I’ve been in Mexico City for no more than 48 hours and we already received 2 offers from investors. Firstly, I consider these offers and in fact offers of any kind as complements. They signal that we are doing and have created something of value that others would like to participate in. However, as with any offer they are not necessarily reasonable and should thus be considered simply complements and treated accordingly. Something to thank and move on from.
One of the two offers flew in via an email within 24 hours of our first meeting. It was an offer to form a Joint Partnership to bring Fundacity to Mexico. Interestingly it came from a very prominent investor in the market. Someone that could certainly offer smart money. The offer however asked for 50% of Fundacity Mexico in return for time and contacts.
I’ve come across several such offers from investors during my visits to Singapore, Mexico, Argentina and USA. Thus I am getting better accustomed to responding to them and most importantly I am learning to better assess my value and that of my team and our product. I’ve come to realize that I am very good at entering new markets. I landed in LatAm little less than 2 years ago without a product idea, with no contacts and without speaking the languages. Not only do I now speak some Portuguese and Spanish and have contacts in the VC industry across LatAm but have a great team around me and a product that is gaining great traction. A lot is possible if we try hard enough.
Some thoughts on such offers
- Firstly, I, and I assume most startups, require a cash component for equity as we require capital to drive the growth of our startup. I am not a fan of splitting ‘smart money’ into ‘smart’ and ‘money’. Naturally, an investor is expected to make intros, bring new contacts and brainstorm on strategies with you…after all he has capital in the game. In fact, if the investor is unable to bring more than just money to the table you should probably not make a deal unless it is an FFF round.
- Significant equity percentages, 10% or more, can be acceptable but only if that person will truly become an integral part of the team perhaps even the CEO. 10% is very significant and should be given to make key hires that take c-level roles and is not a sensible equity offer for advisory roles. For that we should consider around 1%, vested with clear KPIs. See the Founder Advisory Standard Agreement from the cool guys at Founders Institute.
- I am not a fan of bringing in new money or advisors at a subsidiary level. It can cause perverse interests and a lot of complications if the company is later acquired as the conversion from sub to holdco may not be clear or in some cases the subsidiary may not actually be acquired by the holdco which will cause a lot of tensions. In the case of Fundacity, I believe it should be looked at as a whole and all partners should enter the holdco level to help align interests to building something bigger than a local platform which in our opinion would lack critical mass.
- 50:50 means no one is in control. 50:50 JVs are hard. When times get tough neither the investor/partner, with several projects going on simultaneously, nor us, who would have a relatively small participation compared to other regions we are in, will be incentivized to drive things forward.
- When the terms are very far from what you would like them to be I think it is best to decline and refrain from making a counter as it is unlikely you can give a reasonable counter offer from the other parties point of view. I believe it is best to decline and give a transparent and simple explanation as to why the deal doesn’t work for you. This is will help save both of you weeks of unnecessary negotiation. By being honest and friendly you can be in a good position to circle back in the future when the stars are better aligned or perhaps to collaborate on another project.
- Partnerships and JVs can be very valuable especially when entering new markets, but a lot of care needs to go into structuring them…..which is tough. The terms should reflect current needs of the company and also thoroughly consider alignment of interests and impacts of certain what-if scenarios.
In conclusion, the process was very positive and friendly for us. Mexico is full of very talented startups and investors. I think a lot can be done here and I hope to collaborate closely with the players here. If a partnership is the way forward for us then we are yet to find our sole mates.