Market makers

All financial markets need market makers in order to remove frictions and facilitate transactions. While in the public markets, market makers buy and sell securities, in longer-term private markets, they can help set prices and build co-investment syndicates. This function allow capital that is sitting on the side lines to jump in. Nowhere is this more true than in nascent, immature markets.

In Peru, we are witnessing the positive evolution of the local venture capital industry. What was once a few one-off angel or family office investments in startups has turned into a vibrant, fully functioning startup ecosystem with multiple local funds investing actively.

A key market-making role has been played by three funds in particular: Winnipeg Startup Fund, Inca Ventures, and AVP Seed Fund I, where I work. Here are some of the things that we have done:

Invested early: These funds have been willing to be the first institutional investors in Peruvian startups. For example, Winnipeg was the first institutional investor Kurios and Prendea, which later catapulted to Y-Combinator. AVP Seed Fund I was the first investor in Emptor, which later raised funding from DILA capital.

Price-makers: Venture capital funds can act as market makers by proactively setting the terms of investment rounds. AVP proactively proposed terms for its investments in Culqi and Somos Moto. Although the terms weren’t what the founders initially proposed, they were accepted and the startups raised successful seed rounds. Another example is Winnipeg’s role with Peru AgTech startup SpaceAG. Guillermo De Vivanco, founder of SpaceAG, has talked about how Winnipeg helped him structure his investment rounds.

“José [Garcia] ha sido un asesor clave para nuestro crecimiento, apoyándonos a definir la estrategia del negocio y a estructurar las rondas de inversión.”

Guillermo De Vivanco, SpaceAG

Co-invest alongside each other on the same terms: Importantly, in the rounds led by market-making funds, other investors enter the rounds under the same economic terms. This helps reduce friction and allow investors to enter with aligned incentives as true co-investors, not just investors who invest in the same startup. For example, AVP was fortunate to invest in Prestamype’s seed round at the same terms as Inca Ventures. Subsequently, a few other value-adding angel investors came on, making a solid $800k round.

These three strategies have helped Inca, Winnipeg and AVP deploy capital in great startups in Peru and generate momentum for seed rounds. Each of these funds have a size of less than $3 million, but by acting as market-makers they have had a larger systematic ecosystem impact of bringing in more capital to startups in Peru. It’s not straight-forward how to measure this impact, but they are certainly making things (a market!) happen.