In Mexico, founders are facing an Angel round crunch.
As much as Angel investors are all the rage, projected as the force driving a vibrant and successful ecosystem, they are few and far between for founders launching in Mexico. The impact of such a void is felt across the ecosystem. First, it leaves founders without a balanced board, helping hand and friend for support when times get tough. Secondly, it sucks the ecosystem dry of all the positive externalities that arise from experienced and well-connected professionals connecting the dots, from working with lawyers to headhunters and accountants. Finally, there is a growing frustration among founders with seed fund managers because their investment requirements and processes appear to be too demanding for early stage projects, placing an even bigger burden on small seed fund teams catering to startups’ needs.
It is important to distinguish an Angel investor from the more frequent Friends & Family Capital, albeit reserved to the social elites in Mexico. In other ecosystems, as successful entrepreneurs make their exits and increase personal wealth, they usually re-invest as active angel investors, giving back to the ecosystem that made them. In Latam and Mexico, this will certainly happen over time. However, we are at least 5 years away from seeing the first generation of successful founders thus time is of the essence to come together and collectively support this investor class!
Founders — Ever since the seed fund industry exploded in Mexico, it appears that founders with fresh alfas or recent graduates of acceleration programs are more eager to pitch to the VC community than to find the right group of Angels. It seems easier to go after a single check than to pursue and organize an angel round with ten tickets. Nothing could be more further from the truth. Indeed, skipping the angel round stage leaves founders without invaluable industry advice, strategic networks and a support system when launching. Finding a group of relevant angel investors can be a huge startup competitive advantage. For instance, Cornershop recruited top notch angel investors of the region before partnering with ALLVP six months after launching. They were able to justify a higher valuation and have created a powerful to raise a large series A.
Ecosystem players — Accelerators and incubators have done more to create a genuine angel investor class that any other organizations. Angel Ventures Mexico and Endeavor’s mentor program were the first to connect corporate professionals with founders to provide them with advice. Investors in the new generation of discovery and seed funds such as 500 Luchadores have been connected to the ecosystem and have invested in startups. Unfortunately, these efforts have not yet yielded mentors and potential angels in substantial numbers. These efforts need to be recognized and coordinated to reach a larger scale.
Seed & VC Funds — Most Seed & VC funds co-invest with angel investors. The time and experience of an Angel investor is even more valuable when the company has yet to receive institutional money. However, it rarely follows the required sequence, defeating the purpose of the angel round. Generally, Angels commit their own capital, in turn requiring higher returns than funds, and have little influence on the long run strategy of the company. If Angels invest in Seed rounds or Series A rounds, the best they can hope for are the same returns as VCs without the influence, follow-on potential and often investment diversification. This causes the overall Angel business model difficult to sustain.
Government and public entities — In my opinion, the lack of Angel investors in Mexico is one of the larger risks the Seed fund industry currently faces, jeopardizing the impact of one of the most ambitious public policies in the ecosystem. With three years of experience under their belt in fostering early stage investment, it is time for INADEM and NAFIN to create a policy to support professional Angel investors. Despite the challenge of designing a program in a country where corruption or suspicion of corruption can easily sway good intentions, it can be done. For example, before supporting any individual, the INADEM could create an Angel investor certification program with the condition that Angel investors reinvest their returns before cashing-in.
So, instead of focusing so much attention on the Series A crunch, all ecosystem players should start by promoting more Angel investing. Founders should make it a priority to raise an angel round before meeting with institutional investors. Ecosystem players need to turn their mentors into added value individual investors. VCs should provide the tools and information to Angels to help them create a high potential portfolio. Last but not least, the government should help the people that help ecosystems grow and prosper. The good news is that we have a new a new ally: crowdfunding. New equity crowdfunding platforms such as Crowdfunder, PlayBusiness and Fondeadora are building communities of investors that may become the Super Angels of the future.
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