Colombia VC Interview – Simma Capital

Daniel Blandon and Carlos Gutierrez are the Co-Founders and Managing Partners of Simma Capital, a Venture Capital firm based out of Bogotá, Colombia. In 2014, they founded the angel investment firm INVX, which found success with investments in popular Colombian firms such as Rappi and OFI. In 2019, they decided to go all-in and raise a new fund with their new investment firm.

Danial Blandon, Co-Founder & General Partner
Carlos Gutierrez, Co-Founder & General Partner

Below are excerpts from our interview regarding their new firm and Colombia’s VC scene.

The interview has been edited for clarity.

 

How did Simma get started?

Carlos: Simma is a continuation of our first investment vehicle INVX, which was a private investment vehicle started by 5 friends. Simma is like a Phase II of INVX, but it is not all the same partners, just Daniel and me. Another differentiating factor is that INVX was funded with our capital. With Simma, we are raising a fund with limited partners. The fund is launched and we already did our first investment.

 

Does Simma only focus on investments in Colombia and Latin America, or do you also invest outside of the region?

Daniel: In our investment thesis we leverage our network primarily in Bogotá and Medellín; however, we can invest in all of Latin America and even in the U.S. Most of our investments are based in Colombia, but many of the companies in our portfolio are also incorporated in Delaware. This provides flexibility for U.S. investors to join in later rounds.

*Zeb note: Many startups in the U.S. choose to incorporate as a Delaware C-Corp. Delaware’s business laws are historically easier to navigate and provide flexibility around stock options and board creation.*

 

Let’s unpack that a bit more…

Carlos: Colombian ventures will create a holding company in the U.S., but the operations will be focused in Colombia. They do this for other countries they do business in as well, even if the entrepreneurs are located in Colombia. For our 9 investments that were done with INVX, 7 of those had holdings in other countries, so it is the norm.

 

What roadblocks are there currently for the investment situation in Colombia?

Carlos: Apart from reputation, there is an overall lack of capital here. There are way too many investment opportunities compared to the money available here, which right now is a problem. And also the legislation in Colombia is not that flexible or advanced. For example, we are having legislative issues with Uber in the country right now and the government is banning them completely at the end of this month. It’s difficult because there is pressure for us to innovate, but at the same time, things are being blocked.


Daniel: A little more on capital, according to the Global Entrepreneurship Monitor, Colombia is 5th in 54 in entrepreneurship, but 43rd in 54 in investment so there is a huge gap. Another roadblock is that we also tend to think locally, not globally. Globally for individuals here is Latin America, so it’s much more difficult to create new things. We have been copying things that have worked in the U.S. and Europe, and are currently in a phase where we have great entrepreneurs but are lacking resources. We don’t yet have the ecosystem for knowledge because we don’t have a Facebook or another global company that was built here.

It took a while to get great entrepreneurs. To give you an example, our first investment at INVX was OFI which was founded by an American, and our second was from Iran but based in the U.S. so at that time there were no entrepreneurs. The first one we invested in was Rappi.

 

Speaking of Rappi, do you have any opinions around Softbank and some of the other companies within their portfolio?

*Zeb Note: Softbank is a firm based out of Japan with a vast portfolio of companies that were invested in by their Vision Fund. Some companies in their portfolio include WeWork, Rappi, and Uber. The Vision Fund has come under fire recently for their massive valuations that haven’t translated well in the transition from the private market to the public one, causing their portfolio companies to cut costs through layoffs.*


Carlos: I don’t think Softbank is bad in any way, of course, but it is so big that it is disrupting the market. I think that as times to IPO have grown longer Softbank inserted itself into a funding round that historically would’ve been when an IPO would happen. I think many of the startups who received funding had a mindset that they would get additional funding rounds from Softbank or Tiger Global before going to IPO, and it changed the normal way of running the business.

 

Daniel: I think that there is a global trend of looking for profitability, so it is no longer a “growth at all costs” mindset. I think that Softbank is catching on to that. I used to work at a hedge fund, and when I moved to VC I heard that valuation modeling is different, but it is very similar in most respects. The real difference is timing. I think the valuations are correct if looking at a longer time frame, but in a race for growth, some of the business fundamentals were lost.


Carlos: Of course it isn’t a good thing, but it’s also not that bad. It’s almost like a market correction, which is normal.


Daniel: It’s much better for it to happen slowly than to have a crash.

 

In the U.S. there have been legislative changes to provide more access to capital such as crowdfunding and other opportunities to unaccredited investors. Does Colombia have any similar initiatives?

Daniel: There are superintendents of finance that try to protect investors, and they set rules to achieve that purpose. There aren’t accredited investors as defined in the U.S., but to be involved in investment funds there are rules that set a minimum dollar amount. You do need to be within a certain income threshold to invest. In terms of opening investment through vehicles like crowdfunding, there is an existing crowdfunding law that has not been widely adopted. I think the trend is moving that way, but so far it has been very difficult in Colombia. The BVC stock exchange market did recently launch a marketplace that will implement crowdfunding called a2censo. 

 

Carlos: There are two reasons we believe crowdfunding hasn’t been very popular. In the crowdfunding law in Colombia, permits controlled by the finance authority are necessary for a company to raise funds, and those are extremely difficult to get. Also, there is a limit of around $200K that is the maximum you can raise, so it’s not that flexible.

 

Daniel: I would add one thing, there is a lot of money here in Colombia, but the people who have it only invest in real estate. Other investment assets like VC and private equity is too risky for them.

 

What do you think is the cause of that?

Daniel: I think it’s both culture and education. People have seen the success of Rappi and are very excited about the opportunities here, but don’t even know where and how to begin. In general, the risk is seen as too great as well. It’s normal in VC for a company to go bankrupt and that is intimidating to them.

 

Are there any programs or initiatives to bring that kind of education to Colombia?

Daniel: The government is trying to create initiatives, but I think that currently there aren’t enough. Universities in Colombia don’t have a lot of programs around VC investing, but I do think that everything is improving here. There are more opportunities, more entrepreneurs, and more companies, but education around investing is still lacking. Part of our strategy is creating courses as well to teach people, so we are trying to partner with universities and the government as well.

 

Carlos: The government did introduce accelerator programs Ruta N and InnPulsa. We work closely with them in terms of mentorship to their ventures and speaking at events. Private entities are trying to make the ecosystem more robust as well, but even that is currently not making a large impact.

 

What are some of the repercussions of the lack of investment?

Carlos: It makes it more difficult to raise funds from LP’s. Also, it makes it more difficult for companies to raise a funding round. We’ve had situations where we invest in a company, but can’t close the deal because they can’t raise the full round. Sometimes we have trouble getting a round completely full.

 

Daniel: We always say we are in a state where there is not competition, but cooperation, between investors to get a deal done.

 

What is the talent pool like in Colombia?

Carlos: Well there is a lack of software engineers, but that is a common problem worldwide. In general, the human capital here in Colombia for entrepreneurs is very high. Compared to other Latin American countries we have some of the best. For example, when it comes to the number of Latin American companies that pass through Y Combinator, Colombia has some of the most compared to other countries in the region.

 

Daniel: I agree in terms of founders, but below that, it is very difficult to hire. The risk is very high and the salary is very low, so some young people are turned off by the idea even if the environment is better at a startup than a big company.

 

What’s next for Simma Capital?

Daniel: We were very fortunate to start early, so we see ourselves as leaders in the region. We don’t see this new fund as our final goal, but we see it as a process as we are learning and helping to develop the ecosystem. We need to go step by step and create a strong track record. Our goal in the long-term is to be leaders in VC and also create investment opportunities to invest in the later stage of a venture. Most current investment in Colombia is early-stage like Seed and some Series A.

 

Carlos: Creating Simma has been a life-changing decision. We are not making any plan B’s. This firm is it for us. We are very optimistic about Colombia and our track record. We believe we can evolve with the country and have a first-mover advantage.

 

What’s next for Colombia’s investment landscape?

Carlos: Well I see a lot of opportunities here. The country here has been very stable. I think Colombia is going to make a jump, not a step, to catch up with other nations.

 

Daniel: We have a hypothesis that Colombia is going to start seeing a lot of exits. We believe there is going to start being some M&A activity here which will, in turn, bring more capital here and compound on itself.

 

For more information on Simma Capital, go to https://www.simmacapital.com

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