Association, of which Alaya CP is a member. LAVCA publishes a valuable index, the 2017/2018 LAVCA Scorecard, ranking the state of development of the Latin American Private Equity/Venture Capital markets. A more comprehensive list of indices and rankings (updated this for 2018) can be found at the Sausalito Ventures web site.

[3] Establishing a range of pre–money valuations between $750K and $10MM US dollars. The sweet spot are companies with products and/or services (v 1.0) starting to gain traction with paying customers. These startups command a typical pre–money valuations in the range of $1MM and $3MM. Convertible notes are vehicles increasingly used to postpone the need to establish the value of young startups in early developmental phases.

[4] Acquisitions are more likely for Latin American startups over the next 5 years. IPOs are not ruled out, but they are not addressed as they are considered unlikely, and if it happens it would be a singular event.

[5] These are the expected returns of Latin Startups. Obviously, funds like Alaya CP aim for the highest possible return, aligning the interests of the founding team, FFF, Angels, and other co–investing VCs.

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Reflecting on Grapes and Wines: Any imminent disruption?

A couple of weeks ago, I had the opportunity to spend a day in Sacramento at the Unified Wine & Grape Symposium (Jan 23-25th 2018). It was a fascinating experience. I have participated in dozens, and possibly hundreds of, conferences and industry trade shows around the world. However, this conference was different in almost every respect.

For starters, all other gatherings I had participated in related to IT — i.e., some emerging technology in telecommunications, information processing — or related applications. Historically, most of the gatherings I have attended reviewed wholly disruptive products or services that rendered prior offerings obsolete. Furthermore, the products or services at these gatherings were almost always “man-made” sans the direct, explicit participation of mother nature. In most cases, the climate at these gatherings was showy––with multiple languages often overheard in the hallways and Wall Street suits visibly present. Most products or services detailed were only a few years old, and anything beyond 5 years old was definitively a “museum piece”.

Wine, often, gets better and more expensive with age. The industry is only a few thousand years old. Furthermore, the grape and wine business is an important part of the economy, particularly here in Northern California. In the US, it is about a $60B per year industry, and here in California, represents 60 percent of the US, and several hundred billion dollars worldwide. Wine consumption worldwide is growing at a faster clip than the global economy, and the average unit bottle price is shifting to premium brands (over $15-20 dollars per bottle).

Furthermore, while the United States (US) leads in the rankings of wine consumption, other countries lead in production. The table below highlights the top 10 largest producers and consumers of wine[1].

Wine Table
The US leads in wine consumption but not in production

The wine industry is also unique in that, while the US dominates most IT (information technology) sectors, European countries (Italy, France, Spain, etc.) not only are the leaders of wine production, but historically have brought forth and advanced the industry’s leading technologies. They have exported their know-how, mostly via emigration[2], to the US and to most of non-European countries, with the exception of China. Wine consumption (and production) in China is a recent phenomenon in part facilitated by globalization and the continued expansion of the country’s middle class. Other emerging countries exhibit the same trend, showcasing a high correlation between middle class enlargement and demand for wine consumption.

Nature dictates the tempo of the industry. Grapes are harvested once a year and wine production is followed by an aging process which may last from a few months to a few years. Tradition and experience dominate this process, while science and technology has played an increasing role in adding value, reducing costs, and increasing quality and efficiencies across the value chain in the last century, particularly in the last several decades, post WWII.

Incremental innovations[3] galore was my first broad impression perusing the booths of the Unified Wine & Grape Symposium trade show. The range of products on display was mind-boggling, from disparate fertilizers and agriculture machines to advanced tools and bottling labeling equipment. Suppliers for every step of the value chain and every imaginable service was on display. My own professional formation (or deformation) was to look for those disruptive forces3 that would have an impact xN (multiples of N>1), and I really had to look much harder to find those.

Identifying these critical emerging disruptive forces, in general, was not a different task from identifying the disruptive forces of any other industries. I have highlighted these below for your review:

Disruptive Vectors (final)
15 Disruptive Forces Pounding on the Incumbents. A larger version of this table is available at: https://carlosbaradello.files.wordpress.com/2018/02/disruptive-vectors-final.jpg

My observations at the Unified Wine & Grape Trade Show elicited the following disruptive insights:

  1. IoT is slowly penetrating different elements of the value chain making possible to start talking of a “connected” vineyard or winery:
    • Precision agriculture is enabling 2, 3, 4 and 6, among others. First examples of managing water, fertilizers, growth rates, etc. are becoming available.
    • Various key building blocks of the wine-making process (such as pumps, sensors, flow meters, et al) are becoming wirelessly “connected,” enabling dashboards and automation; enabling 3, 6, 8 and 11.
  2. Software platforms are emerging to enable end-to-end management from the vineyard through production, distribution, and logistics. This is enabling 2, 4, 6, 9 and 10.
  3. Direct-to-Consumer (DtC) software and Apps, enabling disintermediation (1), connecting with the consumer directly. Furthermore, this new distribution channel enables a steadfast gathering of information about consumer tastes and preferences (4) to anticipate (8) and personalize (9) the experience, enabling increases in loyalty and revenue. Tasting rooms, wine clubs, apps, et al all play a role here.
  4. Work-in-process efficiencies and monitoring. For example, improving the aging process as it becomes dramatically reduced by using new oxygenation technologies,

CBInsights has developed the map shown below. The map identifies a list of Wine Tech companies entering the space targeting one or more areas of disruption. While it is easy to dismiss very traditional millennia-old wine industry, it seem it cannot escape the lure of technological innovations. Examples range from wine subscription services to rating apps, startups in the space are innovating more than ever before. Connected corks and bottles are starting to emerge, as well as algorithm-based recommendation features to better match personal tastes to wine.

wine-tech-map.jpg

Wine Tech Market Disruptors (source: CBInsights)

Comparing the Wine Tech market map constructed by CBInsights with the list of exhibitors at the 2018 Unified Wine & Grape Symposium, none of the 50+ companies could be found in the exhibitor’s list. This is intriguing… Could it be that they are on the waiting list of floor space for future Unified Wine & Grape Symposium trade-shows, as an executive at one of the incumbent companies responded? Or is it just possible that they are showing their wares at new trade-shows where the disruptors and the early market adopters attend? Provocative as it sounds, I lived through a very real experience in my professional journey, as data communications and eventually the internet created their own venues and conversations away from traditional, century old telecommunications industry trade shows, which were centered on voice communications. This is a far-fetched analogy, but could it be true?

While we are still a while away from dial-a-wine, nutraceutical[4] wines or a complete synthetic wine home production[5], there is no room from complacency. I say this not because of my expertise on the wine & spirit industry, but because of my conviction that the digital transformation is creating the perfect storm for each incumbent, in each industry. Each one individually or as part of a tectonic shift in its industry, and at its own time will be unable to scape and will likely face its own deconstruction and re-construction over the next decade. Disruptive forces will pound on the incumbents, and it will be compounded due to global competitive pressures, all vying to get hold of their revenues and profits.

Until my next post – Carlos B.

[1] www.wineinstitute.org

[2] Italian, French and Spanish catholic missionaries were often the technology transfer agents bringing the know-how of growing vineyards and wine-making to new lands across all continents, beginning in the 1600s through the early 1900s.

[3] Incremental innovations expected improvements are about N% while disruptive innovations provide xN improvements (for example, 5% versus 5 times better performance)

[4] While the health benefits of wine are widely known, the nutraceutical food and beverage industry is still nascent.

[5] Analog to the way 3-D printing has disrupted the manufacturing, logistics and retail industries.

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Reflecting on our journey building the first VC fund in Argentina’s interior

Nov 2017 -- 1 - CopyIn 2011, I was one of five general partners (GPs) who joined[1] forces to start Alaya Capital Partners in Córdoba, the capital city of Argentina’s interior (and my home city).  Just last Thursday (11/16/2017) at the Alaya Investor Day, we announced a new goal to have US$100MM dollars under management by 2022, capping a decade-long journey.

And what a bumpy ride it has been!  Given our unprecedented announcement a couple of weeks ago, I wanted to take the opportunity share with you the areas that I thought we got right, got wrong, and other areas where we clearly misjudged market and government signals.

What We Misjudged

Nov 2017 -- 2 - CopyAmong the most successful tools to stimulate entrepreneurial ecosystems are government programs that provide matching funds to facilitate venture capital (VC) formation (as has been the case in Israel and Chile, among others). As we launched our first fund (Alaya I) and formed Alaya in 2011, we expected to promptly receive matching funds from Córdoba’s provincial government that never materialized.  Unfortunately, we failed to appreciate that these promises made to us by Córdoba’s provincial government suffered a six year delay.

In retrospect, it’s hard to imagine a more challenging time to launch a VC fund in Argentina than 2011.  The years that followed Cristina Fernández de Kirchner’s second term landslide general election victory in 2011 were among Argentina’s worst ever in terms of sociopolitical isolation, rule of law, and economic malaise.

Nov 2017 -- 4Nonetheless, we persevered.  We were extremely fortunate since all of Alaya I’s limited partners (LPs) were from Cordoba, who were well aware of the difficult climate and stuck with us.  We also earned our LPs’ goodwill by investing alongside them[2] and by taking a meager (by market standards) management fee of 2.5% that wasn’t sufficient to cover our basic fund expenses. Alaya I ultimately invested in seven startups.  These difficult circumstances over the ensuing years tested our team, and, since we refused to quit, led us to redouble our commitment to the fund.

What we got Wrong

As we rushed to invest in Cordoba-based startups, it was inevitable that we would make mistakes despite our best intentions. Originally, our investment thesis was that local startups (from Cordoba) would scale well beyond Argentina and Latin America, into North America and other global markets. This actually never happened.  These companies’ value propositions, financials, and their founding teams’ skills were simply not optimized to grow beyond Argentina’s borders. Few attempts were made to reach beyond Argentina into Brazil, Chile, and other Southern Cone countries; for the most part our initial portfolio companies, remained local businesses. We naively thought that, given the right selection process (which focused on team and scalable value proposition), we would be funding scalable ventures.

We have learned many lessons since our first investment in Translation Back Office in 2012.  We were happy that none of our portfolio companies died (died fast/fail forward).  However, we now recognize that our selection process was far too conservative, and our co-founders too local.

What we got Right

We faced significant headwinds, but we did several things right.  Alaya was and remains investor-focused.  We have conducted Alaya from day one with uncompromising integrity and ethics. Also, since investment performance is key, we have concentrated on the development of our portfolio companies. However, the support that we provided to these portfolio companies was unbounded and our advice often came across as too paternalistic, disobeying the Darwinian first principle of entrepreneurial ventures (“survival of the fittest”).

Alaya CP, had a visible impact in the local Cordoba innovation and entrepreneurial ecosystem and many provinces of Argentina’s interior. We collaborated tirelessly with the local six universities, think tanks, Endeavor’s local chapter, other NGO’s and government agencies. Today, Cordoba the intellectual capital of the early 1900’s is regaining its position leading the startup revolution in Argentina.

In late 2015, Mauricio Macri won Argentina’s general election signaling a dramatic change in the country’s leadership after 12 years of the Kirchner’s.  While Macri started to implement his new economic agenda, we at Alaya were eager to take our lessons learned and launch a second fund (Alaya II).  At around that time, we crossed the Andes from Argentina into Chile to participate in Chile’s leveraged fund program (x3) for early stage companies. The qualification process was arduous and took a full year to meet the multiple demands of CORFO (the Chilean Government’s economic development agency).

Nov 2017 -- 5Finally, in late 2016 we received CORFO’s approval and Alaya II was funded with $4MM of private investment and $12MM of Chilean leveraged funds. Today, our $16MM fund is on its way to become first a $20MM, and eventually by the end of next year, as large as $25MM, with its potential x4 leverage, if certain performance conditions are met.

Alaya II, has, by all metrics, been a resounding success. Alaya opened its offices in Santiago and hired a team there, and eight investments (more than over Alaya I lifetime) will be realized by the end of this year (2017 – Alaya II first year of operations).

Alaya

Mariano Mayer, Secretary of Entrepreneurship and SMEs of the Production Ministry of the Republic of Argentina

Now that we’re two years into Macri’s term (and two years into Cordoba’s business friendly governor’s term), our national and provincial governments are now finally catching-up with the global startup revolution.  Our new leaders’ rational management style, the reduction of corruption and clientism, and Argentina’s brand new Entrepreneur’s Law have combined to create an unprecedented startup friendly environment. Alaya intends to participate in many of these programs. But something else is happening: after a decade of being compared in the same breath to Venezuela and Cuba, Argentina is now distinguished with optimism and anticipation of an epoch of growth with emphasis in innovation and opening to global markets. Recently, Alaya has launched a corporate acceleration program with an emphasis on developing an open innovation platform for the leading Argentinean companies based in Córdoba.

The Alaya team now extends from Córdoba to Buenos Aires, Argentina; Santiago, Chile; and Sausalito, California (San Francisco Bay Area). Our team is strong, diverse, and battle-tested.

We are confident in our ability to perform in periods and geographies of extreme uncertainty, deal with the ambiguity that characterize the emerging Latin American economies, and also called by innovative businesses embracing new technologies, or supporting the global growth of our portfolio companies. However, one key milestone remains elusive to definitively prove our team: its ability to exit its portfolio companies with high multiples. Alaya is at the mid-point of its first decade and, for some of our investments, “Exit Time” is rapidly approaching; when we do finally exit, and return multiples to our LPs, it will be among the happiest blog posts I’ve ever written!

Until my next posting – Carlos B.

[1] Mario Barra, Oscar Guardianelli, Omar Vega, and I were the initial GPs and Luis Bermejo (Managing Partner)

[2] The GP’s commit to invest 20% of the total fund capital.

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Reflecting on the Giga-Unicorn Opportunities Offered by the Health Care Business

I often engage in light hallway conversations with my students in between classes. Recently, while discussing the wealth accumulated by some tech entrepreneurs, I said half-jokingly that we didn’t have any trillionaires yet…

Actually, since the heydays of the modern-day pioneers of the Silicon Valley, it has produced hundreds of billionaires, a selective group of several dozen actually have accumulated tens of billions, and probably a few are pushing the 100-billion-dollar mark…but no trillionaires yet.

This reductive measure of success — the financial metric — will likely add a new trillionaire benchmark in the coming decade, but this coveted space will, in my estimation, be reserved for those select entrepreneurs able to finally disrupt the health care industry in the United States first, and then globally.

For starters, Americans are getting a rotten deal in health care. While American citizens spend over twice as much in health care (about $10K dollars per every American) than their French, Italian, Canadian or Australian counterparts, Americans are not living twice as long; in fact, they are living less[1]. By all measures of the market economy, this is the perfect definition of a rotten deal. More often than not we are prepared to spend more to get more, but not to get less. Presently, the debate over health care reform occupies a central place in our public discourse, yet three critical issues remain silent:

  1. About the services that should be provided to every American, the answer seems simple: why not provide to everyone the same health care services that our congressmen and senators enjoy? I have never heard them voice concerns about pre-existing conditions, premium hikes, lifetime limits, or the services they enjoy for themselves and their families. So the benefits question seems settled. If they are our representatives from the people, by the people, and for the people, what is good for them should be good enough for the rest of us, as well, right?
  2. While most industries have enjoyed huge productivity increases during the last 4 decades as a result of the introduction of new technologies across all segments of their value chains, health care costs have continue to rise higher than inflation. More alarmingly, this industry has not produced any consumer surplus, as has been in the case in other industries — in part due to regulation, in part due to the massive size of the health care industry and the power of its lobbying effort. The latest statistics put health care expenditures in the US at pushing close to 20% of GDP, or about $3.4 Trillion in 2016, growing at a pace close to 6% annually[1]. In other words, the US health care economy, if a nation, would comfortably have a seat as a member of the G7, and it certainly would have been part of the G20 meeting last week in Hamburg, Germany.
  3. I often wonder when price lists for the most common services will be published and visibly displayed in our medical waiting rooms or on the web sites of our health care providers of choice. Or when we will be able to enjoy comprehensive rankings of disparate medical specialties in much the same way we are able to enjoy rankings of restaurants, or auto mechanics. Obviously, those providers in my neighborhood offering best-in-class services (5 stars) at the least expensive prices (single $ sign) with over 500+ reviews (quality assurance) will suddenly enjoy a competitive edge!

Presently, most medical treatments are marketed as kinds of art forms, rather than     as routine, often technologically-driven processes. Why? Because, to justify high costs, medical practitioners need to emphasize the uniqueness of individual anatomies and circumstances, and de-emphasize the inconvenient fact that 90% of bone fractures, mole removals, and dental cavities are treated in the exact same way. This marketing dynamic is further facilitated by a widely shared natural fear of death, or at least our aversion to pain and suffering. In other words, we allay our qualms about overpaying with the justification that ‘it’s our unique life’.

At a time where disruptive technologies mimicking human knowledge[3] are applied to disparate domains, such as self-driving vehicles or human tissue/organ image diagnoses (radiography/ pathology), we should rightfully wonder how many ‘low hanging fruit’ in the health care are ready for disruption.

Every day, millions of tissue samples, biopsies, x-rays, CAT/MRI/PET scans, et al are diagnosed by highly paid professionals throughout the world. I deeply believe that all that human talent should be liberated from the boring and repetitive task of diagnosis so that they can make higher value added contributions to medical science and in consequence to society. It is my hope that this will both (a) significantly improve our health care space at a superior price-performance point, and (b) empower medical professionals to migrate to new frontiers of health care, thereby enabling higher contributions to health care and to society.

Along these lines, I am calling for the world’s first trillionaries[4] to search for interesting market entry points and compelling value propositions, supported by innovative business models to disrupt specific sectors of the health care industry. Myriad innovations that break information and knowledge asymmetries will finally bring the democratization that has disrupted many other industries to health care. A global market of 8 Billions consumers by 2026 and 9 Billions for 2042 — all with the same bones, organs, and for the most part the same health care needs – are awaiting your irreverent disruption of the health care status quo.

Who wants to be a trillionaire?

Until my next posting – Carlos B.

[1] According to the OECD, the life expectancies at birth in Australia, France, Italy, and 22 other OECD countries all score over 80 years, while the US just scores 78.9 years. https://data.oecd.org/healthstat/life-expectancy-at-birth.htm.

[2] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-02-15-2.html.

[3] Artificial intelligence (AI), Big Data and Machine Learning are just a few of those emerging technologies.

[4] A reductive benchmark, to be clear, because not all contributions to society can be measured monetarily or in terms of accumulated wealth.

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