Publish in Perspectives - Tuesday, December 3, 2013
In Mexico alone, there were more announced deals in the first nine months of the year than in all of 2011 and 2012 combined. (Photo: Monica Xcaret)
Venture capital in Latin America is expected to see another banner year in 2014.
BY LATIN AMERICA ADVISOR
The U.S. Federal Reserve's plans to taper off a program of quantitative easing have raised speculation that an end to a period of "easy money" could suck the air out of Latin America's much-hyped venture capital market, according to media reports. What is the outlook for venture capital in Latin America in 2014? How have startup businesses fared in the region in the "good years" as compared to other parts of the world? What sorts of policies and programs would put Latin American countries ahead of competitors in terms of startups, entrepreneurship and venture capital?
Juan Pablo Cappello, principal shareholder at Greenberg Traurig LLP: The venture ecosystem in Latin America isn't driven by easy money from the United States. Actually, very few Latin American startups get their money from U.S. venture capital funds or U.S.-based angel investors. In Latin America, there are more than 100 million people who have accessed the Internet for the first time in the past three years via their 'dumb' Internet-enabled cell phones. And there are another 100 million-plus consumers poised to get online in the next few years. Those 'late' adopters are driving the venture capital market in Latin America. Latin America has been a huge, high-growth market for startups due to the huge growth in connected consumers. In 2000, there were 18 million Internet users in Latin America--about 20 percent of the number in the United States. Today, Latin America has as many Internet users as the United States and Canada combined. By next year, Latin American will have significantly more connected consumers than the United States and Canada. The more governments try to help by trying to 'pick the winners,' the more they distort the local market. Any government policies need to be neutral and focused on education, developing talent and simplifying doing business. It can still take months to get a company formed and up and running in Latin America. In the United States, that process can take 15 minutes.
Alex Rossi, managing partner of Latin Idea Ventures in Mexico City: Venture capital in Latin America had a record year in 2013. In Mexico alone, there were more announced deals in the first nine months of the year than in all of 2011 and 2012 combined. I see no reason why 2014 won't be another banner year given the number of new funds and the ever-burgeoning interest in the asset class. Entrepreneurs in the region are more sophisticated than ever and recognize the value of 'smart money' partners. Most start-ups in the region have gained good traction in these 'good years' but invariably there will be fall-out and not all will survive; that is the nature of this industry in Latin America and the rest of the world. Mexico in particular has a very active public program to support start-ups, entrepreneurship and venture capital led by the National Institute of the Entrepreneur (INADEM). Fortifying INADEM's reach and resources could only improve the landscape further and serves as a good model for other countries as well.
Francisco Alvarez-Demalde, founder and partner of Riverwood Capital Partners in New York: The environment of easy money and over-excitement about early-stage and venture capital, particularly in Brazil, has already changed with this year's significant correction in capital flows, foreign exchange and macroeconomic growth expectations. The change in general investor sentiment and the failures of some venture-backed companies have affected the industry, with entrepreneurs having a harder time raising capital. We expect 2014 to be similar. The bad news is that a more cautious and disciplined investor context would significantly affect future funding, particularly for ventures with aggressive business plans that required several rounds of financing. The good news is that excitement between 2009 and 2012 led to the creation of dozens of interesting companies, as well as the development of an incipient venture capital industry, with firms that will continue to operate for at least the next five years. Latin America is now in a very important phase, where the success of several venture-backed companies will have a significant impact on the industry's future. If most companies fail, it might lead to period of capital scarcity and lack of entrepreneurship. In terms of policies, government support is key. Some countries have launched successful early-stage programs supporting seed funding as well as incubators. However, we don't see a consistent plan to take these early-stage ventures to capital markets. The region needs some examples of successful companies that can transition from early-stage to medium or large companies. Riverwood Capital focuses on these growth companies with sustainable business models and a relevant size. However, governments could take a more active approach to help these types of companies. Some policy examples are: 1.) simplified tax and labor regulations that make it easier for small- to medium-size companies to scale and operate; 2.) focus on developing more liquid and deep capital markets that would allow medium-sized companies to consider an IPO as an exit; 3.) specific initiatives to facilitate financing for small- to medium-size companies that have a high-growth profile; and 4.) actual support for venture capital and growth private funds, which help entrepreneurs create more professional and sustainable enterprises.