Making things a bit more complex





I’m on a roll this weekend. 😉 Mario Rivera, a friend and an entrepreneur who I hope some day to do business with, commented my last post saying that there were instruments to address the valuation matter that was discussed in my last post.  Truth is… He was right on! I had tried to simplify the discussion but did so overlooking instruments that the industry took ages to create in the US.


Particularly, he pointed that a preferred stock with liquidation preference would address the issue.  To a large extent, he is right. Especially from the VC’s point of view.


A preferred stock is a different type of stock, which has different (often more) rights than a common stock. It is a version of the Brazilian PN/ ON system on steroids.


One of these additional rights, could be liquidation preferences. Normally that clause will state that the first that there is a minimum return for the Investor in case of sale/liquidation.


Lets go back to my previous example. You are raising $3M at $15M valuation but the VC puts a 6x (rather high) liquidation preference.


If you sell the company, this is what happens: At $100M sale, you’d get $80, the VC would get $20 and everyone would be happy.


However, if the sale is for less than 6x, the VC will get a disproportionate share of the proceedings. Say you are selling for $50. The VC has a guarantee of 6x, therefore is taking $18M (36%) and the founder, $32M.  This becomes more extreme as the exit value goes down. If you get to the point where the exit is at $18M or lower, only the VC is taking money out.


In situations like that, another problem arises, why will the entrepreneur even work for a sale? The entrepreneur will either make the company unsellable, in the expectation that it will eventually become more valuable in the future, or he will simply abandon the company.  Either way, serious misalignment of interests which has to be solved through other clauses.


Despite the specific discussion, I realized that the reason we don’t use many of these clauses is that the average entrepreneur in Brazil has little familiarity with them.


To address that, Fernando Okumura, amazing entrepreneur leading Kekanto, has sent me a paper done by LAVCA (Latin American Venture Capital Association) and Pinheiro Neto, detailing a wide variety of clauses and explaining them.




Another great source of information is the just released book Venture Deals, written by Brad Feld, from Foundry Group, which goes over all the aspects of raising VC, the process and the terms.


Both of these sources are great ways of educating yourself.


Thanks for the help Mario and Fernando!



Making money when it makes sense


By far, the biggest contention point between entrepreneurs and investors

is valuation. That is understandable as none likes to feel like their loosing Money. What people often overlook are the other sides motivations and the impact that the initial valuation has on their behavior.

Let me go into a simple example, with fake numbers, in order to clarify my point.

Suppose that you are an entrepreneur with 2 competing term sheets on hand.

One values your company at R$7M, the other at R$15 M and both are for R$3M in equity,

Everyone would say, go for the R$15M!  I, on the other hand, would urge the entrepreneur to think hard about the topic.

This is my view:

If a VC is putting in a R$15M term sheet, it is expecting to sell the company at a valuation close too or over R$100M.  How many deals do you, entrepreneur, really think that happen over a R$100M?  I tell you, not many. If you are one of the Lucky few, great! You are putting R$80M in your pocket and can go party.

On the flip side, the more common situation is that you will want to sell the company, say for R$50M (which would give you a healthy R$40M) but your VC wont allow it to happen as a 3X return is less than exciting.  To make it worst, imagine that due to this blockage, you miss the window of opportunity to sell and get stuck with an illiquid asset, having to work for it.

The $7M term sheet, would make a sale much more likely. Say at the same R$50M, you would make R$30M (which is still hell a lot of money for an individual), the VC would make a 7X return, and both would be perfectly happy.

The ugly truth is that the higher the valuation you are raising Money at, the more binary your outcome becomes.  Do you really want to swing for the fences?

Of course you don’t want to sell your company cheap, but you have to be very confident on the BP that supports the valuation in order to push it higher, otherwise you are brewing yourself trouble.

Another important point, is that Series A will normally be a primary investment. This means that you are discussing ownership and not cash. The cash will be tied to the exit, which your ownership structure will decide if you are getting too or not.

At Warehouse, we like to use an earn-out model to reduce this friction. We start valuing the company at a very conservative Business plan, as the company performs, we return to the entrepreneurs some ownership, hence increasing the valuation. This makes incentives more aligned and gives the entrepreneur more freedom to decide when an exit is appropriate.

Lately, to make matters more complicated to the Brazilian entrepreneurs, we have added another variable: Raising money in Brazil or Abroad.

While I think that many companies can benefit of having foreign investors and we do like to partner with them co-investing, having them in your cap table with add ForeX risk to your exit timing.

Let me go back to my simple example. Say you got 1 term-sheets for R$7M from a Foreign investor.  Lets assume the dollar at R$1,50/U$1,00.

Both VCs would be happy to sell the company at R$50M.  But lets play with ForeX 2 Scenarios: 1 – Dollar at R$1,20  and 2- Dollar at R$2,00.

Scenario 1- Investment of R$3M = USD 2M.  Desired Return of 7X, hence USD 14M.  Which at R$1,2/USD would equal R$16,8M. Therefore you could sell the company for R$39,2M (growth of 5.6X) and the VC would be happy.

On Scenario 2 – Investment of R$3M = USD 2M.  Desired Return of 7X, hence USD 14M.  Which at R$2/USD would equal R$28M. Therefore you have to sell the company for R$65,3M (growth of 9,3X) for the VC to be happy…. A lot tougher..

Being Brazilian, the entrepreneurs know that volatility in Brazil, over the 5-year investment horizon can far exceed those sce

narios. Particularly concerning, is that exchange rate is far more likely to go up than to go down (it is already killing the national industry).

To manage that, entrepreneurs can bring local co-investors into de deal, which will have more aligned interests in terms of ForeX in order to balance the power equation with the foreign investors.

My 2 cents: Don’t sell cheap, but don’t try to maximize valuation as it might burn you in the future and bring the right mix investors on board!

Empresa transforma galpão em incubadora de negócios em SP

 Hoje na FolhaInspirada num formato tipicamente americano, que serviu de base para dezenas de gigantes atuais do setor de tecnologia, a Warehouse Investimentos inaugura no Brasil um modelo que aproxima a incubação de empresas nascentes e os fundos de investimento, informa reportagem de Camila Fusco para a Folha.

íntegra está disponível para assinantes do jornal e do UOL (empresa controlada pelo Grupo Folha, que edita a Folha).

Empresas de economia criativa de SP mudam para Vila Leopoldina

Encravado em uma rua industrial da Vila Leopoldina, zona oeste de São Paulo, onde até a década de 1980 estavam grandes metalúrgicas, o galpão da Warehouse pouco lembra a modernidade do Vale do Silício. O exterior rústico, porém, contrasta com a infraestrutura tecnológica e o cenário futurista das salas de vidro com as telas de cristal líquido que monitoram, em tempo real, mercados, finanças e transações das empresas iniciantes que funcionam no local.

“Trata-se de um campus do conhecimento. O galpão permite agrupar diversas empresas, e as paredes de vidro permitem o intercâmbio de ideias, essenciais para as pequenas crescerem”, diz Pedro Melzer, sócio da Warehouse.

A intenção da companhia, criada pelos empresários Pedro Melzer, Moisés Herszenhorn, Rodrigo Baer e Hélio Guimarães, é investir em até 11 empresas em dois anos.

O objetivo é impulsionar negócios nas áreas de tecnologia –comércio eletrônico, games e pagamento móvel- e energia limpa. “Essa é uma incubadora com pé na realidade. Os investidores ficam ao alcance dos empresários, disponíveis para debater o crescimento”, diz Baer.

O grupo pretende abrigar empresas com faturamento entre R$ 1 milhão e R$ 25 milhões. No momento, 65 empresas estão em fase de triagem.

Editoria de Arte/Folhapress

Leia mais na Folha desta sexta-feira, que já está nas bancas.

Foreign invasion! Brazilian Entrepreneurs: GET MOVING.

 We all know that Brazil is hot for foreign investments but lately we’ve seen a swell of foreign entrepreneurs trying their luck in the country.

We have met Germans, Dutches, Frenchs and many others coming to start their companies here. Mostly they are starting copy-cat companies, but so are most of the Brazilian entrepreneurs.

A striking difference, however, is how much more prepared they are to talk to a VC. They understand a funds motivation, the terms and the process. This makes negotiation much easier and investors much more confortable, despite their limited local knowledge.

Another interesting group of entrepreneurs we have met lately is returning Brazilians. People that have studied and worked abroad are now coming back to start their own thing. These group blends the best of both worlds and often have had startup experiences abroad.

In common, both groups have a much better education in entrepreneurial matters.  If Brazilian entrepreneurs want to be competitive in their fund raising, they better start preparing fast. Read a book on Basic VC investing such as “Raising Venture Capital for the Serious Entrepreneur”  and the “LAVCA term-sheet guide” to get started. That will not be enough, but is a good start. Networking with entrepreneurs that have raised Capital and mentors will also make the path easier.

Brazil’s future looks bright… let’s just hope that Brazilian entrepreneurs are the ones leading it.

Foreigners: Getting Started – how to open a company in Brazil

After a long while away from the blog I’m back.

I guess it was Mark Suster who made a comment on how you should trust VCs who pick up their wives calls as this is a good proxy to how they will deal with you once you are on the portfolio but that is no excuse.

I apologize to all of those that missed me but I got married and went on my honeymoon. When I got back… well.. You can imagine.

But I’ll pick-up where I left off.

An interesting entrepreneur asked me how do foreigners start companies in Brazil.  As I’ve seen an “invasion” of foreign entrepreneurs (likely to be my next topic) lately, I guess this is a relevant point.

Talked to my lawyers and here is the thing. If you are a foreigner with a residence visa, it is a little different from if you do not have such a visa.

If you do have a Residence visa, you will need to get an RNE (foreigners registration number) with the Federal Police.  (Be aware that this process may take a really long time… I’ve heard of year+).

Once you are done with it, you have to get a CPF (Brazilian Tax Payer Number) from Receita Federal (IRS). This is simple and rather quick. Try using a Poupa Tempo if you are in Sao Paulo

If you do not have a residence visa, you will need to hire a lawyer ( i can point you to some) and give him power of attorney to represent you in Brazil.

Now we really start the process of setting up the company:

1-You have to draft the shareholders agreement (Contrato social) and register it at Junta Comercial (commercial board).  Beware that companies in Brazil cant belong too ne single person, so you will need a partner, even if he has only 0.000001% of the company.

To register you will need to have copies of your ID’s , CPFs and proof of residence.  This takes about 2 weeks.

It is often that the shareholders agreement gets rejected due to some bureaucratic detail

2- Go online to Receita Federal (IRS) ( where you can start the process in order to get a CNPJ (corporate tax payer number). You will have to send a notarized copy of the registered shareholders agreement.  They should take about 2-3 weeks to get back to you with the number.

3- Once you have the number you can open bank accounts and fulfill most of your other operational needs. You can even start running the business.

But you are not done. If you are opening a commercial company, you have to go online to Receita Estudal (State IRS) in order to register with them.   Expect 3 weeks.

4. Whether you are opening a commercial company or not, you will also need to register with the city hall. Expect 3 weeks but this can be cone in parallel with the state registration.

5. Depending on the type of company you are opening other registrations may apply as ANVISA (FDA) for restaurants, drugstores, hospitals and so on. But as that is on a case by case basis, I’d rather not go into details.

Neither these steps are expensive (about R$150 each) but they often are very frustrating and long for someone that doesn’t understand all the details ( there is no how-to-open-your-company-in-Brazil-for-Dummies manual).

An easier and speedier option is to buy a shelf company (a company that has never been operational and was only created to be sold) from a respectable lawyer.  I can point you in the right direction if you need. They normally go for R$3000 to R$5000.

I hope I didn’t mix up any of the bureaucratic steps. If I did, please correct me.

I hope that helps!

PS: Pieter, an amazing Dutch entrepreneur,  leading added 2 observations (they were true at least in 2009/2010)
– You need to have set up the company and transferred the investment before you can obtain an investor visa (you’ll need to appoint someone else to manage it while you wait for your visa)
– No need to wait with the request for your CPF until you get the visa, get it rightaway, much easier



Rio is Alive and Kickin`

As I have family in Rio I come here often. As everyone that arrives in the city, I’ve always been amazed by it.  Normally, what struck me was the beauty of the city. Sometimes it was the violence but there was always a non-striking undertone of Decadence.

Since Rio stopped being the nation’s capital (1960), it is said that its importance in the National GDP has shrunk by 60%. It declined from  18,5% of the national GDP, 1950 to 12,3% in 1985. Today, it is at 11,3%.  As a there was a big migration from the city of Rio, to instate, you can imagine the feel of the city.

When I flew in yesterday, it was this very same undertone that I was expecting when I flew in yesterday. Yet, I was very pleasantly surprise to find a very different ambiance.  The hotel was packed, restaurants were full and the city was lively.

Today, I understood some of the reasons. I found a very exciting entrepreneurial community being developed around Pretrobras massive presence.  At UFRJ I visited and intreresting incubator that is focusing on the oil industry. Morevover, I got a glimps of Petrobras new research facilities

and the new technological park. Both being developed within university facilities…. a giant step for the almost communist Brazilian Academia. This blend of public educational investment and private focus on outcomes might prove to be a winning combination.

I also met with a very impressive incubator at PUC-Rio where it seems like a lot is happening as they are creating a support community for the entrepreneurs.

But, probably, my most impressive visit was to the Rio Investiment Promotion Agency where I learned a bit more about their ambitious plan to transform the Rio Harbour in to a center for the tech community, with VCs, Big Co’s, entrepreneurs and the rest of the community.

The idea is to use the warehouses in a similar manner to what we do at the Warehouse, hence the discussion.

Besides the project as a whole, which is something that would really help to foster entrepreneurship, I was amazed by the quality of the people that the Mayor brought on board. There were a McKinsey Partner, the Founder of IdeiasNet, a Principal from Naspers. All of them, committed to help build the community in Rio.

 I truly hope these guys are able to overcome the bureaucracy and the private sector embraces their effort to start really  firing Rio’s economy back up.

Guys, please count on us for whatever we are able to help.

Founders cant become a problem for the company

There has been an enormous amount of chatter over founder liquidity lately.

Here, our view is quite simple: A founder can’t become a liability for his company.

Obviously we want our founders to have skin in the game and to be fully committed to the company they are pitching us. At the startup of the company, this is key to give investors confidence.  As the value of this company is minimal, we want to know that it is not a free option for the entrepreneur and, therefore, like to see all his assets into the company.

We ensure that the founder is not in distress because we don’t want him worrying about other things but we also don’t want him to have a too comfortable of a life before the company makes money. (MBAs and Consultants, don’t pitch me talking about your forgone salary. Your opportunity cost will be all equity and, yes,  you will have to live a cheaper life for a while) You will be under a Minimal Viable Salary policy.

As the company matures,  the founder should rip some of the benefits of the value he has created, therefore, we change the comp scheme from MVS to something more market based in order to give you a little bit of a breathing room and take out the pressure for a quick sale.

For that same reason, we understand that $50M might not be enough for a VC but great for a Founder. Therefore, we are willing to let you take a large part of you chips of the table, not all… but a large part. In doing so, we balance so that the amount of equity you retain on the company is still meaningful for your personal finances but not so large that it will make you risk averse and not swing for the fences with the company.

This is all very tricky math as different people have different needs, but that is the basic logic behind it.