One aspect of the sourcing industry that usually doesn’t get much coverage is the startup process. Especially in Latin America, that process can be difficult and complicated, often leading to some great ideas and products falling by the wayside. Contrast this with the level of support available to new initiatives in the US with venture capitalists, incubators and angel investors all looking for the next big idea, and willing to pump money into an initiative if they think it’s worth it. Not so in the Nearshore.
One of the biggest obstacles to the growth of a new firm is the availability of funding, and that’s what I’d like to focus on today. Last month I spoke with Francisco Alvarez-Demalde, founding partner at Riverwood Capital, which funds successful LatAm ventures like Globant and Allus Global. He had some great insight on how startup companies can attract funding:
Two main characteristics
There are two main factors that set a startup company apart from the rest, and that many capital funds firms will look for in deciding whether to get involved financially. The first is a strong and dynamic management team. This is surprising since we usually think of nothing but the product and whether clients will buy it. But according to Alvarez-Demalde, “In startup on young companies, the management team is even more important than in larger established companies. Their decisions and leadership alone determine whether the company will take off or not.” Many great products have flopped after rapid initial success, simply because of inexperienced leadership and bad market strategy.
The second characteristic is more obvious: to have a relevant market opportunity. In other words, is there a gap in the industry, or a need for the services you’re selling? Everyone knows this is necessary, but many startup firms identify this opportunity in a very vague or simplistic manner. That won’t work for long. Your strategy needs to be detailed, well defined and written into your business plan, otherwise you can’t market it effectively to potential capital sources.
The LatAm tech boom
I asked Alvarez-Demalde if there’s a specific kind of firm that he’d be more likely to back, and his answer was not surprising. Riverwood Capital, and many other funding companies, are constantly on the lookout for new ideas in technology. In fact, the first thing he looks for is whether a firm has a tech component – if not, it doesn’t get his support. “The reason is because technology is driven by macroeconomic growth and economic changes, and this is especially true for Latin America in recent years,” he says. “What we’re seeing in the Nearshore is a catch-up of IT spending and very rapid growth of the markets there, which offers us many opportunities.”
In my next post, we’ll be looking at the level of support (or lack of it) that startup firms get from the public sector in Latin America.