Big Sur Ventures is a Spanish, early stage venture capital firm which is focused on technology based products and services and internet/SaaS. The firm is dedicated to innovation and establishing strong bonds with the management team, as the people behind the product are a “crucial ingredient.” KITE Invest spoke with Jose Miguel Herrero, the General Partner of Big Sur Ventures to understand what makes their investment outfit tick.
KITE Invest: Big Sur Ventures investment strategy is focused on the technology sector. What is the team’s background experience in this sector and what was the impetus to this investment preference type?
Jose Miguel Herrero: To paraphrase Warren Buffet, ‘Don’t invest in what you don’t understand’, and of course the implication is ‘invest in what you do understand’, and by extension, the better and deeper you understand, the better you will be able to invest.
My background is in Electrical Engineering and Computer Science, followed by an MBA in Finance. It was in this latter area where I spent some years in London with an American firm as financial director for Europe before jumping into the creation of my first company HSC in IT Distribution and Systems Integration. This was followed by several Internet companies including LaNetro which I founded and led, and is an important and well-known story in the history of Internet in Spain. My management experience ranges through most stages of a company’s growth from startup (read zero), to managing a Nasdaq public company in the US.
I quite literally love the early stage startup space, watching and contributing to companies bringing things together and navigating the many obstacles to success. This is where I’m comfortable, where I think I can contribute positively to helping the portfolio company and the team build a great company.
To sum up, love the space, understand it, and this is where I want to live.
KITE: Since founding Big Sur Ventures, how have you seen the industry change and adapt? Good or bad.
JMH: The whole industry (VC, Startups, ecosystem) is evolving. New VCs are becoming very transparent as compared to what they were like not too long ago. They are easy to find, they write and talk openly about what they look for in a deal, etc. This has not always been so.
For the entrepreneur the support structure that exists today is amazing. There are meetups, workshops, accelerators, clinics, specialists, public financing, angel groups, etc. When I started as an entrepreneur, and even not very many years ago, none of this existed. In fact, one would have been hard pressed to identify any fellow entrepreneurs to share experiences with.
Generally, this is very good. In Spain where we make most of our investments, the industry is evolving very quickly, as the sector plays catch up with countries such as the UK, and cities like Berlin that are ahead in the development game. This quick growth leads some excesses, but these are natural, tolerable and will settle as the sector continues to mature.
KITE: For Big Sur Ventures the opportunity to balance risk and value creation are priorities over the investment stage. The firm invests between 100k to 300k euros per deal in the first round. Please elaborate on these priorities and why the investment stage is less crucial.
JMH: What stage a fund invests in really has to do with the risk-return profile you are comfortable at. As we are very early stage, we invest in what for a ‘professional’ is the highest risk profile. No proven facts, lots of hypotheses. Everyone can easily understand that the more mature the company the more information you have the more proven facts, and the fewer hypotheses. As such returns are generally lower given the lower risk.
We believe we can obtain the highest returns (over a portfolio) investing at an earlier stage (pre-A certainly), because we understand how to select opportunities at the stage. Additionally we get the bonus of great personal satisfaction helping these companies develop from this stage. It’s hard work, but great fun.
KITE: Further to this subject, can your shed light on what the different investment stages mean/represent for Big Sur Ventures and would the firm ever consider in larger-scale investments?
JMH: All investment stages are necessary to the development of a startup. All are equally important to the company and its success. Each investment stage is dependent on the existence of investment players at the next stage and vice-versa. Therefore, the different investment stages represent a natural and necessary feature of the company building process. The better developed and more complete the financial offering accessible the better for the economy, the better for company creation and the better for us.
Right now we are very comfortable where we are. Is there room for more Series A and Series B players in Spain? Certainly. Will we ever be active there? We’ll see.
KITE: Big Sur invest prefers to lead or co-lead the first institutional capital round. Please explain why Big Sur prefers investing during the first round of capital in a company, what makes it different to a second round?
JMH: We invest typically, not always, in the first professional round, now this may even be (exceptionally) a seed investment. Generally, we are looking for a degree of traction that gives a glimmer of confirmation of the value proposition that is being proposed to the market. Traction may be in users or in clients. Obviously, the latter is preferable. If we really buy the company’s value proposition, growth strategy, market potential of the opportunity they are addressing and have a great team, we are very comfortable becoming involved before full customer validation has been attained. This allows us to enter the company’s capital at reasonable valuations and where we think we can obtain the biggest returns. This is clearly a higher risk profile than entering in a more mature stage, but it’s where we feel comfortable.
KITE: Can you describe the process of how Big Sur finds and settles on an investment opportunity?
JMH: Most opportunities find us, or are referred to us by our diverse relationships. We also research and reach out in given areas that are of interest to us at each point in time. In each opportunity, we look for teams trying to solve problems that are causing pain for a lot of people. It doesn’t matter to us if it’s people in companies (business) or consumers. The more sufferers and the bigger the pain: the better (market size).
We then turn to how they are solving the problem. Is it credible? Is it sufficiently differentiated from the competition? If it’s not many times better than the current solutions they won’t make it. If everything fits and makes sense, we then turn to the team. An exceptional team is always the key in making an investment. No matter how great the opportunity and the solution addressing the problem, no matter how great their IP, if there is any, it all comes down to execution. We always assume that there are smart people out there and that in all likelihood direct competitors will crop up. Execution will determine the winner.
KITE: What is the preferred method of starting a relationship with an investment opportunity?
JMH: I guess there are two sides to this question. First is how we become aware of them. It is always better when someone whose opinion we value highly, calls us and says “Jose Miguel you have to take a look at these guys they are doing something very interesting.” That helps cut through the clutter and get our attention.
The second part of the question has to do with building the relationship and getting to know each other. Having the opportunity to spend time with the team before the investment helps us not only understand the company and the team, it also helps the team understand us, if they like us and like what we can bring. Having time to spend together with the company before a deal, when this a possibility, makes for better deals for both parties.
KITE: Lastly, what is the most often piece of advice you give to entrepreneurs?
JMH: Not an easy question…every situation is different and advice varies broadly. Let me say that we don’t have to give entrepreneurs pep talks, the teams we invest in need no encouragement. In fact, there are cases we have to tell the entrepreneur to ease up on himself/herself to prevent burnout. Perhaps one of our biggest contributions is for the team, the CEO to feel that he is not on his own, that we are there with him not just for the good news, but to help with the rough patches as well – and every company has its major challenges at some stage. Often the CEO may feel very alone when faced with those challenges, helping him manage his psychology, is a key contribution. The fact that as entrepreneurs we’ve lived through many a bad moment allows us to understand what they are going through. We can’t help him/her do away with the fear but we can help him/her to manage those emotions.