Brainstorm Ventures is best known for such blockbuster bets as Zappos and OpenTable, which snagged lucrative exits more than a decade ago. More recently, it has been helping some of its US-based portfolio companies secure business development and back-office support opportunities across the US-Mexico border.
The firm’s partners are spending more time lately finding “certain partnership opportunities in Mexico that [founders] hadn’t previously thought about,” managing partner Ariel Jaduszliwer told Venture Capital Journal. “Or in the back office, we could grow [a start-up’s] engineering team in Mexico for a fraction of the cost [because] the talent there’s a lot stronger than we expected.”
Brainstorm is currently raising capital for its third fund, per a regulatory filing. Fund III has surpassed its $15 million target, with a hard cap of $25 million, and is expected to have its final close in the first half of 2023. The firm’s first two funds were considerably smaller, with Fund II closing in 2018.
The San Francisco-based firm focuses on pre-seed and seed-stage start-ups. Roughly 70 percent of its portfolio consists of US companies with no connection to Mexico or Latin America but with an eye toward global markets. It also invests in Mexican start-ups that are tackling the Mexican market, the broader Latin American market or global opportunities.
Brainstorm introduced one of its US start-ups to one of Mexico’s largest telecoms, and connected others with Fibras, a Mexican Real Estate Investment Trust, as well as to Mexican homebuilders and master restaurant franchisees.
“It’s particularly appealing in some industries where the market is more consolidated in Mexico, so getting in front of the right groups can be very valuable,” Jaduszliwer wrote in an email.
Brainstorm was the first investor in KIO Networks, Mexico’s largest data center operator and leading digital infrastructure service provider, which went on to become the country’s first unicorn. KIO Networks also operates data centers in Panama, Guatemala, Dominican Republic and Spain.
“We actually transferred the technology that KIO initially used from a company in the US that was in our network to Mexico, helped form the team, put in the first check [in 1999], and then KIO became a billion-dollar company,” Jaduszliwer said. KIO was acquired by I Squared Capital, an infrastructure-focused private equity firm, for an undisclosed amount in December 2021. Before the sale, Bloomberg reported that the sellers were seeking around $1 billion.
Fund III’s focus
Brainstorm’s newest fund is expected to write checks of $250,000 to $300,000 per investment, compared with $100,000 to $200,000 for Fund II. The firm plans to invest in about 24 companies out of Fund III over the next three to four years.
Among the five companies that Fund III has invested in so far is Webacy, whose platform manages users’ crypto portfolios after they die. “[For] a lot of people who have custodian crypto accounts, it’s pretty complex,” said Jaduszliwer. “So if something were to happen to that person, it would be very difficult for their children, spouse, etcetera to gain access to their account. It’s not just crypto but managing how will your social media presence be managed after you pass away.”
Another Fund III bet is Tangibly, which enables enterprise customers to protect and better manage their trade secrets. That includes business processes and product formulas that owners choose not to file patents for because they want to avoid public disclosures.
“Think about a large swath of larger companies in the US. A lot of their asset value is in their trade secrets,” Jaduszliwer noted. “In the event that a case goes to court, it’s a systematic way to prove you documented that those were in fact trade secrets.” That kind of information is most at risk when an employee leaves a firm to work for a competitor, he added.
A Kauffman Fellow and mentor, Jaduszliwer is also vice president of Pacific Community Management (PCM), a growth equity impact investment firm that invests in consumer-facing companies that create quality jobs and wealth in lower-income communities. It was at PCM that Jaduszliwer met Brainstorm co-founder and managing partner Eduardo Rallo, who invited him to join Brainstorm in 2013.
SPVs for follow-ons
While Brainstorm isn’t considering shifting to a multi-stage strategy, it creates special purpose vehicles when it has strong conviction in a certain company whose capital needs are beyond what its funds are capable of investing in.
Its most recent follow-on investment was in Turing, an AI-powered platform called Talent Cloud that Brainstorm’s second fund originally backed. The platform allows Turing’s customers, which are increasingly Fortune 100-type companies and high-growth start-ups, to instantaneously access individual or entire teams of software engineers to work remotely for them, said Jaduszliwer. The work is done on Turing’s platform, so Turing is able to monitor the work.