How do you identify a quality investor or a quality seed accelerator? In nascent ecosystems such as in Latin America, it is as hard to tell as to identify the next great startups. Especially if the majority of funds and acceleration programs are still in the initial phase of their first investment cycle. Only after many years as they exit their investments, they will conclude a full cycle and know the ultimate performance indicator: the hard, cold return on investment.
In turn, investors and accelerators rely on portfolio anecdotes, high-profile partners, alliances, mentors and public relations as a proxy for quality. Without concrete results to pitch, investors are only as good as the image they portray. To the point of skewing incentives for VCs and accelerators towards winning the popularity contest rather than helping founders strive. The market will take a few years to distinguish who are the bad, the good and the great partners for founders.
Meanwhile, I recommend founders to inquire about their potential partners’ traction to assess their quality. While traction should not be the only aspect to analyze, it is one of the most objective. Here are some of the questions you should ask (none that you haven’t had to answer yourself!).
Follow on funds and programs
Most VC firm business models require raising successive funds in order to succeed. Just like a startup raising a follow on round, VC firms go through the motions with a similar logic. To scale, VC firms raise follow on funds. Most active VC firms in the region are investing their first fund and in general, leading VC firms are investing their second fund with the notable exception of IdeaisNet and LIV Capital, investing their third and fourth fund respectively. The same logic holds with seed accelerator programs even if they do not operate with a fund.
Over the past five years, most initiatives have launched a number of programs, run a handful of batches only to pause or pivoted after a couple of years. If your potential partner has been helping start-ups for many years, it’s a good sign. In Latin America, Wayra, 21212, NXTP and Venture Institute are among the longest running programs.
Portfolio traction and founder profile
What startups investors bet on and how they are helping founders succeed is key. My advice is to go directly to founders and ask them about their partners. However, investors should be able to give you a broad picture of how their portfolio is doing. Why did they invest in that specific space or bet on that particular business model? What are their best performing companies, and conversely which are their worst and why? Inquire on their exits and the elements that drove them. Ask about the number of follow-on rounds, capital raised and market value return on investment of their funds to date.
Now show me the data
This is probably the hardest question for VC firms and Seed Accelerator Programs to answer. It is important to point out the fact that investors deal with private and sensitive information about their investments and their portfolio. You wouldn’t like to have information about your start-up published or shared publicly. Having said that, investors in Latam could and should share much more information about their activity and performance such as mortality rate, amount raised by their companies, global sales of portfolio companies, average ticket and average round among others.
If the investor does not touch on this data in their reporting packages, ask them why. If your investors stonewall or refuse to give you exact numbers, ask yourself why.
Next time you meet with a potential investor and you are able to have them show their traction, remember this: investors are the ultimate specialists in pitching their credentials and added value. It’s a matter of practice. Always be diligent and don’t let them off the hook. Some of the most important decisions in your life are about who you invite to join you in your journey.