I just read a great post from Naval at Venture Hacks about why private investors are like herd animals. He compares private investing to a “Keynesian Beauty Contest” where investors choose to finance companies that they believe are most likely to get financed in the future.
The problem with this approach is that it leaves behind a number of promising business concepts that are well positioned to disrupt markets where VCs are traditionally less familiar. Although it’s understandable that VCs in Menlo Park see opportunities in Santiago, Chile or Cairo, Egypt as distant; it’s also in these markets where they will find many of the key factors that likely define their investment approach. Let’s take Latin America as an example; most every country in the region has by now built up an educated and aspirational middle class that demands new services adapted to their local tastes and realities. Only entrepreneurs with a local viewpoint can fully monetize these opportunities and drive innovation. Successful ventures with deep local roots are perhaps some of the most defensible business concepts. As an example we can look at UOL in Brazil. Since it’s conception in 1996 and after successfully battling the launch of AOL Brazil in 1999, it’s become Brazil’s largest internet company reaching almost 30 Million unique viewers every month. Could UOL have achieved this success without the watchful eye of its local founder Luis Frias? Probably not. But it also probably wouldn’t exist if it weren’t for the fact that Luis and his brother Octavio inherited one of the largest media empires in Brazil, the Sao Paulo based newspaper Folha de Sao Paulo. Nothing wrong with that, Luis Frias deserves enormous credit for his vision. The point is he had access to the necessary capital and connections to fuel his move to the internet. Without this critical piece, the world’s largest Portuguese-language internet portal would likely have another name.
Dozens of these opportunities are there for the taking. In the case of Latin America and internet enabled businesses, the numbers speak for themselves: Almost 200 Million internet users, 33% internet penetration and a 925% increase in users from 2000-2009. So when I see that this week Accel partners funded another location-based start up with $20 Million entering a space already crowded with well funded competitors such as Loopt, Gowalla and Foursquare; I can’t help but think about the value that could’ve been created managing a $20 Million fund for Latin American early-stage ventures. The valuations and the investment amounts would certainly be more reasonable. If only the determining factor in successful fundraising weren’t a company’s ability to generate buzz within the US-centric VC community…