The two most important components when building a tech company
Quick disclaimer: I wrote this post in Portuguese on Linkedin, sharing my thoughts and learnings from my time in San Francisco – and I decided to use the same structure to explain how I see these two elements of tech startups (talent and capital) at Brazil tech ecosystem at this moment.
After 4.5 years working for a non-profit organization (Endeavor.org) that supports entrepreneurs and fast-growing companies, I spent almost half a year in San Francisco, putting together a personal and professional desire to live the entrepreneurial culture of Silicon Valley. I did an amazing project starting RD Station outpost in San Francisco and being part of Endeavor Catalyst team (the co-investment vehicle that Endeavor financially boosts entrepreneurs raising rounds with top VCs). In parallel, I spent time trying to meet as many entrepreneurs, startups, VCs, events and everything related to topics I like. I concluded that there are two primary elements in mature tech hubs: talent and capital. Brazil tech ecosystem is not different.
On my first week in San Francisco, I had lunch with a group of entrepreneurs. The lunch was something like a mentorship session with a CFO of an ed-tech startup. The conversation talked about what is necessary for a startup in terms of management routines. I risked a generic question which I always like to hear different points of views: how to define goals for a startup? The answer, surprisingly, was very clear: “it depends on each phase of raising process. If you’re not invested and is raising family and friends money, ask for accelerators/angels what they would like to see. If you’re going up for a series A, ask the VCs you admire what they want to see. The answer is now your goal.”
Although I don’t think it’s too simple, I started thinking about the answer for the next couple of days and realized the difference between capital availability between US and Brazil.
Even if slowly, Venture Capital is rising up
Raising money still is not so simple in Brazil. Investment firms focused on seed rounds such as Canary are starting to emerge. Also, accelerators as ACE, Darwin Starter, and Seed. These players have an important role in the ecosystem, besides the capital and guidance allocated in companies and entrepreneurs. They are helping early entrepreneurs to understand obstacles in the first steps of their journeys.
This period is critical for the business model and the risk of failure is high. Customer development and potential investors feedbacks are important to forge the business model and the initial strategy.
The Snapchat Case
To talk deeper about capital and talent, I chose a well-known company by venture capital industry: Snapchat (NASDAQ: SNAP). The social app has gone public almost a year ago – having a very recent and big amount of data available. The same analysis could be conducted for other companies and I strongly recommend reading Tom Tunguz S-1 Analysis’ series.
Snap Inc’s S-1, the form required for any company who wants to go public in the US, show us the financials:
In most of the cases, the only way a company with revenues of ~U$400MM and net loss of U$520MM can stay operating is having a big amount of money in its cash.
Data available on Crunchbase show us this is exactly what happens on Snapchat journey. As time goes by and the company grows, higher is its valuation and investors are committing more money to the company. This is very common in the US and venture capital industry remains the beginning of last century. But this is not the reality in every country and Brazil is passing through the 1st generation of venture capitalists (just to be clear, we’re talking about institutional investors, who have specific companies to invest money in other companies).
Challenges when you reach scale
If we look at the total amount invested, Snap has raised U$2.65 bi along its short but impressive history. Presumptuously, I assume we would not have available capital to support Snapchat growth even if we sum the total current capital available of venture capital firms in Brazil (disclaimer that even for American VCs, Snap is an outlier). Comparing the size of venture capital industry, MoneyTree Report shows that U$58.8bi were invested by American VCs in startups in 2015 – we’re not even reaching 1% of this value.
Happy to say that though smaller than American VCs, we have been seeing great Brazilian firms investing in great entrepreneurs – being unfair with many, but just to mention some doing a great job: Kaszek, Redpoint eVentures, DGF, Astella, Monashees, e.Bricks and many others. Thus, Brazilian companies are raising money with foreign VCs such as Riverwood, Intel, Qualcomm, TPG, Accell, Ribbit, Lumia Capital, DST, Tiger Global and others. This shows us great entrepreneurs are born in Brazil, despite the lack of options when the topic is capital, especially for series B and above.
Along with its podcast “Master of Scale”, Reid Hoffman appoints: nowadays, startups may be born everywhere, talent is an asset that every country can produce. However, Silicon Valley still is one of the best places when a company needs to scale its business:
“So what makes Silicon Valley so good at scale-ups? The obvious answers are talent and capital. Both offer a scale-up positive feedback loops. The competitor that gets to scale first nearly always wins. First-scaler advantage beats first-mover advantage. Once a scale-up occupies the high ground in its ecosystem, the networks around it recognize its leadership, and talent and capital flood in.”
Capital without talent equals car out of fuel
Starting the “Talent” chapter. Most of expenses that compound a financial report of a tech company are related a technology infrastructure (storage and processing capacity, third party software providers, etc), sales & marketing (paid media, marketing campaigns) and product/engineering (basically, developers, designers, quality assurance, in other words, people). Looking again to Snap’s S1, “marketing and sales expenses consist primarily of personnel-related costs”. Product and development expenses are basically to build a big and qualified team.
Despite the distance between universities and the job market, Brazil has a lot of smart people doing a great job in startups and big companies – and there are more to come, especially in terms of entrepreneurship, who is gaining attention and being a new choice of career to young people after college. The bad thing is labor cost in the country is high – still, market opportunity and currency compared to other nations are attractive to foreign companies.
Snap has gone from 600 employees at the end of 2015 to 1,859 employee a year after. Just to consider salaries and assuming that the average salary remains the same, that means you have three times your personnel-related costs within just a year. The fact is: companies need to hire people with background and experience to keep scaling their business.
The Ecosystem’s challenges
Companies search for qualified professionals according to the business necessity. For example: if your company needs people who speak Chinese fluently, probably you should start looking for professionals in China who also speaks English.
Same is true if you want to build a product to be used worldwide: it could be more effective to hire someone who had previous experience. Same is true to build a SaaS company: usually is easier to bring someone who has passed through churn, CAC, product and other model issues. At this point, more than keep investing in marketing or raising more capital, it’s important to have the right people on the boat.
And this is one of the biggest challenges in Brazil right now. There’s a new batch of technology companies who are scaling their business, who are not traditional such as retail or car manufacturers and the country has no track record – which implies in a lack of experienced people.
Take, for example, the Customer Success area, which its importance has been increasing in SaaS companies. In the US, there’s even an association for this group of people working with the theme. Communities on Slack and Meetup.com have thousands of people talking about Customer Success. Companies such as Gainsight and Totango gather thousands of people on big conferences every year to discuss challenges and new trends.
In Brazil, companies are fighting to educate the market and even helping to shape these terms with customers, partners and the market.
A key for our tech ecosystem development
As the market matures, more experienced people in an ecosystem gain. Startups are trying to turn into scaleups, though the pains related to the growing process, which requires the best people to help solve problems in the middle of the way. The good news is that Brazil is a big market – as seen in our first post. We have great entrepreneurs building great companies, some supported by very qualified VCs. Bringing raw material from other countries may help Brazil to keep its development, mixing the experience with the Brazilian intelligence and dedication.
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