Overcoming the Challenges of Building a Venture Fund in Mexico | Alejandro Gonzalez, Redwood Ventures

This is season three of Founder Journey. With international travel back in the cards, I'm heading up a number of different trade missions, various countries around the world. And while I'm out and about, I'm going to be talking to a whole new slate of founders in my network and bringing their journeys to you. First up is Alejandro Gonzalez of Redwood Ventures from Guadalajara, Mexico. And Alejandro is going to talk about building a venture fund, some of his own entrepreneurial journeys, but more importantly, the challenge of bringing high net worth individuals, family offices, LPs out of the woodworks in New Mexico and getting them to get aggressive about investing in tech in Mexico and Mexican entrepreneurs.

3, 2, 1.

Hey, what's up everyone? Thank you for joining us again for another episode of Founder Journeys. Today we've got Alejandro Gonzalez, managing partner of Redwood Ventures here in Guadalajara, Mexico. Yes, I'm still on my trade mission in Mexico. I'm loving it here. I might not come back. As you can see, I found my place, the bar. Alejandro, I'm pretty sure you're comfortable behind the bar as well.

I do, yeah. Yeah, I do.

We spend a lot of time talking about all the different tequilas, but I don't want to talk about tequila. I want to talk about you. So tell us about Alejandro, your journey. We've had other VCs on the podcast and the harsh reality is building a venture fund today is a hard thing. It is a startup on its own. There's lots of ups and downs and challenges. Tell us about you, your history and then tell us about Redwood Ventures and the journey building Redwood.

Sure. So I started my career as an entrepreneur. I had a company that I built with some friends from high school. I didn't, I didn't know that that wasn't the best practice. So I made all the, every single mistake, probably everybody does and, and I ended up selling the company. I love the process.

But you still, still was a success. So you got an exit.

Yes, not, not that, that kind of exit. It was, it was more like it's not the kind of exit that is in the news, you know, but it was, it was still an exit.

Positive win. Take it. Right?

Yes, yes. And, and I love the process of the exit itself. And I started working in an investment banking firm. So I worked for, here in Guadalajara. I worked for almost six years as an investment banker, know doing M&As, valuations, fundraising and so forth. And I've always loved what like the part of the entrepreneurs in investment banking, you know, like fundraising amongst other entrepreneurs and working together with VCs from the United States and from Mexico to fundraise for these entrepreneurs. And you know, that part was what I was really passionate about. Entrepreneurship, not real estate. So I always wanted to be on the other side of the table like investing in those startups. So I started doing angel investments myself and as an LP in other funds. And I realized that I didn't like some parts of both things. And then I met the founders of Redwood, Jean Paul and Marco. And I was, I was working with them as a, like a provider, a service provider. I did evaluations and all the financial software for some programs that they were running at the time. So we sat on a table, they told me the idea of Redwood and I was like, I had the same idea, you know, like this could be some kind of partnership. They invited me to join them in the beginnings of Redwood to fundraise this first fund from Guadalajara, the first institutional fund from Guadalajara. And I joined them in 2017, I guess, and we fundraised $8 million. At the time, the first fund was small fund, but it's not a small.

Fund, especially for Mexico. Right.

Like in Mexico, it's a decent fund. Yeah, it's a decent size in the.

US and fun one and fund one, like that's the same thing in other markets. The fund one is hard and five to ten million dollars is typically what you see. Eight million.

Yeah. The first fund. Our investment thesis was mostly done to convince Tapatio. Tapatios are called the people from Guadalajara. So Tapateo businessmen and business families to invest in venture capital. Because I think every entrepreneur and businessman is risk taking, but they don't want to take risks that they don't know how to measure.

Exactly.

They don't know these kind of risks, but they like risk. That's the reason they are entrepreneurs and businessmen. So our investment thesis was very focused on providing the transparency and providing the accountability that real estate offers to any investor. You can go there and watch your money being used for construction and everything. So that was like, why is everybody investing in real estate but not in venture capital? And we thought it was because they can see what the money is doing. So we put that same philosophy in venture capital. We have an app for the investors so. So that they can see every single peso that they invest. Where is it going? They know my salary, they know my partner's salary. They know like everything in the fund, what is going on there. They know everything about the companies. We actually present. We invite the founders to present in front of the LPs, their business so.

They have an active involvement. The LPs are very involved.

You wouldn't believe how involved they are. And we're so happy. And I think that involvement is what started the success in fundraising for the second fund, because the 100% of the LPs from the first phone, they all repeated in the second fund. So I think it is because, I mean, we still haven't have an exit in the first fund. We don't have the storytelling that other funds have, like the Sequoias, the Andreessens, you know, like tons of success stories. We don't have that. But why did they invest again in our second fund that they trust in us again? And I think it's because of that visibility of that transparency, that face to face, talking with them and letting them know not only the good things, but also the bad things, like this company not going as we thought it should, and now we're facing these difficulties and let them talk and tell us we think that you could do this to solve that problem. Or we think this industry is not so hot right now, so probably don't go very deep on that sector. And we hear them.

This is really interesting because your LPs are not just passive investors. They're actively involved. They have domain expertise, they have domain knowledge. They're entrepreneurs themselves. And so you want to leverage that and the like. Let's not kid ourselves. If you started in 2017, let's say 2018 is when the fund closed.

The fund closed on August 2018.

2018, yeah. So our, our first investment was 2018. 2019. 2020. Pandemic hits 2021. But you're already on fund number two. Like, that's actually impressive. Like, in four years, you. You've closed fund one, deployed fund one. You're on to fund two in the midst of Pandemic as well.

Pandemic was hard. Yeah. And we actually wanted to start fundraising during the pandemic, but we had to focus on the companies of the portfolio. So we postponed fundraising 2021 just to try to focus on what our new partners need, like the partners that we have a responsibility with them because we actually invest in their companies. So. So we got to focus 2020 on that, and we started fundraising for the second fund in February 2021, and we made like nine months of fundraising and we ended up fundraising $30 million first closing in, I think in October or November. So we just had our first investment committee. We're ready to go again.

That's. That's pretty good numbers. And like I said, it's not easy, like going through this process and the fact that you've actually automated a lot of the back end, you've actually created apps and you're created a whole mechanism to help your LPs feel engaged. That in itself takes time to build and put together. So congratulations.

Thank you. Thank you.

And so when you were doing M and A's, and then now you're at Redwood, where you're always looking at tech companies, or was it like, so what attracted you to the tech. And tell me about the tech industry at Guadalajara, why you love it so much?

So Guadalajara is a very technological city. I think like around 10, 15 years ago, the government started attracting the technological big companies from the world to have offices in Guadalajara, you know, so in Guadalajara you find Oracle, biggest campus in the world is here. And then you have intel, and then you have all the manufacturers and all the electronics and all the, you know, so there's a lot of companies creating jobs in Guadalajara. So consequently, the universities and a lot of educational institutions started developing programs to educate and create talent for those companies. So now what we're looking at is that people from those companies are, you know. Yeah, they're doing their own thing, you know, so they are just venturing into new endeavors, you know. So that's something that probably like five years ago started booming in Guadalajara. So now you see a lot of entrepreneurs. There is. There's like a vintage from 10 years ago, you know, when the Kweskis and the Unimas and, you know, like these companies that went through Y Combinator first companies in Y Combinator from Guadalajara, and everybody was crazy about it and it was amazing. But now the ecosystem is booming and you see new entrepreneurs every day. And now there are more funds in Guadalajara, more fund managers, more angel investors, and everybody is now looking how to get involved in the ecosystem. Now you see the law firms from the past that used to do only.

Or didn't really take it seriously.

Yeah, exactly. And now they have their own fintech division or they have their entrepreneur division. And now they are looking like, hey, I'm the expert on doing flips to other countries. And it's like, yeah, okay. And we don't have many about it. So if you're an expert, what have you done? You know, but the good thing is that they are. They start looking at this whole. I don't think it's like an ecosystem. It's like the whole economy.

Yeah. It's no longer just a little niche or a small pocket. It actually is the economic driver of Guadalajara.

It is. Yeah, it is. And you start looking at really big company raising serious money from international funds and just growing Guadalajara.

And I've been talking to entrepreneurs today. Guadalajara is also a landing pad for other Latin American entrepreneurs from Argentina, from Colombia, Brazil. They come to Guadalajara. They don't go to Mexico City, they don't go to Monterey starting a little bit. But they want to be in Guadalajara.

I think they go everywhere but Guadalajara is a great place to be for them.

Yeah.

And I talked to a few and I think that the quality of life is very good in Guadaljara. The cost of living is not what you see. It's not too crazy.

I mean, getting crazy.

Yeah, it's escalating.

But that's the factor of any tech ecosystem that is successful. The victim or the victims are real estate prices.

If you are an entrepreneur and you don't want to start your company on in Colombia or in Argentina or wherever you are and you want to go somewhere else where there is a bigger economy and you go to San Francisco, you have to fundraise and live like, you know, like very poor because it's so expensive. And Miami is also very expensive. You know they say like, oh, Latin America, go to Miami. Oh, you should think twice. But, but if you come to Mexico, you find out that there is a huge ecosystem, there's a huge support to you, the culture is very friendly and it's very similar to other Latin American cultures. So you end up like really having friends and someone to talk with, you know, and you merge with the culture very easily. And if you are looking for talent, it's very easy to find talent in places like Guadalajara because they are all there. And if you're looking for clients, you probably go to Mexico City because every big company is there. And if you're like so, so depending what you are looking for, maybe some companies, some, some places are better for.

Some companies if they're a business development arm of a Colombian company they probably want to go to. But if you're actually looking at building a dev team, you're part of your company.

Yeah, no question about it. Actually we invested in a company from Dallas and we helped them grow a company, their company and their developing team in Guadalajara and now they have offices here because it was just so cheap and the talent was good. So it was a no brainer.

Yeah. So you and I actually connected back in 2019. I see. I've traveled around startup hubs all around the world and I see huge potentials in Mexico and Canada together. Like there's obviously the US in the middle, but Canada and Mexico together are stronger together than they are apart. And so where do you see opportunities and synergies between entrepreneurs in Mexico and entrepreneurs in Canada?

Well, I think.

Knowing that everybody else go to the U.S. that's where the market is, that's where the clients are. But what can Canada and us do together?

Well, first, I think different markets. So each market has their own opportunities. And of course the drivers of the economy of each country are different. So depending on what you are devoting your company to, it would probably make more sense to go to Canada than stay in Mexico. And also the level of investment in Canada, it's huge. Even though in Mexico we're growing, you know, we 3x the amount of capital invested this year in Canada, they just.

It'S a stepping stone to the year.

So, so if you're fundraising, it would make a lot of sense if, if you go fundraise in Canada and in Mexico as well, you know, like, and you have a mix of that. Also peer flow is very common for us to look for companies in Canada that are expanding to Mexican markets, you know, because probably, for example, we saw a company building technology for, for aquaculture. And aquaculture in, in, in, in Canada is big, but also in Mexico. Yeah, so, so they, for them it made a lot of sense to start operations in Mexico. You know, like, we're growing in Canada, but now we're looking for other geographies and the next opportunity is Mexico because in, in the US everybody's, you know, like, so technified and there's a lot of regulations in that matter. And in Mexico, not so far. So their product made sense. So a lot of soft landing opportunities for companies from Canada to come to Mexico and as well from companies to Mexico, you know, like find these bigger markets or the headquarters of big companies in Canada to sell. It just makes sense, I think, in that way. And also legally the structures are more friendly in kind of in terms of taxes, in terms of where you can allocate money, in terms of how you receive investments and the implications of that in terms of investment instruments. You know, like safe doesn't exist in Mexico, but in Canada they're very used to, so there's a lot of, you know, like complementary things from one to another.

Yeah. And I always say that as a CEO, it's your job to try to find the best resource, resources you can to build your company and made it a global entity and, and leverage what you can, whether it's go to Canada, go to the U.S. stay in Mexico, go to Colombia. It's on you as the entrepreneur to figure out. And that's where launch comes in. We try to help with that process and Redwood's a good partner for us to expand our services and offer those things. I want to jump back to Guadalajara. What is it that, what's hot right now? What's driving the sector? Is it Fintech? Is it Web3? What's really got you excited of what's. What are you seeing?

I think there's a lot of fintech in Guadalajara and great companies doing a lot of innovations in fintech. There's a lot of creative industries in Guadalajara like gaming and design and marketing and animation. And that's big in Guadalajara. And that is driving also web3 because a lot of companies from Guadalajara are now embracing Web3 on the way of doing business. And I starting, you know, like leveraging this new way of developing your company and leveraging also the creativity of the entrepreneurs. So I see a lot of that. I love the creativity. I mean you're in a great area to feel that creativity. And also there is a lot of companies developing biotechnologies and scientific based entrepreneurship.

Yeah, we met with two or we didn't meet with them. We're lining up meeting with two health tech companies tomorrow. So also there's a lot of health.

Tech here, a lot of health tech, a lot of biotechnology and also a lot of companies being built in the universities. There's very interesting offices of technology, transfer offices and they're doing a great job mixing investment from people that are not used to investing in those kind of projects and trying to evangelize how to invest in these sort of weird companies that you don't know what they're doing, you don't fully understand what their technology is all about. And probably not even the entrepreneurs have figured out how to sell the technology, how to invest in those kind of companies.

You know, like how are the universities with the ip? Because I know in Canada the IP transfer and the, the IP rights with the university. If you embed something in the university, that's been a bit sticky issue. How is that similar?

Yeah, it's similar, it's similar and I don't think it's that developed so far but, but they're improving.

If you're doing biotech and you're actually doing really deep, deep research, but if you're building SaaS companies, fintech companies, it becomes challenging. Like you shouldn't have that much red tape and challenges trying to get that IP out of the university and commercialize.

Yes, probably for not so scientific companies is not that bad. A lot of companies comes out from university incubators and accelerators and, and they're fine and but for more scientific projects that they, you know, like use the university facilities and so forth, it's probably not so sophisticated right now. So like they don't know how to help the company without screwing the company.

You know, systems have been in place where systems that were okay 20 years ago, 30 years ago, but now it's so different, right?

Yes, but there is a know how of people that have done it before, many, many years and they are willing to teach like how they did it. So there's a lot of collaboration with other universities, Guadalajara universities, with mit, with Harvard, with Berkeley, you know, Stanford, so that they get the know how of how to build scientific based companies within the university and then just let it fly. So I think they are getting sophisticated, slow but steady movements in the right direction. Yeah, it's definitely in the right direction. And when you see how we were five years ago and how we are now, you realize that we're moving fast. You probably don't feel it because you're, you know, like in the car when you get like, oh, we have. Yeah, it's been a while.

Yeah, that's awesome. I'm really excited to spend time here in Guadalajara and hopefully you're going to be back on a regular basis. So this is podcast called Founder Journeys. We talked about your journey, but part of Founder Journeys is we want to talk about the taboo topics, like some of the things that entrepreneurs don't necessarily talk about, but a reality. There's, there's a lot of things that happen in that journey. You as a VC also get to see firsthand what other founders are going through and challenges. And we kind of talked a little bit earlier. There's something that you seen quite a bit of and you wanted just to address or.

Oh, I've seen a lot of things.

That's why we refer the tequila.

Yeah, yeah, I think I was watching one which one I like. But I mean there's a lot of mistakes that founders make and I don't think is just rookie mistakes most of the time. And but if I make like one that I, that I just get very mad when I see it is messing up the cap table, like really messy, you know, like inviting one investor for $50,000 and giving them half of the company. And it's like now there's no room for anyone or probably some founder just leaving the company six months after starting and he has, or she has 30% of the company now, but they don't work there. So it's very common for rookie entrepreneurs to mess the cap table completely. And that is something that if you are playing the busy game and you want to go the long run, like racing several rounds, you have to stay with a healthy cap table. So there's always room for new investors and always there is room for you as an entrepreneur. And I think that is the priority that the entrepreneur still has the ability to run the company with his vision or her vision. And for us, that's in the core of Redwood, that the entrepreneurs should always be a rock star of their companies. When we see like messy cap tables, we're like, oh, I mean I have talked with entrepreneurs that they have like 3% of their company.

Yeah. And it's like, so where's the motivation to continue?

If you have to bring someone in and give them besting type of compensation, they will have more than you. And it's like. And they didn't start a company. So what are you going to do? I'm going to talk with my investors to see if there is any chance. And they come a month after, hey, my investors gave me a great deal. Now I have like 5% of the company instead of 2. And that's not a great deal. But yeah, it happens a lot. It happens a lot especially. And I think it's something that we have to be see every time less because of the sophistication of the investors. You know, every time the investors see that, probably the first investment they made, they did it like that. And now nobody wants to invest in a company and the company's a great company, but they cannot find funding because of that. The next time they think twice and they say like, probably should take a little bit less so that they can fundraise again and keep growing.

And everybody learns through the process. And the strength of an ecosystem is the mentorship, the guidance that everybody gets. So that's why accelerators, incubators are really important because you want the entrepreneurs be surrounded by other entrepreneurs that went through those mistakes. Guide them and teach them. Yeah, don't do that. Make sure you have vesting agreements. Don't, don't, don't give your uncle 50% of the company.

Exactly, exactly. And it's like, okay, your uncle has the 50% of the company, but what does he do? And like nothing. He gave me $25,000. And like you. Okay, okay. And yeah, and it happens a lot in Guadalajara. And I Think that is part of, of our job to. To give an example or put the.

Resources out there, but the education out there.

Yeah.

Be accessible.

We do a lot of like evangelization, you know, like, like we participate in programs. Two years ago, before COVID we actually made a course to train new investors. You want to invest in venture capital, you want to turn into an angel investor, but you don't know how this thing works. We give you a 10 week course of how to do it. And in the end we invited them to a demo day to meet companies to put in practice what they learned and then it turned out very well.

That's extremely important because that's part of your funnel. And if those angel investors are not making proper investments or not helping to shepherd the companies in the right way, you have fewer companies to invest in because they're not investable at that time. But they get to you. Right. Awesome. Alejandro, this has been amazing conversation. I want to close this off by you talking to our audience and telling them why should they come to Guadalajara? What can they do to connect with the ecosystem here?

Okay, so Guadalajara is a very friendly environment for entrepreneurs. So whenever you come, just send a message to whoever you know in the Guadalajara ecosystem to me if you want and they will present you to everyone. I think the good thing of Guadalajara ecosystem is that we are so close to each other and everybody knows each other. So I don't know. There's very few people in the ecosystem that I don't know. But it's not because I'm so popular, is because everybody knows everybody, you know. And that's the great thing about Guadalajara is very friendly. There is a lot of opportunities here. It's a huge city as a market to start your company, to pilot your company. It's not an easy market, but that is also good for when you start your company so that you can see if there is a market viability in what you are doing. So it's a great place to be. Also we have a lot of tequila, so that's another perk.

And if you're a North American company, Canadian company, looking to expand into Latin America, Guadalajara is your stepping stone.

Yes.

Come here, hit Mexico.

There is a lot of talent. If you're looking for talent, there is a lot of talent. If you're looking for market, there is a lot of market. If you looking for an office and space every time that is less used. But if you need space for your company, here is not that expensive. Also there is a lot of companies doing like soft landing services for pouring companies to come to Guadalajara. There's legal services, accounting services for entrepreneurs. I mean there is a whole ecosystem to help you if you come to Guadalajara and if you don't know anyone, just ask.

And it's very easy to find super friendly ecosystem. Lots of meetups and stuff happening now starting to come back post Covid. We've got our own tomorrow. So I highly recommend if you're going to look at the Mexican market, if you're looking at Latin America, make Walahara stop and Dr. Redwood ventures for fun of course. This is amazing. Thank you.

Thank you. R.