2021 Resolution ideas? Here's one: Angel investment in Latin America



In this article, I want to share my personal experience as an Angel investor in 8 startups since 2016. My general goal is to present a realistic view of what I’ve learned in the process, to hopefully get you excited about startup investment in an ecosystem I'm passionate about. More specifically, I want to share a perspective for conversations to motivate Latin American professionals in US/Canada/Europe to invest in Latin American startups so we can build a stronger ecosystem through a tighter integration of capital, mentorship, and connections.


Warning

Investing in startups is a high-risk endeavor and you need to understand how it affects your personal situation from different perspectives: financial, tax, legal. I’m not a CPA or a lawyer and I still consider myself a noob in the investment world, so go through the appropriate due diligence you’re comfortable with. In the US, as is the case in some other countries, it starts with meeting the accredited investor requirement.


Why to invest in startups?

As I’ll discuss below, investing in startups has concrete benefits. Overall, I think it makes sense because:

  • You don’t need to be a millionaire to do it, and depending on the stage of the startup, investments from USD$1K may be possible especially if you contribute additional value.

  • It’s a good way to diversify by adding an asset class to your low and medium risk portfolio, assuming you already have it. This being said, it should remain the minority of your net worth, with some financial experts recommending a 15% maximum.

  • You like the problem’s domain, the team working on the solution, and consider that your “smart money” increases, even in a tiny fraction, the probability of success.

  • You want to see more entrepreneurial activity in the region(s) that you plan to invest in.


Why not to invest in startups?

I’m not going to sugarcoat it: investing in startups is not a financial panacea as IPO or acquisition news would have you believe; it is a long-term, risky bet that in most cases won’t pay off. If you believe in any of these statements, investing in startups may not be right for you:

  1. Investment is money you or your family need for essentials, e.g. rent, debt, fun, retirement.

  2. You want 10X returns: Studies found that on average, startup investments provide returns under publicly available market alternatives.

  3. You want returns soon: Studies found that the return time for capital is generally 3-7 years.


Benefits of investing in startups

There are concrete benefits for the startup as well as the investor:


Short term:

  • Acceleration: This is the obvious one: Having money available, allows the startup to make progress faster by assigning resources to solving problems.

  • New jobs: Most times the money raised is used to hire qualified roles which is critical to any economy's development. In Latin America this has been so powerful that some local startups even pay higher salaries than traditional, large corporations.

Medium term:

  • Financing: Having angel investors trust a startup with their money, is considered a great sign by investors. This increases the chances of future financing rounds from Venture Capital firms, who use angel investors as a source of due diligence. More financing translates into increased acceleration and jobs.

  • Industry insights: Startups are usually trying to disrupt traditional industries that have inefficiencies or untapped potential, making its founders strong industry experts. As an investor, this is a great way to get to evaluate an industry from a fresh perspective and understand it more deeply.

  • Networking: Investing in startups is a nice way to create relationships with entrepreneurs and other angel investors that you’d otherwise hardly meet.

Long term:

  • Learning: For cases where a startup excels -grows rapidly, expands internationally-, it is a great experience to learn from the founders following their challenges, evolution, and accomplishments.

  • Returns: Last but not least, any investor would like returns on their money. While a 10X exit or more is definitely possible, it should not be the only or primary motivation.

As an example, I am excited to see some of the achievements (after I invested) of 8 startups as of Dec/2020:

  • Total funding raised*: USD$15.3M

  • Hiring (full-time): 141 new jobs

  • International expansion: 7 countries

  • Silicon Valley partnerships: 3 (2 with Unicorns)

  • Exits: 0

  • Companies that died: 0

*Includes investments from my direct network who invested $580K in follow up rounds.


What to consider when investing in startups?

Startups’ potential can get exciting and at the same distracting, so being methodic while investing is important:

  • Investment thesis: Defining what types of startups you want to invest in provides clarity when evaluating deals and allows you to get more prospects, as other investors will share opportunities that may be out of your reach. My investment thesis is: early stage -preseed/seed- tech startups headquartered in Latin America, with a MVP, looking for technical insights, and a clear interest to connect with Silicon Valley (funding, partnerships). The reason is that adding value is key to angel investment and I’ve lived in Silicon Valley for the past 10 years with a network to leverage. Having flexibility for opportunistic investments out of the thesis is not a bad idea -in fact I’ve done it- but it should be the exception, not the rule.

  • Growth potential: As mentioned, startup investment is risky so it is important to consider a growth potential that justifies accepting it. The priorities I use to evaluate growth potential in startups are: 1) team, 2) Total Addressable Market (TAM), 3) product (or MVP). I believe the growth potential of Latin American startups and market is huge, traditionally underestimated, and growing rapidly.

  • Investment budget: As an Engineer, it’s very hard for me not to get excited whenever I hear a pitch which is why I recommend to define a maximum investment amount and investments per year. I’ve had to decline amazing opportunities in order to stick to it but I don’t regret it as it followed a data-oriented decision approach I had committed to.

  • Diversification: While there may be good reasons to be passionate about a specific industry, I think diversification is always a good idea. In my case, I’ve covered 6 industries: FinTech, EdTech, InsurTech, CyberTech, InfraTech, and HRTech. One of the advantages of being in Silicon Valley is that you get to meet amazing founders from different countries; this has allowed me to invest in startups headquartered in 4 countries (Colombia, Mexico, Ecuador, US).

  • Deal breakers: While it’s easy to focus on the startup’s amazing things, it’s important to anticipate problematic situations especially in the long term. In my case, assuming the thesis is met, the deal breakers are: 1) founders who seem dishonest or whom I think I’d not enjoy working with; 2) startups where I can’t see how I can help.

  • Identify where you add value: Startups love any help they can get from investors, so think about what you can contribute beyond putting in money. So far, I’ve helped with: - Recruiting Tech Leads, e.g. CTO. - Making introductions to large corporations in Latin America that may become customers, or large corporations in Silicon Valley that may become partners. - Jumping in on calls with VC firms to share perspectives of the potential I see in a given startup. - Influencing team culture: This is a tricky one as startups are a different world, but: “When is having more information and alternatives a bad idea?”, which is why I suggest: take what you need, adapt it to your context, and measure its success. Some examples include interviewing Engineers, advising on technical operations (architecture, infrastructure, processes) to optimize for speed and quality, career growth and mentoring.

  • Avoid conflicts of interest: This applies amongst the startups you’ve already invested in, and between your employer and the startups you’re considering to invest in. At my current employer, the process is standardized and prior to investing, I go through a formal review to get an approval.

  • Terms: If the startup wants to be considered for funding in the US, encourage standard investment terms, e.g. Convertible Note, SAFE, and structure, e.g. C-Corp.


I want to invest, what next?

The first step is to define the thesis and terms you’re comfortable with, according to your specific situation. Then, get in front of great startups to invest in. The information in this article comes from my experience related to direct investment which has worked due to having a presence in a tech hub like Silicon Valley and getting referrals from top investors. There are, however, other alternatives, e.g. joining a group deal via a Special Purpose Vehicle (SPV), which offers more flexibility -lower investment amount, investment thesis- and requires less involvement -due diligence, mentoring-. SVLA is a highly trusted entity that offers such investment opportunities in specific startups, so I strongly recommend them.

Special thanks to Miguel Casillas, Luza Jaramillo, Jorge Velez and Andres Rios for their trust co-investing in some of these startups and for reviewing this article.


About me

Senior Engineer at Google, in Silicon Valley since 2011. MSc. Carnegie Mellon University. Board member of SV Links, a non-profit that connects emerging countries with Silicon Valley. Born and raised in Medellín, Colombia.