Chile VC Interview – Magma Partners

Magma Partners is a Latin American VC firm based in Santiago, Chile. Started in 2014 with three partners, Magma quickly became a leading firm in the region by rapidly expanding its team and fund. Their investment portfolio currently consists of 70 companies, invested in from two funds. I had the opportunity to speak with JT Li, who does Operations for the firm about Magma and Chile’s startup scene.

JT Li, Operations at Magma Partners

Below are excerpts from our interview.

The interview has been edited for clarity.

 

How did Magma Partners get started?

It all started in 2010 when our managing partner, Nathan Lustig, first came to Chile for the pilot round of Start-Up Chile. Start-Up Chile is a government program that helped accelerate the ecosystem you see for VC and startups here. Nate brought his startup down here to participate, and that’s when his Chilean journey began. He then went back to the U.S. to sell his startup and had a successful acquisition there. Not long after, he came back to Chile to improve his Spanish further and got a job at a startup here. He also started to advise startups and created a class at the university about entrepreneurship. So basically, he began to do all the things that a VC does, without actually investing, and thought to himself, “Why don’t I just do it?” So then he met Francisco Saenz, a Chilean investor, and they co-founded Magma Partners in 2014.

For a long time, we were the only private fund here, which differentiated us from other VC funds in Chile. Many of the other VC funds in this country are tied to CORFO’s funding, which is a public organization, so their money comes with a lot of restrictions. The thing with CORFO is that it is challenging to invest outside of Chile. That’s one reason why we didn’t go with it. 

 

What is your funding history?

In 2014, we kicked off Fund 1. We have already closed that fund, investing in 29 startups. Most of the companies within that fund are Chilean. We started Fund 2 in 2018, and we’ve almost deployed all the capital. In the second fund, we were more expansive and more regional. We invested in a lot of startups in Latin America, including Mexico, Colombia, Argentina, Peru, and Costa Rica.

This growth is a direct result of us building our credibility and reputation in the ecosystem, thus gaining traction from other countries. Fund 2 is also bigger than Fund 1, so we can invest in other areas. We are currently raising Fund 3, and we are looking at deals.

 

What is your investment thesis?

We focus on Latin American companies in FinTech and Insurance Tech along with companies that support those two verticals, including cybersecurity, ID management, anti-fraud, APIs, etc. We also target companies that have a Latin American team but target the U.S. market, so it can be a SaaS model where they sell to the U.S.

Apart from that, we prefer B2B companies and prefer to see some traction. We invest anywhere from Pre-Seed to Series A, with check sizes as small as $25K and as high as $5M.

 

Latin American companies tend to focus only on the market here; why do you lean towards the U.S. market?

There’s a chance of arbitrage because talent and everything else is cheaper in Latin America, so you can have a tech team here and sell to the U.S. market for a higher price. The other thing is for a SaaS model; it’s unlikely for them to have higher returns in Latin America because the market economics in the U.S. is just way bigger.

A lot of companies are indeed afraid to go beyond the borders of Latin America. The mindset can be, “If I can do it in Chile, then I can do it in Peru and Colombia.” The cultural similarities make it seem easy, but that’s not the case. You’re still going to enter a new country and market, so why not just go to the U.S.?

 

Are your LPs based only in Chile?

It’s changed over time as we began investing in other countries because we started to have LPs from other countries as well. Fund 1 was Nate, Francisco, and another Chilean investor. In Fund 2, we have investors from China, the U.S., Colombia, Argentina, Mexico, and of course, Chile. With Fund 3, we are going to continue to expand.

 

Is it difficult to find investors here?

It’s been changing. Francisco comes from a family office, so when Nate met him in 2014, and they started the firm with a third partner, the mindset was, “I’m going to try with my money first, and if it works, I will start recommending to others.” In Chile, people are afraid of failure, so back in 2014, it was tough to get people to invest in VC and startups. Francisco was one of the first ones to try; not many people would do the same.

 

Does the “fear of failure” apply to the talent here as well?

I would say yes, young people here are still not as enthusiastic about startups as people in Silicon Valley. From my personal experience getting to know many young people here in Chile, they still prefer to work for big banks and large traditional companies, a safe career with a good reputation and salary.

I will say things, of course, have changed a lot now with Start-Up Chile and contributions to the ecosystem. But in general, I think people still prefer to stay in their comfort zone.

 

Are there any other obstacles here for investing or starting a company?

Yes, definitely, but it depends on the industry. For example, FinTech can be quite tricky in Chile because of regulation. We have a cryptocurrency company in our portfolio, CryptoMKT, that was having issues with the bank closing its accounts. Because they work with cryptos, and there was no regulation around the currency, their bank thought that they were an illegal business. That was in 2018, and CryptoMKT couldn’t operate for a while. They suffered a lot, but things like that can happen when you’re entering a new technology.


I’ve learned Chile has a gap between early-stage and later-stage funding, do you agree with this?

Yes, I agree. I think that’s the case in Chile or Latin America in general. I would say there are multiple reasons why, but one thing is that the ecosystem is still not as developed as the U.S. You always start with angel investors and then from there to VC, and late-stage VC. So that’s why when startups get to a later stage, they have to leave the country and go to Silicon Valley, Mexico, or Brazil for bigger capital.

In Silicon Valley, you see founders give back to the community. So they raise some funds there and then when they succeed, they become angel investors. Here, the loop can’t be completed because the founders have to leave the market to go to other places, and the capital doesn’t come back into the ecosystem.

 

Beyond investing, what is Magma Partners currently doing to help improve the startup ecosystem here?

Most of our efforts are in promoting awareness of startups in general. Specifically, we provide content to LatAM List, which is an English media website that Magma Partners created to publish tech news on Latin America. We specifically publish content in English, so it gets through to the rest of the world. We also have a column in 36Kr, which is the Chinese TechCrunch, to get the news out there in the Chinese market as well. That one is particularly interesting because 36Kr told me they also read a lot from LatAm List. 

Apart from those, Nathan does a lot of independent work through his blog and podcast, where he interviews Latin American founders and VCs, all in English. He has also written many books on Chile and the startup scene here. So we put forth a lot of effort in providing English and Chinese content to get this region more exposure and use whatever platforms necessary to market the scene in Chile and Latin America. Here at Magma, we respond to every single inbound request for information.

 

What’s next for Magma Partners?

We will still keep the same investment thesis, but are probably going to raise our investment size to try new things out and do bigger deals. Another thing that we want to focus on is female entrepreneurship. In Fund 2, we are targeting to get our portfolio to at least 30% – 50% female founders. Ideally, it would be that 50% goal, but the entrepreneur market here is still pretty male-dominated. Start-Up Chile has a dedicated female program that is helping drive change to these demographics, though.

 

What’s next for Chile?

It’s already so complicated right now with the current political situation. We don’t yet know how these protests are going to help or hurt the economics of the country. That’s pretty broad but important. Specific to startups and VC, the ecosystem is improving and will continue to do so, we just don’t know how fast.

*Zeb note: During the interview with JT, protests were going on in the streets below us, highlighting the complexity of Chile’s political atmosphere at the moment.

 

To find out more about Magma Partners, please visit their website.

 

For LatAm List, please use this link.

 

For more information on Managing Partner, Nathan Lustig, please visit his website.

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