Luis Martín Cabiedes is one of the most important investors in internet and technology ventures in Spain. He’s also a professor at IESE, a philosophy graduate, a sailor, a motorsport enthusiast – and he must have a wealth of other faces that I have not yet had the chance to get to know. He’s never not a teacher, always speaking in paraboles and metaphors that any decent poet would envy. He’s known for his work as a VC, yet he identifies as an angel investor and swears by a model that mixes the two.
He has an impressive track record of exits such as those of Habitissimo, Trovit and Privalia, and the startups he’s currently invested include BlaBlaCar, Chicfy, Uvinum, Tiendeo, Kantox, SocialCar, Deporvillage and Bida, just to name a few. And yet, he says that he’s “not as aggressive” about investing nowadays as he was before. Some of his statements may be provocative, and he may have the reputation of being pessimistic about the Spanish investment ecosystem, but once you engage in a conversation with him you find out that he’s simply a rational thinker. “We are not just intuition and numbers,” he says. “There is a lot of room for rational analysis.”
We sat down in IESE Business School’s cafeteria to talk about the state of the Spanish investment ecosystem, and ended up having a long conversation about bubbles, cycles, steering wheels, and the anatomy of the entrepreneur and the investor.
The investment bubble and sailing in rough waters
I know that you haven’t been the most optimistic about the Spanish investment ecosystem lately. Could you give us a quick overview of how you see the market and the investment scene in Spain?
When you have been in this business for a long time, you realize that it’s cyclical. A lot of people confuse trends with cycles. For me, this is just another part of a cycle. And it’s not a very good part for an investor.
Besides being an investor, I’m also a teacher. I research a lot and I read a lot. And there’s a wonderful article by Kaplan, who’s probably the most authoritative name in literature on venture capital and private equity, showing that there is a very strong negative relationship between the amount of money going into venture capital and the returns of venture capital per year.
Startup investment is dominated by vintage, just like wine. There are good years and bad years. The difference between a good year and a bad year is huge in terms of returns. For example, 2010 was a historic year. That was the year when I invested in BlaBlaCar, Trovit and Habitissimo. I thought it was something special for me, but it wasn’t. It was a good year for everybody. 2013 and 2014 weren’t as good.
What affects how good these vintages are?
They key variable is the amount of money coming into the business. What happens is this: when there’s not too much money coming into Venture Capital, the people that are investing have wonderful returns. Then, when they have wonderful returns, a lot of money comes into the business, and returns deteriorate. The more money coming in, the less returns. Now we are at a peak, and it’s a worldwide phenomenon. 2016 and 2017 were historic years in terms of the amount of money coming in, and these were bad years for Venture Capital. So right now, as an investor, you don’t want to be very aggressive with investing, and you want to wait for the years when there’s not much money pouring in.
“If you’re a good sailor, you learn how to sail with shifting winds.”
What happens now?
The bubble will burst. It has every time. This one is a little bit special, and it’s taken a bit long. It’s only happening in private markets, not the stock market. The private market is not as transparent as the stock market, so it’s harder to see. But there’s nothing wrong with bubbles, they’re a part of the business.
If you’re a good sailor, you sail with rough waters and easy waters. You have to learn how to sail with big winds and small winds. With shifting winds. Now we have strong tailwind pushing us, but all we have to do is know how to play it. You just have to be able to identify what part of the cycle you’re in, because you have to have a different strategy depending on where you are.
So you’re investing is less companies, less amounts?
Yes, and I’m much more prudent than I was in 2010. Some investments that I would have done then I will not do this year.
It’s not that there are too many investors competing for a project. It’s that there are too many projects competing for the same prize. Now you have all these incubators and venture builders and startups on their own. So I may like the model of, for example, Housfy, a new online real estate agency, but the problem is that there are at least six different extremely well-funded projects that I know of competing for that same prize. So now it’s very difficult to make money. If it were one, I would probably invest in it. If there were two, I’m used to that. But if there are five…
And the market is not big enough for them?
No. The market has not increased that much. The prize of winning has not increased, while the cost of competing has gone up dramatically. So that’s why it’s not that easy to make money. And that’s why I’m not that positive.
Sometimes people ask me: are there more projects than before? And I say yes, there are too many. And it’s very difficult to build a winning position.
Viable, feasible, investable
What are your main criteria for the companies that you do invest in? How do they make the cut?
That has shifted a little. I think – or I hope – that I am a very rational investor. I look for six criteria. Let’s group them in twos.
First of all, a company has to be viable. It has to have a market that they can identify and look for, and it has to have a competitive advantage. Secondly, to make it less abstract, the company has to be feasible, which is all about the team and the timing. Who’s going to carry this project through? Who’s going to land this idea? And why now? Last but not least, the startup has to be investable, meaning that it has to be scalable and there has to be an exit opportunity. Why? Because most startups fail. Even investors that have been doing this for a long time fail around 80% of the time. 8 out of 10 companies that we invest in will not work. To make up for the ones that fail, you have to multiply the 2 companies that do work by ten. That’s how you can make a 15% return on a portfolio of 10.
There are a lot of projects that are viable and feasible, but they’re not investable – either because they’re not scalable or because there is no exit in sight, meaning that you won’t get your money back. As an investor, if you don’t get your money back, it’s a failure.
This model was developed by a professor at IESE named Rob Johnson. It’s the model I teach and the model I use. And the good things about it are the things that are missing. There are no numbers, no business plan, no product. I cannot trust a business plan because the numbers, the projections that it’s based on are from thin air. I’m not that interested in the product or the idea. For me it’s about the opportunity, the market, the team, and the competitive advantage.
So if it’s not the numbers that you go by…
It’s a rational process. People are not just intuition and numbers. There’s a lot of space in the human brain for rational analysis, which is neither. And that’s exactly the space of evaluating.
“Yes, you have a good idea and you have a good team. But I met another good team with the same idea yesterday. What’s going to be the difference?”
Out of the six criteria, which one is most important to you?
The dominant one keeps changing. Around 15 years ago, when I was starting, it was more about finding the right market, the right need, mostly because there weren’t that many startups. So it was about people who had good ideas and good market opportunities.
But then, the internet became mainstream, and suddenly the most important thing was the team. The opportunity was already obvious, but who was going to implement the idea? That lasted for some time, around ten years.
The problem now is that there are so many good teams around that it’s back to the competitive advantage, and the competitive strategy. Those are the key factors again. The market will be there for everybody, you can assume that there will be at least five or six very, very good teams, which were not there ten years ago. So now there are lots of startups, lots of teams, but it’s very difficult to make something different and something sustainable. And that’s where most companies fail. Yes, you have a good idea and you have a good team. But I met another good team with the same idea yesterday. What’s going to be the difference?
Pitch decks and fantasy numbers – or what you shouldn’t do when talking to an investor
What’s the first thing that you ask when someone is pitching their company to you?
I hate pitches. I have been hearing pitches for too long. I’d love to be able to tell entrepreneurs: I don’t want to hear your pitch. Tell me something I don’t know!
Let me explain. Most of the pitches go like this. First slide: internet is a big thing. Second slide: mobile is growing. Third slide: The number of women aged 25-55 in Peru. Those are all things that I already know, or I can look them up if I want to. But what is it that I don’t know? It’s who you are, what brought you here and why this is a good opportunity. What makes you the right person for this opportunity, and why this is the right opportunity for you? That’s not typically in the pitch. I don’t care about visions and missions. Who are you and why are we sitting here?
The problem is that entrepreneurs have been taught that this is the way they have to do their pitches. I’m sick of hearing that healthcare is broken. I don’t want to see your projections: I know how to make them, I’m actually pretty good at Excel.
“I don’t want to know what you want to sell in month 3 of year 5 in Argentina. I want to know what you sold yesterday.”
What should they be telling you instead?
Entrepreneurs have a lot of valuable information that they don’t deliver. I don’t want to know what you want to sell in month 3 of year 5 in Argentina. That’s a fantasy. I want to know what you sold yesterday. Maybe it was just one thing. What did this client see in your product? It’s easy to multiply. Just give me the basis of that multiplication.
So the mistakes that people make when pitching their company to you are trying to impress you with fantasy numbers and telling you things that you already know. But what are the biggest mistakes that people make once you’ve already invested in them?
The biggest mistake of an entrepreneur is starting a company. But that’s done, so there’s no going back. If they ask me what advice I’d give to someone who wants to become an entrepreneur, I say: don’t do it.
Why do you say that?
Because most of the startups that I see are started too early, and they’re not started with the right foundations.
Too early as in too early for the market, or for the founder?
Both, but mostly for the founder. People typically underestimate the risks and overestimate their capabilities when it comes to starting a company. There is this belief that it’s all about having a good idea, a lot of energy and perseverance. That you just have to go for it. But that’s not how it works.
Of course, in hindsight, all successful entrepreneurs or sportsmen fool themselves into thinking that they had a vision and they “just kept going”. Have you seen the interview with Mark Zuckerberg from 2004 on CNBC? He had no idea what he was doing. He didn’t wake up one day and say: “I want to change the face of human communication”. He didn’t have that vision. He just did something and something happened.
You hear people saying “I want to be an entrepreneur”. It’s like saying: “I want to be a gold medalist”. We have this culture now. When I was 8 years old, I wanted to be a soccer player in Real Madrid. I got a ball to help me start my football career. But the same football was given to a million other kids that same year, and I didn’t make it.
Being an entrepreneur is not your decision. You find an opportunity and you do it.
“You have to fight battles where the advantage is to David, and not to Goliath.”
So what’s the second biggest mistake of an entrepreneur after the fatal decision of starting a company?
Once you have a startup, the main problem is premature scaling. A startup by definition is a company that doesn’t have a business model yet, and is looking for one. Exploration is part of it. So the problem isn’t not having a business model. The problem is expanding too fast in marketing and pushing a product that has no market. It’s overspending before you have a business model. Scaling a business model that is not proven. That’s where most of the money is lost and most companies fail.
Finding a business model takes a long time and a lot of experimenting. Explorers take very little luggage, because they don’t know what they’re going to find. They ration their water supply from day one. They don’t know how big the desert is. If they find an oasis in month 2, then they’ll forget about their hardships very quickly. But until then…
So forget about your vision, find an opportunity, don’t scale too fast… What else?
You have to fight battles where the advantage is to David, and not to Goliath. Find the battles where it’s an advantage to be small.
For example, it’s very difficult to compete in car manufacturing. Same with payments. I have invested in a lot of fintech startups. But is there a place for a startup in that game? I’m not sure.
There are a lot of opportunities that are good opportunities, they’re just not for you. Sometimes a startup will come to me with an idea and I’ll say: that’s a wonderful idea if you’re Coca Cola. But you’re not.
When there’s a lot of uncertainty, it’s much better to be small. Because if you fail, you fail small. You can take more risks. If you only have 100 customers and you make a mistake, you can call them on the phone and send them flowers and you’ll be fine the next day. But if you’re Microsoft, you cannot launch a lousy Windows.
Focus on your competitive advantage and find battles in which you’re not at a disadvantage. I see a lot of startups in Barcelona picking fights which are not fights for a startup.
Who’s steering the wheel?
There’s a misconception that investors always try to control the companies and the entrepreneurs they invest in. But that’s not the way you work.
I’m a completely passive investor. There are people that think they can be investors and entrepreneurs at the same time. That’s very strange to me. There’s a saying in Spanish that goes: “El Maestro Ciruela, que no sabe leer y pone escuela.” Don’t try to teach when you don’t know how to read. The VC industry in Spain is losing money, and even so, some investors are trying to teach entrepreneurs how to make money. So before you take advice from a VC, ask them if they’re making money! Good entrepreneurs wouldn’t take advice, and investors are not prepared to give any.
When you’re an investor, you have to pick people that are better at running their business than you are. Otherwise you’ve made a bad decision. 80% of the time they will still fail, but that’s OK.
For example, I’m not that good at sailing. But I have two world champions in my boat. I pick the best people to steer the boat, and I let them do the job. Good drivers will not let you drive for them.
Running their business is what entrepreneurs do every day. You can help them with other things. When to sell, when not to sell, the financing rounds – which is basically your bread and butter but entrepreneurs don’t do it every day. Maybe board situations, like conflict between entrepreneurs.
Is it a question of trust?
You have to admit that sometimes they will fail. Formula 1 is a good example. You give these expensive toys to these young guys and you know that some of them will crash it. But you have to trust not that they will succeed, but that they are the best ones to do it. Even though there is a big chance that they will not make it.
What ratio of your activity is VC, and how much is angel investment?
I’ve always thought of myself as an angel investor, but what I really am is an angel fund, which is a hybrid. I do very early stages, and half of the money that I invest is my own money. That’s the business angel part. But the problem with business angels is that if you do only that, you will be kicked out of good investments. You lose them to Venture Capital, and you’re left with the failures.
So what I do is I follow up as if I were a VC. In Spain, the VC model, in which you enter at a later stage, requires you to take huge risks, because you don’t know the company that you’re investing in. However, when I write a 2 million check, it’s for a company that I’ve invested in for 18 months or 24 months. When the time comes to give them some real money, I already know them pretty well. It’s all about being there month after month in the board and seeing how the model is being refined. I know much better when it’s time to scale, and I can make a more informed decision than VCs.
“I’m in love with Barcelona, I think it has a wonderful opportunity. But we have to have realistic expectations.”
People like to compare Barcelona to Silicon Valley, but I’m skeptical about that approach. What should the Spanish ecosystem aim at, in your opinion, instead of trying to be more like Silicon Valley?
What’s happening in Silicon Valley is totally unique and it will not happen anywhere else in the world. Not even New York was able to come close to it for decades. Comparing is actually very dangerous. It’s like trying to play American football but with the rules of soccer. Here, we have no helmets and we cannot touch the ball with our hands. It’s a different game.
I’m in love with Barcelona, I think it has a wonderful opportunity. But we have to find our own model and have realistic expectations. Spain is what it is. Europe is what it is. It’s not China or the United States. We don’t have a huge unified market like they do. So we cannot aspire to be like them, because that only leads to frustration. But the startup ecosystem is probably the second best thing about Barcelona, after soccer. We should be celebrating.
Also, you cannot try to have multiple innovation hubs within Spain. We need to push for Barcelona, since we’re fortunate enough to have a winner in this city.
What can be done to support entrepreneurship in Barcelona?
Support for education. Support for grassroot investing, creating a vibrant business angel community. And if we really want to have a vibrant startup ecosystem in Barcelona, the problem is not the startup world. It’s the economy. Entrepreneurship is a biproduct of a vibrant, thriving economy. It cannot be reinforced without solving some of the big problems that we have in the economy: corruption, unemployment, and the size of the market. European integration should be a priority.