Camilo Botero Gaviria - Managing Partner - CEO @ Veronorte

Welcome to another VC Wisdom pod. We have Camilo Botero with us today, managing partner and CEO at Vero Norte in Colombia. Glad to have you on, Camilo. Can you briefly introduce yourself to us, a bit more about what you're up to?

Sure thing, Charles. Thank you for having me. Yeah, Vero Norte is a VC firm based out of Latin America. I'm based in Colombia and my partner Felipe is based in Mexico. And for the past almost 15 years, we've been building an investment practice that has the purpose of building the bridge between Latin American capital and the US venture capital market. We've done that through 5 funds and 2 types of strategies. I think we've done a fairly good job up until now. Very excited for this conversation. There you go.

So you started in banking, uh, what brought you to the VC world?

I did start in banking, um, and, and not because I've searched that. I just, I did my, uh, a summer internship, uh, an investment bank, and I ended up working, uh, in investment banking for 15 years. Uh, but when I was doing my undergrad, uh, my thesis was on, um, how to build a venture capital ecosystem in Colombia, and that got me— that was way back in the 2000s, '99, 2000, um, and I just got really excited and just started studying. We didn't do anything about that, um, but when Felipe came back, uh, to Colombia after living in Europe and in Asia and in Mexico and the US, uh, for around 11 years, uh, he and I both connect around the idea that, um, we should be working together to understand the asset class and then to build a practice, an investment practice, to help this part of the world prosper faster. Um, and as we've organically evolved and grown, we've become a very active US investor with LATAM capital.

US investor with LATAM capital. So you're sort of inverting what most are doing, right? Like US capital investing in LATAM is hot, Tell me about that thesis in itself. Seems a bit contrarian.

Yes, actually, we don't know many folks that do the things that we do. But our rationale is that LATAM is not an active developer of technology. We have a lot of talent, good software development, some biotech, particularly in Argentina, the Southern Cone. But when you look at the big picture, LATAM develops less than 1% of all meaningful strategic technology compared to the rest of the world. That is a big deal because technology influences everything that happens. How every industry evolves is a function, at least partially, on technology adoption. It's risky from our point of view that we are We were downwind from that technology development. So that got us interested in understanding where that technology came from, what we had to do to invest, to get involved. And as time progressed, we've been able to deploy 4 funds and we're deploying out of our fund number 5, helping our investors understand that there is a different business context from what they're used to here in LATAM. And that there is a chance to look at the world in a positive, optimistic way, understanding how these technologies and the technology convergence that we see today is actually a source for abundance and new businesses that are good for the world, are good for people, are good for companies. And those are the thoughts that we've based our approach on.

And who do you raise from? Is it like families with money? Like, give me a bit more, a big bit of a bigger picture for the LPs.

Sure. So our LP base is, I think, 3 broad groups. One is family offices, as you've just mentioned. We see them progressively more interested in understanding their role as managers of their family capital and what could be an opportunity or what could be a threat 5, 10, 15 years into the future. So it fits to invest in venture capital with that in view. Our second group is corporates. It's basically the same logic. Even large corporates based out of Colombia operate within Latin American business logic and constraints. And something disruptive can come along, and most likely they're not going to build it, and it's not going to be built in Bogotá or Lima. Most likely going to be built in China, or Singapore, or Western Europe, or the United States, where we are very active. So we help them understand and deploy a little bit of capital along with, with those interests. And the third is university endowments. We don't have many, and they are progressively being more sophisticated, not as sophisticated as US university endowments, but we do have a couple of investors in that bucket in fund of funds 1 and funds of funds 2.

So you invest in funds of funds, right? Like, I thought you invested in startup directly. Tell me a bit more about that.

We did. So, so if you look at, uh, Veranorte's evolution over time, uh, our first 3 funds, uh, were very typical Series A, Series B venture capital funds. We did that mostly with corporate capital. Um, and then in 2022, we decided to open up the opportunity for other types of investors to participate in this asset class. And the way we thought it better to structure the product that they should be investing in is a fund of funds. And the reason behind that is that, uh, family offices in LATAM are not as large and don't have the experience of investing in venture capital compared to family offices in the United States. So an investment proposal that we had to make to them was a more complete solution. In our view, when you invest in VC, you must diversify even along funds. You know, how VC returns are distributed, how they're concentrated, and they did not have the expertise, the access, or the capital to build their own portfolios. So we provide that for them through the fund of funds. Now, Fund of Funds II, which is our most recent cohort, we launched that fund in January this year, comes with a co-investment fund. So we are taking advantage of the deal flow that comes from our managers, uh, in co-investment opportunities and, um, and parking those in the co-investment fund where the fund of funds is an investor and also some of our LPs, uh, can commit, um, also.

And is that generally a better strategy? It's, I mean, it's less risky, right, for like Latin family offices, but it's also, I guess, Is it simpler to explain it to them or is it more complicated? And does it complexify the way that you manage the fund or is it just a winning thesis, the fund of fund, fund of fund, via like direct investments?

So I will say it depends on who you are and what experience you have and what access you have. This is an access business. So I would say if you are a very large family office that has been investing in venture capital for 30 years and have a lot of relationships and can get into the best funds, definitely you don't need to go through a fund of funds. But when you look at the math, and you have access to top decile, top quartile funds, it does make sense to build a fund of funds. If you look at the benchmarks, good fund of funds outperform direct investment funds, not significantly.

[Speaker:CHARLES CORMIER] I've read the other way around. I've read that funds outperform the— fund of funds.

Again, if you look at the broad picture, that might be true. But as I started saying, it depends on who you are. And if you have the access to build a top quartile, top decile fund of funds, then you're looking at a narrower distribution of potential returns and basically very tight, very tight very tied to the benchmark top quartile returns. So from a Sharpe point of view, it's a much better product. And it makes more sense, again, for the family office or the investor that doesn't have $20 million to allocate to venture capital, and does not have the expertise to choose or the access to go into the best funds. So it is, from a risk-return perspective, a very attractive product. And it's a one-stop shop for those types of investors that, again, don't have the experience.

So my obvious follow-up question is, how did you get access to NFX, Menlo, IVP? How did you get access to all of these guys?

So the history behind those relationships are our first 3 funds. When we deployed that capital, we were very thesis-driven. And when we built our market maps and looked at the companies that satisfied our thesis, we went out and knocked on their investors' doors. So we have a very cool story on a company called PagerHealth out of our Fund 1 that we saw that NEA and Lux Capital had invested in that company, and we just called them, cold-called them, and they replied, and we just said, we're a small investor from LATAM, We represent a corporate that could be a good ally for PagerHealth that could help expand their business into LATAM. We can help them build a partnership with this group, and we are willing to invest in the company if it passes our due diligence. And they were generous enough to introduce us to the company, to the CEO, and we spoke for a long time. We did our diligence, ended up investing in the company's bridge round to the Series B. We actually co-led that, and then we helped PagerHealth connect with Sudamericana, a very large insurer here in Colombia, build a very nice business for Pager. So NEA and Lux, I think they have— they think of us highly as we've become an investor and are helpful, and then we replicate that along all the investments that we did from those first 3 funds. What we ended up doing, not deliberately, but very organically, is creating very close relationships with these funds that were our co-investors. Comes 2022, and then we asked them, could we be an LP in your funds instead of doing co-investments? We're very small, co-investments take up a lot of capital, and we need more optionality for what we like to do. Connect technology with LATAM. And all of them said yes. Some of them said, our minimum ticket is a little bit high, maybe we're gonna have to wait, but we've been able to deploy relatively small tickets in many of these top-tier funds because of our previous relationships and the fact that we are a value-add LP. That's the gist of it.

I love it. Charles' stamp of approval on this one. It's pretty genius, right? It's like, Yeah, start small, start somewhere, and then like go up and go up and go up and leverage your connection. That's like the story of my life. Um, the LATAM investors, how do you get in touch with them? Normally LATAM people are notorious for responding to cold emails. Uh, is that how it starts and then you meet them physically?

Oh no, definitely not.

I mean, more, more than family, more than like other countries is what I found from like 10 years of doing cold research. I can understand that family offices and very rich people have a harder complex responding, but yeah, tell me a bit more about your approach.

So, I cannot say about all of LATAM because we've been very active in Colombia and Mexico and have explored other geographies to find potential investors. But we've— most of our investors are Colombian today. And you might know the history of this country. So people with wealth are very, very low profile. There's a very tight circle of trust that you have to be in for an investor to be open about how they're allocating wealth, what types of investments they like to do, and engage in a conversation that is meaningful on both sides and could potentially end up resulting in an investment. So if you look at our investor base, most are, I would say, friends, not like actually personal friends, but people that are very, very close to our networks. I've lived in Colombia most of my life and I've worked in Colombia all of my professional life. And that— it's that build of trust that has allowed us to raise the capital that we've raised. And then as time progresses and we have actual track record and we can show the results of the previous funds, that lends itself for other types of LP sourcing. But I would say this is mostly a warm intro one-on-one conversation that has, you know, like a long lead time to actually convert into an LP.

Okay, but for example, Mexico City, right? You're not there physically. So how does that relationship start?

Well, actually, we are there physically. Felipe, my partner, moved there last year. And it's sort of the same, but without the advantage of me being here for 25 years and building a lot of relationships. We're just learning about the business culture in Mexico, and we have actually no rush to raise capital from Mexican family offices or corporates. Felipe is learning the culture, meeting people, trying to be genuinely helpful in what we do best is connect technology to LATAM. And as time progresses, ideally we could find capital there, But, you know, you never know.

Okay. So like to get to the scale of it, right? I'm a systematic guy. So does it mean like him showing up to a fancy F1 event in Mexico City, an afterparty or something, and connecting physically with people there? Is that how the relationship starts? Or him connecting on a dinner with an existing investor that came from whatever funnel and asked him, hey, do you know someone that might be interested in that? Is it private roundtables? I'm trying to get to the top of funnel here.

Yeah, I think it's all of the above, but in the case of Felipe, particularly, he's a very well-connected individual. He had business relationships prior to him moving last year there, because he lived in Mexico while working at a big infrastructure fund that had Chinese capital. That was something he did after living in Beijing for a couple of years. And he used that experience to build genuine relationships, it's just how he is. And he's very well connected, he did his MBA at Chicago Booth, so he has also a lot of Mexican classmates that have helped him connect to the business environment. So he's done like the broad events, dinner table thing, but also, visiting one-on-one family offices and business folks that have been warmed, introduced to us through his previous relationships.

If I'd have to do it as a guy in Mexico, first, not much in my thesis. Mexico is not on my radar much. Could be eventually, um, VC side of things, maybe startup side of things. That's where I see like more opportunity in Latin America specifically, or if I would want to deploy some of my personal capital in here. But if I would have to start from scratch as a VC fund, I would definitely cold email people to a private event with a very personalized email. And then of course, I would follow up with like more offers, like you said, more value, right? Potentially having them on a podcast, potentially a mastermind. I even run these Friday VC poker night, like fun events, right? Like that are outside of the box and that are valuable. Some public, most private in the case of capital, right? Like, People love to keep their stuff private, but I think I'd start there. And from there, of course, I'd ask referrals when appropriate after I've added tons of values, like, hey, can you connect me to this guy in your network? Or who's the biggest nerd you know? Who's the best salesperson you know? I love just leveraging that. What do you think about that?

Those all sound creative and we might implement some of those. You know, something that we've learned so far Actually, we've been told by Felipe's Mexican friends is that the actual level of friendship that has to be built before doing business is very significant, much more even than here in Colombia, because I said we're friends with most of our LPs, but it's not like the close friendship. It's just we know a lot of people, we have a lot of people in common. People know who you are. This is a very small community, um, so that there is a lot of that one-on-one, one-on-two time spent on genuinely becoming close personally. And that is something that's not easy because you're not after the transaction. The transaction is a consequence of something genuine. Um, Felipe does an amazing job. He genuinely likes that. Um, I, I may have a harder time.

Yeah, I have my opinions on this as well. It's like, if you get in business first before— like me, all my best friends I do business with. If I cannot do business with someone, I don't think we should be friends, because business is trust and it's performance and it's value, right? Like, and if I can't talk money with someone or can't bring them something back— I mean, we live in a capitalist world, right? So "Not sure to become friends before." I understand what you're saying though. It's like building the trust, right? Like, and showing what you're made out of. For sure, I can respect that. And I wouldn't mind, I don't know, doing extracurricular activity that are already on my calendar, like sports, right? Like squash game, taking a coffee, picking up their brains, picking their brains and just being like, Hey, what do you think about that investment? And I think, yeah, when you naturally talk about business to people, it can only lead to one thing. It's like, dude, I know what you're made out of. I trust you. Let's go. Let's do it. Another fun one in Mexico I've been deploying, sort of deploying, is like bringing some of my clients on Pico de Orizaba, like something that is really like out of their bounds, like climbing Mexico's highest mountain. You really see them in like an extra state and I think this is like a 10x, 100x in terms of, uh, yeah, it's, it's— and I think Colombia has some pretty cool mountains as well.

Definitely. Yeah. Um, there are— struggling together. That's right. Uh, in, and you have to collaborate, you have to, you know, sleep in tents that are just one next to the other, things like that. Yeah, those are things that could be done here. I hadn't I hadn't thought of that, actually.

What's next for your fund? Like, what's on the top priority list this year?

So we are raising Fund 2. We have a $35 million target and a hard cap in $55, which is around 1.5x our previous fund. We've already closed on half of that capital in this January. So I'm dedicating my time mostly to finish up fundraising, ideally by the fall. And then deploying that capital very sensibly, very thoughtfully. I actually don't think too much about way, way further down the line. We like to evolve organically as we find opportunities and feel comfortable with them. So that's why I mentioned we built this co-investment fund as a result of what we saw in Fund 1. We might build SPVs as a result of doing the co-investment fund and finding that we have extra allocation in meaningful companies, but then never know what continues from there.

And where does your fund sit in their portfolio of investments, right? Is it higher risk, higher return type of, like, how do you treat that equation?

Um, actually, uh, with a lot of, uh, thoughts, um, we, We build the portfolio along 3 main sets of criteria. The first one is predictability, so risk-return. The second is cash flow profile, because DPI is a challenge and Latin American investors that are not accustomed to this asset class miss the liquidity. So cash flow profile is number 2. And third is themes. Because we built this strategy thinking about Latin American gaps and what the challenges here are. And we want to allocate the fund or be exposed through the fund of funds to things that we think could eventually be meaningful for Latin. So as a result of the first two criteria, we allocate around 50% of the fund's capital to what we call established managers, which are funds that may have the big brand name, but more deeply is where we can trace strategy systematically to cash flows and returns. And most of the times, you can only do that when you analyze 5, 6, 7, 8 funds that have been executed along the same strategy. 30%, 35% of the capital, what we call emerging managers, which is funds from 3, from 4, from 5, which are not brand new, where we can test the strategy, where we can interview a lot of the entrepreneurs, but most likely no DPI. So it's not fully proven from a cash flow perspective. And then around 15%, to what we call frontier managers, which is fund ones, solo GPs, and folks that are doing things very out of the box, where most likely it's all about the people and none of it is quantitative. And then from the second criteria, cash flow profile, we allocate around 65% of the capital to early stage, which is pre-seed, seed, and Series A, and 35% to Series B, Series C, what we call late stage. By combining those criteria, what we have is meaningful predictability around where the return should be, alpha through emerging and frontier managers, and a half-life of the fund that should gravitate around year 8, even considering how companies are staying private for longer, and exits from the late-stage portfolio starting year 5 or year 6. So it fits pretty well. At the end of the day, it's product-market fit, right? You know, understand how our investors think, what they need, and then build a portfolio that is reasonable for the risks that we're taking, but meets their criteria. So that's basically how we think about that.

What about other countries in LATAM in which you see potential? Wouldn't Argentina fall in that category? What about Brazil?

I have to say honestly that we don't know Brazil, and I think that's like a common theme around Latin America, that that is like a different continent. Besides the fact that it's a different language, it's so big that there— it's a world of its own. So I can't, I can't speak about Brazil. But regarding the other countries in LATAM, we've decided not to deploy capital into, into LATAM, even though we see that there could be value based on two things. One is that we want to really understand and connect with game-changing technology, and it's not being built in LATAM. It's mostly built in the US or China or other places, and we act like a complement to what other folks are doing within LATAM. And the second reason is a market reason, is most VC funds in LATAM are open to receiving capital from, you know, reasonable, well-known family offices or corporates around the continent. They don't need— investors don't need us to get access to those funds. There might be some that are more exclusive, but in general, the balance between good assets and capital is that it's less capital than that same balance in the US where you have to compete for the best assets. So we wouldn't be providing an outstanding service, let's call it, for our LPs to give them access to a fund that they would have access anyway. So we try to differentiate ourselves that way and be more meaningful and deliberate about what we do.

Yeah, I like what you're building. It's very different and seems you're very qualified to run the fund. I'd like to meet Felipe in Ciudad de México whenever I can get up there. Camilo, where can people find out more about about you?

I think the easiest thing is vetonorte.com. You can also check out our LinkedIn profile. We're just, you know, building it. The thing is, we've been like very quiet, heads down, building Veto Norte for the past 14 years, and we haven't really talked a lot about what we do and why we do it. It's just been very recent we brought on a head of communications, Catalina, joined us just beginning this year. And since we have now Fund of Funds I fully deployed, fully committed, and Fund of Funds II running very smoothly, actually, it makes more sense for us to speak out a little bit more.

There you go. So it's Camilo and Charles from Under VC.