Professionalization of Venture Capital in Emerging Markets
In the United States, the development of the Venture Capital industry dates back more than 100 years to the founding of Bessemer Venture Partners in 1911. In addition, there are active funds that have been operating in the market for more than 50 years and that today are important benchmarks in the US Venture Capital ecosystems, such as Norwest Venture Partners (60 years), Greylock Partners (56 years), Venrock (52 years), Sequoia Capital and Kleiner Perkins Caufield Byers (both 50 years).
It’s not a surprise that most of these funds continue to rank among the top performers year after year and have managed to establish organizations that last over the time. Bessemer is a clear example of a VC firm that has managed to transcend cycles and borders; to date Bessemer has raised eleven anchor funds worth over USD-$-10bn, investing in over 1,060 companies with 232 exits. Their portfolio is so successful that they have been part of over 130 IPO’S over the last 50 years, including companies with a global presence such as Twilio, Yelp, Shopify, LinkedIn and Wix.
Comparing the evolution of VCs in emerging markets, we find a big difference based on the time of creation of the funds and the level por professionalization of the teams. The firs funds in Latin America were born in Brazil with Monashees being one of the first with 15 years of experience and Kaszek with 10 years. In Mexico one of the first funds to get into Venture Capital was Latin Idea, founded in 2000; however, they eventually renamed themselves LIV Capital and started investing in Private Equity operations. Doing VC in emerging markets is not easy. It requires professionalization of teams and time for them to gain experience. Some of the elements needed to realize this growth are as follows:
-Full-time VC: Usually the first funds raised by a manager are often small and therefore the management commissions received may not be sufficient to cover the cost of living to which they are accustomed. Sometimes there are managers who combine their tasks in other companies or activities; for example, being the president of entrepreneurship platforms, senior manager in private universities, owner of acceleration platforms, etc. At the same time, successful fund managers in the US devote a substantial part of their time to developing the Venture Capital fund and not to other economic activities.
-Recognize that VC funds are services companies: The job of the Venture Capital fund is to manage the funds of Limited Partners, invest them, and earn a return. The VC fund manager is not the owner of the resources. Moreover, to carry out his work properly, he needs to serve his portfolio companies by adding value. Therefore, egocentricity and arrogance are not attitudes that should predominate in a VC fund manager.
-Have a specialized investment thesis and industry sector expertise: Some people would think that having a generalist investment thesis is sufficient for success. However, the most successful funds in the US analyze and define an investment thesis congruent with market dynamics and manager expertise. Funds such as Pantera Capital, which specialize in blockchain, only invest in that vertical globally; similarly, there are funds such as Lightspeed Venture Partners, which have specialized teams by geography, investment stage and industry vertical.
-Collaboration and empathy: Despite de fund managers competing for capital and transactions, the best recognize that Venture Capital remains a small and growing ecosystem where much collaboration and empathy is required. In Israel, funds often collaborate with each other and look for mutual growth opportunities. In emerging countries, a lack of trust and a “for me to do well, others must fail” mentality inhibits the development and scalability of Venture Capital.
-Provide added value to LPs and portfolio companies: VC fund managers sometimes think that providing capital is the only support they can provide to their portfolio companies, however, the fund’s job is to always support startups, providing ideas, knowledge, and strategic connections in the market, as BCapital does in the US and Asia. In addition, come fund managers struggle to identify the added value they can bring to their LPs, such as co-investment opportunities and acting as a bridge to the innovation and entrepreneurship ecosystem.
-Depth of technological expertise and investment processes: Google Ventures, besides the investment team, has a team of technical specialists and engineers who support the investment process and add value to the startups in the portfolio. Venture Capital funds don’t necessarily need wealthy entrepreneurs or people with large fortunes, but rather technically prepared people who can deal with the day-to-day activities in the development of the vehicle.
-Easy access to information and depth of data analysis: Funds in the US such as Ulu Ventures and Tribe Capital have robust investment processes, using startup and market big data and algorithms for decision making. In emerging countries, there is a need to develop a culture of data and information to facilitate decision-making.
-Congruent planning of the development of the vehicle: From the capital raising, fund managers should be clear about the economic units of the investment vehicle and have a robust financial plan to understand the capital they will have available for administrative activities and the human resources they will have available to carry out the investment activities over 10 years. Another important factor is the geographic location where the fund team will be based, which should be consistent with the market dynamics and the development of the startup’s activities.
-Building strategic relationships: Probably one of the most vital elements for the success of a Venture Capital fund is to build, maintain and reinforce strategic relationships with all the participants in the ecosystem, such as startups, funds, accelerators, government, universities, etc.
Funds like Bessemer Venture Partners have developed these qualities over the years, which is why they have managed to maintain their position in the global VC ecosystem over the time. A Venture Capital firm of 100+people, with teams in multiple geographies, covering different industry verticals and with a robust portfolio support platform is not built overnight, it requires professional and experienced teams, with differentiated leadership and capabilities, and the development of the Venture Capital ecosystem as a community.
“As venture capitalists, we pay too much attention to pattern recognition and matching when in reality, the biggest opportunities exist where those patterns break. Our job is to make perceptive bets on the future, especially those that others will dismiss and ridicule. We are fundamental optimists and strong believers in the power of innovation; our life’s work is putting our reputation, time, and money to help entrepreneurs realize a different future.” — Bessemer Venture Partners
Note: please refer to the original publication at EL CEO: La profesionalización del venture capital en mercados emergentes (elceo.com)
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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