10 Questions Latin American Startups Must Answer When Meeting a VC

As a startup, raising money outside of your region can be intimidating. You may think there’s too much competition in a new, foreign market or that it’s too difficult to compete from abroad. However, getting investment in Latin America can be just as challenging, if not more difficult, than raising funds in another country such as the US.

Before pitching to an investor, you’ll need to do a significant amount of research. You must prepare yourself by answering questions that address everything from “Why are you solving this problem?” to “Is your company a fit for the VC fund?”

Here are ten questions startups should prepare to answer before meeting a VC.

1. Does your startup have an “unfair” advantage?

An incredible idea, a reliable team, and a robust business model are all minimum requirements for receiving investment in any country. However, it’s that “secret sauce” that can convince a VC to bet on your startup. It’s the special ingredient that will allow you to succeed over your competitors in a new market.

Think about what differentiates your startup. Do you have a product or service that would be difficult for a competitor to replicate? Does your company already service a significant client in the industry? Perhaps you previously built a startup that failed. A VC will want to know these things. It’s what sets your startup apart from a crowd of applicants.

Whether you base your differentiator(s) on the product, process, price point, or your team, be prepared to give a compelling reason for why you’re going to “win” and dominate in your market.

2. Is your team well-balanced, dedicated, and focused on the problem?

A VC will look for these three traits when vetting your team. An early-stage startup team commonly consists of the founders, plus vital roles such as an engineer or salesperson. Investors will typically want to see that these team members have a similar motivation to solve the problem as well as complementary skill sets. Team members should provide insight into this when they answer the question, “Why did you start this business together?” 

An investor may want to spend time in your office to evaluate what your team looks like in action. They may ask tough questions or organize whiteboard sessions to find out how your organization would handle a specific problem or challenge. Investors are looking for balanced teams that work well together. 

Investors also prefer to see that you are working on your business full-time. Your full investment shows that you have incurred risk and are strongly motivated to solve a particular problem. If you have a backup, you won’t chase profitability with the same drive as an entrepreneur who has everything to lose.

3. Why are you solving this problem?

The “why” is what drives a VC to invest in a startup. First of all, a great story draws people in. Perhaps you have a story behind why you started the business. For instance, investors will feel more motivated to back someone who is contributing to a personal cause versus a wealthy entrepreneur looking to profit off their latest whim.

Second, running a startup is hard work – your passion or “why” is what keeps you going through tough times. You’ll need to show investors you have the inner drive to navigate the highs and lows of entrepreneurship. 

There will likely come a time when your startup will need to pivot or change your business model to solve the problem more efficiently. Being attached to the “how” instead of the “why” can cause any pivot to destroy the company.  

4. Do you know your business, competitors, and industry?

Tech startups are rampant and the competition is stiff. If your startup is raising money from a US investor to launch in the US, for example, then you’ll need to be aware of your competitors in that new and saturated market. Knowing your competitors’ strengths and weaknesses enables you to serve new customers or to pivot to help a new segment. 

Competition and dealing with a complex industry are inevitable parts of founding a tech startup. However, investors would rather hear you address these challenges head-on than try to hide any harsh facts. You’ll be in good shape if you can explain your business concept in just a few sentences and your most significant threats to building it.

5. Do you have the ability to scale?

Being able to scale your company is critical as it represents sustainability and growth. US VCs, for example, want to invest in businesses that they predict to grow at least 10X over the next five to seven years. 

The US presents a massive opportunity for market expansion. However, the market moves quickly so you’ll need to adapt to keep up with the pace. If you overestimate your startup’s ability to handle an influx of sales, putting a strain on your technology, then there’s a chance you won’t survive. But if the technical side of your company is stable, then you’ll be able to adapt your product as needed and support a growing customer base.

It’s best to have a few key team members operating on the ground to establish your company in any new market. Uber and Airbnb, for example, successfully expanded to other countries by sending core team members abroad to establish a presence while hiring local talent.

6. Is your startup making money?

Regardless of location, running out of capital is the number one reason a startup fails. You’ll need to figure out how to get to profitability as quickly as possible. When your team finds a way to turn one dollar invested into two dollars profit, or better, then the money machine is working. 

Latin American startups often focus on generating revenue much earlier on to keep their companies alive, rather than fundraising. If you’ve bootstrapped your business and prioritized profitability, then you’ll impress investors. Show them you can make them money, and you’ll likely convince them to write a check.

Remember, your startup valuation will often be significantly lower than in more developed markets due to lower operating costs, such as salaries, in Latin America.

7. Is your valuation in line with the industry and region?

When pitching to investors, you’ll need to understand that the valuations of startups in Latin America are usually far below what most investors see in the US. There haven’t been many high dollar exits in Latin America. Therefore, the initial price that VCs pay must be lower. Read more about why startup valuations are lower in Latin American than in Silicon Valley here

At Magma Partners, we’ve invested in 55 startups across Latin America to date, getting the same equity stakes as a Silicon Valley fund would get by investing $20M into similar companies. In total, our portfolio companies are generating eight figures in revenue per year.

Valuations can vary by industry and region of the world. Therefore, it’s critical that your startup’s valuation is in line with similar companies in the same industry, city, or area. A high seed or Series A valuation can make it challenging for your startup to raise future rounds – or require you to do so in a down round. If you go into a pitch with different valuation expectations, it can kill the deal.

8. How do you intend to use VC funding?

If you’re seeking investment, a VC will want to know, to some degree, how you intend to use their funding. Will you invest in new hires? Will you make improvements to the production process? Maybe you want to upgrade your technology to serve your growing customer base better. Know exactly how you will spend the money and show investors how your plans align with your goals.

Keep in mind that raising money from investors is just another milestone for your startup – never the end goal. Research potential investors and partner with those that not only provide money but also add strategic value to your company.  

9. Is your company a fit for the VC fund?

Every VC has a thesis that guides their approach to investing. If you’re looking for an investor, then you’ll need to know the VC’s areas of interest. 

For example, at Magma Partners, we primarily support startups in Latin America that want to launch and scale across borders. We base our strategy on the business models that we think will be the most profitable or successful in the regions where we invest. We also select industries where we believe we can offer the most help to entrepreneurs, such as fintech, insurtech, and blockchain. Although there are a few exceptions, most of the time we stick to our thesis when deciding in which companies to invest.

If your startup applies from outside a VC’s focus area, you should be able to explain why the firm is still the right fit to help your business grow.

10. Do you know the essential numbers to your business?

As with any big decision, you should know the most important numbers related to your business, such as your burn rate, customer acquisition costs, churn rate, etc. before meeting with an investor. Not only should you know these numbers exceptionally well, but you should be able to back them up with documented metrics and reliable data. 

If you’re unable to provide figures when a VC asks for them, you’ll lose credibility. Investors want to see that you understand the finances and critical metrics of your business. You’ll need to show you have a firm grasp on your numbers and can communicate them well.

Meeting with an investor is a pivotal move for Latin American startups. Startups should prepare ahead of time by answering these questions to increase the chances of raising money with a VC. If you can secure funding and expand your startup across borders, then you’ll be more likely to gain attention globally and grow your business exponentially.