Geoarbitrage in action; camels in the drought

Geo arbitrage in action: a recent deal, the launch of Out-Innovate in Spanish and a Brazilian interview

Please create an image of a tron like background, with a crane in the foreground carrying a camel

Geographic arbitrage in action: a recent investment

BRKZ, a Saudi Arabia-based B2B Construction Marketplace, emerged from stealth and announced its $8 million Series A funding round co-led by 9900 and BECO Capital. Fluent Ventures invested in an earlier round.

The syndicate includes a number of global and local investors like Aramco’s Wa’ed Ventures, Knollwood Investment Advisory, Better Tomorrow Ventures, Class5, among others.

Our investment in BRKZ is an example of our geographic arbitrage strategy in action. We back local monopolies building proven global business models. Today, B2B marketplaces for construction servicing “traditional” contractors are succeeding around the world yet MENA remains ripe for disruption. We believes BRKZ can execute on a playbook to build a B2B marketplace for construction in MENA similar to Infra Market (India) Of Business (India), BRIK (Southeast Asia), Material Bank (United States), Kojo (United States), Tul (LatAm), Schuttflix (Europe), and Chausson (Europe).

We are excited by what BRKZ is building towards and wanted to share our thoughts.

—> See the deep dive here.

In the venture capital drought, camels fared better than unicorns

I am just back from Brazil where I was interviewed by NeoFeed, as a follow-up from an interview when Out-Innovate was released. I’ve included the translated version below.

By Rodrigo Loureiro

In mid-2020, American professor and investor Alex Lazarow wrote the article “Startups, It’s Time to Think Like Camels – Not Unicorns” (read here in Portuguese). In it, Lazarow compared unicorns with camels when referring to startups. In his view, entrepreneurs should stop aiming to become unicorns.

The article published by Alex in Entrepreneur and translated, with the author's permission on NeoFeed, states that, "unlike unicorns, camels are real, resilient, and can survive in the toughest places on Earth." The text gained so much attention that it became a book of the same name, published that same year.

Lazarow, who will be present on one of the stages of the South Summit Brazil, in Porto Alegre, an event for which NeoFeed is one of the media partners, shares how he coined the term camels and his perceptions of the current startup market – which has seen a turnaround since his article was published.

Lazarow says the crisis in venture capital generated after 2021 is directly related to investments made at the time. This includes both investments in startups with fragile finances and promising businesses that were overvalued in their valuations.

“Imagine a company with good financial indicators that raised a round with an extremely high market value. Now, that same company needs more money and is going back to the market,” Lazarow explains. “The inexplicable valuations created a disorder in the market.”

Lazarow says that Brazilian startups are a mix of unicorns and camels. For him, there are good examples of companies that resemble the desert-traveling animal, such as Ebanx and Pismo. “These are companies that kept their finances in order while growing,” he states.

Lazarow has been acting as managing partner of Fluent Ventures since 2022. The firm has invested in businesses like Clara, Neon, Kamino, and Facily - the latter being a Brazilian unicorn that fell by the wayside. During his visit to Brazil this week, he says he will talk to entrepreneurs and may find new investment opportunities.

On his radar are businesses that “are local leaders and can be scaled globally.” Regarding sectors, the firm is more actively looking at fintechs, healthtechs, and B2B marketplaces.

How did your theory of camels instead of unicorns come about?

The creation of unicorns became globalized with the pandemic. Before the pandemic, you had unicorns in only four cities in the world. Today more than 150 cities already have companies worth at least $1 billion. With the pandemic, big investors started looking at markets all over the world.

So, I wrote the article pointing out that the world's best entrepreneurs were building camels, not unicorns. This approach of building more resilient and sustainable startups in terms of their unit economics has become more relevant than ever.

There was a flood of money into startups in 2021. Where did investors go wrong?

We had two problems in 2021. The first is that investors were financing businesses that should not receive capital because they did not have strong finances. The second problem was the relationship between the investment and the market value of these companies, which made no sense.

Is this what motivated the downrounds we are seeing now?

Imagine a company with good financial indicators that raised a round with an extremely high market value. Now, that same company needs more money and is going back to the market. The inexplicable valuations created a disorder in the market.

What will happen to these companies?

I don't want to generalize here. If you have a good team, you may find a way out of this situation and save the business. In some cases, you might continue to raise money or manage an acquisition. The solution varies for each case.

Have investors learned, or is it still easy to raise capital?

I believe it's like “a tale of two cities”. If you have an artificial intelligence company with a brilliant project in Silicon Valley, it will be easy to raise capital. For other companies, operating businesses with a high need for cash burn and not so good unit economics, it will be very difficult.

You express a strict view regarding cash burn in companies to accelerate growth. Why?

There are two points. In one scenario, I am a venture capitalist. If companies don't burn capital, I have nowhere to invest. The philosophy of operating like a camel means having strong unit economics and controlling cash burn. Companies run into problems when they grow just for the sake of growing.

And the other scenario?

The other scenario is related to the type of companies and the market they operate in. Where there is a lot of competition and only one company will be the winner and all the others will disappear, this strategy of scaling the business makes sense. Most companies can benefit from turning into a camel, but there are exceptions.

Is it still possible to create startups that take many years to reach breakeven?

There's a difference between reaching profit and having a financially healthy company. I don't think it's possible to aggressively scale a financially unsustainable company with a model that has not yet proven itself. That doesn't work, and I already thought it didn't work before.

And what works?

What works are camels that raise venture capital money. It's possible to have a company that has real revenue, real unit economics, and says that every dollar invested can turn into a five-dollar gross margin. It's a good business, and these companies are still being financed, but the bar has gotten higher.

Are Brazilian startups closer to unicorns or camels?

I think it's a mix of both. Companies like Ebanx and Pismo are examples of camels. If you look at the most successful companies in Brazil, you'll see that they had a focus on keeping their finances in order. Nubank, for example, raised a lot of capital, but I believe it is a camel by the way they grew with a profitable mechanism.

You've already invested in some Brazilian startups. Are you still thinking about making new investments in the country?

The main problems in the world are global, but the solutions are local. I want to support companies that are local leaders in their businesses and prove they can scale their operations. Many of these companies end up being fintechs and healthtechs.

There's excitement in the market around artificial intelligence. What do you think of it?

It's necessary to separate it into two points. The first is questioning whether artificial intelligence is really something real and will transform markets. The second question is whether a company in this sector should be valued at a thousand times its revenue.

You don't seem very excited...

I think the artificial intelligence wave will be less like the revolution caused by the iPhone or digital banks and more like what happened with cloud computing. Today, practically all companies run their businesses on cloud. And I think, in the future, all companies will use artificial intelligence in their businesses.

Book of the month

Well this one will be self serving: after a long trip on the road, it was a fun surprise to receive my copies of the Spanish edition of Out-Innovate!

This is the fourth edition after English, Chinese and Korean. The book came out during the pandemic, and I had written about how the best startups should:

1. Build like camels: with strong unit economics and managed burn from the get go
2. Be born global: thinking about customers and teams across markets from day 1
3. Create rather that disrupt: building in essential industries like #fintech #health #digitalinclusion

Vamos!