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LEAP focuses on Latino entrepreneurs in the U.S., Mexico, Central America and South America
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Roman Leal is CEO and Managing Partner at LEAP Global Partners
Serial entrepreneur, with over 10 years of experience in product, operations and strategy in social networking, education and financial technology sectors. Prior to LEAP, Roman was a Co-Founder and CEO of QueSee, a social learning platform for Latinos.
Prior to becoming an entrepreneur, Roman served a variety of roles in Financial Technology and Financial Services, most recently at PayPal and Goldman Sachs. At PayPal, he co-led the next-gen financial services, digital currencies and P2P strategies, where he collaborated on market strategy, business development and product. At Goldman, Leal covered the Financial Technology sector and he was one of the founding members of the Emerging Technology Research and Payment Processing Around the World platforms, where he advised several technology startups on market and product strategy across multiple industries and countries.
Leal has degrees in Economics and Legal Studies from the University of California at Berkeley. He is also a CFA Charterholder. He speaks Spanish and English fluently.
VatorNews: What is your investment philosophy or methodology?
Roman Leal: Our focus is cross border in nature. We believe that we are looking at, and focusing on the Latino entrepreneur, which we consider to be one of largest untapped opportunities in the VC ecosystem. That means both U.S. Latino, which a large and growing population in many respects, and it also means Latin America, so Mexico-based, Central America-based, South America-based. That's going to be our focus.
There are a couple of reasons for that. From a market size perspective, the numbers are very, very large. The U.S. Latino population itself commands around a $1.5 trillion spend per year now, and Mexico's GDP is roughly the same size. If you take just these two markets, then you're talking about a top five global market. Since it's two markets that's not how you'll ever see it on a chart, but to us it makes a lot of sense for a lot of reasons. One is, about 65 percent of the Latinos living in the U.S. are of Mexican decent, like myself. My father is from Mexico, and I was born here. So there's a wave of immigrants that came from Mexico to the U.S. and now there's the wave of the second generation that were born in the U.S. and even now a third generation that is more and more immersed in the U.S. culture, but there's still linkages culturally, financially, and even consumer behavior-wise to Mexico. There's over $25 billion in remittances being sent from the U.S. to Mexico every single year. There's a lot of back and forth of imports and exports. There are a lot of businesses that have been built in the U.S. by Mexican Americans that have targeted that population. That includes restaurants, food and beverage companies, and retail companies. So there's a lot of linkages.
Really interesting as well, there's a lot of cultural traits that makes the markets very similar to us in terms of the types of goods and products we like to buy, the type of messages we like to hear from an advertising perspective, and I think that brands have really figured that out. Also, the way we make decisions, especially very important decisions, like financial decisions, where to invest money, do I buy a home, when is the right time to buy a home, am I going to move to go to college? I remember how big a decision that was for me, leaving Los Angeles to come to the Bay Area. Those decisions are made as a family unit; it's very seldom an individual, "I'm going to do whats best for me." In the Latino culture it's very important to weight in the family. We've even seeing that with our investors. Our investors are primarily family offices and you really need the family to back an investment before the family office actually makes an investment. It's just a deeply embedded cultural thing.
This is a long way of saying that we believe that this is a very large market. We see it as one large market from an entrepreneur perspective and from a consumer perspective. And our thesis is that the U.S. and Mexico are the emerging middle classes of the Americas. We believe that the entrepreneurs that come from these communities, they understand the problems that these communities face, and are best equipped to solve them, or to at least create the platforms that can potentially solve some of these problems. Unfortunately, this is the entrepreneur that is one receiving 1 percent of all venture capital financing. To us, that is a large and significant opportunity. I believe it's an arbitrage opportunity for a VC.
VN: What are some the problems that Latino entrepreneurs are facing that cause that number to be so low?
RL: Stanford Business School launched what's called the Stanford Latino Entrepreneurship Initiative. Really, that's where the idea for LEAP was born. Pablo Perez, my co-founder, and I were there from day one. We were at the launch event, we were in the co-working space, we met the startups, and we read the research. We saw the numbers, and they were so impressive, but some of the reasons, according to Stanford, why there's this big gap in the market is, first and foremost, a lack of a relevant network that can really get you to venture capital financing. What that means is, in early stage venture capital, a lot of entrepreneurs typically rely on a friends and family round to get started. You tap your network, whether it's your parents, your uncles, cousins, brothers. You're tapping a network that gets you a $250,000 or $500,000 type of round to get you to a prototype or some sort of proof of concept that you can then pitch to a VC and say, "Here's what I've done. I've raised one small round, it got me this far, here are the numbers. I think it looks promising, what do you think?" Unfortunately, for a lot of people the Latino in community, but also minorities in general, I believe that African Americans face a similar situation, and immigrant populations, they haven't established that type of network here.
I was born in Los Angeles, and I was very fortunate to go to college and to work on Wall Street but I was the first in my family to go to college. I didn't have a network where I could ask, "What should I study? Which university should I apply to? What's a good financial aid package?" All these things, I did it on my own and I believe that a large chunk of the population that are in that first and second generation are doing it on their own. That's college and then career decisions. "Should I venture on? Where do I get capital?" That's a really tough challenge to overcome. I think a lot of entrepreneurs just don't ever get to that point where they can actually present to a VC because they didn't have that first friends and family round to get them to a place where it makes sense. Typically with VCs you need a referral, or someone who worked with you. Again, many times Latino entrepreneurs don't have that.
Lastly, I do think there's an emotional component. The VC needs to truly understand the magnitude of the problem that the entrepreneur is tackling, and understand how that product and service can solve it. There's big gap there, if you're not connected to that community.
VN: What do you like to invest in? What are your categories of interest?
RL: We like fintech. From an experience perspective, a lot of people in our team and our network have been in fintech for quite some time, so we believe we can add a lot of value there. Healthtech, education, marketplaces. Those are going to be our main focus areas.
The overarching reason why is that we we truly believe that, in those markets, there's a huge advantage to folks who understand and have lived through the same problems as an immigrant population or a person without credit or a person who didn't have access to banking. If you've gone through that yourself, or you saw your parents go through that, there's a huge value add because you understand the problem in a very personal, practical way, and you're best equipped to solve those problems.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
RL: In VC, there's a saying: "It's all about the founder." I 100 percent agree with that. The last two investments we announced, Insikt and Wizeline, we believe are two strong cases in point and they're very strategic for a couple of reasons. They're both at the forefront of amazing trends, one in fintech and one in artificial intelligence.
Insikt is creating a lending as a service platform, which basically allows any brand to have a direct customer relationship and special data on that customer. They can now offer a loan directly to their customer, deepening engagement with the customer by giving them better access to a financial service product because they have better data, or better data points, that banks do not have. Obviously this works very, very well when that is customer is unbanked or underbanked. Any brand, from supermarkets to remittance service providers to prepaid card providers to telecomm operators, including T-Mobile, which is one of their partners, can now extend loans directly to their customers. I think this is very exciting.
Wizeline is an artificial intelligence platform that helps non-tech companies create and manage technology products. The thesis is, if you're not a technology company, and you're not building efficient technology, you are in trouble because disruption is coming to every single industry. If your strength is selling cars, like BMW, which is one of their clients, or shoes, like Nike, another one of their clients, or content, like Fox News, another client, you should focus on that but you still need to leverage technology and you have to have a great technology team. So, the platform helps these companies prioritize among the several dozen, if not hundreds, of products that they need to launch, based on where they'll get the highest return. What's really going to be value add to the core business? Where do they really have the strength to do this? Wizeline helps them build those products. It's a very interesting play on technology.
These are big markets, and they are pioneers in their markets. Most importantly, James Gutierrez from Insikt and Bismarck Lepe from Wizeline are been there, done that entrepreneurs. There are not a lot of those for Latinos in technology. James had already created company called Oportun, which is valued at over $1 billion, so it's a unicorn. It's extended over $4 billion in loans to Latinos, in the U.S. already. So he has lots of experience and a proven track record. Bismarck was an early Google employee and then he founded Ooyala which sold to Telstra for $410 million. So, he's another very successful entrepreneur. Strategically, these folks are going to be mentors to our future portfolio companies. Back to why Latinos are not being founded, it's the lack of network, and now any Latino founder that we back are going to have Bismarck and James as part of their network. It's going to be a game changer.
VN: What do you look for in companies that you put money in? What are the most important qualities?
RL: With founders, it's always great to see domain expertise. If they are a fintech play, what have they done in fintech before? Having a special domain expertise, or relevant experience industry in that industry, is very important. The type of team they can assemble around them is critical. That speaks to a lot of things. That speaks to is this person a visionary who can motivate around their north star? Is the person honest to his or herself about what are their weaknesses, where do they need to fill gaps in their skillset? So I think the team around them is critical.
In terms of the product or the market size, we're in early stage venture capital so we look for billion dollar bets, or market sizes that we believe can become billion dollar companies. In order for it to make a meaningful return for our investors, given that we're likely not going to get a big chunk of the cap table over time, over dilution, over multiple rounds, we need to see those very big exits. So we do look for very large markets where this company can potentially be one of the top three providers to that market. We do look for home runs, to put in another way.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
RL: When the Stanford Latino Entrepreneur Initiative came out with their criteria for how to apply to their program, it was either you had made $1 million in revenue or had raised $1 million in capital or have $1 million of IP in whatever you had built until that point. Then you could be a candidate for that program. I believe that is right in line with our thesis. If you're seed or Series A, if we see those numbers then you will likely be in conversation for investment.
If you're below numbers then I at least, for a seed investment, want to see some sort of proof of concept that you're on the track or you found product market fit. It's really, really critical for us. You have to show that you have users, that you've defined who those users are, to some extent, and the key metrics that matter to whatever platform you’re building are moving in the right direction. It's doesn't always have to be revenue; if it's an advertising revenue play, for example, ad revenue won't come until you have tons of users, but are the metrics moving in the right direction? If you're a fintech company, if the volume of payment transaction number is moving the right way. So we look for those types of proof of concepts and product market fit. We really study what the key metrics for each product is and we want those to be, hopefully, up and to the right or at least going in the right direction.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
RL: From meeting to investment it varies on a lot of factors like how well we’ve known the entrepreneur and how the data has tracked and the timing of the investment round. There's lots of factors. We can move really fast when need to, and when we don't we can manage timing a little more.
A lot of this has been built over our careers. I met James when I was at Goldman Sachs and I got to see him as an operator. It was a very similar story with Bismarck, who I met at least three or fours years ago. I think it's really the network that Pablo and I have built over our careers. But the sources of pipeline that are coming in now, the Stanford Latino Entrepreneur Initiative is a very big one for us in the U.S. There's a nonprofit called the Latino Startup Alliance, which is a network of Latino entrepreneurs across the Americas. They're very focused on Silicon Valley, but they're more and more international as well. I think they have close to 1,000 Latino entrepreneurs in their network now, and it's ready to be activated. It's ready for VCs to come in and activate that network.
We partner also with lot of employee resource groups within major Silicon Valley companies. Most of the major companies have a Latino employee resource group. We believe that a big source of entrepreneurs is always these tech companies, where a group of engineers or a group of employees see a gap or a problem in their day to day work. Instead of building in-house, they leave to a build a startup. To us that's going to be a major source of pipeline, these Latino ERGs in the major tech companies. I would copy and paste it for Mexico; we have very similar pipeline source in that market.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
RL: I have definitely seen those trends. What that means for the entrepreneur, I think it really depends on how well their product market fit has been defined. If they truly understand what their customer segment is, what it looks like, how to reach that customer, and if the unit economics make sense. If they're raising a lot more money, but they're spending $5 to win $1, it's never going to make sense. That’s just throwing good money after bad. That's where entrepreneurs and investors get in trouble. But if the unit economics make sense, and if the per dollar spend in acquisition cost means you're getting a good enough return, then it can make sense to take risk off the table. Raise the bigger round, and give yourself a much larger runway to capture market share and to enter different markets. So it really depends on those answers. Do you really understand your customer? Do you know how to acquire a customer? And do the unit economics of acquiring the customer make sense? If so, obviously there's a lot of questions around dilution and how much you want to take, but the earlier you are, and the more financing you can secure for runway, I think always the better because you just never know. Today, capital may be easier to access, but, as we saw in the financial crisis, that's not always the case. Cycles come and go. If you don't know who the customer or the unit economics aren't good, it’s probably not a good idea to raise as much as possible because you don't understand if you're throwing good money after bad.
I will add that we are not seeing those types of numbers in the Latino entrepreneur because there's a major gap. There's not a lot of capital being invested in these entrepreneurs so the rounds are not going to be as big. That's good and bad, but I don't think we're going to have that similar issue.
To fix that, we need successful entrepreneurs and case studies that then pay it forward. That's what made the valley the Valley. You see it in so many different cases, from origins of Intel to Paypal. You have these ecosystems, with founders who are successful and they invest in the next wave of founders and you just keep paying it forward. You have this feedback loop, where you become VCs or angel investors. Bismarck and James and the founders that we've invested, they become angel investors and they become limited partners in LEAP. Those are the trigger points that have to happen in this community in order for us to move the needle from that 1 percent of all VC to something like mid to high single digits, which is internally our goal in the next decade. That's how we get there over time.
If we can become true experts in filling in the pipelines, sourcing the founders, making sound investing decisions and the helping those founders accelerate their businesses, when there's a talented Latino entrepreneur that wants to access Silicon Valley, sure they'll come to us for capital, but we can introduce them to the other VCs. If you're a VC in Silicon Valley, and you care about diversifying your investments, and you care about always getting the best deal flow no matter where it comes from, where do you go to source the best deals from Latin America? We want them to come to us. We want to be that bridge that speaks to both VCs and the entrepreneurs in our community.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
RL: I never dreamt I'd be a venture capitalist. It was never on my roadmap, but I'm not too sure that I even had a roadmap.
My parents immigrated, my father from Mexico and mother from El Salvador. I was born in Los Angeles, one of four brothers, and a very humble background. I was raised, partially, on government welfare. I share that because I believe, subconsciously, that is where my affinity for fintech comes from. At the age of 10, I was basically making financial decisions for my family. Not directly, but indirectly, because my parents never learned English, so I would go with my father to the local check casher, and he would tell me, "You need to translate these documents because I have no idea what it tells me." Back then there were not a lot of bilingual documents, especially in financial services, so that's what I did. I would explain, "They're going to charge you 5 percent to cash your checks and 3 percent for each money order and 10 percent if you want to send money through Western Union." I just went down the line and my father would be upset with me, "Why are they charging me so much money?" All I was doing was translating the documents, but the pressure that was on my father, I felt it in a real way and I wanted to help, and the only way I could help was by using my language skills and research. I'd go the Internet or ask or call and so I found myself finding the places that charged the least amount of money for check cashing, the least amount of money for bill payment. That was my first arbitrage example. I didn't know it at the time, I was truly trying to find the best deals across the board to make my father's dollar last longer.
I know that's what spurred my interest in economics, and I was very fortunate to get a scholarship to UC Berkeley. From there, I found an organization called Sponsors for Education Opportunity (SEO) which gives students of color at top universities on opportunity on Wall Street. They place minorities in an internship, usually during the summer of their sophomore or junior year, and they just give them a shot. My internship was at Merrill Lynch. That was my first time in New York and I just loved it and I loved finance and it was great. I got the job, so, after graduating college, I went to Wall Street. Again, really no roadmap, I just knew I had gotten an opportunity and I made the most of it.
Fast forward, from Merrill Lynch, I worked at other banks, including Bank of America and then Goldman Sachs. Every time it was a vertical jump. I got higher titles, and more responsibility and all of that was great, but also I had opportunities to volunteer and raise my hand on what type of industries I wanted to cover. I always kept coming back to financial services and fintech.
I fell in love with technology when I was at Goldman because I was in the Goldman Sachs office in San Francisco. After being in New York for so long, I came back and I saw that the Valley had completely transformed and I wasn't part of it. I'm a California boy but I missed out on this because I had no direction and I was just sort of going with the flow and where the opportunities were. Again, there were really no mentors to guide me on the next big thing coming. Now I'm building a strong, professional network. I can meet the CEOs of major Silicon Valley companies. I can meet the major investors in the Valley and start asking questions about the trends, what they are seeing. Fintech was now fintech; it wasn't just innovation in financial services, there was an actual segment. I got to work with companies like Braintree, Lending Club, and Green Dot, these pioneers of the first wave public of fintech companies that went public or got acquired, because many of them worked with Goldman. Through that process, I met several members of the PayPal team, and I finally decided, "Here's my opportunity. I've had a good time in finance, but that's not where heart is."
I joined PayPal for a couple of years and worked on the global strategy side. I worked on some amazing opportunities in peer to peer payments, in remittances, all these financial services that I had grown up with in my household. PayPal acquired Xoom so I was part of that. That was very interesting.
Then the Stanford Latino Entrepreneurship Initiative launched, and I knew it was my calling. It was the perfect opportunity for me to take my investment experience and marry it with my passion for technology and my passion for fintech. That's where Pablo and I got together; he's also a Goldman Sach alum who had seen the light and who had left and gotten into tech a lot earlier than I did. We convened at the program launch, and instantly we knew we were going to do something together and it was going to be around this market opportunity. That's where LEAP was born.
VN: What do you like best about being a VC? What makes you excited?
RL: With any investment, you need to have an edge because you know the market better than the other investors or because you have a more predictable model. That's all really important. I think in VC you still need to have an edge but I think it's a very different type. You need to truly understand the trends and the themes that investors are looking for because it's not about investing where everyone's investing. It's understanding what those trends are telling you. For example, when I was at Goldman a big trend was the cloud. At the initial stage of the cloud it was, "Oh, this is crazy, it'll never happen. There are security concerns, etc." Now every company needs to have a cloud strategy. They absolutely need one and now it's hard to even think that it was a discussion. It was a trend that was occurring and all these startups were coming around, finding their piece in how they were going to ride that wave. Same thing with fintech and bitcoin, which is still in the area of, "Is this really going to work?" 10 years from now we'll all be talking about, "How can you not have a blockchain strategy?"
I think that's fascinating. It's figuring out those trends, figuring out what's noise and what's truly capturing a change in consumer behavior or in enterprise behavior, and then sorting out all the companies that are trying to ride that wave. Who truly has a sustainable business that's going leverage this trend? I think that's fascinating and it's something I wouldn't have seen at my old job in finance.
VN: What is the size of your current fund?
RL: Our target is $15 million. We're $10 million of the way there, and we're still raising that last piece.
VN: What is the investment range?
RL: Our initial check is in the neighborhood of $250,000 to $500,000 and our plan is to stick with our best companies until we invest around $2 million. We would love to have at least five investments at that range, so it will be concentrated portfolio and, because of that, after this first wave of investments, we'll probably lean more towards seed to make sure that we've built a good sized portfolio.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
RL: There's not a maximum range target, but we do have a minimum. We at least want to be around 5 percent. It varies on the valuations, the deal, who else is investing, etc, but that's the minimum of where we want to be.
VN: What percentage of your fund is set aside for follow-on capital?
RL: It's going to around 25 to 30 percent of the fund so that we can take those three to five companies that we want to continue to grow with.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
RL: Our mandate is to primarily focus on seed and Series A.
We are opportunistic in certain investments. For example Wizeline is a Series A+, a bridge to their Series B. So we were opportunistic and strategic there, but we believe that, because of the size of the fund, and because of where we see the most activity in our pipeline, we are likely going to be very focused on seed over time.
VN: In a typical year how many startups do you invest in?
RL: We actually started guns blazing. It was four investments in two to two and a half months. That's not the pace we're going to keep. It's very important for build our portfolio because of who the founders are; they're going to serve as important mentors to our companies. We're likely going to now be at a pace of one investment every two months or so. That's going to be the pace going forward.
VN: Is there anything else you think I should know about you or the firm?
RL: There's one piece that's important to everything LEAP does. It's not just the investments but it's also the investors. The primary investors right now in our fund are members of family offices/family enterprises in Mexico. Many times, in Latin America and emerging markets, these family enterprises and family offices are one and the same. The largest companies are still family owned. That's the case for our investors.
There are a couple of things that I want to highlight that are very important. One is that the investors in our fund are typically 25 to about 40 years old, so they’re the millennial plus generation of these Mexican family offices. It's very critical because they are really going to be the ones taking over. In fact, some of them are already at the helm of their family offices, but the majority will take over in the next few years or at least carve out their own VC fund in the next few years. This is important because a lot of those family offices in Mexico, like in Latin America, are not at the point where they have a specific portfolio allocation to venture capital, let alone early stage venture capital. They're very big on real estate, they're getting there on private equity, but really not there on venture capital. So the amount of capital that that's going to unleash in the next few years, we're talking tens of billions. These are very, very large family offices and institutions. We've got them not only interested in learning about venture capital, but we have them fully bought into the vision of cross border and the gap for Latino entrepreneurs. That's going to be very, very key for growth, not only of our fund, but I believe the growth of a lot of other funds because you'll have family offices that will invest in multiple funds. Back to what the trigger points are, how do you move the needle, I think the make up of our limited partners is a big piece of our strategy.
One last thing about them, because they're family enterprises, they are certainly interested from an investment perspective, but the second piece is that every enterprise across Mexico and Latin America, just like in the U.S., sees disruption and see technology and understands the need to be active. They also want us to serve as the mechanism to source technology that makes sense for their family enterprises. I think those situations create a win-win-win, where if we invest in the technology that makes sense for one of our family enterprises, and get them an anchor client in Mexico or somewhere else in Latin America, we bring that startup a huge client and we make them a global company. Our investment is that much more worth it, so that will be critical to our strategy as well.
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