This article was originally published on Medium
As our firm enters its fifth year, the way we understand and apply our investment thesis has evolved.
As ALLVP enters its fifth year, after investing in 36 rounds of 20 portfolio companies, 2016 promises to be a critical year for our firm. We have to balance the past with the future, realizing returns from Fund 1 and deploying almost two thirds of our Fund 2 capital on follow-on investments into our existing portfolio as well as investing in new exciting opportunities. Perfecting that balance will define the future of our firm. Following in the footsteps of Andy Weissman from USV in his post on USV’s investment thesis (https://www.usv.com/blog/usv-thesis-20), there is no better time than the start of the year to review how our strategy has evolved over time. Our thesis is simple but may be difficult to deduce from our portfolio and it is important for us to share it with founders, angel investors, potential co investors and larger funds and corporate investors.
Since we started ALLVP, Fernando and I crafted a thesis based on two pillars: our view of the economy paired with high potential industries, and how we view and manage risk in an unproven venture capital market.
Our insight about early stage opportunities.
Our first pitch deck for fund 1 was full of economic data that exactly supported a market rife with early stage investment opportunities. In our view, the combination of demand-side dynamics driven by an untapped, swelling middle class still lacking access to basic services propelled by innovation and technology adoption on the supply side make for unprecedented investment opportunities, in particular in Mexico. Our team planned to find exceptional founders and help them create solutions to persistent problems in their markets. Other positive external factors, such as changes in regulations would accelerate some these market trends. This insight lead us to invest in large growing and highly regulated industries such as healthcare, financial services, consumer internet and smart cities.
How we understand and manage risk.
In mature venture capital markets with proven growth strategies, abundance of financing and exit paths, VC firms manage risk with a diversified portfolio and follow-on programs. In Latin America where the industry has yet to prove its viability, we decided to manage risk in additional ways: investing in proven business models, avoiding technology risks and seeking a portfolio with a balance between digital and bricks and mortar companies. Very early on, we decided that we would not manage risk by protecting the downside with growth equity terms or controlling the companies we invested in. We set out to bet on an early stage investment model for Latin America.
The way we understand and apply our thesis has evolved. Some of the adjustments have been driven by environmental changes and others from experience after investing as a team for four years.
The evolution of ALLVP’s thesis.
Our biggest evolution has been how we view our role with founders. This change has been driven by our initial mistakes, some sub optimal practices from other investors across the region and what we have learned from our co-investors and limited partners from Silicon Valley. It starts with the terms we propose. We avoid excessive dilution in early rounds, unfair preferred returns or controlling clauses. We strive to maintain incentives aligned with founders and base our dealings with startups with the trust of our partners. It follows with the support we provide to our portfolio companies. Our operational experience in large corporates and startups allows us to help founders with their go-to market and financial strategies as well as scale operations within complex environments. It involves maintaining relatively small portfolios, participating in boards and monitoring investments with regular operational meetings.
Early Stage investor
The main reason we decided to start with a seed fund is simple: our firm and the VC industry in Latin America lacked the necessary track record to raise a Series A fund as a first time fund manager. Our plan was to raise and deploy a small seed fund to prove, albeit partially, our firms’ capacity to attract and invest in the best opportunities and more importantly to prove that our thesis was sound. Our initial track record allowed us to raise a second fund, this time focused on series A rounds. As the seed fund industry has begun to explode in Mexico, our focus on series A seems appropriate as founders need to raise follow on rounds. We expect that more than two hundred companies based in Mexico will raise post seed rounds in 2016. However, when raising fund 2, our limited partners encouraged us to continue participating in seed rounds. In turn, we created a seed round program to leverage our capabilities of helping founders find product market fits and finance projects in industries such as healthcare and energy that still lack a strong institutional early stage investors base.
Our initial macro insight and preference for large industries led us to invest and gain expertise in industries we did not plan to enter. For example, ALLVP is by far the most active VC or PE investor in the healthcare sector. When we started investing, we discovered that our experience in finance and retail were very relevant in a sector full of unsolved problems. Moreover, it is one of the most transactional industries in the region. We invested in companies such as Medica Santa Carmen, Cuidate and Farmacias Personalizadas. For fund 2, we have made two major adjustments to our industry focus. First we added energy services given the landmark energy reform, heralded in by the new Mexican government along with seven other reforms, has created the largest business opportunities. We pursued this opportunity with Enlight and E3 investments, leveraging Fernando’s experience in the electricity sector. Our second shift is in E-Commerce. For fund 1, we made investments in vertical e-commerce plays betting on the emergence of e-commerce in the region. For fund 2, we favor more scalable and innovative marketplace models such as Cornershop.
When we started the firm, our geographical focus was mainly Mexico. However, we quickly realized with companies in the digital space that in order to gain scale we needed a larger footprint. Moreover, deal flow from Spanish speaking South America has flourished in the past 2 years as founders are looking to tap into the Mexican large and growing internal market and seek out a local partner. For fund 1, Aventones was the only company that had an international strategy with offices in Chile and clients in Peru and Colombia. For fund 2, out of the first 9 investments, three have operations outside of Mexico. We expect that most of our portfolio in the consumer digital space will follow an international strategy. We believe that follow on rounds and potential exits will be facilitated by a regional approach.
At the end of the day, we are a thesis driven firm (just as USV partners define their firm) and will continue to bet on our initial insight and risk approach. However, we are aware that we have still not proven anything but a capacity to raise and deploy capital. In time, the returns of our limited partners and success of our founders will ultimately determine the validity of our investment thesis.