Patrick Arippol & Bianca Martinelli (Alexia Ventures) on the next Gen of VC in LatAm and sustaining moats through tech enabled communities
On this episode, Pat sat down with Patrick Arippol (Co-Founder) & Bianca Martinelli (Partner) of Brazilian / LatAm fund Alexia Ventures to talk about the thesis of the firm, their respective journeys into venture, and their take on adding value to founders.
On this episode you will learn about:
- How to craft the thesis of a VC
- Are moats ever sustainable and the potential lock-in effects of tech-enabled communities
- How to make the most out of boards
- What metrics Alexia VC is looking for in sharpening their investment decision
Short in time? Here’s what this episode is about:
- Walking the talk: Alexia Ventures is a newly founded Latin American Venture Capital firm led by seasoned investors and successful former operators specialised on Series-A rounds in software, SaaS, data/intelligence and Blockchain/ Crypto startups. Alexia VC’s “smart money” comes from founders with profound experience, and is supported by a network of investors, venture partners, and founders from innovation hubs in the region, key emerging markets, and the Bay Area.
- Generalist vs. Specialist: Being driven by their own portfolio instead of the market does not only entail better sourcing and value-add capabilities but also greater returns
- Diversity, Intellectual Honesty, and the Generational Factor: The key to the success of Alexia Ventures lies in the miscellaneous backgrounds of its team, the awareness of where to best apply their experience, and the inclusion of younger points of view through fast-track promotions.
- Beyond numbers: Even though metrics and ratios are important benchmarks, it is more important to understand the founders’ approach to how they were calculated as it reveals their understanding of the business and the market they are operating in
- Networks effects & tech-enabled communities: The strongest variations of moats lie outside of intellectual property and lead time calculations. Patrick and Bianca make an interesting case for the potential of moats through tech-enabled communities.
Way into Venture
Coming from a family with an entrepreneurial background, Patrick’s journey into the world of start-ups and venture capital started early in his life. He first founded a company in 1997, the healthcare transaction company PlanetaVida together with Wolff Klubin, who is actually now also a Co-Founder of Alexia Ventures. Having learned how to program himself, he has ever since been involved with building and developing software. Bianca, on the other hand, kicked off her career at Endeavor Brazil and Endeavor Global in 2007, thereby experiencing first-hand the tech boom in Brazil and Latin America. This role also allowed her to expand Endeavor’s model to different regions and markets. Their paths crossed at RD-Station, a digital marketing and CRM platform, where Bianca was working as VP of US Expansion and Patrick was a board member & investor.
Walking the Talk
Patrick “turned to the dark side” — as he would call it — and joined several top Venture Capitalist firms in the US from 2007 onwards.
“There were many things that were not always known to the founders — and there is so much opportunity to do things differently.”
Initially, he launched a fund to invest in a US-based software company, however, home was calling in 2010 and he returned to Brazil to join DGF Investimentos, where he had the opportunity to lead two funds and get even more involved on company boards.
“Not of the sake of being contrarian — but to be concentrated”
In 2019, he knew that he wanted to approach the traditional VC model from a different viewpoint: He wanted to bring founders — those people that had been at the front-lines of building companies — with the idea of pushing the outlook on their global basis together into a founder-led VC.
That means to Patrick: Fewer companies, more value-added, and bringing specialty not from solely experience, but rather from a network system.
“There is nothing stronger for the ecosystem than the inspiration that a few companies can have on the entire market”
Bianca was immediately convinced, as she was really inspired by that thesis of enabling the founders through network-based operations, and she saw huge potential for such funds, especially when focusing on SaaS, AI, and data.
Generalist vs. Specialist
This is an ongoing debate in VC globally, in LatAm so far we see only a few VCs with a more specialised thesis. Patrick argues that over the last years specialist funds have not been outperforming generalist funds in terms of sourcing or better value-add capabilities, but it is also known that those funds generally have the potential to generate increased returns.
“We are not driven by fear of missing out on a great company — we are simply driven by our own portfolio construction“
Once Alexia Ventures has committed to a company and its founders, they are taking on a long-haul view. This is why before joining the journey of the start-up, they analyze the company closely and establish deep relationships with the founders. From Patrick’s point of view, even though there is a new generation of VCs popping up recently in the region and it’s not the same names from the last ten years anymore, it is not enough. There is more than enough space for new plays and each venture firm adds their own flavour to the industry. Alexia Ventures is especially focused on capital-efficient sectors and the “engines of the companies” — as he would call them: SaaS, AI, and Blockchain.
Building the Venture Team
Both agree that diversity of backgrounds is the key to the success of Alexia Ventures and what brings value to their business.
“It’s not about former MBA class-mates coming together, with the same background”
Patrick stresses that Alexia Ventures is composed of people with very different walks of life that are aligned through their vision of putting the entrepreneur first. That is also what Bianca finds most important: As every one of them has worked as founders, operators, or supporters of the entrepreneurial ecosystem in miscellaneous ways, they can be empathetic and really understand the journey of their founders.
Adding to this, what Bianca calls “Intellectual Honesty” is rounding off the values of the fund. This means that they never approach a challenge believing that they already have absolute answers — It is rather about providing options given their experiences and evaluating them together with the founders.
“In the long-term, VCs will succeed especially on how much they pass on to the younger generation to really take the lead”
Another distinctive aspect about Alexia Ventures, as Patrick adds, is the generational factor. Through establishing fast career tracks, juniors can become partners and are thereby more committed, able to contribute and thus make the VC engine more powerful.
Beyond Standard Profiles
Generally, all VCs are looking for large markets and great teams. Interestingly, Patrick believes that there might be excessive attention on founders’ profiles, which are typically shaped by top MBAs, schools, and previous successful company creations. These backgrounds are great, but there are so many opportunities outside the radar of those profiles. He narrates that historically they have backed many founders that might not have been as bullish previously. However, through their support, these founders have found their paths and curve of evolution themselves.
Even though due to the acceleration of the market, they are now entering companies before reaching the 1 million ARR mark, it’s still indispensable to focus on product-market-fit and a scalable market model in the due diligence process.
“Does the customer ever want to stop using the product?”
In terms of the product-market fit Bianca depicts that they try to deeply comprehend the product by talking with all stakeholders involved — especially the customers and the network. Patrick adds that it is also crucial that founders have such a deep understanding of their product and the market, that it will take a long time for somebody to replicate the idea on a similar level.
Diving into the idea of a scalable market, Patrick finds it a bit of a pity that there are a large number of companies that offer outstanding products in Latin America, but which in the end don’t end up going anywhere. But this is also exactly where Alexia Ventures jumps in and adds value by evolving go-to-market strategies and sales channels or building up general know-how.
More than just numbers
Following benchmarks is a good baseline and there are important metrics, but they shouldn’t be treated as the holy grail. The way that the numbers are computed, is much more interesting, as Patrick explains. It shows a lot more about how the founders really think about their business.
“Sometimes the companies have fantastic ratios but it is very clear that they can’t put more gas into their engines.”
This is why it is important to understand the metrics, make sure that they are correct in their analysis while getting beyond the reasoning of the founders.
With respect to Alexia Ventures, Bianca adds that due to their investment thesis and focus on capital-efficient business models they are looking carefully at margins and how founders are managing their costs. They need to invest in a stage of development, but at the same time, they value founders that look at the bottom line to find out how to get to the top.
Moats, Moats, Moats
A Moat — a term that is often attributed to Warren Buffet — refers to a company’s ability to maintain the competitive advantages that are expected to help it fend off competition and maintain profitability into the future.
“The most important competitor is the one that you haven’t seen yet.”
Patricks explains that especially for their business it is hard to define clearly their moats. In venture, due to regulatory restrictions, a technology rarely has an IP.
“And all of a sudden — boom — you have a competitor that has the chance of slipping right through accelerating beyond what you have done.”
In the end, what they do is analyze the lead time, which means how much time somebody would need to take a look at the company and replicate the idea. This time can be 2 years, but also 2 months — however, as long as the company has the best team, which is constantly revisiting their competitor’s situation this is okay, Patrick explains.
But there are some more specific aspects that they consider as more sustainable and stronger moats: Network effects and tech-enabled communities. Network effects are often driven by megatrends, such as the technologies behind SaaS and data intelligence, which Alexia Ventures is focusing on.
“They must be not only nice to have but be a must-have”
Bianca explains that they are therefore observing technologies that they are especially analyzing switching costs when evaluating the recurring revenue over time.
Tech-enabled communities grow where people align their whole careers behind a specific type of technology in the way that it becomes their new modus operandi. This moat is especially interesting for Latin-American entrepreneurs considering the existing cost leverages that they can have from a talent perspective. There is an increasing number of global-born companies coming from LATAM, which is a huge edge for founders that can now tap into talent and sell it worldwide.
Adding Value on Boards
In terms of size, Patrick recommends keeping the board as small as possible for the longest time, as, with each additive member, complexity is added to the decision-making.
Digging into interpersonal nuances, due to his extensive board experience, Patrick can unpack many stories about how a relationship between the board and founders should not be working. For example, he observed many times that founders feel like they have to sell their ideas to their board members and show off how beautiful things would be going, while at the same time not mentioning the problems. This dynamic is very hard to break.
Another observation is that sometimes investors want to show that they know everything, and even if their expertise is not the focus at the moment, they want their ideas to be treated with priority. Boards that are trying to be too prescriptive can make the founder adapt to things and make them feel inferior to the board. It is healthier for the company to incentivize the founder to do their own research instead of making them think alike. Founders should be provoked to help them to become better.
“You need to find your zone of genius”
Bianca stresses that adding value to the entrepreneurs is the most important task of a board member, and not every member can add value to every topic. She calls again for intellectual honesty — they should focus on the skills they are best at and double down. This is why it is so important to have a diverse team, also in terms of the networks that are brought into the business.
Operator vs Investment Professionals
Alexia Ventures is an operator-oriented venture firm. Having this focus, it is important to bring in as much diverse experience through the team as possible.
“Watch out with first-time founders that do extremely well, because they can be the worst angel investors that you could have. They think they have the touch of Midas”
Patrick shares one of the best pieces of advice he ever got: When once starting to raise money with angel investors in Silicon Valley he was warned of successful first-time founders, as they are very young, have done a really good founding job and this is why they might believe that everything they do will be a success. This can be a problem as every company will come to a point where there is a problem and that is when these kinds of founders would love to jump in, get their hands dirty for the first time.
The Latam Success Story continues
Bianca believes that the next 10 years are going to be incredible for the Latam ecosystem, especially when tapping into the fields of technologies and talent arising in the region. However, there is still a gap in terms of technology that are going to be developed and talent from the region, and this is where the opportunity for Alexia Ventures lies: having investors coming from operator backgrounds, combined with entrepreneurs acting as investors that have already been part of this new wave in Latam. The region will leverage lower costs in terms of talent while at the same time seeing companies start global from the start and accessing talent in a decentralized manner from all over the world.
“We are resilient and creative by necessity”
Painfully thinking about The Economist 2010 cover of Brazil, Patrick narrates that he was not always bullish about Latam. However, the pandemic has been a huge accelerator. Before companies have been defensive and protective in terms of their employees, and now companies with Latam founders are so phenomenal that they can attract talent from all over the world. For him, it is amazing to observe how markets are becoming global.
If you want to learn more about Patrick’s and Bianca’s take on future megatrends in the region and learn more about their personal advice on founding, then listen to the podcast here: