Reflecting on our journey building the first VC fund in Argentina’s interior

In 2011, I was one of five general partners (GPs) who joined[1] forces to start Alaya Capital Partners in Córdoba, the capital city of Argentina’s interior (and my home city).  Just last Thursday (11/16/2017) at the Alaya Investor Day, we announced a new goal to have US$100MM dollars under management by 2022, capping a decade-long journey.

And what a bumpy ride it has been!  Given our unprecedented announcement a couple of weeks ago, I wanted to take the opportunity share with you the areas that I thought we got right, got wrong, and other areas where we clearly misjudged market and government signals.

What We Misjudged

Among the most successful tools to stimulate entrepreneurial ecosystems are government programs that provide matching funds to facilitate venture capital (VC) formation (as has been the case in Israel and Chile, among others). As we launched our first fund (Alaya I) and formed Alaya in 2011, we expected to promptly receive matching funds from Córdoba’s provincial government that never materialized.  Unfortunately, we failed to appreciate that these promises made to us by Córdoba’s provincial government suffered a six year delay.

In retrospect, it’s hard to imagine a more challenging time to launch a VC fund in Argentina than 2011.  The years that followed Cristina Fernández de Kirchner’s second term landslide general election victory in 2011 were among Argentina’s worst ever in terms of sociopolitical isolation, rule of law, and economic malaise.

Nonetheless, we persevered.  We were extremely fortunate since all of Alaya I’s limited partners (LPs) were from Cordoba, who were well aware of the difficult climate and stuck with us.  We also earned our LPs’ goodwill by investing alongside them[2] and by taking a meager (by market standards) management fee of 2.5% that wasn’t sufficient to cover our basic fund expenses. Alaya I ultimately invested in seven startups.  These difficult circumstances over the ensuing years tested our team, and, since we refused to quit, led us to redouble our commitment to the fund.

What we got Wrong

As we rushed to invest in Cordoba-based startups, it was inevitable that we would make mistakes despite our best intentions. Originally, our investment thesis was that local startups (from Cordoba) would scale well beyond Argentina and Latin America, into North America and other global markets. This actually never happened.  These companies’ value propositions, financials, and their founding teams’ skills were simply not optimized to grow beyond Argentina’s borders. Few attempts were made to reach beyond Argentina into Brazil, Chile, and other Southern Cone countries; for the most part our initial portfolio companies, remained local businesses. We naively thought that, given the right selection process (which focused on team and scalable value proposition), we would be funding scalable ventures.

We have learned many lessons since our first investment in Translation Back Office in 2012.  We were happy that none of our portfolio companies died (died fast/fail forward).  However, we now recognize that our selection process was far too conservative, and our co-founders too local.

What we got Right

We faced significant headwinds, but we did several things right.  Alaya was and remains investor-focused.  We have conducted Alaya from day one with uncompromising integrity and ethics. Also, since investment performance is key, we have concentrated on the development of our portfolio companies. However, the support that we provided to these portfolio companies was unbounded and our advice often came across as too paternalistic, disobeying the Darwinian first principle of entrepreneurial ventures (“survival of the fittest”).

Alaya CP, had a visible impact in the local Cordoba innovation and entrepreneurial ecosystem and many provinces of Argentina’s interior. We collaborated tirelessly with the local six universities, think tanks, Endeavor’s local chapter, other NGO’s and government agencies. Today, Cordoba the intellectual capital of the early 1900’s is regaining its position leading the startup revolution in Argentina.

In late 2015, Mauricio Macri won Argentina’s general election signaling a dramatic change in the country’s leadership after 12 years of the Kirchner’s.  While Macri started to implement his new economic agenda, we at Alaya were eager to take our lessons learned and launch a second fund (Alaya II).  At around that time, we crossed the Andes from Argentina into Chile to participate in Chile’s leveraged fund program (x3) for early stage companies. The qualification process was arduous and took a full year to meet the multiple demands of CORFO (the Chilean Government’s economic development agency).

Finally, in late 2016 we received CORFO’s approval and Alaya II was funded with $4MM of private investment and $12MM of Chilean leveraged funds. Today, our $16MM fund is on its way to become first a $20MM, and eventually by the end of next year, as large as $25MM, with its potential x4 leverage, if certain performance conditions are met.

Alaya II, has, by all metrics, been a resounding success. Alaya opened its offices in Santiago and hired a team there, and eight investments (more than over Alaya I lifetime) will be realized by the end of this year (2017 – Alaya II first year of operations).

Mariano Mayer, Secretary of Entrepreneurship and SMEs of the Production Ministry of the Republic of Argentina

Now that we’re two years into Macri’s term (and two years into Cordoba’s business friendly governor’s term), our national and provincial governments are now finally catching-up with the global startup revolution.  Our new leaders’ rational management style, the reduction of corruption and clientism, and Argentina’s brand new Entrepreneur’s Law have combined to create an unprecedented startup friendly environment. Alaya intends to participate in many of these programs. But something else is happening: after a decade of being compared in the same breath to Venezuela and Cuba, Argentina is now distinguished with optimism and anticipation of an epoch of growth with emphasis in innovation and opening to global markets. Recently, Alaya has launched a corporate acceleration program with an emphasis on developing an open innovation platform for the leading Argentinean companies based in Córdoba.

The Alaya team now extends from Córdoba to Buenos Aires, Argentina; Santiago, Chile; and Sausalito, California (San Francisco Bay Area). Our team is strong, diverse, and battle-tested.

We are confident in our ability to perform in periods and geographies of extreme uncertainty, deal with the ambiguity that characterize the emerging Latin American economies, and also called by innovative businesses embracing new technologies, or supporting the global growth of our portfolio companies. However, one key milestone remains elusive to definitively prove our team: its ability to exit its portfolio companies with high multiples. Alaya is at the mid-point of its first decade and, for some of our investments, “Exit Time” is rapidly approaching; when we do finally exit, and return multiples to our LPs, it will be among the happiest blog posts I’ve ever written!

Until my next posting – Carlos B.

[1] Mario Barra, Oscar Guardianelli, Omar Vega, and I were the initial GPs and Luis Bermejo (Managing Partner)

[2] The GP’s commit to invest 20% of the total fund capital.

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