How To Raise Venture Capital From Magma Partners, Ep 64

Venture capital, especially in Latin America, can often seem like a black box where founders have very little access to information about what happens on the inside of the firm. I’ve gotten so many questions about how to apply, when do it, pitfalls to avoid and so many more.

On the last episode of Crossing Borders, I interviewed Komal Dadlani, CEO and cofounder of Lab4U. One of her conditions for the podcast was that she could then turn the microphone around on me and ask all the questions she wanted to know about venture capital…of course I said yes! It was a great to share what we’ve learned in five years of VC and share how to best raise venture capital form Magma Partners. This episode is a combination of the questions Komal asked me and the most common questions I get via email, Twitter, Facebook, and LinkedIn.

As Komal wondered, many entrepreneurs ask themselves how VCs analyze companies that they are considering for investment, and why they choose to invest in a specific companies. Others are curious about dilution, deal structure, or even the operations of the Magma team.

This episode was an opportunity to answer those questions. If one person asked, then at least ten people were probably thinking the same thing. Check out this episode to hear me answer Komal’s questions and delve into the most common questions I get on social media.

The Magma Application form

The most common question I get through almost every channel is: How do I get in touch with you? Short answer: you’re already in touch with me! You’ve either written me an email, connected on LinkedIn or are in a Twitter message. Ask the question directly there! But if you want advice on your startup or for us to look at your business for an investment, fill out the application form on our website. Everyone, whether they are our LP’s brother, a previous founder or someone with no connections at all, can reach our team 24/7/365 from our online form.

Why do we use an application form rather than requiring an introduction? Check out the rest of this episode to explain how this form levels the playing field for entrepreneurs looking for early-stage capital in Latin America.

Everyone makes an investment thesis and then immediately breaks it.

Everyone at Magma Partners has been an entrepreneur. We started Magma in part to share that experience with other founders in the ecosystem, and in part to fill gaps we saw in funding structures in Chile. Our first thesis was built on models we could see were working, but that doesn’t mean we were successful with all our first investments. We’ve learned lots of lessons along the way, but especially in the first two years.

Komal pushed me to explain what lessons I could bring from this first fund into our second fund, which is currently open. Looking back, we made many mistakes that I wouldn’t make now, knowing what I know today. Listen to the rest of this episode to find out how our Magma I investments impacted our investments in Magma II.

Fucked up Cap Tables and other startup nightmares

I plan on writing a full blog on the terrible cap tables we have seen during investments, but I also recently got a question about dilution on Twitter. Just this year, we had to pass up on 5-10 investments because their cap tables were so messed up that we could not enter the deal. This issue is unfortunately quite common in Latin America as well-meaning funds, angels and family offices have started investing directly while not using standard terms or taking high percentages of equity. Luckily, few investors are actually trying to screw over the entrepreneur; they’re just not as familiar with startup investing and how its different from a traditional investment.

Check out the rest of this episode to find out the two most common mistakes we see on cap tables – even for an early-stage startup – and how to avoid them. We are also happy to review any startup’s term sheet if you would like a second opinion on the deal. We have read thousands of term sheets over the past few years and have a pretty good idea of what might be a red flag. To send a term sheet to our team for review, please reach out via our form and check the “feedback” box.

How Magma Partners supports founders

We will work as closely with founders as they would like. We don’t only focus on returns to the fund when deciding how much time to spend with one of the startups in our portfolio; we try to help all startups, but some end up with more help from our team. Why? Some entrepreneurs prefer a less close relationship. Others want advice, but don’t take it into account, no matter how many times we meet. Others follow advice blindly. We’ve found over the years that neither of these options leads to the most successful company.

Check out the rest of this episode to hear my hypothesis on what makes a great founder, and what makes a founder easy to work with. It has nothing to do with the amount of money the company has raised or how much they make in sales. I’m always happy to spend large chunks of time with any of the companies in our portfolio if they would like the support.

Show Notes:

[1:06] – How do I get in touch with Nathan and Magma Partners?

[6:54] – Nathan’s transition from entrepreneur to investor

[9:08] – Developing an investment thesis for Magma’s first fund

[12:20] – What did Magma’s first fund invest in?

[15:23] – What did you learn from Magma I to apply to Magma II?

[22:07] – What do you look for in a company when you consider investing?

[27:30] – Magma II investments

[31:12] – The second most-asked question on social media

[33:38] – What is the ONE biggest reason you invest in a company?

[34:43] – Is it okay to ask my investors why they want to invest in me?

[36:15] – What is the usual stock dilution in every round?

[43:06] – How do experienced VCs educate founders on deals?

[46:57] – How do you choose to work closely with a startup?

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