5 lessons from 10 years investing in Latin America
by Antonia Rojas
December 15th, 2022
As we head toward investing our Fund IV, we wanted to take the time to look back at our funds’ portfolio construction, processes, and practices. This is particularly important as we finished our investment period for Fund III and our Fund II reaches maturity.
First, let’s recap on our previous funds;
We have exited 5 companies, with 1 multi-billion-dollar exit.
We have invested in 41 companies across 3 funds, alongside top VC funds like Accel, Sequoia, QED, NFX, BTV, among others.
Companies in our Fund III have successfully expanded their operations to Mexico, out of which, on average 80% of their sales are currently coming from this country.
In total, we have returned more capital than what we have raised, providing returns above 30% (USD).
With these great results, we have faced great challenges as well, and we wanted to summarize our core learnings in 5 lessons, that we are implementing as we commence the investment period of our Fund IV. 1. The team is the soul of the company In the last few years, we have experienced one of the most unique and challenging times in history, with COVID being at the inflection point. It came with deep health, logistics, and safety constraints, huge uncertainties, but incredible opportunities at the same time. Back then, it was impossible to imagine a few quarters afterward, we would be reaching a historical record of investments in Latam, we would experience a digital adoption that was unprecedented, and that so many companies would adapt to be up to the challenge, so fast. It was only due to the incredible people that were leading them.
Some industries were hit harder than others, particularly the ones tied to logistical chains and complex value chains that involved high degrees of coordination. There is no textbook that can explain what happened during that time; resilience, optimism, empathy, and intuition were the key ingredients. Many companies were shutting down and teams needed to act fast; for their teams, their clients, and the deep belief in the problem they were solving. For them, failing was not an option, and against all odds, the best teams managed to triple their operations in a matter of months as there was no alternative; thousands of people needed their solution.
We have always known how important teams are for the success of a startup, but it wasn’t until that time, that I saw first-hand, that they were its fuel and its soul… the only certainty was them. 2. Timing can make or break a company Across the different cycles of investment throughout our funds, we have been able to see many companies thrive, and fail. There have always been cycles of sectors that are receiving most of the attention, that come and go in batches. Companies need to be able to understand and incorporate these timings within their operations. Companies that are capital-intensive and didn’t use the last years of historically low-interest rates to build their moats and sustain their businesses in the future, are probably companies that are going to face extreme hardship in this upcoming cycle. The same goes for companies that saw their businesses skyrocket with COVID’s digital adoption, but sustain their businesses only on people being at home/remote all the time.
The challenge comes from incorporating these timings but being able to evolve. Teams need to be able to build companies for the long term, they can’t create dependency on these cycles, but they should use them to fuel them.
Another important thing associated with timings comes from the unique context that each country in Latam is experiencing. Sometimes there is a political change, a local tailwind, or a change in regulation, that we need to incorporate into our decision-making. This can translate into delayed expansion plans to a country in favor of another or accelerate the offering of a specific product.
As an investor (and an eternal optimist), one of our biggest challenges is finding the right timing for a disruption. We want to envision a new world, and we want to invest and help teams give it shape, but we also need to recognize that some things take time, and the right timing can make or break a company. 3. Maintaining discipline was hard but it pays off. 2021 was an outlier year in many ways. With a record amount of capital being invested in VC globally, and Latin America seeing a 4x influx of capital versus 2020. Many funds participated in this frenzy by accelerating their deployment pace, to historical highs. The over-optimism on growth rates achieved after the massive tech adoption derived from COVID, fueled this frenzy, justifying high multiples for many companies that had little to no fundamentals. Subsidized growth was many times confused with real – solving a need – growth, and often, very hard to distinguish one from the other.
We maintained an emphatic discipline throughout our investment period, that encompassed our investment pace as well as our ownership targets. At times, this was hard to maintain as the frenzy in the market was contagious. We felt a chronic state of paranoid and had many FOMO (fear of missing out) moments.
We believe that exposing capital over periods of 3 years, providing time for our companies to mature, as well as time to see how fundamental changes in the market pan out, have been essential to our investing strategy. Having been in the market for a while, allows us to compare the pace of deployment of one fund against the other, and this implies that often we can quickly (and graphically) see if we are starting to be off in any mark.
Graph 1: Pace of deployment of ALLVP Fund III and Fund II.
As much as we want to expose ourselves to different cycles, we also know that to provide outlier returns in Latam, we need to be disciplined at out entry prices. We are very optimistic in the evolution of our region, and my partner Jimena wrote more about it here, but we know too well that only the best of the best companies will follow Cornershop’s trajectory, and therefore we need to make sure we have enough stake and enough upside in the companies we believe are going to reach those heights.
Graph 2: Entry prices (US $M) for the different companies we have invested throughout the investment
period of our Fund III, in the different stages. 4. Manage risk and double down on the winners, as long as every additional USD spent, corresponds to the risk-return profile of the fund. There are funds that invest most of their capital on follow-ons, there are others that invest none, and in return, they raise consecutive funds that do cross-fund investments. We believe, there is a delicate balance that can be accomplished in our VC craft, with the key being around understanding the risk-return profile of each first-time investment, as well as the ones that follow.
In Fund II, 54% of our invested capital went to follow on, as opposed to 32% for Fund III. In both cases, there was a core strategy driving that portfolio construction that incorporated this, but external factors played a part as well. In the case of Fund II, the market was in its early beginnings, and there was less capital available to fuel our portco’s growth. This led us to expose more capital in a different return profile than what we were initially aiming for. In the case of Fund III, round sizes almost double in a short period of time, forcing us to do larger rounds earlier, in order to maintain our desired ownership.
As we continue learning and being our most fervent critics, we believe a better optimal is around 40%, in which we can follow up and maintain our stake in our best companies, without overexposing the entire fund to the performance of a single company.
Graph 3: Investment exposition in follow-on vs 1st time investments in Fund II and III, as a % of total dollars invested 5. Build conviction in-house The feeling of doing something off track and opposed to the crowd requires courage and a constant reminder, that when the entire market is signaling a direction, it probably signals that it’s too late.
We have learned to build this conviction in-house. We need to be able to invest and believe in an entrepreneur before it’s obvious. Looking back, the best returns in our funds have come from companies that at the time of investing, something was bugging. Most of the times, there was a change in the market or landscape that created a short-term uncertainty, but if the team was able to overcome it, then the upside was massive.
In order to be able to take those risks, we had to optimize our processes and build conviction on a space beforehand, so once we found the right team to tackle that challenge, we could act fast and focus the energy on what mattered most.