Chile Interview Series — Chile Ventures
Chile Ventures is a seed-stage VC firm based in Santiago, Chile. Started in 2016, the firm was conceived when Managing Partner Felipe Matta Navarro tried to create a corporate venture arm for his previous employer. After the failed attempt, Felipe went his own way to start something new.
Below are excerpts from my interview with Felipe regarding his firm and Chile’s VC scene.
The interview has been edited for clarity.
How did Chile Ventures get started?
Chile Ventures began five years ago when I was working at Sonda, one of the leading Latin American IT services companies headquartered here in Chile. I was concerned about Sonda’s innovation and thinking about the company’s future. I began doing some research, and I relayed to Sonda that for them to stay ahead of the competition, they needed to start to buy innovation. Through my research, I understood that the way to purchase innovation is through venture capital, so I conceived of a corporate venture capital arm in the company. This event was around six years ago, and their response was, “Corporate what? What is this?” They did not want to pursue this opportunity because none of us fully understood the model.
At that moment, I decided to take a sabbatical in California to learn the VC and startup ecosystem. I moved my family there for ten months and spent the time talking to entrepreneurs, investors, and academics to figure out how this works. I was still employed at Sonda but was on unpaid leave while I was conducting this research. When I came back, I said, “Now I understand. We have to do this, and here is the model for us to buy innovation.” They said, “No, this is not for us.” So I decided to go my own way and started Chile Ventures.
Was it challenging to make that decision?
It was a tough step because when you’re with a big company such as Sonda and have strong financial backing, you can try new things without a problem. I decided to go from that to nothing, so I was in a position where I knew the model of how to invest, but I didn’t have the money and didn’t know how to raise it.
In 2016, I decided to try to raise a fund. Chile’s startup ecosystem is very tied to CORFO, which is a government-sponsored innovation fund. Their model allows an investor to provide $1 of their money, and CORFO matches $3-$4. This model enables the creation of a big fund with small LP’s. I modeled my fund after this same structure, but CORFO decided not to back the project because I was a nobody, so it never ended up seeing the light of day.
After they said no, I took a different approach and tried to raise a smaller fund with whatever amount of money I could get. This fund would allow me to invest smaller amounts in companies, but with an investment thesis that allowed room to develop in scale over time. In 2017 I eventually raised $1M in what I call the “First Fund.”
Being brand new, how did you go about raising the First Fund?
My approach was just being honest with potential LPs about my strategy. At the time, I was a nobody in VC, but I had a strong background. I worked at Sonda for 20 years as CFO of Sonda Mexico, and CIO of Sonda Chile, so I knew finance and technology. I also grew my knowledge and network during my sabbatical in California. So I did have some tools, but I had never actually proven myself in this business. I approached big players, like family offices with a small team, and told them to put in a minimal amount of money to get to know me and my thesis; then, if it worked, we could do more funds in the future. Others told me that I was wasting my time because the family offices just weren’t interested in venture capital. That simply wasn’t true, they wanted to invest in this asset class, but they didn’t have the network or the knowledge. I had to explain very simply what my goal was and what kinds of companies I was looking to invest in and made it very easy for them to understand. It was an exciting step, but I ended up with great LPs, and in early 2018 we began investments.
Are you willing to talk about the First Fund’s performance?
Yes, with that fund, we made eight investments (links at the bottom of this interview) that are showing positive growth. On average, the companies in the portfolio are tripling every year. This performance has allowed me to show my LPs that I can select excellent companies. With this track record, I was able to raise a more significant fund of $7M from my LPs. I was also able to raise an additional $14M from CORFO, who is now on board with my strategy. This fund is called the “Next Fund” and is just beginning. We haven’t made any investments with it yet, but it has allowed me to grow my team beyond just me. I have another GP on this fund and hired a financial analyst along with a scout to help us find great companies.
What funding rounds are you participating in?
In our First Fund, the average check size was $120K, and we were investing in seed-stage companies. With this Next Fund, we will be increasing our investment amount to $300K but staying in the same company stage. This approach will allow us to take a more significant percentage of equity in the same round. We want to model the Next Fund after the First one. With this approach, we can increase the check size, increase the number of companies we invest in, and reserve more for follow on funding for the winners.
What is the thesis you are currently using to guide your investments?
We are industry agnostic and invest in companies with subscription models. Our investment thesis includes companies tackling both B2B and B2C markets. We typically invest in software subscriptions, but not exclusively. We can be supportive of this model and the companies in our portfolio because we understand the metrics of recurring payments like CAC, LTV, churn, and gross margin, and can define whether or not their payment model is efficient.
We also only invest in companies when they have found product-market fit, we don’t invest in the PowerPoint stage. They need to have customers and measurable growth to provide us with the ability to project their performance into the future.
How do you find companies and founders to invest in?
A lot of ways. We are very involved in the ecosystem in this industry, so we participate in every demo day and stay connected to every accelerator. Over the past five years, we have grown a big network from which we get deal flow. We also have outbound ways by having a scout on our team and staying up on current ecosystem news. We are always investigating, so when we read something about a company, we want to talk with them.
Beyond the company stage and product-market fit, we are very data-driven. For the base, we want numbers and metrics around growth, but it’s not enough. Beyond that, if I could put it in a word, we want magic. That doesn’t necessarily mean it comes from a charismatic leader, but it could be the solution they are bringing to the market, or the numbers themselves can be magical.
What are some roadblocks to investing in VC in Chile?
I think we are all still learning here, both entrepreneurs and investors. No one has proven by themselves a full track record of success. I believe this is even more valid for funds because there isn’t a history of recurring exits and returning cash to LPs. It’s a new ecosystem, and we still have a lot to prove. We are in a moment where there are a lot of things happening.
Is it challenging to find individuals who want to be entrepreneurs?
Capital isn’t much of an issue here for early-stage companies thanks to initiatives like CORFO and Startup Chile, but we still need to see some later-stage successes. We have some signals, such as Cornershop’s pending acquisition from Uber. But there is not yet an industry that can produce those startups over and over. Chile today is how the U.S. was sixty years ago, it’s a development phase here, and It was my bet when I started the firm that we would continue to grow. It’s a great time to be here because we can only continue to improve.
The costs to start a business here continue to decrease, and the mindset here is changing as well. Twenty-five years ago, when I graduated from university, all my classmates wanted to work at Latam Airlines, Sonda, etc. They wanted a traditional job with security. When someone said they wanted to start a business, it was because they couldn’t find a regular job.
What’s next for Chile Ventures?
I think now some people enter university who just want to be an entrepreneur. Sometimes that doesn’t work out, and they have to get a traditional job. Their mindset, I think, is increasingly entrepreneurial, and they are more comfortable with that risk. Now, individuals want to do something different to solve a problem. So the idea of being an entrepreneur is much more accepted.
Our current plan is to begin investing from the Next Fund that we just raised. In three more years, we will build another fund, but first, we need a couple of exits from the First one. The story from raising the First Fund to the Next one was, “I can take this capital and invest in companies that show growth.” That won’t work next time. I will need to demonstrate real cash returns to my LPs to raise round number three. My First Fund was $1M, and this Next one is $21M. We believe in three years that the third fund will be around $100M.
What’s next for Chile?
On top of that, we believe it will be a Latin American fund. Currently, we invest solely in Chilean companies, so we’d like to expand outside of the region. Lastly, we are presently experts in the seed-stage, but we are open to moving further down the line to Series A stage companies as long as we can use our knowledge to contribute to the company’s success.
Well, for the startup ecosystem, we need an industry with entrepreneurs and VCs who can drive companies to an exit. This industry will create examples for more entrepreneurs to follow and allow us to raise bigger funds. We need to demonstrate to institutional investors that this is a good business and incorporate vehicles such as pension funds into this investment model. A good example is Israel because they are a small country, yet they have created global companies with exits. If we can follow those footsteps, then we will see a lot of success here.
For more information on Chile Ventures, please check out their website.
For more information on the companies in Chile Ventures’ current portfolio, check them out below:
Fintual: Manages the investments of young professionals.
Zapping TV: A provider in Latin America of live television and radio together with the best web series and videos of the web.
Cloner: Provides cloud backup for business endpoints.
ZeroQ: Line-skipping service provider.
AgendaPro: is an all-in-one web-based management platform for beauty/health-related businesses in Latin America.
Simpliroute: The route optimization revolution.
Chipax: Financial services for companies.
TeamCore Solutions: Generates potential sales opportunities through an AI-based algorithm and platform.
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Originally published at https://vagabond.vc on March 18, 2020.
