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Alta Ventures Mexico examine the growth of Mexico’s venture capital industry – “capital emprendedor”

Alta Ventures Mexico is an early-stage venture capital fund providing seed, venture and growth capital to entrepreneurs and companies targeting high-growth markets in Mexico and Latin America. Alta invests in opportunities in Internet, SaaS computing, mobile computing, consumer, security, communications and health care, and has helped launch more than 30 companies since opening its doors. KITE Invest spoke with Alta Ventures Mexico’s Co-Founder and active VC player, Paul Ahlstrom, about the dynamic market that Mexico and other emerging markets are offering investors.

KITE Invest: As an American and a former Founder of an American venture capital firm, what was the catalyst behind the formation of Alta Ventures Mexico, and why Mexico specifically?

Paul Ahlstrom: I began researching an international investment strategy in 2006. At the time I was Founder of a series of venture capital funds in the United States and investors showed interest in investing outside of the United States. We began deep research,looking at countries around the world demonstrating growth and stability. We noticed was that the global contribution of GDP growth by emerging markets was increasing, while the GDP growth contribution of advanced economies was decreasing, and foresaw the growth contributions crossing over within a few years’ time.

Many emerging markets demonstrated some interesting stability due to the low debt-to-GDP ratios and the deficit-to-GDP ratios. Countries like Mexico, Chile, and Peru showed great macroeconomic profiles while many advanced economies in Europe, the United States and Japan were upside down in terms of long-term stability.

We looked at hundreds of variables, but were mainly focused on long-term growth, encouraging demographics, country stability and equity availability. Mexico was very promising and very underserved. From this point we conducted over a hundred face-to-face meeting with different players in the ecosystem, starting with former President Vicente Fox. We developed a market-entry strategy and created a middle-market growth equity fund in Mexico. We launched the fund, Alta Growth Capital, in 2007 and began investing in early 2008 in middle market, profitable, and growing companies in Mexico.

At this point I received invitations from NAFIN in Mexico and the IFC, World Bank, to help establish and grow the venture capital industry in Mexico. Our primary research in growth equity uncovered a significant opportunity for earlier stage investing. In Mexico, the venture capital asset class was completely non-existent, despite Mexico’s trillion-dollar economy. I accepted the invitation, moved with my family in 2009 to begin creating a new venture capital industry in Mexico. In 2010 we hosted the first venture capital conference in Mexico, ‘The Monterrey Venture Capital Conference’ and created the first high-tech venture fund raising $70 million.

KITE: Alta Ventures has offices in Monterrey, Mexico and Utah, USA. Is Alta Ventures strictly focused on investments in Mexico or has it branched out?

PA: From the beginning our thesis was a base in Mexico as a springboard to Latin America. For each of our portfolio companies, we encourage them to think globally, whether it’s a US company getting into Latin America or a Mexican company thinking more expansively. We have now opened an office in Lima, Peru and have a presence in Mexico City and Colombia.

The Peruvian Government asked us to partner with them to help develop the venture capital industry in Peru, just as we did in Mexico. In partnership with COFIDE, Peru’s development bank, we created monthly meet-up events called Startup Grind, established the first seed fund in Peru, called Kickstart Peru, planned Peru’s first venture capital conference and have started making investments. We have now been invited by 12 countries to come and do the same thing in their respective country. Our primary job is investing, not ecosystem development, but the appetite for entrepreneurial ecosystem development shows the level of pent up demand and the desire to shift towards a knowledge-based economy as a foundation for future economic growthUltimately, I see Alta Ventures as a “connector fund.” We take interesting ideas from one economy and help translate them and accelerate them into another economy, while providing capital and connections.

KITE: Having had the on the ground investment experience in Mexico, and as the country is currently undergoing a major economic shift, due to the reforms in energy, telecomm, education, and more, in your estimation have the reforms been impactful and where do you see Mexico in terms of global economic positioning in the short-term?

PA: My observations is that the people outside of Mexico believed more in the reforms than the people inside Mexico, because there was a level of suspicion about the reforms being a window-dressing attempt to stimulate the economy.

Although the reforms won’t happen quickly, in the long-term I am very encouraged by the deep thought and sincere intent behind the reforms. With reform comes change and uncertainty and economic markets don’t like uncertainty; markets tend to freeze up. In the short term, this uncertainty has actually led to a reduction of capital in many of the sectors. These short-term challenges include unintended consequences arising from new polices and in the middleof uncertainty people hold onto their money to see how things will play out. This uncertainty in the short term has frozen many activities, and as a result we have actually see a reduction in investment capital in many sectors. Over time this short term freeze will thaw and the Mexican economy will come through healthier.

KITE: Mexico is becoming increasingly more open to foreign investors, is Alta looking forward to a greater penetration of investors? Would you like to form co-investments with foreign VC funds?

PA: We co-invest all the time, so yes we are delighted with the increase of foreign investors’ interest in Mexico. We are actively looking for co-investment partnerships.

Not only is Mexico becoming more open, but Mexico has taken steps toward the new free-trade program called the Pacific Alliance, made up by Mexico, Peru, Colombia and Chile, which are the fastest growing and most stable economies in Latin America. These countries are serious about increasingthe level of investment in the region and have even created a joint stock market called the MILA. As a result, this trading block is becoming a significant economic force and a very encouraging indicator for sustained economic stability and growth in the region.

KITE: In terms of entrepreneurs and startups, how have the reforms affected them and where the direction of this ecosystem going? What is the outlook for the venture capital industry in relation to the reforms?

PA: As I mentioned, around 2008 or 2009 the venture capital industry did not really exist in Mexico. One of the reasons was that the name of the industry in Spanish is called “capital de riesgo” (risk capital), which roughly translates to a “you may lose your money capital.” It is hard to build an industry around “you will lose your money capital”, so we created a contest at the Monterrey Institute of Technology to re-name the industry. The name “capital emprendedor” (entrepreneur capital) was suggested and selected. The name stuck and became the new name for the industry.

The new name for the industry also served as an umbrella for the entire sector of early-stage investing, such as family offices, super angels, angels, seed funds, venture funds, and early-growth equity. The re-naming of the sector became a catalytic moment. The Government saw this too and created “fondos de capital emprendedor” (entrepreneur capital funds) and entrepreneurship programs. Currently, there are 37 seed and venture funds in Mexico. Today, the ecosystem is ignited, is vibrant and is growing.

Entrepreneurship is taking off and all across the country, with entrepreneurship classes being offered at universities and entrepreneurial events being held regularly throughout the country. Having said that, the community and industry are still young and results take time to measure. It is too early to call victory, but the trajectory is very steep.

KITE: The focus of Alta’s investments is quite broad, how has Alta come to incorporate such a variety of industries within its portfolio and where do you envision the scope of Alta’s investments in the future?

PA: Eventually we will have a specialization funds that can penetrate certain sectors as the industry matures.

Alta’s investment strategy was built on our analysis of industries and sectors where there was significant growth, no monopolies, a dynamic and competitive environment, and supported by the demographic trends of the country. Mexico has a very young population, a rapidly growing middle class, shifting consumer behaviors, growing financial sophistication, rapid Internet growth as well as mobile and social media. Due to the convergence of these trends, we looked at investment opportunities that exist at the intersection of these sectors and market dislocations.

One industry in Mexico stands out – financial technology. In my opinion, this is one of the most interesting industries for all of Latin America. We have made several interesting investments into the FinTech sector.

KITE: Lastly, what is the number one piece of advice you would give to an entrepreneur looking for funding?

PA: Think big and nail it before you scale it. To help entrepreneurs do thisI wrote a book called, “Nail it, then Scale it” and also recently published the“Big Idea Canvas,” both tools were created to help entrepreneurs increase the odds of getting it right the first time. Your question is one of the most frequently asked questions I get. To put it another way, I tell entrepreneurs that before they spend the next five to ten years of their life working on a startup, they should spend some time determining if the idea is worth a significant devotion of their time and energy. Fist time entrepreneurs have a tendency to think small.. Think big!. In reality, thinking big makes it easier to attract money, to attract talented team members and whether you think big or think small, you still use the same amount hours in the day.

The first four things I would measure to determine if an opportunity is worth my time are:First, is the customer “pain” worth solving? No pain, no opportunity. Second, what is the financial potential if I resolve that “pain”? Third, what is the best way to enter the market? And fourth, do I have the core competency to develop an innovative solution in this space?After that there are hundreds of questions to be addressed. By first focusing on problems that are worth solving, the entrepreneur can quickly sift and sort through and prioritize towards innovative and rewarding solutions to market problems.

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