May 21, 2020

#2 - How to structure your startup for international investments: Dan Green, Gunderson Dettmer

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No matter how big your company gets, if you don’t have a strong foundation, it won’t stand up for too long without suffering some losses.

When we’re starting up, we don’t always pay much attention to legal structures or to tax legislation. Entrepreneurs tend to go with the fastest, easiest, or cheapest way to get the business off the ground.

I, too, made this mistake. It cost us approximately one hundred million dollars in company value

That’s why I invited Dan Green, partner at Gunderson Dettmer, to talk to us today. Gunderson is a global law firm specializing in tech. They are one of the most active law firms in Brazil and Latin America working with venture-backed startups and VCs.

In this episode, Dan shares specific advice about setting up or flipping your structure to raise capital from international investors, what these investors look for during due diligence, how to manage intellectual property, vesting and your cap table in the early stages, and more.

I found this talk super useful, and I think you will too. Unfortunately, the audio is a bit spotty at times, although it doesn’t compromise the interview.

Getting ready to start raising from international VCs? Visit and set up your venture-backable company structure.


Brian Requarth

If we can start just by maybe sharing with the entrepreneurs: when is the best time you would say to set up an international legal structure to fundraise from those institutional investors?

Dan Green

Yeah it's a great question it's a question we grapple with every day, every week, and I think it requires a certain amount of foresight and a little bit of a crystal ball. The more thought you put into the process early on, the easier it will become later on. And you'll be able to save a whole host of money and headache if you do it right from the get-go, or you at least know when you're gonna do a flip. I usually use the metric of — you're raising a couple million dollars from an institutional fund or international investor who's sophisticated enough to value an international structure.

For Latin American entrepreneurs today, what this basically means is one of a couple of different alternatives: Cayman as a holding company, a Delaware LLC or, in certain cases, a Delaware C-corporation, which is the vehicle that 99% of US entrepreneurs use. And to answer that question about which of those three paths you go down, you kind of have to answer in your own mind, as a founder:

  • Who am I raising from?
  • How much am I raising in total, from here to exit?
  • What type of exit do I expect if I have that crystal ball?
  • And where are my operations gonna be?

With those four questions, you get a lot of guidance in that moving forward. There are some founders — Oskar and Danny at Cornershop are a good example... With Cornershop, when we got them off the ground in 2015, that was their third or fourth startup, so they knew exactly what they wanted to build, they knew who they were gonna fundraise from… so we set them up with a Cayman holding company on day one. But they're the minority.

Most founders are scrappy, they're trying to save money in the early stages, they set up the basic minimum entity that's needed. Oftentimes it's a Limitada in Brazil, or a SAS in Colombia, and they get some traction there, and then they reach the stage — six, twelve or more months down the road — that they have to do the flip. And then that's where a firm like us can come in to help guide them through that flip and fundraising process.

Brian Requarth

What are the challenges in a flip? When you can't really raise money directly into an Limitada very effectively, or SAS in Colombia — What is it required for the flip,  more or less how long does it take? What's involved in making that happen?

Dan Green

It's predominantly tax driven, so once you've answered the question “where am I going, what's the new holding company going to look like?” — let's just assume for this purpose it's going to be a Cayman entity with an LLC and a local subsidiary —, once you've solved that, which usually takes one to two weeks in most circumstances, then the next process is tax planning. What's the most tax-efficient way to go from point A (my local structure) to point B (the holding company)? That varies dramatically on a jurisdiction or country-by-country basis, and also depends on how mature your company is and how high-value your company is.

Generally speaking, the earlier you do the flip in a company's life cycle and the lower the value is of the company, the easier it is to do that flip. Flips can get complex and hard when a company's been around five years, it's profitable, it's raising money at a forty million pre-money and it's got thirty shareholders on the cap table. All of those factors can determine it's going to be a pretty complex process, as opposed to flipping a six-month old company that's raised half a million in SAFEs from four investors.

Fundamentally, it's a local tax question. By local I mean: local at the country of operations, so Brazil, Colombia etc. You need to have a really good local tax advisor and you need to have a really good international law firm, like us or others involved, so you can do that process effectively.

Generally speaking, flips can take, overall, from start to finish, anywhere between two weeks (on the really fast side) to two or more months if it's complex.

Brian Requarth

So further along you are in your process with the company, in terms of your operation... If you've got a company that's been around for five years operating for a long time, you obviously have a lot more cleanup and a lot more things to corral to be able to have a clean flip, and a clean structure for an investor to put money into?

Dan Green

That's exactly right. Yeah and as part of this process, the investor, as you're saying, is going to look to do a legal health check. They're gonna do due diligence — legal, financial, customer etc.

One of the aspects of the legal due diligence is: am I investing in a company that's got a whole bunch of tax liabilities from this flip? And even if the investors aren't gonna inherit those liabilities, they don't want the founders — they don't want you, Brian, as a founder, to be saddled with millions of dollars of tax liability that could bite you in the future, when there's an exit. No one ends up in a good place if that happens.

So they want to make sure that the flip has been done effectively from a tax perspective. They want to make sure the IP — the intellectual property of the company — is very clearly owned by one entity within that holding company structure. But there's clear what we call ‘chain of title’, that there aren't going to be that classic example of disgruntled former founder, or disgruntled former employee, who comes out of the woodwork right on the eve of an exit and says ‘I own part of the IP’ or ‘I own part of the cap table.’ So there's a lot of integrity that goes into that process, in making sure you've done it effectively.

I would say that sometimes you'll see — I see it less today, but I've been doing this for close to 15 years, and I've seen all sorts of variants on the theme of ‘hey, my buddy is telling me I've gotta focus on tax efficiency.’ Yes, that's correct. ‘he's telling me I should set up in Panama’, ‘he's telling me I should set up in Uruguay’ or ‘in Singapore, because there’s tax effective and tax efficient jurisdictions.’ My answer to that is: Singapore may be great if you're an Indian entrepreneur raising capital in that market. It doesn't make sense in Latin America. And Panama and Uruguay don't make sense because they're not countries that a US or international investor is going to be comfortable investing in, just for the same reason that an international US investor is not gonna be comfortable directly investing into a Limitada.

Why? Because they want predictable governance.

They want to know that their right as an investor is going to be protected. They want to know that their fiduciary duties as a board member, if they sit on the board, are gonna be clear and well drawn-out. And if the proverbial s-h-i-t hits the fan, they want to know that they will have a predictable way of resolving this dispute. And unfortunately, there's many countries out there that offer tax advantages, but few can offer the advantages of predictability that Cayman or Delaware offer.

Brian Requarth

So just kind of recapping, it sounds like — you mentioned at the end — Cayman and Delaware are the primary holding company structures that make the most sense, for all those reasons you just mentioned, in terms of predictability.

Are those exclusively  the two places where you should have your holding company set up? Down the line here, if you're in Brazil, what's the optimum structure — assuming you're just starting, you’re raising a seed round, your operations are there, the customers are there? Walk me through what you would do, and then let's maybe take another couple of countries in the rest of Latin America and see how it stacks up.

Dan Green

Yeah the good news is, over the last five years, I would say for Brazil and also much of Latin America, the world is converging on a typical holding company structure of: a Cayman holding company, below that is a Delaware LLC (limited liability company), and below that is the operating company in Brazil, the Limitada in your example — or a SAS Colombia or a S.A.P.I. in Mexico. And as you build out other markets for that business, you can set up other subsidiaries beneath the LLC.

Let's take that structure and let's unpack it a little bit.

So Cayman, we talked about, is a really tax-efficient place. There's no corporate tax, there's no shareholder tax, and it's also predictable and it has modeled its corporate laws off of Delaware. So you can do a SAFE financing, you can do an ESOP (Employee Stock Ownership Plan), you can do preferred shares — all in a Cayman structure that more or less looks quite familiar to Delaware. So it's got a lot of advantages and it doesn't come with the headaches of certain other tax jurisdictions, such as the Netherlands or Switzerland, that require you to hire local directors there, to have board meetings on their soil, to incur a lot of administrative costs that, for a startup, can be quite burdensome.  Cayman eliminates a lot of that. Yes, there are maintenance costs for a Cayman entity, just like there are for a Delaware entity. You've got to budget that, but they're quite low as an overall framework.

Below the Cayman entity sits the LLC, which we call an intermediate holding company. And below that sits the Limitada. The Limitada is where the operations are. It's where your employees are. It's generally where your contracts with customers, suppliers etc, are. There may be a few exceptions to that, and you want to make sure that that entity is protected, because if there are liabilities (slip and fall, injury, gig economy worker issues, or other liability issues), to the greatest extent possible, you want to make sure that that subsidiary, Limitada, is subject to the liabilities, but not the entire structure — not the LLC or the Cayman entity. That's why you have three separate entities, to protect the integrity of that structure.

The LLC in between — you may ask: why do I need that? It serves a couple of reasons. One is flexibility on an M&A exit. It gives you one more way to sell, because the LLC can sell the assets or the shares of the Limitada, or you can sell at the Cayman level. In both cases, it's tax-efficient because the LLC also has no corporate tax, just like Cayman doesn't have. And in some cases — Cornershop is a good example — the LLC provided disclosure advantages.

So Cornershop was going through -- in its first sale process with Walmart, that ultimately didn't happen, they had an antitrust review, which is pretty typical of larger transactions. The antitrust authority in Mexico sent over its request list, the documents that they wanted to see — all typical stuff. But when you start to unpack that request list, they wanted things like the governance documents and financial statements of all VCs that hold over a certain percentage, which included, in Cornershop’s case, Excel and Jackson Square, two Silicon Valley funds. They were both like ‘no way are we gonna share with a non-US regulator our governance documents and our financial statement. We don't even do that in the US. We are not going to do that, that's a deal-breaker for us.’ And what happened was: we were able to structure that transaction as a sale of the LLC instead of the Cayman entity. And the antitrust authority only looked one level up. So they basically said ‘we need this information for the owner of whatever entity is getting sold’. So if it's Cayman, we need the entity above that, we need the investors. If it's the LLC, we only need the information for Cayman, for the company. We were like ‘ok great, well we can do that.’ That's a lot easier.

Brian Requarth

Amazing. Ok, cool, that makes a lot of sense. So that explains the LLC in the middle there. And I usually think about it like a pass-through entity, but it also has other advantages and I've never thought about that before.

So when we look at other markets, is it the same in Mexico and Colombia?We talked about the Limitada — is there anything different or is it the exact same structure applies across the region? We have this Cayman at the top as the whole company, and then you have the Delaware LLC, and then the local operating companies. Is that the same everywhere?

Dan Green

It is, although there are slight differences in each country. And I don't profess to be an expert in every country in Latin America, I work in some of the larger markets. There are slight nuances. So Mexico recently adopted a new tax reform and now applies an additional 10% tax on founders who are Mexican taxpayers — in the Cornershop type of Cayman-LLC entities. That's a recent change. Other countries could adopt similar changes. There's ways to structure around it but I still think it is the best structure for most countries.

I would say in certain countries or certain situations there can be sensitivity to Cayman. Cayman is, in Spanish, a paraíso fiscal. It's a tax haven. So it is viewed in a certain light in certain ways in Latin America. Family offices or funds that have raised capital from government entities may view Cayman and say ‘look, I'm not able to invest in Cayman, it's got too much political risk for me, too much reputational risk.’ And that is a real issue in some deals. So what we've done in a few examples — and I wouldn't necessarily recommend this as plan A or plan B — is we've used the UK as an alternative. I've got several clients that have UK holding companies because the UK also has pretty good tax rules, has pretty good governance and predictability, but doesn't have that stigma of being a tax haven.

Brian Requarth

Got it. Now let's talk a little bit about intellectual property. What are the pitfalls that entrepreneurs should be aware of, that they should be thinking about?

Dan Green

Yeah, that’s a classic area of due diligence that an investor will focus on. What you really want to make clear is that the company that you set up owns its intellectual property, and that there's no issues with somebody coming in that has done some work for the company in its first couple of months and then left, or with someone you can't get ahold of.

I'll give you an example. About five years ago, we flipped a company — in this case, it was from Spain, but the principles apply. That company had been around for several years in Spain, it had 40 or 50 people develop its IP. It was flipping because Kleiner Perkins and some other US investors were investing in a series B round, they were putting 30 or 40 million dollars to work. And they asked the company: ‘look, tell us the names of everyone that's developed your IP and provide intellectual property assignment agreements, or what are called PIIAs. Provide signed copies of all these documents so we can make clear that everyone has assigned their rights of what they developed to the company.’

And what they had done — in Spain, at this time, it wasn't common to get these agreements in place with every single member of your team. Maybe top developers or top engineers signed them, but not everybody. In their case, they had maybe 10 or 12 people do work years prior that had never signed those agreements, but it was valid work that was still being used. And the VC was like ‘look, sorry, we need you to get the agreement signed by Juan Pérez who left two years ago.’ And you can imagine the difficulty that a founder has, going knocking door to door two years later, when they really have no incentive — they may not hold any equity in the company at that point, they have no incentive to sign this piece of paper that says ‘hey, everything I developed two years ago is owned by the company.’

So ultimately, I mean, there's ways around it. It can be messy but you've got to be diligent about getting every person who works for your company to sign that type of agreement. The US investor generally treats IP very broadly. Some people think of IP as ‘it’s just code, it’s just patent, it’s just trademarks, it's something I can register.’ The reality is that's not only what IP is.

The US investor thinks of IP as incredibly broad: know-how, customer lists, marketing lists... anything of value in my head should belong to the company. While I'm working for the company, I should be assigning that to the company. So in a US startup, the classic example is: everyone from CEO down to secretary and office receptionist signs those agreements, and the same standard generally gets applied to a Latin American startup as well.

Brian Requarth

Got it and what about freelancers, are they included in that as well?

Dan Green

They are, yeah, they are. This is where it can get interesting, right. As a cost-saving measure you may want to use freelancers, you may want to use a dev shop in Serbia that's a third of the price of what you would pay in Silicon Valley or São Paulo. So you've got to be thoughtful about making sure you have the right agreement in place. That dev shop can work fine, it’s very valid from an economic perspective, but you want to make sure that everything developed by that dev shop is ultimately controlled by the company.

I'll take it one step further because we were just talking about the corporate structure that you typically use for fundraising — Cayman, LLC, Limitada or local subsidiary. In that case, you may ask: which entity of those three should own the IP? Generally speaking, the IP sits at the level of the local subsidiary — the limitada in our example. And that's usually where the developers are.

If there are freelancers, if there's a dev shop, another country used, you also want to make sure that the IP flows to the entity that owns the IP from other people as well. Eventually, companies that get more mature, that they grow and they get more sophisticated, they may want to think about creating an IP company: an entity that its only purpose is to own IP and license IP out to other entities within the same group of companies. I think that's too overkill or too sophisticated for an early-stage company, so we don't often see it, but at some point it's something to think about.

Brian Requarth

And so PIIA: proprietary information and invention…

Dan Green

Assignment agreement.

Brian Requarth

Assignment agreement, okay. The name of that document, should it be in the name of the local subsidiary, then? People signing that document in the name of the subsidiary, where they’re employed?

Dan Green

Yeah, that's right. And what we've done in several places in Latin America was: we've created a dual call and Portuguese-English or Spanish-English version of that document. It's governed by the local laws, it's reviewed by a local lawyer to make sure it's kosher, and it is in the name of the local subsidiary. That's great, so then it's enforceable in Brazil, it can be reviewed by a US lawyer representing Sequoia when they're investing in that company, it looks and feels like a US-style document, but it does what it needs to do in Brazil.

Brian Requarth

Yeah, got it. When we think about — you’re starting a company, vesting is a thing that comes up oftentimes for founders’ and employees’ shares. What exactly does that mean and what are the best practices around this from what you've seen?

Dan Green

Yeah, so vesting is another area that's a focus of investor due diligence, something you gotta be thoughtful about. Vesting basically means that if my shares are subject to vesting, I've got to continue to work for the company over four years (typically), or three years, until I get a hundred percent of right to use that equity the way that I want to.

Vesting can apply to both founders shares or restricted shares and it can apply to options.

With an option, I don't own the equity. I have to work for the company, then vest in my option, and then exercise the option, paying money for the strike price of the option. Then, I own the shares.

With founder shares or restricted shares I own the shares, but I may not be able to do everything that is typical until I vested in those shares. So in both cases, it requires a contractual agreement that is signed by the company and the person receiving the equity, acknowledging the vesting terms.

This is one area where less creativity is better. There's a lot of standardization around investing. In Silicon Valley — and I think this would generally apply in much of Latin America as well —, the standard vesting schedule or term is four years. The idea — the philosophy behind that is that four years is a pretty good amount of time to know that this employee has created value for the company, and will be able to monetize that equity at some point thereafter. Sometimes, in cases where a company takes longer to grow, there may be additional equity with new vesting terms. But generally, four years is the schedule that is used to vest.

Then, you have what you call a cliff, where you don't vest as a new hire or a new employee until twelve months have elapsed. The idea there is: it's a trial period. You're in those first twelve months, still finding your groove, still proving your value to the company. After 12 months, you've shown that you're a good valued member of the team, and then you're gonna vest thereafter in equal monthly installments. That's usually the standard. That's what people refer to as a four year year vesting schedule with a one-year cliff. I'm talking here about rank-and-file employees, like standard employees.

Founders are in a different bucket. Founders are there at the beginning, they're taking the highest amount of risk, they're getting the most amount on the cap table. Generally speaking, for founders, you don't have a cliff. You don't have a trial period — the idea being you guys are in it, you're demonstrating value from day one, you don't need a trial period. But you do have the need for vesting as founders. Brian, if you're founding a company with Thomas and Yuri, and the three of you are in it together — even if you guys are lifelong friends and you went to kindergarten together, you know each other through thick and thin, you're still going to want to have vesting on your shares to protect each of you vis-a-vis the others, and vis-a-vis the company as a whole.

Why? Because we've all seen situations where the three founders go in it, they don't create vesting on their shares, they own their shares outright and then nine months later, either something happens to one's health or somebody's life situation changes, they go off to the Himalayas and meditate. They're no longer creating value for the company. Without vesting, if their shares are fully vested, they've just walked away with all of their equity, which can be a significant amount for a founder.

So our advice for really every startup situation is: make sure the founding team and the rank-and-file have vesting on their equity.

Brian Requarth

No, it makes sense. I've seen that happen in companies that I've invested in, where I've got the cap table and I'm like: ‘hey where is this 25%?’ And they're like ‘oh, that's, you know, this person... they're not here anymore.’ And that actually really dramatically affects fundraising, because an investor really wants to ensure that those that are operating and generating the value have aligned share of the equity in their hands, so they're incentivized. So I totally agree.

When we think about international VC funds, what are they looking for when founders are pitching for, let's say, a seed round or a series A financing? What are they typically looking at?

Dan Green

You just raised a really important point in your last comment and I want to make it clear: one thing that international/US VCs are looking for is a properly calibrated cap table. And what I mean by that is that the equity ownerships are aligned with the value creation that the investor and that others perceive.

In your example, of 25% owned by someone who's no longer contributing to the company, unfortunately, in Latin America, that occurs far too often. There are various reasons for why it occurs and, without casting blame or normative judgments, it becomes a real handicap to even a great company that checks so many of the other boxes, in terms of traction, team and market. If they have a cap table that isn’t aligned with what a VC is expecting, that can be fatal to the fundraising process. Why? Because these VCs are busy, they're getting tons of deal flow for the most part. They don't want to step in and clean up a cap table when there's dozens of other opportunities that don't have those issues that they can invest in. There are exceptions, and if the deal is so hot, they may do it. But for the most part, it really becomes a handicap.

So what do you have to do as a founder to be thoughtful around that? One is try to model with an Excel, or a tool that Latitude 4 will provide, the ownership of the company — not just on day one or day 60, but through multiple successive rounds of funding, with assumptions (I'm gonna raise a $10 million series A, I’m gonna do this and that).

You can model out with a fairly good degree of accuracy what your cap table will look like. And I see far too few founders do that with integrity and I see a lot of founders get multiple accelerators or startup programs that take their 5%-7% along the way. Maybe they do the post-money SAFE financing. And then they end up raising more than they thought they were gonna raise, which all sounds great, because they're getting good traction. Then, when it comes time to raise in their first priced round, their first preferred round, they've got dozens of SAFEs converting at fairly low caps, and suddenly their cap table is decimated.

I had a deal recently with Kaszek — great founder, young founder, I think he's like 21-22, first time founder, had gone through YC, and he was raising his first priced round. I think he was raising like four or five million dollars and had four or five million dollars of SAFEs that had previously been raised and under fairly low terms. When we got to the actual conversion and showed him what the cap table looked like post-series A, he was decimated. And he really, truly, was surprised. He hadn't fully modelled it out and thought it out, we were not involved in the earlier phases of that company. So the poor guy ended up with probably 40% less equity than under normal circumstances he would have had. So I see that a lot. In Latin American and developing markets you really have to be thoughtful about making sure each equity that you raise is modeled and valued appropriately.

Brian Requarth

Yeah I know that's a great point, giving the tools and you don't want to be caught by surprise when you think you've raised some money and you think you own this much of the company. It's one of the challenges with SAFEs or any kind of convertible note. You've got to do the math and understand what the implications are, and sometimes that doesn't happen — you just think about the money and you don't think about the consequences of what it looks like.

Dan Green

Exactly. One corollary to that as well: on day one, if you're a founding team — let's say a founding team of three —, the temptation in that moment is... Let's say you got a CEO, CTO and a Chief Marketing Officer, and you guys are all relatively the same in terms of seniority, stature and you're all going to be full-time. The temptation in that fact pattern is to grant everybody ⅓, or slice the pie equally. Try to avoid that temptation. One of you or maybe two of you is gonna be contributing more value than others.

Generally speaking, the CEO has the highest equity stake because that person is leading all functions of a company, that person's the public face, that person's usually leading fundraising. And a VC, when they come on board later, they're gonna expect the founding team to have done the hard conversations and the thought around making sure the equity’s aligned with what true value is going to be created. Not to say that cut that you do on day one... — there are opportunities to re-slice the pie if, in fact, one of you ends up creating more value. And there's opportunities to re-up the founder pool. This is another aspect. I don't want to dwell on this too much but it’s corollary to the dilution point we talked about for founders.

Dilution generally is continual through a company's lifespan. You're only gonna get more diluted as a founder, generally speaking. The exceptions to that are when you can do a founder refresh. So if you're a well-performing company, you're raising institutional VC money along the way — Series A, maybe a Series B — you oftentimes have leverage as a founding team to ask the new investors to quest a founder refresh.

A founder refresh means refreshing or increasing the equity that's allocated to the founding team, in addition to what you guys got as founders on day one. Usually that takes the form of an option pool increase and a portion of that option pool increase that gets allocated to the key founders, key management team etc. It's a tool in the founder toolkit to help offset the dilution from a new fundraising round. Keep it in the back of your mind — it's not always available but for well performing companies, including in Latin America, I've seen it adopted in the last couple of years and it's very helpful.

Brian Requarth

Yeah, absolutely. I mean, particularly if there's a founder that maybe got overly diluted early on and is executing extremely well. It's usually in the best interest of the investor. You don't want a founder that's excellent and has a very small equity and it's just thinking about opportunity costs. That's not a smart thing for a founder.

Speaking of equity, founders, one thing that I'm seeing a little bit more — and I wouldn't say it's common but sometimes there's some secondary that's taken off the table. Talk a little bit more about secondary: is that something you're seeing? How should founders think about that? At what point? What's the right amount? How would you advise on that?

Dan Green

That's a great question, it's something that we saw a fair amount in 2019, with Softbank and other later-stage investors writing larger checks, higher value deals. I would say now in the post COVID-19 world, I think we're gonna see fewer of those deals.

Secondaries, generally speaking, are a way to get liquidity before that exit, as you're saying. I think as a founding team it makes sense in a certain type of scenario. For example, I've got a company that was formed in Argentina in 2010 and it's in the enterprise software space. It's done well, it's raised I think through Series C. At the Series B round, six years after formation, the founders had all started having kids, they all had expenses, they've been underpaying themselves (as founders often do), below market salaries, when they had great credentials, their buddies were at banks or in airlines or other companies that were making three times what they were making in cash compensation, year after year. And they've been doing that for six years in the company. Yes, they had significant equity stakes, but those equity stakes hadn't been monetized yet and would not be monetized until an exit, typically.

In that example, where the founders needed to provide for their families and their wives or their significant others, their partners were like ‘look, you know, we need to start providing for our family here’ — I think it makes sense for the founding team to come to the lead investor in that deal and say ‘look, I want to take a little bit of money off the table — not to grow wealthy and kick it on the beach, but really just to take away some of that lifestyle stress that, as a founder, I have to deal with day in and day out.

So there are different scenarios and different lifestyle needs but, generally speaking, if it's one to five million dollars in a 50 million dollar round or more, where that company's been around for six or more years, that's an argument that most VCs in an up market, with a good company, will understand and be sympathetic to.

That's been the case in Silicon Valley for many many years. I remember Dropbox's Series B deal and there was a large secondary component to that in like 2011. And we've seen it in Latin America recently. Having said all that, it's a function of a market that's fairly pro-founder. With the new funding environment that we're going to be in, and capital being a little bit more scarce, even with good companies I think we're gonna see less of it. But if you have a really good set of facts, then as a founder you should try to make the ask.

Brian Requarth

Sure, I mean, taking a little bit off the table to kind of have more stability so you can think long term is something that — it was a big release for me when I went from having zero liquidity to putting a little bit of money in the bank. It allowed me to rethink about where I'm gonna go and not worry about my current situation.

Speaking of M&A, let's wrap it up here with two questions. One challenge in Latin America has been exits and we haven't seen a ton of exits. We'd mentioned Cornershop early on the conversation, I think that's a good example of an incredible success story. What can you share on any exit deals that you've been a part of, or on your experience, that can help Latin American startup founders think about M&A in the future?

Dan Green

I think it's the linchpin of this market continuing to grow, and you're hitting it on the head. There's been so few M&A exits that return venture returns that get US or international investors excited. The good news is that's changing. Obviously you're associated with that type of deal, the Cornershop deal, we're working on another deal that will be impactful. There's going to be more to come as the world wakes up to the market size and technology disruption and talent that exists in Latin America. I will say it is very very challenging to exit a business in the US, which is a developed market, it's even more challenging to exit a business in Latin America, for a variety of issues.

We talked about antitrust. Antitrust has been a huge issue for Cornershop. Why? Because they operate in several markets. Some of those markets have antitrust regulators that, in many cases, have never seen an e-commerce deal. They're educating themselves on basic principles of e-commerce. When you're doing that in a world where the velocity of a deal is great, there's a lot of risk in a deal, markets change in a heartbeat, you've got competitors who are lobbying to kill that deal because they're fearful of the deal, and you're trying to educate the regulator on what e-commerce is and how to define competitive market — it's incredibly challenging.

I will just say that one of the most exciting things for me about Latin American in the next five to ten years is that I see the potential for enormous exits. And what I really get excited about, at some point — I don't see it imminently but at some point — I think that Latin American businesses, the incumbents in Latin America — the Grupo Carsos of the world and the large multinational, Falabella etc — they have already started to and will continue to do tech buys.

When they start to do tech buys and when there's a generational shift to digital natives, family members of those businesses that are running things, you're gonna see more M&A activity. Maybe they're not going to pay them the premiums that US or international buyers will pay, but if the deal is competitive enough and they need the technology enough, they will start to pay better multiples — which will increase the buying universe. And I really want to see that. I don't think that's gonna happen in a year or two but, over the next decade, I see it happen.

Brian Requarth

That's great, yeah. I mean, it's a big market, there's a lot of incumbents in traditional businesses that have a lot of cash and will probably realize the importance of technology.

So if I asked this question to you six months ago, you probably would have had a different answer. We wouldn't have been able to predict where we are today — if I said in 2019 ‘what's 2020 gonna be like?’ it would’ve been hard to know where we are. But let's take a little longer term and let's take a three to five year perspective: what do you think the evolution of the LatAm startup ecosystem will look like? Give me your thoughts on that.

Dan Green

Look, I think 2020 is gonna be a tough year globally. We're already seeing that, right. Until we get a vaccine or line of sights and better health news it's gonna continue to be a struggle for the globe. Having said all that, technology is extremely well positioned in many areas to benefit from this pandemic. The pandemic is gonna accelerate what we're already seeing in terms of communication tools, like zoom, in terms of online education, in terms of telehealth, in terms of e-commerce — Cornershop’s business has been growing through the roof in the last three months.

So all of those secular trends that we saw before the pandemic, that are benefiting from working from home and being at home, are going to only accelerate. And people's confidence level — I remember talking to people in 2012 about e-commerce, like ‘no, I'm scared to give my credit card information’, ‘I'm scared to like buy something and then get assaulted if I go pick it up.’ That's all gone by the wayside, because people are confident in purchasing online and engaging in commercial transactions online. That confidence level is growing in this pandemic and is only going to continue to grow. So I'm actually really optimistic about technology benefiting from the pandemic.

What's challenging is investor sentiment, because there is so much unpredictability in the world right now, and FX rates, and political uncertainty, in addition to the health. Until we see more certainty in a lot of those areas, investor sentiment is going to be choppy. But good deals are gonna happen. Good deals are still happening right now. We're still seeing term sheets for deals. I think a lot of the deals this year are gonna be on the earlier-stage side. You're gonna see fewer hundred-million dollar series C and series D deals. Obviously Softbank is having its own challenges. But three to five years out, I see a resumption of growth and a long-term trend where it's inexorable that technology is gonna grow.

Brian Requarth

I agree and my perspective is I take a ten year look at these things anyway, so if you look at it from the long-term, that lens of the long-term… Both of us have been working in Latin America for over a decade and so we've already been through a bunch of different cycles. This one might be particularly tough, we'll see, but Latin America tends to go up really fast and go down really fast. But if you're thinking of the ten-year horizon, you could be fine. And it's the best time to start a company. Viva Real was started during the last recession. It creates the right DNA for the company, you're scrappy, you're making things work and there's a lot of available talent. So you've always got to find the silver lining, I think that's what great entrepreneurs do.

Dan Green

Yeah, totally agree. Valuation is going to come back to a more accessible level for many investors and great companies are going to be formed.

Brian Requarth

Absolutely. Well hey, Dan, thank you so much. I appreciate the partnership with Gunderson and I’m excited to kind of build this next era and generation of companies, so great to have you on the show.

Dan Green

Thanks Brian, I appreciate it!


Brian Requarth

Thank you for listening to the Latitud Podcast with Dan Green, partner at Gunderson Dettmer! Each week we’ll be talking to some of the top founders and investors in Brazil and Latin America, so be sure to subscribe wherever you listen to your podcasts. I’m your host, Brian Requarth. Until next time!

Gabriela Levy

Head of Marketing at Latitud

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