July 20, 2015
Interviewed by: David Snow
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The Acceleration of Mexico’s VC Scene

Mexico’s venture capital scene has exploded in the last two years, says Sebastián Miralles of Fondo de Fondos. He outlines what’s happening in the country’s VC market, why tech start-ups are eyeing the country, and why mezzanine debt is a huge opportunity.

Mexico’s venture capital scene has exploded in the last two years, says Sebastián Miralles of Fondo de Fondos. He outlines what’s happening in the country’s VC market, why tech start-ups are eyeing the country, and why mezzanine debt is a huge opportunity.

The Acceleration of Mexico’s VC Scene
With Sebastián Miralles of Fondo de Fondos

David Snow, Privcap: Today, we’re joined by Sebastián Miralles of Fondo de Fondos. Sebastián, welcome to Privcap today. Thank you for being here.

Sebastián Miralles, Fondo de Fondos: David, it’s a pleasure to be here.

Snow: You invest in funds across Mexico and have a number of different activities. I’d love for you to explain the mission of Fondo de Fondos.

Miralles: Fondo de Fondos was established in 2006 to foment the Mexican VC and private equity ecosystems. We’ve been investing in the country essentially almost 10 years. We are now the largest private equity investor in the country; [we’re] mostly focused on LP interests, but we also do co-investment and directs.

Snow: You are in charge of venture capital and mezzanine investing. What are the opportunities to invest in startup situations in Mexico and what does the VC scene look like?

Miralles: The VC scene in Mexico has completely changed in the last two years. It’s evolved at a very, very accelerated rate. Entrepreneurs have gone in smarter. Deals have reached international standards. A lot of it is bringing models that have worked outside of Mexico into the country. Valuations are at a correct level. The companies are seeing traction. There’s a burgeoning ecosystem of angel investors and early-stage VC funds that are helping these companies grow and achieve their full potential. [There are] great opportunities, particularly in the A, B and C rounds of these investments as the companies grow, and they’re finding somewhat decreased availability of funding.

Snow: How many VC funds have you backed? What is the population of VC funds targeting Mexico?

Miralles: I believe we have backed about 15 funds and not all of them are Mexican. We have backed some U.S.-based managers with the promise of bringing them into the Mexican ecosystem, basically to bring their knowledge, their expertise and their contacts from Silicon Valley into the country. This has been a very successful strategy that has allowed us to bring in some talent that would not readily be available in the country and has really helped about threevery high-profile companies achieve the critical mass and the critical skillset they require to grow.

Snow: What are the kinds of VC deals or kinds of sectors being targeted by early-stage investors in Mexico?

Miralles: Right now, the focus is on tech. We personally like to diversify our portfolio a little bit, so we’re actively looking for innovation deals outside the technology sector. We are finding them on a limited basis, but they are high-quality deals and we’re happy with that.

Snow: Who are these entrepreneurs that are changing the game in the Mexican startup scene? Are they people who were already successful in places like Silicon Valley and are returning home?

Miralles: Mostly it’s local talent, some of them who have worked at Silicon Valley firms, not necessarily lived and were expatriated in the U.S., but many times working at the local affiliates in Mexico. Some of them previously worked in other startups, so we’re starting to see that cycle of people who have actual experience in managing a startup.

Curiously, we’re also seeing some international executives, young guys, moving into Mexico because they believe in the country. They believe in its potential.

Snow: You also oversee investments in mezzanine debt. Talk about the need for mezzanine debt in Mexico and how your group is helping to foment the development of that market.

Miralles: We’re pioneering the mezz product in Mexico. Essentially, there’s about $500 million available in mezzanine financing for the entire country. We particularly believe that, just in the SME arena, there’s about a $10-billion opportunity. So, it’s an amazing opportunity to grow. We have currently $35 million committed and are looking for to end our fundraising sometime toward the end of the year at about $120 million.

Snow: What do venture capital firms need to know about your process before they give you a call and try to book a meeting?

Miralles: The number-one thing is that we prefer to co-invest. We prefer to be along with a lead investor. We will go out of our way to help structure a VC transaction if we believe it’s promising. We like clear business plans with credible teams and a strong focus on operations. If you’re not focused on operations, we’re probably not the investors for you. We also look for management teams that are very open to receiving advice and are easy to work with.

Snow: So, you’re willing to back VC funds that are not necessarily based in Mexico. What does a non-Mexican VC fund need to show in order to win a commitment from your organization?

Miralles: They have to show that they have a strong interest in investing in Mexico—a credible intent. We demand that they sign a letter of intent for twice the amount of money that we invest with them.

Snow: What do you predict for the Mexican venture capital scene over the next five to 10 years?

Miralles: Well, it will continue its booming growth. We’re going to see a bit of constraints on returns on the earliest stage of investments, just because there’s a lot of capital working there right now. And the opportunities are not quite fully there. But the development and the ecosystem will become more robust. The knowledge base will continue to expand. Ties to Silicon Valley will strengthen and, as such, the pool of deals will continue to improve.

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