After reviewing the content for session answer the following questions 1. What is the degree of...

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After reviewing the content for session answer the following questions 1. What is the degree of sociability and solidarity in DILA Capital? What evidence supports your conclusion? 2. What effects do the forms of cultural control affect Dila Capital's business model? Its corporate purpose? What are the strengths and weaknesses of DILA Capital in relying on this form of cultural control? 3. What is the degree of sociability and solidarity in Mexico's Venture Capital Ecosystem? What evidence supports your conclusion? 4. What strategy would you recommend for financing DILA Fund III? where's and if so how do sociability and solidarity affect the ability to raise funds? WILLIAM OCASIO AND ANDREA MEYER DILA Capital: Navigating Mexico's Budding Venture Capital Ecosystem Alejandro Diez Barroso '11 stood on the balcony of DILA Capital headquarters, looking out onto Mexico City. He had just returned from a weekend retreat at Valle del Bravo with his team. The 33-year-old Kellogg MBA had founded DILA Capital in 2013, and the company was already operating an MX$50 million seed fund (DILA I) and an MX$150 million seed and Round A fund (DILA II). Yet Alejandro had bigger dreams. Working with 36-year-old Harvard MBA Eduardo Clave, the DILA Capital team developed an investment strategy for DILA III-an MX$1 billion multistage venture capital fund and the first private billion-peso fund in Mexico.' The weekend at Valle del Bravo had energized Alejandro. The team's financial plans validated his vision, and Eduardo agreed to join Alejandro as a general partner" and co-manager of DILA III. Eduardo had experience, a good reputation, and skills that complemented Alejandro's. But now reality began to sink in: Would they be able to raise such a large amount of money, and how should they go about doing it? In May 2016, DILA I and DILA II were among a growing number of seed funds in Mexico. Thanks to recent programs by the Mexican government to foster entrepreneurship in the country, numerous seed funds had been established; however, Alejandro knew of only five firms that offered later-stage Series A and B financing* in Mexico. The DILA Capital team had identified 125 firms that had received seed funding in Mexico during the last few years and that would soon seek later- stage financing. Alejandro was bullish on the long-term prospects of Mexico's venture capital ecosystem. Local and foreign private equity firms operating in Mexico were eager to find investment opportunities beyond the seed stages of venture capital (see Exhibit 1 and Exhibit 2). But DILA III faced daunting short-term challenges. Alejandro knew that investors typically wanted to see at least 2.5 to 5 percent of a fund contributed by general partners before they would consider investing as limited partners (see Exhibit 3), and he and Eduardo alone did not yet represent a credible general partnership. They would need to secure additional general partners in order to attract limited partners that would help them reach their goal of 1 billion pesos. There were many prospective * General partners comprise a venture capital (VC) firm itself; they raise and manage VC funds. Limited partners invest in VC funds but do not manage them, as limited partners have limited rights and obligations. A VC fund is governed by a limited partnership agreement, which is a contract between the general partners and limited partners. A VC fund invests in portfolio companies. *Seed funds provide seed capital, or the initial capital, to start a business that is often still in the idea or conceptual stage. *Series A is the first round of financing after seed capital. Generally, this is the first time that company ownership is offered to external investors. By a Series B financing round, companies have advanced their business, resulting in a higher valuation, so an investor will generally pay a higher price for investing in the company than a Series A investor. investors in Mexico: those who had invested in DILA I and DILA II, the investment offices of wealthy families, and high-net-worth individuals. He believed venture capital from the United States might also be needed to reach their goal for DILA III. Alejandro faced other obstacles as well, including the precarious exchange rate due to great uncertainty in the political environment and its effect on the Mexican peso. In addition, the young venture capital industry in Mexico had yet to see an exemplary exit, such as the acquisition or successful IPO of a Mexican entrepreneur's startup, which was key to attracting investors. The lack of successful exits meant a lack of awareness about Mexican startups.3 Acquisition was also minimal, as big Mexican corporations were skeptical that startups were capable of generating innovation worth acquiring. Family History and Entrepreneurial Beginnings Alejandro's family, the Diez Barrosos, came from Spain to Mexico in the 1830s. Despite the Spanish naming convention of forming one's last name by taking the paternal surname as the first last name and the maternal surname as the second, each new generation of the Diez Barroso family maintained the original name. Alejandro's great-grandfather was the first certified public accountant in Mexico and founded its professional association, now known as the Mexican Institute of Public Accountants. Alejandro's father was himself a successful businessman. Originally an employee in the oil and gas industry in Mexico, he moved his family to Texas to run a hotel, Blockbuster and Domino's franchises, and warehouses in the 1980s and 1990s. In 1992 he returned to Mexico where he and a close friend started the country's second mobile phone company, which they eventually sold to Telefonica, the multinational broadband and telecommunications provider. Like his father, Alejandro had an entrepreneurial spirit. Even as a child, he was always looking for ways to make money, from running a lemonade stand to helping his father in his businesses to creating the official scapular" of the Mexican Soccer Federation. As a high school senior he noticed ads on plasma televisions in Denver and started a company selling ads in shopping malls. His partner in the venture was classmate Pablo de Yturbe, whose family owned shopping malls in Mexico. Alejandro's father and friends provided the two with initial capital, while Pablo's family gave them access to malls. Alejandro and Pablo ran the ad business during their college years, but their plans to grow the business were thwarted by a lack of funding options. Eventually they had to sell the company to a bigger player in the commercial advertising industry. Alejandro wished there were venture capital in Mexico. Alejandro and Pablo decided to begin tackling the problem themselves. They started with cash from their sale and again approached their families and friends, raising US$2 million to start a new company, DILA Capital. The idea was to invest in startups through the company. In 2005, having raised commitments and capital, the two found that Mexican laws were not conducive to creating venture capital funds and lacked good protection for minority shareholders and minority rights. Alejandro and Pablo looked for other types of investment opportunities. "We bought 51 percent of a soccer company that wasn't being run well and took it over. We became more like a very small private equity* firm," Alejandro recalled. The two also invested in an ink and toner cartridge business, of which Pablo became the full- time CEO, and a French brand of high-end bathing suits for men that Alejandro led as CEO until an Indian private equity firm purchased it in 2008, before the world markets crashed. In 2009, Alejandro started an MBA at the Kellogg School of Management. My goal was to understand all I could about venture capital and private equity. I took all the classes I could on these topics and interned for a VC firm in Utah that was looking to enter Mexico. While I was there, things transformed in Mexico. The Mexican government started to realize that we needed companies to innovate, to create new jobs. Business in Mexico The Mexican economy was dominated by family businesses; about 50 percent of Mexico's 100 largest businesses were family owned. In 2015, 40 percent of the companies listed on the Mexican stock exchange were still privately held by the founding families, and investors often experienced a "control-mentality" when investing in Mexican firms. Indeed, a few affluent families and investors held a large amount of the country's capital." Although only 20 percent of Mexicans worked in large firms (those with over 500 employees), these jobs were considered the most desirable because of their higher wages." Entrepreneurship was seen as not reputable and too risky a career path for more educated Mexicans, while well- established family firms were viewed as reputable. Though family firms were slow growth and conservative with generally few external investors-they were what Alejandro considered lifestyle companies: they provided sufficient returns for owning families to live very comfortably. Families took out dividends, preferring to opt for stability and status quo rather than invest for aggressive growth. 12 Alejandro explained: It is generational. Our generation of Mexicans is a lot more willing to take risks than generations before us. Previously there were so many recessions that being an entrepreneur was harder. In the 1994 recession, if you had any debt you failed because the value of the peso dropped so much. People who lived through that are risk averse. But I have not experienced a huge financial crisis in my working life. Also, for my dad's generation, it was very expensive to start a business with legal fees and brick-and-mortar facilities. Now, with the growth of technology, the cost of starting a new business has never been lower. 13 Although Mexico was the twelfth-largest economy in the world, small- and medium-sized businesses did not have access to credit. 14 most Mexican startups and While in the United States, bank loans provided 15 to 30 percent of the initial financing of high-growth startups, in Mexico the figure was close to zero. 16 In 2012 the Mexican government created a seed capital fund that provided MX$300 million for startups. Shortly thereafter, the government formed the National Institute of the Entrepreneur (INADEM), whose mission was to provide access to financing, improve entrepreneurial skills, provide access to information and communications technology, and foster public-private partnerships. 18 INADEM invested in 36 Mexican VC funds that in turn provided seed funding to entrepreneurs. 19 Not all of the new seed funds were run by experienced venture capitalists, which sometimes complicated the budding venture capital space, as their inexperience introduced unexpected terms sheets and valuations.20 In addition to addressing the lack of seed funding, the Mexican government introduced reforms that enabled Mexican pension funds to invest in PE and VC funds through an instrument known as Development Capital Certificates (CKDs).21 The Mexican government also deregulated major sectors, such as energy and telecommunications, to attract foreign investment and encourage competition.22 Soon U.S. entrepreneurship resources began entering Mexico, from Silicon Valley-based 500 Startups and the Founder Institute to New York-based Endeavor. The venture capital ecosystem in Mexico City was beginning to gel. One venture capitalist from Mexico City observed: The Mexican startup scene is reaching a point where the necessary elements for it to flourish are in place: a dynamic and vibrant, technically educated youth, support institutions like incubators, mentors, angels* and government programs, macroeconomic stability, and funding mechanisms.23 Birth of DILA Capital as a Venture Fund After completing his MBA in 2011, Alejandro was hired by Kellogg alumnus Fernando Chico Pardo as an associate at his private equity firm in Mexico City. Chico was not as enticed by the venture capital space, reasoning that it took the same amount of time to make a $50 million deal as a $500,000 one. Yet he did offer Alejandro the opportunity to run a venture capital arm of his firm, which he funded personally through his family business and children participating as investors. The two co-invested in three opportunities, but by 2013 Alejandro could no longer hold back his excitement for the changes taking place in Mexico City. "I began to see the co-working spaces, incubators, accelerators arrive, and INADEM, and I told Fernando, 'I have to do this."" Alejandro approached Chico with the idea of investing in DILA Capital as a venture fund, and Chico agreed to be his first investor. In July 2013 Alejandro began re-approaching the investors who had invested in his first attempt at DILA Capital: venture fund. I focused on financial returns, but I also asked them to remember that, when they were starting out, someone had helped them. Innovation in our country was an important part of my pitch. With the funding Alejandro secured, DILA Capital invested MX$50 million in seven additional companies beyond the three original investments Alejandro had made with Chico. They called this investment the DILA I fund. As a VC firm, DILA secured money from investors-private individuals, family businesses, or government mechanisms like CKDS-to create funds. DILA then identified entrepreneurs who had promising ideas in high-growth-potential industries and invested its funds in the startups; DILA's management team also provided advice and connections for the startups through select investors. Whereas some VC funds focused on a particular industry, DILA did not limit itself to a specific industry. DILA Capital's team had three associates, each responsible for tracking the progress of three portfolio companies. In hiring the associates, Alejandro interviewed thirty-five candidates and gave them a GMAT-like exam to test their competence. He worked in the office every day with his associates and was in continuous contact through WhatsApp. More formally, the team met every Monday morning to assess the status of each company in DILA's portfolio. DILA Capital's board met every three months. The board was a subgroup of its investors, comprising twenty individuals in their twenties, thirties, and forties, predominantly the children of people to whom Alejandro had pitched his original idea for DILA Capital. The role of the board was to provide advice and to approve or disallow actions such as ending financial support for a poor-performing portfolio company. "These people are the first ones I reach to for advice: my board and some of my investors," explained Alejandro. Collaboration and Competition with VC Firms DILA collaborated and competed with about ten VC firms in Mexico. Alejandro explained: My personal thesis is that if there were no collaboration, the venture capital system in Mexico wouldn't work. We have to collaborate, so we always co-invest. We have never done a deal alone. We co-invest either with angels, or with family offices, or with other VC firms. I truly believe the success of the venture industry in Mexico is dependent on collaboration. Co-investing in startups with other VC firms strengthened deals, because each firm conducted its own due diligence and put its reputation and capital on the line. This, in turn, often garnered greater media attention to a deal, which could help VC firms attract additional funding for later- stage deals or new deals in the future. Although co-investment with other VC funds was a financial transaction, over time Alejandro developed personal relationships with partners at some of the other VC firms: "We see each other at least once a month, have coffee or lunch or beer. We socialize outside of work." When partnering with other VC firms on financing deals, DILA was typically the lead investor, initiating the deal and often providing the highest amount of capital. Alejandro chose not to collaborate with some Mexican seed funds that had sprung up from INADEM funding, due to their lack of experience: Some of them don't know what they are doing. They are bidding up valuations that are insane. They give term sheets whose terms and conditions don't make any sense. They are doing a huge harm to the entrepreneur, to the ecosystem, to investors. They are not educated in the VC world and don't understand the investments but are doing them anyway. Finding Entrepreneurs Most of the startups in which DILA invested were proprietary deals that had come from personal referrals. DILA received many proposals that had not come through referrals, but Alejandro found that these tended to be of lesser quality. As a result, every company in DILA's portfolio was founded by someone who knew Alejandro or Pablo Pedrejon, whom Alejandro met through his MBA contacts and whose company, Petsy.com, DILA I had funded. We listen to all proposals, [but] the ones we have funded are those who were close to us. I truly believe we don't do anything different. We don't analyze it differently, but when I look at the portfolio after the fact, we do deep analysis to see what sources are the best sources of projects that we have. At the end of the day, we open all doors, but the ones we have actually funded have all been through a direct contact who already filtered them. A typical founder from one of DILA's portfolio companies was someone who had a corporate background, then earned an MBA, and finally started a business. In the U.S., that model has been criticized by VCs who prefer to have serial entrepreneurs rather than MBAs, but the model works well in Mexico. I am pro-MBA. Especially from Kellogg or other top schools, you have a huge competitive advantage over other Mexicans. MBAs tend to have better business plans, better ideas, better financial models, and presentations. They know how to speak our business language. They know what VCs expect. They know "drag alongs" and "tag alongs." When you sit with an entrepreneur, and they don't know what the terms mean, and that you could sell their company, that's a barrier. I think education is the underlying factor, and in Mexico that education is lacking. In other innovation hubs in Mexico, like Monterrey, the culture differed somewhat from Silicon Valley. In the valley, college dropouts were celebrated, while in Monterrey a university title was necessary to get your foot in the door with potential investors, who were often affluent families that stretched back for generations. Part of our mission is to democratize capital, to give capital to those who don't have it- but we are not achieving that part right now because we are giving capital to the people who are best prepared, and those who are best prepared are those with the best educations, who tend to come from wealthier families. The challenge is that we are investing at a stage where there's not much to grasp. We fund ideas, so I have to find entrepreneurs who are prepared. We can't sacrifice the performance of the fund. By 2015, DILA Capital had raised MX$150 million to establish a DILA II fund.24 DILA II invested in a mix of ecommerce companies (33 percent), platform marketplace companies (33 percent), consumer goods companies (17 percent), services firms (9 percent), and retail (8 percent). Examples included Petsy, an online-only retailer of pet supplies in Mexico that DILA I had funded; TuCanton, a full-service online platform with local agents for low- and middle-income homebuyers; 25 and Aliada, an on-demand maid booking service (see Exhibit 4).26 Alejandro maintained close relationships with the entrepreneurs DILA funded; they became friends and confidants as they weathered the inevitable challenges of new companies. Startups were a risky business, and Alejandro considered the personal relationships important in establishing trust: They come to me when they are overwhelmed, we go out for drinks, and I let them vent all their frustrations. Many have become close friends. It could be dangerous, of course, because we only have a certain amount of money to invest in follow-ons, so we have to analyze them carefully. We can't let the heart get in the way, but it's attractive to have that relationship with them because you solidify the relationship, you are transparent, they trust us, we trust them. Finding Investors To find investors for DILA's funds, Alejandro similarly worked through personal contacts, seeking individuals who possessed unique capabilities and skillsets that his staff did not. He sought funding from angel investors as well as the investment arms of family businesses. Of DILA's investors, the officers of family businesses were the most hands-on. Given his emphasis on personal relationships, Alejandro was enthusiastic about an opportunity that arose with one of DILA's limited partners: We wanted to open an office in Monterrey, and one of our investors suggested we do it through his family. He said he could raise funds in Monterrey. So, his 30-year-old son came to our Mexico City office for four months, worked full time at no pay, to learn and understand how everything works. It was a pilot to see if he liked us and if we liked him. He worked hard to understand the market, so he is now our full-time representative in Monterrey. He will play that close role. If we invest in Monterrey, I want to have someone on the ground there for the handholding entrepreneurs will need. Despite the fact that venture capital was on the rise in Mexico, the industry still had a long way to go. As of September 2015, Mexico had 39 VC funds under US$36 million in size, but only three funds in the US$36-70 million range, two in the US$71-105 million range, and one each in the mezzanine funding range of US$106-210 and US$211-270+ in size. 27 Financing for startups in Mexico came from venture capitalists and angel investors in only 5 percent of cases, compared to 20 to 47 percent in the United States. 28 The Latin American Private Equity & Venture Capital Association still ranked Mexico third behind Chile and Brazil on its scorecard for Latin American countries.29 Dreaming Big Alejandro and his successful portfolio companies did not have time to wait for the industry to mature. They needed to address the dearth of Series A and B funding. Alejandro's mind was on raising the DILA III fund to fill the gap in later-stage financing affecting his portfolio companies and Mexico in general. DILA III would need to raise a much higher amount than ever before. Alejandro decided that he could not start such a fund on his own. He had yet to demonstrate a successful exit to his limited partners, to prove that he could make money for them, but he didn't have time to wait for that. As he scanned the Mexican entrepreneurial landscape, he saw 125 companies that had received early-stage funding that could need Series A funding soon. The time had come for DILA III. Alejandro turned to his long-time friend Eduardo Clave, who was head of DILA II's investment committee. The two had talked of starting a fund together, but Eduardo had a commitment to running a company that his own search fund had acquired. With that company poised for sale, Alejandro saw a window of opportunity. He asked Eduardo if he would join him in a new fund, if the two could raise sufficient money. Eduardo tentatively said yes, but with his investment-banking mindset he wanted to determine the exact size of the fund. It was an important question. The fund had to be big enough to finance multiple companies through Series A, B, and C, and yet not so large as to seem insurmountably high to raise. To determine the size of the fund, Alejandro, Eduardo, and four of DILA's key employees drove to Valle del Bravo, a popular lakeside retreat an hour from Mexico City. They sequestered themselves for a weekend to answer these questions: "If we shoot for the stars, what would be our ideal fund size? What management fee would be needed to support the salaries for the expansion? How many companies would we fund in Round A?" After deliberations and calculations, the team came up with a figure of MX$1,030,000,000-a billion-peso fund. The team then projected the number of companies to fund at each stage. Eduardo agreed to co-manage DILA III, which Alejandro heartily welcomed. Eduardo's more risk-averse attitude, financial focus, and attention to detail complemented Alejandro's broader vision, soft and team-building skills, and entrepreneurial appetite. His experience and successful exit as an entrepreneur and background in investment banking at UBS could also help open doors with both Mexican and U.S. investors. Alejandro knew that raising a billion peso fund would be an uphill battle. Within Mexico, the macroeconomic picture was good, but the current president was unpopular and social tensions were rising. The uncertainty over the upcoming U.S. presidential election and the candidacy of Donald Trump, who was widely perceived as harmful to Mexican business interests, caused further caution. It was not a time when investors would typically be bullish on the entrepreneurial scene. He knew Mexican startups had the potential to gain the international spotlight-but how could he raise this ambitious amount of money? At least 2.5 to 5 percent would have to come from general partners willing to put skin in the game. Alejandro and Eduardo had both individually invested as much as they could in DILA III, but they needed other general partners to put them in a strong position to attract limited partners. Alejandro planned to speak with his father, whose backing would help build confidence in the new fund, and to gain the support of the DILA II investment committee. He knew that a MX$1 billion fund was not only a big leap for his firm, but also for Mexico's venture capital ecosystem. After reviewing the content for session answer the following questions 1. What is the degree of sociability and solidarity in DILA Capital? What evidence supports your conclusion? 2. What effects do the forms of cultural control affect Dila Capital's business model? Its corporate purpose? What are the strengths and weaknesses of DILA Capital in relying on this form of cultural control? 3. What is the degree of sociability and solidarity in Mexico's Venture Capital Ecosystem? What evidence supports your conclusion? 4. What strategy would you recommend for financing DILA Fund III? where's and if so how do sociability and solidarity affect the ability to raise funds? WILLIAM OCASIO AND ANDREA MEYER DILA Capital: Navigating Mexico's Budding Venture Capital Ecosystem Alejandro Diez Barroso '11 stood on the balcony of DILA Capital headquarters, looking out onto Mexico City. He had just returned from a weekend retreat at Valle del Bravo with his team. The 33-year-old Kellogg MBA had founded DILA Capital in 2013, and the company was already operating an MX$50 million seed fund (DILA I) and an MX$150 million seed and Round A fund (DILA II). Yet Alejandro had bigger dreams. Working with 36-year-old Harvard MBA Eduardo Clave, the DILA Capital team developed an investment strategy for DILA III-an MX$1 billion multistage venture capital fund and the first private billion-peso fund in Mexico.' The weekend at Valle del Bravo had energized Alejandro. The team's financial plans validated his vision, and Eduardo agreed to join Alejandro as a general partner" and co-manager of DILA III. Eduardo had experience, a good reputation, and skills that complemented Alejandro's. But now reality began to sink in: Would they be able to raise such a large amount of money, and how should they go about doing it? In May 2016, DILA I and DILA II were among a growing number of seed funds in Mexico. Thanks to recent programs by the Mexican government to foster entrepreneurship in the country, numerous seed funds had been established; however, Alejandro knew of only five firms that offered later-stage Series A and B financing* in Mexico. The DILA Capital team had identified 125 firms that had received seed funding in Mexico during the last few years and that would soon seek later- stage financing. Alejandro was bullish on the long-term prospects of Mexico's venture capital ecosystem. Local and foreign private equity firms operating in Mexico were eager to find investment opportunities beyond the seed stages of venture capital (see Exhibit 1 and Exhibit 2). But DILA III faced daunting short-term challenges. Alejandro knew that investors typically wanted to see at least 2.5 to 5 percent of a fund contributed by general partners before they would consider investing as limited partners (see Exhibit 3), and he and Eduardo alone did not yet represent a credible general partnership. They would need to secure additional general partners in order to attract limited partners that would help them reach their goal of 1 billion pesos. There were many prospective * General partners comprise a venture capital (VC) firm itself; they raise and manage VC funds. Limited partners invest in VC funds but do not manage them, as limited partners have limited rights and obligations. A VC fund is governed by a limited partnership agreement, which is a contract between the general partners and limited partners. A VC fund invests in portfolio companies. *Seed funds provide seed capital, or the initial capital, to start a business that is often still in the idea or conceptual stage. *Series A is the first round of financing after seed capital. Generally, this is the first time that company ownership is offered to external investors. By a Series B financing round, companies have advanced their business, resulting in a higher valuation, so an investor will generally pay a higher price for investing in the company than a Series A investor. investors in Mexico: those who had invested in DILA I and DILA II, the investment offices of wealthy families, and high-net-worth individuals. He believed venture capital from the United States might also be needed to reach their goal for DILA III. Alejandro faced other obstacles as well, including the precarious exchange rate due to great uncertainty in the political environment and its effect on the Mexican peso. In addition, the young venture capital industry in Mexico had yet to see an exemplary exit, such as the acquisition or successful IPO of a Mexican entrepreneur's startup, which was key to attracting investors. The lack of successful exits meant a lack of awareness about Mexican startups.3 Acquisition was also minimal, as big Mexican corporations were skeptical that startups were capable of generating innovation worth acquiring. Family History and Entrepreneurial Beginnings Alejandro's family, the Diez Barrosos, came from Spain to Mexico in the 1830s. Despite the Spanish naming convention of forming one's last name by taking the paternal surname as the first last name and the maternal surname as the second, each new generation of the Diez Barroso family maintained the original name. Alejandro's great-grandfather was the first certified public accountant in Mexico and founded its professional association, now known as the Mexican Institute of Public Accountants. Alejandro's father was himself a successful businessman. Originally an employee in the oil and gas industry in Mexico, he moved his family to Texas to run a hotel, Blockbuster and Domino's franchises, and warehouses in the 1980s and 1990s. In 1992 he returned to Mexico where he and a close friend started the country's second mobile phone company, which they eventually sold to Telefonica, the multinational broadband and telecommunications provider. Like his father, Alejandro had an entrepreneurial spirit. Even as a child, he was always looking for ways to make money, from running a lemonade stand to helping his father in his businesses to creating the official scapular" of the Mexican Soccer Federation. As a high school senior he noticed ads on plasma televisions in Denver and started a company selling ads in shopping malls. His partner in the venture was classmate Pablo de Yturbe, whose family owned shopping malls in Mexico. Alejandro's father and friends provided the two with initial capital, while Pablo's family gave them access to malls. Alejandro and Pablo ran the ad business during their college years, but their plans to grow the business were thwarted by a lack of funding options. Eventually they had to sell the company to a bigger player in the commercial advertising industry. Alejandro wished there were venture capital in Mexico. Alejandro and Pablo decided to begin tackling the problem themselves. They started with cash from their sale and again approached their families and friends, raising US$2 million to start a new company, DILA Capital. The idea was to invest in startups through the company. In 2005, having raised commitments and capital, the two found that Mexican laws were not conducive to creating venture capital funds and lacked good protection for minority shareholders and minority rights. Alejandro and Pablo looked for other types of investment opportunities. "We bought 51 percent of a soccer company that wasn't being run well and took it over. We became more like a very small private equity* firm," Alejandro recalled. The two also invested in an ink and toner cartridge business, of which Pablo became the full- time CEO, and a French brand of high-end bathing suits for men that Alejandro led as CEO until an Indian private equity firm purchased it in 2008, before the world markets crashed. In 2009, Alejandro started an MBA at the Kellogg School of Management. My goal was to understand all I could about venture capital and private equity. I took all the classes I could on these topics and interned for a VC firm in Utah that was looking to enter Mexico. While I was there, things transformed in Mexico. The Mexican government started to realize that we needed companies to innovate, to create new jobs. Business in Mexico The Mexican economy was dominated by family businesses; about 50 percent of Mexico's 100 largest businesses were family owned. In 2015, 40 percent of the companies listed on the Mexican stock exchange were still privately held by the founding families, and investors often experienced a "control-mentality" when investing in Mexican firms. Indeed, a few affluent families and investors held a large amount of the country's capital." Although only 20 percent of Mexicans worked in large firms (those with over 500 employees), these jobs were considered the most desirable because of their higher wages." Entrepreneurship was seen as not reputable and too risky a career path for more educated Mexicans, while well- established family firms were viewed as reputable. Though family firms were slow growth and conservative with generally few external investors-they were what Alejandro considered lifestyle companies: they provided sufficient returns for owning families to live very comfortably. Families took out dividends, preferring to opt for stability and status quo rather than invest for aggressive growth. 12 Alejandro explained: It is generational. Our generation of Mexicans is a lot more willing to take risks than generations before us. Previously there were so many recessions that being an entrepreneur was harder. In the 1994 recession, if you had any debt you failed because the value of the peso dropped so much. People who lived through that are risk averse. But I have not experienced a huge financial crisis in my working life. Also, for my dad's generation, it was very expensive to start a business with legal fees and brick-and-mortar facilities. Now, with the growth of technology, the cost of starting a new business has never been lower. 13 Although Mexico was the twelfth-largest economy in the world, small- and medium-sized businesses did not have access to credit. 14 most Mexican startups and While in the United States, bank loans provided 15 to 30 percent of the initial financing of high-growth startups, in Mexico the figure was close to zero. 16 In 2012 the Mexican government created a seed capital fund that provided MX$300 million for startups. Shortly thereafter, the government formed the National Institute of the Entrepreneur (INADEM), whose mission was to provide access to financing, improve entrepreneurial skills, provide access to information and communications technology, and foster public-private partnerships. 18 INADEM invested in 36 Mexican VC funds that in turn provided seed funding to entrepreneurs. 19 Not all of the new seed funds were run by experienced venture capitalists, which sometimes complicated the budding venture capital space, as their inexperience introduced unexpected terms sheets and valuations.20 In addition to addressing the lack of seed funding, the Mexican government introduced reforms that enabled Mexican pension funds to invest in PE and VC funds through an instrument known as Development Capital Certificates (CKDs).21 The Mexican government also deregulated major sectors, such as energy and telecommunications, to attract foreign investment and encourage competition.22 Soon U.S. entrepreneurship resources began entering Mexico, from Silicon Valley-based 500 Startups and the Founder Institute to New York-based Endeavor. The venture capital ecosystem in Mexico City was beginning to gel. One venture capitalist from Mexico City observed: The Mexican startup scene is reaching a point where the necessary elements for it to flourish are in place: a dynamic and vibrant, technically educated youth, support institutions like incubators, mentors, angels* and government programs, macroeconomic stability, and funding mechanisms.23 Birth of DILA Capital as a Venture Fund After completing his MBA in 2011, Alejandro was hired by Kellogg alumnus Fernando Chico Pardo as an associate at his private equity firm in Mexico City. Chico was not as enticed by the venture capital space, reasoning that it took the same amount of time to make a $50 million deal as a $500,000 one. Yet he did offer Alejandro the opportunity to run a venture capital arm of his firm, which he funded personally through his family business and children participating as investors. The two co-invested in three opportunities, but by 2013 Alejandro could no longer hold back his excitement for the changes taking place in Mexico City. "I began to see the co-working spaces, incubators, accelerators arrive, and INADEM, and I told Fernando, 'I have to do this."" Alejandro approached Chico with the idea of investing in DILA Capital as a venture fund, and Chico agreed to be his first investor. In July 2013 Alejandro began re-approaching the investors who had invested in his first attempt at DILA Capital: venture fund. I focused on financial returns, but I also asked them to remember that, when they were starting out, someone had helped them. Innovation in our country was an important part of my pitch. With the funding Alejandro secured, DILA Capital invested MX$50 million in seven additional companies beyond the three original investments Alejandro had made with Chico. They called this investment the DILA I fund. As a VC firm, DILA secured money from investors-private individuals, family businesses, or government mechanisms like CKDS-to create funds. DILA then identified entrepreneurs who had promising ideas in high-growth-potential industries and invested its funds in the startups; DILA's management team also provided advice and connections for the startups through select investors. Whereas some VC funds focused on a particular industry, DILA did not limit itself to a specific industry. DILA Capital's team had three associates, each responsible for tracking the progress of three portfolio companies. In hiring the associates, Alejandro interviewed thirty-five candidates and gave them a GMAT-like exam to test their competence. He worked in the office every day with his associates and was in continuous contact through WhatsApp. More formally, the team met every Monday morning to assess the status of each company in DILA's portfolio. DILA Capital's board met every three months. The board was a subgroup of its investors, comprising twenty individuals in their twenties, thirties, and forties, predominantly the children of people to whom Alejandro had pitched his original idea for DILA Capital. The role of the board was to provide advice and to approve or disallow actions such as ending financial support for a poor-performing portfolio company. "These people are the first ones I reach to for advice: my board and some of my investors," explained Alejandro. Collaboration and Competition with VC Firms DILA collaborated and competed with about ten VC firms in Mexico. Alejandro explained: My personal thesis is that if there were no collaboration, the venture capital system in Mexico wouldn't work. We have to collaborate, so we always co-invest. We have never done a deal alone. We co-invest either with angels, or with family offices, or with other VC firms. I truly believe the success of the venture industry in Mexico is dependent on collaboration. Co-investing in startups with other VC firms strengthened deals, because each firm conducted its own due diligence and put its reputation and capital on the line. This, in turn, often garnered greater media attention to a deal, which could help VC firms attract additional funding for later- stage deals or new deals in the future. Although co-investment with other VC funds was a financial transaction, over time Alejandro developed personal relationships with partners at some of the other VC firms: "We see each other at least once a month, have coffee or lunch or beer. We socialize outside of work." When partnering with other VC firms on financing deals, DILA was typically the lead investor, initiating the deal and often providing the highest amount of capital. Alejandro chose not to collaborate with some Mexican seed funds that had sprung up from INADEM funding, due to their lack of experience: Some of them don't know what they are doing. They are bidding up valuations that are insane. They give term sheets whose terms and conditions don't make any sense. They are doing a huge harm to the entrepreneur, to the ecosystem, to investors. They are not educated in the VC world and don't understand the investments but are doing them anyway. Finding Entrepreneurs Most of the startups in which DILA invested were proprietary deals that had come from personal referrals. DILA received many proposals that had not come through referrals, but Alejandro found that these tended to be of lesser quality. As a result, every company in DILA's portfolio was founded by someone who knew Alejandro or Pablo Pedrejon, whom Alejandro met through his MBA contacts and whose company, Petsy.com, DILA I had funded. We listen to all proposals, [but] the ones we have funded are those who were close to us. I truly believe we don't do anything different. We don't analyze it differently, but when I look at the portfolio after the fact, we do deep analysis to see what sources are the best sources of projects that we have. At the end of the day, we open all doors, but the ones we have actually funded have all been through a direct contact who already filtered them. A typical founder from one of DILA's portfolio companies was someone who had a corporate background, then earned an MBA, and finally started a business. In the U.S., that model has been criticized by VCs who prefer to have serial entrepreneurs rather than MBAs, but the model works well in Mexico. I am pro-MBA. Especially from Kellogg or other top schools, you have a huge competitive advantage over other Mexicans. MBAs tend to have better business plans, better ideas, better financial models, and presentations. They know how to speak our business language. They know what VCs expect. They know "drag alongs" and "tag alongs." When you sit with an entrepreneur, and they don't know what the terms mean, and that you could sell their company, that's a barrier. I think education is the underlying factor, and in Mexico that education is lacking. In other innovation hubs in Mexico, like Monterrey, the culture differed somewhat from Silicon Valley. In the valley, college dropouts were celebrated, while in Monterrey a university title was necessary to get your foot in the door with potential investors, who were often affluent families that stretched back for generations. Part of our mission is to democratize capital, to give capital to those who don't have it- but we are not achieving that part right now because we are giving capital to the people who are best prepared, and those who are best prepared are those with the best educations, who tend to come from wealthier families. The challenge is that we are investing at a stage where there's not much to grasp. We fund ideas, so I have to find entrepreneurs who are prepared. We can't sacrifice the performance of the fund. By 2015, DILA Capital had raised MX$150 million to establish a DILA II fund.24 DILA II invested in a mix of ecommerce companies (33 percent), platform marketplace companies (33 percent), consumer goods companies (17 percent), services firms (9 percent), and retail (8 percent). Examples included Petsy, an online-only retailer of pet supplies in Mexico that DILA I had funded; TuCanton, a full-service online platform with local agents for low- and middle-income homebuyers; 25 and Aliada, an on-demand maid booking service (see Exhibit 4).26 Alejandro maintained close relationships with the entrepreneurs DILA funded; they became friends and confidants as they weathered the inevitable challenges of new companies. Startups were a risky business, and Alejandro considered the personal relationships important in establishing trust: They come to me when they are overwhelmed, we go out for drinks, and I let them vent all their frustrations. Many have become close friends. It could be dangerous, of course, because we only have a certain amount of money to invest in follow-ons, so we have to analyze them carefully. We can't let the heart get in the way, but it's attractive to have that relationship with them because you solidify the relationship, you are transparent, they trust us, we trust them. Finding Investors To find investors for DILA's funds, Alejandro similarly worked through personal contacts, seeking individuals who possessed unique capabilities and skillsets that his staff did not. He sought funding from angel investors as well as the investment arms of family businesses. Of DILA's investors, the officers of family businesses were the most hands-on. Given his emphasis on personal relationships, Alejandro was enthusiastic about an opportunity that arose with one of DILA's limited partners: We wanted to open an office in Monterrey, and one of our investors suggested we do it through his family. He said he could raise funds in Monterrey. So, his 30-year-old son came to our Mexico City office for four months, worked full time at no pay, to learn and understand how everything works. It was a pilot to see if he liked us and if we liked him. He worked hard to understand the market, so he is now our full-time representative in Monterrey. He will play that close role. If we invest in Monterrey, I want to have someone on the ground there for the handholding entrepreneurs will need. Despite the fact that venture capital was on the rise in Mexico, the industry still had a long way to go. As of September 2015, Mexico had 39 VC funds under US$36 million in size, but only three funds in the US$36-70 million range, two in the US$71-105 million range, and one each in the mezzanine funding range of US$106-210 and US$211-270+ in size. 27 Financing for startups in Mexico came from venture capitalists and angel investors in only 5 percent of cases, compared to 20 to 47 percent in the United States. 28 The Latin American Private Equity & Venture Capital Association still ranked Mexico third behind Chile and Brazil on its scorecard for Latin American countries.29 Dreaming Big Alejandro and his successful portfolio companies did not have time to wait for the industry to mature. They needed to address the dearth of Series A and B funding. Alejandro's mind was on raising the DILA III fund to fill the gap in later-stage financing affecting his portfolio companies and Mexico in general. DILA III would need to raise a much higher amount than ever before. Alejandro decided that he could not start such a fund on his own. He had yet to demonstrate a successful exit to his limited partners, to prove that he could make money for them, but he didn't have time to wait for that. As he scanned the Mexican entrepreneurial landscape, he saw 125 companies that had received early-stage funding that could need Series A funding soon. The time had come for DILA III. Alejandro turned to his long-time friend Eduardo Clave, who was head of DILA II's investment committee. The two had talked of starting a fund together, but Eduardo had a commitment to running a company that his own search fund had acquired. With that company poised for sale, Alejandro saw a window of opportunity. He asked Eduardo if he would join him in a new fund, if the two could raise sufficient money. Eduardo tentatively said yes, but with his investment-banking mindset he wanted to determine the exact size of the fund. It was an important question. The fund had to be big enough to finance multiple companies through Series A, B, and C, and yet not so large as to seem insurmountably high to raise. To determine the size of the fund, Alejandro, Eduardo, and four of DILA's key employees drove to Valle del Bravo, a popular lakeside retreat an hour from Mexico City. They sequestered themselves for a weekend to answer these questions: "If we shoot for the stars, what would be our ideal fund size? What management fee would be needed to support the salaries for the expansion? How many companies would we fund in Round A?" After deliberations and calculations, the team came up with a figure of MX$1,030,000,000-a billion-peso fund. The team then projected the number of companies to fund at each stage. Eduardo agreed to co-manage DILA III, which Alejandro heartily welcomed. Eduardo's more risk-averse attitude, financial focus, and attention to detail complemented Alejandro's broader vision, soft and team-building skills, and entrepreneurial appetite. His experience and successful exit as an entrepreneur and background in investment banking at UBS could also help open doors with both Mexican and U.S. investors. Alejandro knew that raising a billion peso fund would be an uphill battle. Within Mexico, the macroeconomic picture was good, but the current president was unpopular and social tensions were rising. The uncertainty over the upcoming U.S. presidential election and the candidacy of Donald Trump, who was widely perceived as harmful to Mexican business interests, caused further caution. It was not a time when investors would typically be bullish on the entrepreneurial scene. He knew Mexican startups had the potential to gain the international spotlight-but how could he raise this ambitious amount of money? At least 2.5 to 5 percent would have to come from general partners willing to put skin in the game. Alejandro and Eduardo had both individually invested as much as they could in DILA III, but they needed other general partners to put them in a strong position to attract limited partners. Alejandro planned to speak with his father, whose backing would help build confidence in the new fund, and to gain the support of the DILA II investment committee. He knew that a MX$1 billion fund was not only a big leap for his firm, but also for Mexico's venture capital ecosystem.