In the early days of January, 2020 looked promising for venture capital firms in Latin America, as the new year was coming on the heels of three consecutive years of strong performance and big investments in the region’s startups. Suddenly, the coronavirus changed the landscape and deals were put on hold or renegotiated. Not so much for Valor Capital Group, a firm dedicated to early-stage tech investments in Brazil.
Valor has been making significant infusions in different companies, such as Tembici, a rental bike service, and CargoX, a logistics startup, even amidst the Covid-19 crisis, betting on the post-pandemic.
The company also makes cross-border infusions with partners in the United States and investors from Asia. Therefore, it had access to early indicators of what was being brought to Latin America alongside the virus.
The magnitude of that scenario was downright distinct from everything that preceded it, so the group started talks with its portfolio companies early on, preparing to sound the alarm and advising them that this would be a different environment, including, but not only, from an economic point of view.
LABS reached out to Scott Sobel, co-founder and managing partner of Valor Capital Group, to talk about that.
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Since the pandemic caused startups to freeze spending and at the same time seek growth opportunities, investment funds also needed to learn how to manage their portfolio digitally. “What I am very proud of is that entrepreneurs in Brazil went from planning to taking action very early”, said Sobel.
As startups had to rethink forecasts, the ones in Valor’s portfolio (which includes edtech Descomplica, geolocation startup Inloco, fintech Stone, besides Tembici, CargoX and more) did it from a bottom-up standpoint.
Companies that had shorter runways were thinking about how best to fundraise in this environment and Valor Capital has seen 100% of its portfolio companies take action and move quickly to make critical decisions, according to him.
When the pandemic took place, Valor had a broader communication to its startups, writing letters to its founders, providing health suggestions and offering guidelines on what they needed to do with their employees. Then, it made suggestions on what the companies needed to be looking at from their cash positions, their revenue, their agreements with their suppliers, and how to manage it and do some scenario planning and sensitivity analysis.
Surprisingly, around 10% of Valor’s portfolio is thriving in this environment where digitalization across industries has enabled them to flourish.
CargoX, for instance, is digitizing the long-haul industry, connecting truckers with their cargo on a real-time geolocation basis. In a time when mobility ceased, truckers have to keep supporting the economy and forwarding goods. Notably, the company raised in April an $80 million-dollar round led by LGT Lightstone fund and which included the participation of existing partners such as Valor Capital, Goldman Sachs Growth Equity, Farallon Capital, among others. All of this amid the crisis.
Wellness unicorn Gympass has done some reorganization because it wasn’t able to properly operate amid the pandemic, with closed gyms across the country. It had moved up the digital roadmap to enable gyms that couldn’t operate in this environment providing online training.
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Furthermore, the Brazilian fintech Stone had trouble with its POS segment, since physical stores were also closed due to social-distancing measures. However, its business extends beyond just physical stores and the company is offering other solutions to its merchants to enable them to sell online and process their digital payments.
On the other hand, Sobel recalls that Valor had companies that have had to hibernate their business. One example is Buser, a Uber-like platform that links passengers to intercity buses, as people weren’t able to ride on them. The executive believes that coming out of the crisis, it will do well because of the model of its business.
As a firm, Valor has focused on its portfolio and spending time with its fund-raised startups. According to him, the crisis also acted as a test of Valor’s ability to be transparent with its entrepreneurs, for them to see where the venture capital company is coming from and vice-versa. “I’m proud to say that, in all of those term sheets we had tough conversations, but I believe it all ended up in a very good place, together, as a result of those conversations”.
Now, Valor has a new mission: looking at new companies and building relationships virtually. “Funding companies require people coming together and spending time together, having that in-person body language experience, and we all aren’t having that opportunity right now and that’s a new chapter for all of us. I think it’s just a top of the funnel challenge for us in building those relationships with entrepreneurs”.
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Valor will continue investing according to its principles
Latin America and particularly Brazil are the epicenter of the pandemic worldwide, but Sobel is positive about the near future. Asked about how active the market and liquidity will be, he answered that never in history has the whole world focused on one issue at one time, with all the capital and intellectual capital focused on solving this problem with the health crisis. “I don’t want to speculate when markets will reopen and how they will be open so I’ll leave that aside, however, from the venture capital point of view, I have to look at lagging versus forward indicators and I think that’s the real question around the Venture Capital industry in Brazil and around the world. I need the top of the funnels because the liquidity is there. I don’t think this [Covid-19] is going to persist for years, to me this is another quarter or two”, he says.
And this positive view drove Valor to lead, with Redpoint Ventures, a $47 million Series B round into Brazilian rental bike business Tembici earlier this month. The startup is the leading micromobility bike-sharing platform in Latin America, as Sobel pointed out. “We’re very excited about Tembici as it moves into e-bikes for their supporting commuters, they’ve done a lot in planning around COVID-19 disinfectant perspective with their bikes”, he said. Valor believes the startup will do great out of the crisis because people will feel more comfortable riding bikes versus taking taxis or other means of mass transportation as they start to circulate across cities again.
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The micromobility sector has been facing a tough time recently in Latin America, with scooters startup Grow cutting staff and reducing operations in Brazil, due to financial issues. “We’re not big fans of scooters”, Sobel says, adding that Tembici doesn’t offer a scooter solution. “We think that Tembici is going to be a big trend because, rather than other scooter solutions, it’s more reliable and it provides better economics, less opportunities of theft, less damage and, therefore, it has a lower cost basis”. Sobel also explains that there’s an important side on the partnerships with municipalities on regulation, which those other scooter platforms didn’t have, according to him. “That’s what gave us the confidence that there’s a long-term resilient or sustainable model around Tembici, as it provides a healthier way of transportation, and it’s better for the environment”.
Healthier and better for the environment follow the founding principles for Valor infusions. According to its co-founder, it relies on industries in Brazil where it’s possible to see those principles and apply technology to reduce costs as driving productivity gains. “At this moment we got to look very carefully at the industries and we also believe that businesses that are good for the environment, businesses that are inclusive, businesses that provide for diversity, all that are just good businesses and make good investments.”