Guest Articles

April 10

Daniel Cossio

Revenue Over Rounds: Why We Should Encourage Entrepreneurs to Focus on Revenue Before Fundraising

Before the fallout from coronavirus sent a wave of uncertainty into venture capital around the world, 2019 was a banner year for startups in Latin America. Kaszek Ventures launched a $600 million fund over the summer to build on their success launching billion-dollar companies like Nubank and Loggi. Japan’s Softbank arrived on the scene with a $5 billion fund — instantly doubling the size of the region’s VC market.

Things have slowed down for obvious reasons: VC investors have either an aversion to uncertainty, or have moved to take advantage of the downturn. But even during this crisis, Latin America continues to emerge as a global hub of high-growth tech innovation. And as entrepreneurs continue to lead in their response to the massive economic, social and health care-related challenges exposed by the virus, wise investors are continuing to look toward long-term value creation.

As leaders in the Latin American startup community, we need to ask the question: Could all this new money interested in our market — and the valuations that will surely come with it — be a good thing for Latin American entrepreneurs? As economists say, it depends.

On the one hand, entrepreneurs we speak with are breathing a sigh of relief that investors on the world stage finally see the potential for innovation in growing economies like Brazil, Mexico and Colombia. Venture capital can help Latin American startups scale to other countries in the region, and partner with startups in the United States and Europe.

But there is a danger that Silicon Valley-levels of funding will bring with it Silicon Valley-level market distortions. All this money pouring into the ecosystem could incentivize startups to scale too big, too fast — and lead to the kind of high-profile flame-outs that we have seen recently, from WeWork in the U.S. to in China.

As investors and entrepreneurship leaders, if we want to see the startup ecosystem in Latin America succeed, we need to learn from the mistakes of Silicon Valley. We need to push back hard against the growth-at-all costs mentality and come up with an alternative definition of startup success.


Growth at all costs

There has been a lot of conversation recently about the dangers of growth-at-all-costs entrepreneurship. Commentators have criticized Silicon Valley’s culture of “blitz-scaling” and even coined a term, the “foie gras effect,” to describe the way that investors, hungry for high valuations and exit opportunities, end up force-feeding cash to entrepreneurs.

We’ve seen how this plays out. Some startups see wild success and become billion-dollar unicorns. Many more startups flame out well before they become household names. Stuck on a treadmill of seeking more and more funding, they fail to generate enough revenue to justify their rounds.

WeWork is a recent example. Our team works out of the WeWork location in Mexico City. We appreciate the company for what it is: a convenient workspace for small teams to rent without worrying about things like refilling water or wifi connection.

But WeWork’s previous leaders — and their investors, including Softbank — had grander visions for the company. Fueled by billions of dollars in venture capital cash, WeWork overplayed their hand, opening hundreds of locations in just a few years (our office is one of nine in Mexico City alone). When they couldn’t make the math work, investors panicked. Even a few weeks ago, many of the spaces in our office building sat empty.

It’s easy to forget, but the purpose of a venture-backed startup is not to raise money for the sake of raising money; it is to develop and sell a product that serves a particular need, and then grow to be financially sustainable by selling that product at scale. Venture capital money should be a means to an end, not an end in itself.

Maintaining that delicate balance rests, at least in part, with investors.


An inflection point for Latin America

Coronavirus notwithstanding, Latin America’s startup ecosystem is at an inflection point. The region’s “unicorn era” has already arrived: Brazil had five new billion-dollar valuations in 2019 alone. That means that the “grow-at-all-costs” era has arrived as well.

I’ve seen this mentality more and more in recent years. At Village Capital we work with startup founders when their companies are still young, in the process of raising their seed or Series A round. It’s a critical moment in the lifecycle of a company — the first time they get on the “venture capital treadmill.”

When these founders arrive at our accelerators, many of them have the same question: “How can you help me raise funding?” They don’t always know why they are raising; in some cases, they feel pressured to raise because they see their peers and competitors doing it.

We always give them the same answer: Focus on building revenue first. Make sure you have true product-market fit or are in the process of getting there, and invest time in finding strategic partners. When you do fundraise, raise only what you need to develop, test and scale your product – plus a sensible buffer for unexpected changes. You will lose credibility if you cannot provide a specific fundraising goal and a strategy to allocate those resources internally.

But the responsibility to grow at a reasonable pace is not on entrepreneurs alone: It is also on investors.

When investors arrive at our accelerators, they also often ask the same question: “Which startups in the cohort have raised the most money?” I have certainly participated in that dynamic myself – it’s the most convenient topic, and it’s exciting to talk about the most recent local unicorn, or how a Brazilian company has expanded operations to several other countries in the region.

To investment analysts and principals in the region: You can think differently. Here are a few ways you can do that.

First, encourage entrepreneurs who ask for funding to focus on revenue and product-market fit. If you want to add value to an early-stage company, do it by opening your network first and your wallet later. This is a good way to learn more about the company and establish a relationship, so that when they are ready to raise, they look to you. For example, investors at Mexican VC firm ALLVP have helped several Chilean companies like Fintual and Cornershop with industry, legal and market knowledge to land in Mexico. This is the type of capital that these startups need: investors who will offer support during the most challenging crises, who won’t pull out and re-negotiate terms when things turn difficult.

Second, consider investing in companies using alternative capital structures like revenue share rather than equity. Adobe Capital and Root Capital are just two of the Latin American funds that offer revenue share investments, opting to invest in startups that have already found customers. According to ImpactAlpha, many Latin America fund managers are already “ahead of their U.S. counterparts” in exploring alternative capital options.

Finally, you can look out for startups that are “zebras,” a term coined by Zebras Unite to describe startups that aim for sustainable rather than exponential growth. Chilean startup Übank provides a case in point. Übank helps people save money for the future, by automatically storing spare change in a checking or investment account whenever a certain rule is met – whether it’s your favorite team scoring a goal or buying coffee at your favorite coffee shop. Their founders have focused on building key strategic partnerships with Santander in Mexico and Banco del Pacífico in Ecuador. They have scaled to more than 430,000 users and have helped them save more than $250 million. This was achieved largely by reinvesting their own revenue into their business – and with support from an angel investor who actually helped them develop the product.

Across all of these examples, we see Latin American entrepreneurs leading the world in a new and better form of entrepreneurship – one that places revenue over rounds. Together we have an important opportunity to remind the world that the greatest entrepreneurs focus first on building excellent products that thrill their customers and help the world adapt to the “new normal.” This is the right time to show how entrepreneurs are a crucial solution to the challenges we will continue to face as the effects of this global crisis continue to play out.


Daniel Cossio is Regional Manager for Latin America at Village Capital.


Photo caption: The entrepreneurs from Monetus learn that they were one of the two peer-selected companies during Village Capital’s Finance Forward Latin America 2019. Photo courtesy of author.




Investing, Social Enterprise
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