Rodrigo Martinez: Best time for building and exiting firms

Rodrigo Martinez speaking at Junior World Entrepreneurship Forum Malaysia 2015.

Chilean serial entrepreneur Rodrigo Martinez has been building companies and exiting them via trade sales since the early 1990’s in South America. Specialising in B2C exits and Internet enterprises, Martinez has a passion for building companies and helping young entrepreneurs.

Martinez is credited with building and seeing two of Brazil’s largest Internet ventures – STI and hpG – without external funding.

He arrived in Singapore in April 2012 and was an early investor in local accelerator JFDI, as well as a founding member of Impact Hub Singapore.

Currently resident of the JTC Launchpad in Singapore, Martinez is focused on developing and building traction for ventures via his firm, Dikaios Internet Pte. Ltd., a B2C software venture builder. His latest venture is FYI.TO, a platform meant to enable the targeted curation and promotion of relevant content for personal and corporate brands.

An advisory board member at Kairos Society ASEAN, he is also known for building hpG and exiting it within an 18-month period, in a deal regarded as the largest internet deal of 2002.

In an earlier interaction with The TechPanda, Martinez shared: “I never went to university as I started my first company when I was still in high school. I learn by continuous observation, leveraging on what others have learned and by my own trial and error.”

In an interview with DEALSTREETASIA, Martinez discusses entrepreneurship, exits, innovation, evolution of Internet economy, recent trend of startup fundraising as a measure of success and the current funding frenzy.

Edited excerpts:

You’ve expressed strong opposition to conventional fundraising practices seen in the startup sector. What fuels this opposition?

It’s difficult to deny your own journey. My own entrepreneurial journey had no external investment as I bootstrapped my ventures from the beginning. I created two of the largest internet companies in South America in the late 1990s from the first wave of the Internet, before the 2000 dotcom collapse. hpG was created shortly before the crash end 1999 and launched in the midst of the crash and eventually sold in June 2001.

My first company – STI Internet, Brazil’s fourth largest ISP – was sold to PSI Net, a Global ISP, in May 1999. It started as a BBS in 1992. My second company, hpG, which was the world’s largest Portuguese language web hosting company back in the day, was acquired by iG, one of Brazil’s largest internet portals. It was sold 13 months after I launched it.

What fuels my opposition to current practices of fundraising is that – bearing in mind my own experience – I’m not opposed to fundraising but the frenzy around the fundraising, in a way that makes people believe that it is a metric of success. Rather than seeing so-and-so raise a million dollars from some investor, I’d like to see someone announce their millionth paying customer.

I share commonality in my views with Mark Andreessen, where he points out all the bad things that can arise from the current fundraising frenzy, such as going on a hiring spree. Constraints drive creativity. When you have too much funding, you have a natural tendency to solve problems by throwing money at the problems, rather than finding an elegant, simple solution. Fundraising is not a metric of success but has become one.

You’ve been involved in many of the more famous entities of the Singapore startup ecosystem (e.g. JFDI, The Hub). Where do you see it evolving in the 2015-2020 period?

I think that maturity is what will occur, as the ecosystem develops.. I see more and more ventures having an exit strategy in the spotlight. In effect, I predict that such awareness will grow to the point that perhaps ‘exit strategy education’ will enter the cultural consciousness in the same manner lean startup methodology has done.

You’ll definitely end up seeing more exits and I think that the entities that have not matured or shifted in the right direction will become irrelevant in the ecosystem. If I’m right and there is a maturity and shift in that direction – in Brazil they say ”pegar o bonde “, which means “jump on to the bandwagon” – entities that don’t hop onto the wave of maturity will eventually become irrelevant.

Another thing I see is more MNCs wanting to do their own thing. Muru-D is one and its great because it has someone – Joseph Ziegler – who has been through the process of an exit and so he has the experience.  But I think a lot of these corporates that want to conduct incubation and acceleration should choose who runs their programme wisely.

I don’t think we are going to see that early on. Some corporate incubators & accelerators (CIAs) will not choose wisely and they will mature, much like the startup ecosystem. Some of these corporate people might have to unnecessarily go through this learning curve as well. Some corporates will get it and focus on exit strategies; others will go through the same learning curve again, rather than learning from the good practices out there.

I think that’s basically one of the trends from the entities. In other words, I foresee additional sifting happening to refine who really brings value to the ecosystem.

Also Read: PE return potential much higher than equity, realty: Saigon Asset founder Louis Nguyen

Can you comment about your time in The Hub and how it first introduced you to Singapore?

It taught me the difference between a social entrepreneur and a startup founder, in addition to helping me form my network in Singapore. I believed in The Hub and became a founding member. Eventually, as my own venture matured, I shifted out.

What are the first principles entrepreneurs should start from when building a venture?

Some of the best things in life are the simplest things. Personally, the first thing entrepreneurs should be doing is asking themselves: “What can I build that someone would want to acquire?”

Because that was the first question I asked myself. And it allowed me to build and sell a company three times bigger than my first venture, in a fifth of the time. In other words, start with the end goal in mind and work backwards.

Also Read: Philippines: Narra Venture Capital targets fintech, edtech & healthtech startups

What are some of the major problems that need to be resolved in order for the startup ecosystems in Southeast Asia to further mature?

I think what really needs to improve is how you identify opportunities. There is still a lot of desire to do ‘radically new things’ but if you look at some of the most successful Internet startups, what they’re doing is re-inventing an existing solution with a much better user experience.

In a way, it’s more about focusing on a more practical solutions that facilitates convenience. One of the early things that the Internet delivered was news. In the 1990s, you pretty much had news, email and directory services to pinpoint you to different websites.

Until today, people still want to be informed and ahead of the curve and up to date with news. You have things like CNN’s iReporter, meant for people who want to create news. It’s essentially about sticking to things that people have always wanted, but in a new and convenient way. That is the best approach. Convenience sells and the funding is there but there’s still a lot of frenzy and hype.

The beautiful thing is that the markets are there now. I sold my first company with about 100,000 users. My second company two years later was sold with a million users. Now the markets of people that are online is in the billions. The market is there, the funding is there, but the mindset needs to improve, especially when it comes to identifying opportunities.

Micro-acquisitions– what’re your thoughts about them as exit vehicles for entrepreneurs?

Micro-acquisitions are perhaps the fastest way to make your dreams come true. A micro-acquisition in the range of $20-$50 million is one of the most common deals. But due to their unsexy nature, we don’t hear much about them.

I’m compelled to say that if you consider all the startup ecosystems in the world, there could an M&A transaction happening every few days, but we simply don’t hear about them.I’d rather bootstrap and sell a $20-million company with a co-founder and cash in on $10 million in less than two years, rather than build a $100-million company and cash in on $20 million dollars in 5 years, where founders own 40 per cent due to dilution.

I’d rather make $10 million in 2 years than $20 million in five years, because I can build and sell another $20m company in 2 years and then go on sabbatical in between.

Also Read: We plan to do a couple of acquisitions each year in India: Exl Service CEO Rohit Kapoor

Exit pipelines – M&A, corporate buyout/trade-sales or acquisitions. What’re your take?

Now is a great time for building and exiting firms, a great time to be making your dreams come true. Yachts back in first internet wave cost a million. Maybe they cost $3 million today, given inflation.  An Internet company that was worth $10 million back in 1990s is now worth at least $100 million. It’s a combination of the maturity of the entrepreneurs’ mindset along with the maturity of the investors.

You need to build an internet firm catering to the largest possible pool of acquirers you can. No one is going to come and give you cash. You need to give them a compelling reason, fill a need within THEIR strategy. There are exits and then there are exits. Some have no cash on the table. So to engage in an exit requires you to be strategic.

What about IPOs?

Trade sales are the shortcut to making your dreams come true. And when your dreams come true, you’re in a better position to make someone else’s dreams come true. The IPO could be making someone else’s dreams come true, rather than yours. For instance, Starmedia, a web portal, did an IPO back in the late 1990s on the NASDAQ. In 2001, shareholders were suing the company.

I have no experience with IPOs, but I’m aware that the actual founders can’t sell their shares until many months down the road. What I don’t like about IPOs, mainly for consumer-type businesses, is that as a private firm you’re creating value for your customer, offering them more for less. It’s a customer-centric approach.

But once you do an IPO, you become shareholder-centric and analyst-centric. Your focus is on creating value for your shareholders. With a food manufacturer, they could replace ingredients to improve their bottom line.

Also Read: I don’t want unicorns in Asia but viable businesses that can grow: Joseph Ziegler, Telstra Muru-D

What’s the most basic difference between an entrepreneur/startup founder and a corporate businessperson?

An entrepreneur works with whatever resources he has and that are within arms reach to find the most creative and efficient way to solve a problem. A businessperson will, many times, solve a problem with the resources he/she was given and with a standard operating procedure.

By contrast, entrepreneurs need to be inventive and resourceful. Meanwhile, corporate executives have to work inside a box. An entrepreneur creates new boxes as needed, in order to address a problem.

A lot has been said about Startup Chile. As an expatriate Chilean looking in from outside, what’re your thoughts and what’s the truth about it? How effective is it?

I measure programmes, methodologies and so forth based on their results. In the startup world no other metric speaks success like the number of exits. The Tel Aviv startup ecosystem, for example, has on average 1 multi-million dollar exit per week.

I haven’t been following Startup Chile in a lot of detail, it would be interesting to know how many exits (output) are coming out of the program, from the first batches, versus how many startups went through the program (input). It’s the ratio of success that matters. They have attracted some attention but insufficient value to keep them amongst the Top 20 Startup Ecosystems ranking by Global Compass.

Also Read: ‘Thai mobile games market is on a steep growth curve’

You’ve been a serial entrepreneur since the 1990s and intimately involved with the Internet sector. Where do you see it going until 2025? And is there a bubble right now?

Everybody is talking about a major financial crisis somewhere from now to 2025. And it would be too pretentious of me to predict how that crisis will impact Internet firms going forward.

But in between now and 2025, there’ll be an event, and it will impact Internet ventures. My advice for entrepreneurs that already have created companies is to hopefully exit before that event, unless you have the war chest to weather that storm.

I also see increased M&A activity over the next 5 years, there’s consolidation going on. On the other hand in the chocolate industry, you don’t see that much M&A activity.That sector is already established with big names. So you can infer that from 2020 onwards, I see M&A plateauing.

In terms of a bubble, I wouldn’t say there is a same type of DotCom event like in the 1990s, but expect more grounded valuations going forward and a grater focus on metrics like revenue (i.e. paying customers).

Singapore was recently ranked as No. 10 on the Global Startup Ecosystem Report. However, it suffers from a lack of talent. Meanwhile, Canada, amongst the various countries with a startup visa programme, is offering immediate permanent residency to entrepreneurs. Should Singapore look at forming a Startup Visa programme offering long-term residency? 

Singapore is a country that has always been more friendly to receiving outside talent than other states. With relation to this particular question, the issue is how to qualify entrepreneurial talent. For example, some of the great talent out there doesn’t even have a university degree. How do you address this question? It would be great to see a joint effort between IDA, MDA, MOM and ICA to find ways to continue to fuel the talent pool here.

Also Read: Startups have limitations in traditional business, says Capgemini India CEO

How has the innovation cycle changed?

When I first started STI in 1992, it took 3-4 years to innovate. At one point, living in São Paulo I had no money to swap my car tires. I used all the rubber till you could see the steel belt. At another point, I had no money for petrol.

So when that happened, I parked my car and got to work via public transport all the time. At another point, when I couldn’t afford public transport, I walked to work. That was a painful time.

Now, innovation cycles can be months, rather than years, depending on some companies. This of course depends on the sector. STI had some customers and we sold it off before that particular domain became too capital intensive. This specific venture was 100% bootstrapped and was built up from 1992 to 1999 – a seven year journey from conception to creation and closing the deal. We sold it for $10 million and it changed my life.

I became passionate about building and selling companies from that point and made a decision to build an even larger company, but with less investment, time and money.Thus, I realised that it was not about my idea or what it lacked, but what I could actually build that someone would want to acquire.

If the acquisition is the greatest value creator for entrepreneurs, then it is all about identifying the opportunity with the highest likelihood of getting acquired and within micro-acquisitions ($20-50 million) simply because there are many more deals happening in that range.

My second venture was built to be sold, given that I had an exit strategy when I first started. So, there is a difference between getting acquired and selling your firm. When you sell your company, you’ve already identified your pool of possible acquirers. You create something catering to the needs of this pool, so that can you have leverage in your negotiations.

Viber fits the pattern of the shortened innovation cycle. They didn’t create VOIP but were acquired within less than 4 years. They entered the market and enhanced the overall user experience, before its founders exited via the Rakuten acquisition. The cycle has shortened to 2-3 years and adoption is faster due to a larger universe of Internet users.

When do you invest in and exit a venture? What’s your investment thesis? 

I like to build ventures that leverage on someone else’s innovation, whose core value proposition is enhancing the overall user experience. A lot of times, there’s no users but plenty of product development going on. When adoption of users starts to accelerate – when you get the initial user adoption, then I like to enter the venture.

I always recommend doing your research, analysing the trends and studying the markets. Find patterns then capitalise on them, finding out when people are picking up on this kind of service. For instance, the whole Tinder thing – there’s much more to it then just dating. The concept of swiping left and right – something as simple as that can be a game changer, in terms of user experience.

Rather than checking lists or ticking boxes, swipe left or right. Now, you’re seeing this being applied to other areas and apps. When you identify a certain level of market adoption, you need to be strategic in when you enter and when you exit the venture.

Also Read: Wearables, recommendation engines will displace display advertising: Shapira, MassiveImpact CEO

Does being a father impact an entrepreneurs’ ability to execute, given the demands of raising a family? Does it affect your decision to invest in founders?

Yes, it definitely does. Elon Musk, went on to create much bigger companies after he became the father of six. His secret? ““I’d say the real pay off is the sense of satisfaction in having created a new company that I sold (exited)”. That’s the kind of investee I’m looking for, regardless of parenthood.

With reference to an interview with Ziegler of Muru-D, what needs to be on entrepreneurs mind when considering an exit vehicle?

Ben Franklins, that’s your exit vehicle right there. Elon Musk said “Receiving cash is cash. I mean those are just a large number of Ben Franklins”. If you receive a cash offer that is 50%, regardless of from whom, of what you were expecting to receive when you started this entrepreneurial journey, don’t be greedy, TAKE IT!

You can always build another successful Internet startup. Case in point, Elon Musk built and sold Zip2, built and sold (PayPal). I wouldn’t be surprised if, given the ever increasing competition, he sells Tesla soon so he can focus on his real passion: space exploration. I rest my case.

Also Read: Core of strategy is clarity of purpose: Jamie Camidge, muru-D

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