Bloomberg Línea — Brazilian Facebook co-founder Eduardo Saverin is set to invest in Latin America startups through B Capital Group, his venture capital firm that recently raised $2.1 billion for its latest Growth Fund III and related funds.
The Brazilian billionaire co-founded B Capital eight years ago alongside Raj Ganguly, and B Capital started with more than 10% of the money being the partners’ capital. The firm, which opened an office in Miami in 2022 to be “the closest place to Latin America in the US”, as Ganguly told Bloomberg Línea in an interview, is also led by Howard Morgan and Sheila Patel. It is now seeking founders in the region willing to take their business abroad.
B Capital has $6.3 billion in assets under management and already invested in Latin America through Yalochat in 2020, an AI-based conversational commerce platform based out of Mexico, with offices in San Francisco, Brazil, and India.
Ganguly, who is also the managing partner of B Capital, said the firm invests globally, but the focus has been a lot on the East/Midwest so far.
“Latin America is obviously a very exciting market, my co-founder is from your home city (Sao Paulo) so it’s very close, we invested in Yalochat in our last fund. It’s definitely a market that we are excited about, we opened a small office in Miami in the past year, which gives us better coverage in Latin America. It’s not Latin America but it’s closer to Latin America than any other place in the US,” said B Capital’s co-founder.
Ganguly says the company is “especially excited about fintech and enterprise software in Latin America”, and that B Capital is cautious about tech investing flocking to generative AI pulled by OpenAI’s ChatGPT and its peers. “We caution that sometimes the hype and the excitement about this will get ahead of the reality of these technologies,” he said.
Below is the full interview with Raj Ganguly, co-founder and managing partner at B Capital, and which has been edited for length and clarity:
Bloomberg Línea: You invested in India’s most valued startup Byju’s. What is your feeling about edtech nowadays?
Raj Ganguly: The struggle with edtech in the US is that there have not been so many great exits in the US and we are especially seeing more opportunities for edtech outside the US and in emerging markets like Southeast Asia.
We are actually seeing Byju’s acquisitions in the US and they are taking their learning modules to the world, so the cross-border edtech model is something exciting for us, and fundamentally so much of Latin America is cross-border. Even in Brazil, which is the biggest market, we are seeing companies from Brazil expanding to other countries in the region and it’s something that we always thought about. If you are a company focused in one country, there are already great investors in Brazil, but we can help support these companies to expand across the region and globally.
Do you prefer companies that go global rather than regional?
I’d say both regional and global. The part where we think we are less helpful is if you are focused on only one country. Our goal is to invest our capital to be value-added partners. We have a partnership with BCG (Boston Consulting Group) to connect our companies to be partners. That’s why our focus is pan Latin America businesses like Yalochat, which started in Latin America and now expanded to markets like Asia.
How is the partnership with BCG?
In our partnership, we do have our own diligence but we leverage BCG to get added inside companies where they can help our companies grow their network. It’s much more on the value-added side.
Is it more related to IPO?
IPO preparedness and corporate M&A. Our partnership with BCG is about adding value to our portfolio companies and that comes from the part that Eduardo [Saverin] and myself, before becoming investors, were entrepreneurs and founders.
The company [Facebook] Eduardo started is quite well known today and as founders, we always thought that we wanted investors that could really add value.
Our goal is to be capital providers that give access to our network. We know what it takes to build a company. And our goal is to be great partners to the transformative founders.
Are you late-stage investors?
We like to get into companies earlier, so we have a venture fund and we have a growth fund, and in both of our funds, we like to invest early. So the growth fund we often do Seed investing to B and C, that is kind of early growth.
The reason for that is that we like to follow these companies to help them scale and grow, and we also like to invest in multiple rounds of these companies. We do some late-stage pre-IPO but generally when we are doing that it is for business that we followed for many years.
We look at those businesses that have done extraordinarily well and probably we should’ve invested even earlier but now we are investing in the late-stage. But generally, we prefer to invest in the early growth stage and really be partners with the company to scale and grow.
How much of a company do you acquire when you invest?
We don’t want to be a small investor in a company. We engage with the company, we want to be an investor who matters to the company, and that company matters to us, so we tend not to make small investments.
We tend to follow it, build a relationship, we open up our value-added network and BCG-added network before we invest, and that is because we really want to make a relationship, w don’t want 2,3% ownership stakes. We ideally want to get a bigger stake in the company.
Do you invest in equity, or are you willing to fund debt too?
We are flexible, we can do things like structured equity, and we can be flexible in terms of the way equity is structured. We have a venture fund, a growth fund, and a late-stage pre-IPO opportunity fund, but in having these three funds and being lifecycle investors we can follow these companies as they scale and grow, and sometimes we are lucky to back these companies from Seed and Series A stage to growth and even late-stage.
Would you invest in a down round?
When a market comes to a lot of volatility like right now, I’ll be honest, we haven’t seen as many down rounds, we are probably seeing more companies delaying raising their capital or having more complicated terms to not get a down round.
Down rounds aren’t the worst thing in the world, companies scale and grow, and they go through ups and downs, that is a natural part of being a founder and building a business. So we have no issues investing in rounds where the valuation might be lower than the last round.
Even if it is a lower valuation versus a round that has very complicated terms that will cause the company’s issues to scale and grow, we much prefer the first one, and we like to be operationally engaged. We are not afraid of companies that have zig zags and ups and downs. Not every company is going to grow always up.
For companies in our portfolio that have had ups and downs, we always tried to be great partners and when making new investments we are always open to companies the growth has not always been linear.
What do you see as the main trends for this year?
I was told that if you are creating the future, try either don’t get dates or don’t get numbers, but if you can get dates and numbers together that is where you get into trouble.
What we say is, first of all, on a long-term basis, we think that technology is just getting started. We got into this business because we thought about the trends in digitization that are happening in healthcare, banking, finance, industry, and transportation. But if you look at these things are just getting started. We are probably 1 or 2% of the way there in terms of the total opportunity.
Basically generative AI, which has been the talk of everyone in tech right now, is very early. We caution that sometimes the hype and the excitement about this will get ahead of the reality of these technologies.
Ultimately for us, we take a long-term perspective. My other co-founder Howard [Morgan] always likes to say that our business is about being early and finding trends early but not being too early. Because too early can take too long for these trends to come about.
Frankly, when we look at 2023, we think of a much better market environment than 2020 and 2021 where valuations were really getting ahead of themselves, and we also think some of the best companies will be founded.
If you look at companies back in the 1997s like Microsoft, they started during difficult times, even companies like Facebook that Eduardo co-founded, started during not the best times in the market. We think that some of the best founders and entrepreneurs built businesses during these times because capital is not as easy, and revenue and customers are not as easy so some of the best founders came during these times.
We think that 2023-2024 will have some great years of investing and we are excited that we have this dry powder for us to invest and support great founders over the coming years.
The LPs that are backing this Fund III, who are they, and where are they based?
We started with more than 10% of the capital of our own capital, the partners’ capital. So we are heavily committed. Our LPs are large institutions, primarily in the US, but also have ones outside the US, foundations, I can’t mention the names of individual LPs but we have some of the largest institutions globally but especially in the US. Our goal is to make sure we provide extraordinary returns to our investors and we do that by backing the best founders and being great partners to them.
Do you see the IPO window opening again this year?
The first two quarters of this year will continue to be very tough, maybe the full year. If you look at past cycles the IPO window could be closed for a year or two, which will take it to 2024.
The IPO window will take some time to reopen and when it does reopen it will be a small number of companies that can go through. It will take many years again for the IPO window to fully reopen. But in the meantime, there are trillions of dollars seating on corporate balance sheets, and there are a lot of opportunities to build great businesses.
We say that to all of our businesses: make sure you have the capital to get through this downturn and really focus not just on playing defense but looking at opportunities to acquire smaller companies, acquire great talent, and grow and scale.
An IPO might not be feasible but the positive of that is that IPOs can be very disruptive to businesses, they lose a whole year or two years of growth as preparing to go to an IPO and going to an IPO.
I think capital is going to continue to be expensive and I think you are really going to see businesses focusing on fundamental growth and growing in a profitable way. I think that there were some bad habits that companies picked in 2020 and 2021, such that capital was so cheap that they were acquiring customers where it was actually valuing destroying to acquire those customers. There was more money to acquire the customer than the value that they got out of the customer.
I think just focusing a lot more on efficiency, and optimizing unit economics is something we always talked to our founders about, whether capital was cheap or expensive. We speak to our founders every day and we don’t produce letters to our founders or things like that because our whole business is on this daily basis.
Do you believe there will be a recession in the US?
It’s a tough question. My personal view is that the labor market in the US remains very strong. If you look at a year ago I think people were very convinced that the US was heading into a recession with China in this Zero Covid policy and some regulation of tech, and that the US labor market would start going toward higher unemployment and potentially a recession. None of those things turned out to be true. China has got away with the Covid Zero policy, and the US labor market has remained very strong.
I think there are a lot of reasons to be optimistic but I do think that there were days when there was so much capital in the market that anyone who wanted to start a business could access cheaper capital. I actually think it is a better time for us as investors because the founders who are in this are in it to build something and not just to build a business in two years and get a unicorn status and figure out how to sell their shares and take a bunch of money. I’m quite optimistic and based on history some of the best years in tech investing have been post this kind of volatile period.
Byju’s is seeking to restructure its $1.2 billion loan while it struggles with cost reduction targets, how is B Capital looking for this specific case?
We invested in Byju’s two years ago because of the edtech market in India specifically where you have a really rapidly growing middle class who wants better access to education for their children, and we continue to believe in that promise, that Byju’s team has built one of the leading companies in this space. The short term is tough times in the market but we remained really committed to the Indian market to edtech and to Byju’s as a business.