Andres Barreto to startups: “Don’t let Latin American VCs lead your round”

Colombian entrepreneur Andres Barreto was one of the guest speakers at Start-Up Chile’s SUPWeek, a one-week entrepreneurship event series that took place in Santiago, Chile. The goal of his workshop was to share valuable and very frank advice with the program’s alumni.

While Barreto is still young, he has plenty of experience in the field, having founded no less than three companies over the last few years – Latin American tech media outlet PulsoSocial, lawsuit-ridden music streaming website Grooveshark, and tablet-friendly service Onswipe (see our recent article). Along the way, he learned some lessons which he hopes will be useful to Start-Up Chile’s teams and Latin American entrepreneurs in general.

As a matter of fact, Barreto may now be living in NY, but he is still very much committed to giving back to his native region. As we reported recently, he is one of the promoters of Coderise, an initiative aimed at teaching code to kids in emerging countries, starting with Colombia.

In this context, Barreto has been closely following the local tech scene, and has now come to a conclusion: Latin America doesn’t lack talent; nor does it lack capital, with the recent emergence of accelerators and funds investing in the region. What it still lacks, though, are entrepreneurs with a global vision.

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“VCs often ask me if I have Latin American startups to recommend. This is how I found out that very few of them have global ambitions,” Barreto explained, while advising participants to break this pattern.

Another mistake they shouldn’t make is to be too careful. “Don’t wait too long before you launch; it is better to take risks and fail fast than to spend months in pre-launch mode.” Barreto said, pointing out the importance of overcoming the fear of failure.

Beware of Latin American VCs?

Then came Barreto’s most controversial piece of advice: “Don’t let Latin American VCs lead your round,” he insisted. “You can let them participate if you really want to, but you should first turn to firms that are based in Silicon Valley, New York or Boston,” he told the audience.

Indeed, Barreto didn’t shy from labeling most of Latin American investors as “unsophisticated,” which he said is also true from many US angels who are based outside of the country’s three main investment hubs.

So what’s a sophisticated investor? Barreto illustrated this point with an example that comes from his own experience:

“When we started Onswipe, we were trying to raise $500k. That’s when we met our current investors, they said they would not only invest in us, but also invest $1 million, rather than the $500k we were asking for.

Thanks to their knowledge, we avoided a mistake that is quite common for startups: asking for too little money at the beginning, running out of cash, and having to go back to fundraising in a matter of months, which is both distracting and risky.”

More generally, startups should deal with experienced people that are fully in charge of their investments. “If a VC needs his LPs to approve every single deal and term sheet, run,” Barreto recommended.

This also applies to lawyers, he noted. “Don’t deal with a guy who has closed many deals for big corporations, just because your friends know him. You want someone who sees 50, 100 term sheets like yours each year. So again, my advice is to take a US-based, startup-friendly lawyer.”

How to evaluate investors

It doesn’t mean that Barreto is against recommendations and word-of-mouth. “Before accepting an offer from a VC firm, you should absolutely talk to similar startups in which it has already invested. This will help you understand how their partners work and whether they are the right fit for your company,” he explained.

That specific point led him to send another warning about Latin America’s investor scene:

“Many new people and funds have entered this space over the last year, and lots of them still have to make their first investment. This isn’t only about things being slower in Latin America – the problem is that we are increasingly seeing ‘investors’ who don’t invest, and may not even intend to invest, so you should be very wary of that.”

For Barreto, the main criteria to judge investors should be an existing, trackable portfolio. In addition, the best VCs should have a long track record of working with startups, hopefully as entrepreneurs.

According to Barreto, most of these are based in the US, which is why he thinks startups should take a plane and raise funds there, regardless of where their team is based.

A changing landscape

All of the above comes with a caveat: Barreto admits he doesn’t know Brazil very well yet, so most of his advice refers to Spanish-speaking countries. In addition, his last attempts to raise money from Latin American VCs happened a few months ago.

From our perspective, this means that some of his warnings mostly apply to traditional Latin American investors. Many of those have a banking background and a private equity approach, not to mention practices on which we have been hearing consistent negative feedback from local entrepreneurs.

Yet, entrepreneur-friendly funds are now active in the region, such as Kaszek Ventures and 500 Startups’ Mexican.VC, which Barreto himself mentioned in his slides. Moreover, a growing number of US funds are launching operations in Latin America, especially in Brazil, with the ambition to source Latin American deals.

In other words, Latin American entrepreneurs may not have to fly to the US to find smart money. Still, chances are that their VCs will be connected to Silicon Valley, NY or Boston in some way.

More importantly, we couldn’t agree more with Barreto on self-proclaimed investors: you are not an angel or a VC if you don’t invest at some point. Yet, the increasing glamorization of entrepreneurship means that this kind of free riders have mushroomed, and it is important to call them out. Entrepreneurs, keep that advice in mind if you don’t want to waste your time.

What’s your personal take on Latin American VCs?

Image credit: Start-Up Chile