Our co-founder, Pedro Vilela, as a WeWork mentor, has conceived a round table with some entrepreneurs at WeWork in São Paulo, and an interview to Emma Haak McKinley, Global Content Manager at WeWork Labs, about his lessons learnt from business plan analysis and fund raising process. The full interview is described below.
Four Key Factors Investors Look for in Startup Business Plans, From Rise Venture’s Pedro Vilela
When you’re fundraising, you’ll find yourself in front of dozens and dozens of investors. And while they may each have specific parts of your business they’re most interested in, there are a handful of factors that nearly every investor wants to see in your plan. Labs mentor Pedro Vilela, cofounder and CEO at Rise Ventures in São Paulo, hosted a roundtable discussion about best practices for fundraising, mistakes he sees founders make in the fundraising process, and more. Here are four things investors want to see when you approach them for an investment.
1. An extremely strong team
“Investors buy teams, not plans,” Vilela says. “So it’s very important for the team to be prepared to show their execution capacity. Because as an investor, the only thing that I know for certain is that the plan you’ve outlined isn’t going to happen. Real life will either be better or worse than the plan, and difference lies in the team’s ability to execute and adjust.”
“Adjust is the key word because there will be 190 problems in the first quarter that you’re not expecting,” Vilela says. “The team needs to be able to course correct. When I’m evaluating teams, I look at how quick they are, how flexible they are, how open minded they are. Sometimes entrepreneurs are convinced about their own ideas. I was like that in the past, and I lost money with that thinking.”
2. Realistic financial projections
“The majority of business plans I see are unrealistic because they present very aggressive financial projections,” Vilela says. “Entrepreneurs come to investors and say ‘Okay, my year one revenue will be $500,000. Year two, $2 million. Year three, $30 million.’ It’s not possible. You are not going to be an outlier, most probably.
“When you present unrealistic financial plans, you lose credibility with investors,” Vilela says. “This is very common in tech, this mentality of ‘I’m going to dominate the world.’ When a team like that comes to me, I challenge them on their financials and ask if they really believe they’ll achieve their projections. If they say yes and aren’t open to other opinions, I’m out. If they say they’re open to challenge, then we can move forward.”
3. Bottom-up assumptions in your plan, not top-down
Picture this: “A coworking startup says okay, the market is $20 billion per year in the U.S. So we’ll take 1 percent of that market and therefore our revenue will be $200 million a year. That’s not the right approach, because it’s based on top-down assumptions,” Vilela says.
Instead, take a bottom-up approach to your assumptions. In this coworking scenario, you’d ask yourself questions like the following recommended by Vilela: How many buildings are you going to rent and why and where? How much will that cost? Have you spoken to the landlords? Have you negotiated any contracts and if so, how long did the process take? How many buildings do you think you need? “This bottom-up mentality is important for the assumptions you’re creating at every level of your plan,” Vilela says.
4. Validated assumptions
Don’t approach an investor with assumptions that you haven’t gone out and talked to real people in your market(s) about. “If you say you’re going to enter two or three new distribution or sales channels, go talk to the buyers and see if they want to purchase your product,” Vilela says. “What do they require? What price would they pay? What level of service are they interested in?”
“Validation applies to every industry,” Vilela says. “The majority of people do business plans on Excel or PowerPoint in closed rooms, staying inside their offices for two or three months. But you have to spent at least 50 percent of your time on the streets talking to people when you do a business plan. You have to validate your ideas and avoid fantasies. Fantasies can help drive the dream, but you have to stay rooted in reality.”
The Challenges of Fundraising in Brazil, According to Rise Venture’s Pedro Vilela
Brazil is a challenging ecosystem for startups. “Seventy percent of startups here die in the first five years. It’s a cruel statistic, but it’s getting better. Four years ago, it was 90 percent,” says Pedro Vilela, Labs mentor and cofounder and CEO at Rise Ventures in São Paulo. Vilela hosted a roundtable discussion about fundraising, including the challenges facing startups in Brazil. Here are the unique factors startups need to know about.
1. Scarcity of seed capital
“In Brazil, we have a scarcity of seed capital. It’s very, very difficult to raise early-stage money,” Vilela says. “That’s because the opportunity cost to invest for small funds is high. They prefer a minimum ticket of $5-$10 million over $1-$5 million because they’ll have to do the same amount of work with both but the absolute returns will be larger with the bigger companies, although the relative IRR (%) might be similar.”
Another reason why there’s little seed money to go around: “We don’t have unicorns in Brazil, or huge companies with huge valuations,” Vilela says. “It’s a big challenge.” It’s also due to the fact that the VC industry is relatively new in Brazil (more on that later). “Over time, I think we’re going to have much more of a culture of VC investment here,” Vilela says, “but right now the capital available for early-stage startups comes from angel investors, and it’s still not that much. It’s for seed rounds. If a startup needs $1 million, that’s difficult because that’s a high ticket for angels but not enough for VC firms to be interested.”
2. Limited early-stage liquidity
“We don’t have liquidity in the early stages like in the U.S.,” Vilela says. “In the U.S., you have public markets that are much better developed in terms of investing public paper, and you have small companies that are publicly traded. In Brazil, we don’t have small companies that are publicly traded. We don’t have coaching on investing public equity, so we don’t have the IPOs here that you have in the U.S. Unless your revenues are above $100 million per year in Brazil, forget about an IPO.”
3. A relatively young VC industry
“The VC industry in Brazil is very new compared to the VC industry in the U.S. — it only emerged in 2009,” Vilela says. “Some Silicon Valley investors came here and did very well, and it created an example that others wanted to follow.”
“But there are a lot of mistakes made in terms of trying to copy and paste the U.S. VC model here. It doesn’t work because the culture here is different,” Vilela says. For example, “We don’t have internet access here like you do in the U.S. Once a week, my internet shuts down for an hour near Paulista Avenue, in São Paulo. And the culture of using apps and technology is more advanced in the U.S. You can’t replicate that in Brazil. It’s a different reality here.”
4. The cost hiring and retaining a great team
“If I had to create a hypothetical country that made it hard for entrepreneurs to do business, I wouldn’t even be creative enough to come up with Brazil,” Vilela says. Between taxes, legal structures, employment contracts and legislation, “the cost of doing business here is very high,” Vilela says, at least in part because the legislation that governs employment and taxes is very outdated.
“If you hire someone, take their salary and double it, because that’s how much they’ll actually cost you when you include taxes for the government,” Vilela says. “The law also doesn’t recognize bonuses or variable compensation. It’s illegal to pay variable compensation, so you can’t recognize someone financially for doing better than other employees. Companies end up finding creative (and legal) ways of doing so.”
5. The necessity for complicated legal workarounds to fundraise
There are several legal entity types startups can incorporate as in Brazil, “and everybody in the early stage becomes a limited company,” Vilela says. “But as a limited company, if I receive money from an investor, Brazilian legislation doesn’t recognize the difference between the valuation (market value of the company), and the shareholder equity (capital recognized on the balance sheet). Having said that, I have to pay roughly 20–30 percent taxes on the money that is received from investors. So you have to create alternative legal instruments to be within the law without transforming the company into a legal entity that could accept this investment without taxes. Because if you do that, your taxes will increase so much that you may bankrupt.”
“So we have like many legal engineers here in Brazil,” Vilela says, “creating instruments to suit entrepreneurs and to serve them. For them not to be illegal but not to exactly follow the law. Otherwise they are going to go bankrupt due to taxes.”
