Originally published in TechCrunch, April 2016
You know entrepreneurship has gone mainstream when a local Shark Tank hits cable TV. I was approached by the Shark Tank production team in Mexico to recommend startups for the show. I sent some names of candidates that had not yet received institutional capital nor angel investment and could benefit from the exposure — at their own risk. Beyond my caution with founders, I am more concerned about the ecosystem as a whole than about individual participants — TV “deals” can always be fixed or undone.
First, let’s state the obvious: Shark Tank is reality television. It was designed and produced to entertain, not to reflect reality and certainly not to have a positive impact on the entrepreneurial culture. As with American Idol, producers will be asked to strike the right balance between reality and ridicule — promising startups versus absurd ideas played out by colorful characters. The success of the show will be measured in rating points and advertising dollars.
Moreover, the reason investors participate in the show is because they want to be featured on cable TV, not because they are looking to see quality deal flow. Investors are cast because of their big personalities and high profiles. Most sharks already have access to enough investment opportunities and are hardly looking for a new career in venture capital. Celebrity has always been a strong human incentive.
Obviously, I am not a TV critic and I am not going to embark on a full-blown evaluation of the show’s prospects. However, as a venture investor, I believe it is important to be ready for the possible unintended consequences this reality show may have on Mexican startup dynamics.
Venture to solve problems
Founding a startup often involves leaving a promising career, or putting off plans to study or join a corporate. If successful, it can be a 10-year commitment of hard work, sleepless nights, low income and thousands of problems to solve. If unsuccessful, a founder faces the prospect of losing money and time, albeit with a lesson learned.
The new generation of founders in Mexico are becoming more aware of this trade-off than ever, and pursue these roads with a passion to solve a problem. They know they will probably fail, but that hard work, luck and perseverance might win the day.
As much as PR can yield good results for certain startups as they position an innovative product, succeeding at scaling a high-impact company is all about hard work, perseverance and luck. It’s not about raising your profile or becoming a star speaker. Indeed, distractions brought by a high profile can be the reason you fail.
Surely there are better and faster ways to become famous, if that’s want you want. Fame and success in solving a problem are two faces of two very different coins that should seldom be tossed together.
It’s always about the people
One of the first important decisions in the life of a startup is about the people you invite to join you for the ride. More than money, you need a confidant and a mentor. Choosing the right angel investor can potentially shape how your startup will find a product market fit, finance future rounds and scale into a large company.
To choose the right people you need to know them well and have many options. In general, this requires having several meetings and informal interactions with a number of candidates. It involves asking other founders and VCs about your possible investors. A great angel investor shares your vision and passion for solving a particular problem. They have relevant experience and a large network in areas that are strategic to your business. Most importantly, you have a personal chemistry that builds into trust over time.
Pitching to a poker face and arguing for three minutes is hardly a good alternative to building a relationship, let alone partnering with someone.
Raising capital from an investor is more serious than fun. You enter in a legal and moral contract with your investor. The moral contract involves the promise of doing your best — and more — for the success of the company. In turn, if things go bad, you are allowed to move on to start your next venture.
The legal contract sets the rules for the playing field and how the value created will be distributed. The legal contract considers all scenarios, including bankruptcy. Honoring your moral obligation and respecting your legal duties is part of being a good citizen and a leader. Moreover, the way you approach these contracts has a long-lasting impact on your reputation.
Closing deals in front of shining lights and TV cameras might be exhilarating, but reflects poorly on the solemn act of a long-term agreement.
When we started investing in 2012, we were sometimes shocked by the dilution founders faced from the first capital round and the harsh terms they settled for with investors. Even if we were far friendlier than the rest, our first valuations were probably too low. Fast-forward to 2016 and you will find that most early-stage investors understand that value is created by betting on ambitious projects rather than negotiating petty terms.
Of all your potential investors, terms at the angel round should be the friendliest. They should be simple and without any particular requirement. Hence, negotiation for the terms are in general easy and straightforward. You should not expect aggressive bargaining or a complex structure from your first strategic backer. Moreover, any complex structure will affect follow-on rounds with institutional investors.
You can expect a lot of bargaining and in-your-face negotiations from Mexican sharks. Drama drives ratings.
Behind the bright lights
When a friend asks you for advice on looking to meet “the one,” your top-of-mind suggestion would most likely be old-fashioned blind dates. You would not send them an application to participate in The Bachelor. If another friend was looking for a dream job, you would not advise them to enroll in The Apprentice.
Searching for the right investors is a bit like looking for a partner for life or searching for that dream job: There are no cameras, no first impression roses and no firing before even getting hired. Has anyone ever found love, a great job or a good investor that way? Sure — but you probably won’t.
It has taken years for our ecosystem to become a friendlier place for founders with big dreams. We, too, have learned a few things along the way and passed on our wisdom about the early-stage investor role. Investment terms and valuations have come a long way from the first institutional seed investments in 2010. In general, the financing stages are respected and reflect the risks and realities of the Mexican economy. The early-stage industry is not perfect, but is starting to look like a respectable crowd for founders. Let’s keep that in mind when we unleash the sharks into our ecosystem.