Venture Capital: Growing Force in Latin America

Venture capital has become a growing force in Latin America’s economic development.

BY BORIS HIRMAS SAID 

Venture capital has begun playing an increasing role in fueling the Latin American’s region entrepreneurial endeavors. In its 2011 Scorecard, the Latin American Venture Capital Association (LAVCA) estimated that funding for VC and private equity (PE) deals more than doubled in 2010 from 2009 to a record $8.1 billion. Of the 12 nations in the region that LAVCA evaluated, Chile, Brazil and Mexico respectively scored highest on a range of criteria that define a favorable investment climate, including political, legal, regulatory, tax and other risk measures.

Latin America, including Central America, Mexico and the Caribbean, is a diverse, dynamic market of nearly 600 million people, almost twice the U.S. and Canadian populations.  While the region’s $5.3 trillion 2010 GDP is just a third of those countries’ combined GDP[4], prospects for the region’s economic growth are bright, due to booming commodity exports[5] and a rising middle class. In fact, a United Nations study revealed that the number of Latin Americans considered “poor” declined from 44 percent of the population in 2002 to 32 percent in 2010. In effect, the region’s market for middle-class consumption grew by 70 million people in just eight years.

New frontier.  For all that progress, Latin American VC investing remains a frontier compared to more mature VC funding platforms such as  the U.S., Europe, Israel and other G8 economies. That’s partly due to the need for continued growth in support of entrepreneurship by governments, financial institutions and regulatory authorities. More fundamentally, however, Latin America’s traditionally risk-adverse business culture must change its mindset to accept failure not as shameful defeat but as the price of eventual success – same as failure is viewed in highly innovative economies, the U.S. especially.

Fortunately for the region, signs of entrepreneurship are growing. In a keynote at the Americas Venture Capital Conference in Miami last November, serial entrepreneur Wences Casares said that today, when he speaks before university-level business classes in Latin America, the number of students interested in starting their own companies is the highest he’s ever seen.

“Fifteen years ago,” he said, “everyone preferred working for large multinational companies or their governments.” As founder of two successful online businesses in Latin America, he also noted that technology allows startups to flourish with much less capital than more traditional bricks-and-mortar businesses. What’s more, Internet-based startups can transcend national boundaries in Latin America, effectively creating pan-regional markets where none existed before. LAVCA has noted that the number of Latin America technology deals funded in 1H 2011 rose 133 percent versus the year prior to nearly a third of all funded deals, far ahead of any other sector.

LATIN AMERICAN CAPITAL’S CAPITAL

Miami serves Latin America as a wellspring of Angel and VC funding, thanks to a large expatriate community from the region that understands its history, traditions, culture, challenges and, above all, its potential. In general, the Angel and VC community in Miami has much more of a pan-regional view of Latin America’s markets and cross-border business opportunities than in-country investors, who are often from among a country’s wealthiest families.

Given this broader perspective, Miami’s Angel and VC community can provide Latin American startups with a more nurturing entrepreneurial environment and encouragement that’s free of any national parochialisms that could hinder a new enterprise starting, say, a new venture starting in Chile but aiming to quickly expand to other Latin American countries may receive pushback from their local Chilean investors.

CROSSROADS TO SILICON VALLEY

Another important role of the Miami Angel and VC community is as an intermediary with VCs in Silicon Valley and elsewhere. Not only can Miami’s Angel and VCs provide Latin American entrepreneurs with much needed introductions to Silicon Valley and other  U.S. funding sources they can also provide those US VCs with introductions to Latin American entrepreneurs – along with guidance about navigating the region’s challenging business environment.

That guidance can be vital to winning support from U.S. VCs. Among Latin American entrepreneurs who’ve traveled to Silicon Valley to pitch VCs there, a general lack of knowledge about the region has been reported. Certainly part of that is due to the often overwhelming volume of deal flow from within the Silicon Valley and elsewhere where political, legal and regulatory risks are known and stable. After all, venture investing inherently involves high risks, so why add unknowns to the mix say some Valley VCs? 

The answer to that question is the fact that any Latin American entrepreneur making it past the seed stage has already met major challenges posed by their still-maturing Latin American business environment and that entrepreneur has a much greater chances of success. As that environment continues to mature, with risks better known and stabilized, the region itself will become ever more attractive to VC investments.  

Boris Hirmas Said is Entrepreneur-in-Residence at Florida International University’s, College of Business Administration’s Eugenio Pino and Family Global Entrepreneurship Center. Mr. Hirmas is also the Chairman of Tres Mares S.A. (Santiago, Chile) an innovation driven holding company with investments in the Americas.

This column is part of Entrepreneurial Perspectives from the FIU Pino Center. All perspectives are available at http://www.entrepreneurship.fiu.edu