Neither early-stage nor late-stage, a new venture capital fund has debuted in the Brazilian market with an eye on bootstrap startups, those companies founded and leveraged without backing from investment funds. Cloud9 Capital wants to invest in startups that have managed to grow on their own, without an excessive capital burn, led by founders who are exceptional at running the business but have stayed off the traditional venture capital radar.
Founded in mid-2021, Cloud9 is a venture by Felipe Affonso, Noah Stern, and Rafael Serson. Affonso and Stern are both former members of SoftBank‘s first team in Brazil and have also worked at GIC, Singapore’s sovereign wealth fund, and Goldman Sachs, respectively. Serson worked at Kinea Investimentos‘ private equity team.
The first closing of Cloud9’s inaugural fund brought in BRL 280 million, most of it from institutional investors, single and multi-family offices; the target is to raise BRL 400 million. In an interview with LABS, Affonso said that Cloud9 will build a diverse but more concentrated portfolio, investing in about 10 startups over the next three years. The leaner portfolio will allow the fund to offer greater financial backing and set aside capital for subsequent rounds. The size of the checks should vary according to the company, with the sweet spot starting at BRL 20 million. The first investment should be announced soon.
For now, Cloud9 will focus its efforts on Brazil. “We will look for entrepreneurs outside the venture capital track, outside the Faria Lima networking, who have good traction and a scalable business, but who haven’t had access to funding from traditional VC firms. This is part of our DNA, to travel a lot and do a very active prospection work in other country’s regions. That is why the focus of this first fund is in Brazil. One day, maybe, we will look abroad,” he said.
Here are the main excerpts from our interview with Felipe Affonso:
LABS: Can you tell us a little bit about Cloud9’s investment thesis?
Felipe Affonso: Cloud9 was born to break some of the rules of the venture capital game: today, the market rewards the founder who is very good at fundraising and penalizes the founder who is not good at fundraising. We believe that the founder who should be rewarded is the one who is good at running a business. Fundraising is important, but it is only one part of the equation.
Now, how do you evaluate a founder when his company is still young, sometimes just an idea? At the beginning of a company’s journey, the perceived quality of execution is tied to the perceived quality of fundraising. So the founder who has more ability to build storytelling, to sell his product, and to access fundraising networking, has some advantage.
On the other side, we have the founder who is less skilled in storytelling and fundraising but is competent in execution and even without funding, or with little funding, manages to build an amazing company.
Yet this founder is still often overlooked by the venture capital market. Either because he is not backed by institutional funding, or because his storytelling is not good, or because his company is not structured – because, since he doesn’t know how to raise money, nobody has asked him to organize the company’s numbers.
LABS: Which sectors are you looking at? What are you betting on?
FA: We are agnostic regarding the sector. Our constraint has more to do with the business model. We look for scalable models, so, we do not like very much businesses that have a very big physical component, that demand a very big investment in machinery, in physical assets. We are more interested in asset-light business [business model where a business owns relatively fewer capital assets compared to the value of its operations], in SaaS models, digital products, and services.
And this makes perfect sense for our investment thesis, of looking for the founder who built the company without funding support. We ended up getting precisely in these SaaS models, asset-light businesses because it is the kind of business that can grow without investment. It is more difficult to find a business that demands more material assets, such as a car rental startup, that has great traction without ever having raised a round.
LABS: What will Cloud9 offer to the invested companies besides funding, considering that the companies will already have a more mature business, unlike early-stage startups, for example, to whom investment funds usually offer more tactical support, strategic guidance?
FA: The most important thing here is that the protagonist of the story is the founder. Our intention is not to invest in that founder to whom we have to offer mega-guidance. We will only invest in that founder that we believe can execute an idea and build an amazing company all by himself. This is a central part of our thesis.
We want to support and complement the skill set of this entrepreneur. Since we look for the founder outside the VC track, he has been less “polished” by previous funds – this is something that early-stage funds do very well. We bet on companies that in general don’t need much help regarding the core business – their strategy is good, their product is good. So we don’t want to interfere in the day-to-day business.
We want to help in eventual next fundraising, put this company on the investment track, in structuring an M&A, in structuring the company, for example, a stock option plan, in auditing the operation’s numbers, in building a C-level team. We will also provide support at the strategic level, within the board.
LABS: 2021 was a booming year for Brazilian startups, with lots of venture capital coming in, lots of international capitalists looking in. Do you think this will happen again in 2022, also considering the election year and the macroeconomic scenario?
FA: The VC firms are very well-capitalized and this available money will drive a lot of activity, it will be a good year for venture capital, but I believe it will slow down a little bit compared to last year. First, because big rounds were done and the companies are well-capitalized; second, because the drop we saw in several companies post-IPO has made investors and the companies themselves more cautious.
Of course, there are elections, there is the macroeconomy… But a good tech company is not very badly affected by the macroeconomy. I wouldn’t say it is immune to macro, but if it has a great founder, a great market, a good product, and good execution, it will do well. From a venture capital perspective, it’s more about getting the right company and the right founder than it is about the timing of the macro.
LABS: But you are going to make safer bets, on companies that have proven themselves?
FA: It’s a little bit safer, you’re right. But it is also more than that. We are going to back the company that is already the most money-efficient. We are going to make investments that match the traction and the needs of the company because these companies have already figured out how to grow in an efficient, sustainable way.
LABS: What are your guesses in terms of sectors with the greatest potential in the Brazilian market? Should fintechs continue to lead the fundraising?
FA: Definitely. The Brazilian financial market is gigantic and unarbitrary, there is a lot of room for new players. And fintech is a kind of business that requires a lot of funding… There are other sectors that are doing a lot of cool things, like real state, proptech. Another sector that is huge and has the same characteristics as fintech, also requiring more funding, is healthtech. It is a sector that is even a little frustrating for investors because there is investor appetite, but there is a lack of companies to invest in, and it is a very regulated market. Whoever manages to crack its code will be able to do a lot of cool things in this area.