By Boris Hirmas Said
Growth in Latin America’s private equity and venture
capital volume continued to drive entrepreneurial developments across the
region in 2012. This phenomenon should expand in the coming years due to a
number of factors shared across most Latin American nations. Primary among them
are a fast-growing middle-class, more stable political and regulatory climates,
and increasing interest and comfort levels about investing in the region by
funders located outside it.
Compared to 2011, the Latin American Private Equity & Venture Capital Association (LAVCA) reported in its recently published 2013 Scorecard that 2012’s private equity and venture capital funding grew by 21 percent. In fact, the region’s $7.9 billion total investment in startups, early stage and expanding companies was the highest in five years.[1]
According to LAVCA, 2012’s private equity and venture investments in Latin America numbered 237, which was 47 percent higher than 2011. So, while the number of deals grew faster than the total amount of funding, that means the average amount of each deal was smaller.[2]
**Brazil, the magnet.**Brazil won the lion’s share of both deals and funds, accounting for 147 deals and $5.7 billion of 2012’s total. Chile was second with 10 percent in the number of deals closed, followed by Argentina with six percent of the deals.[3]
Brazil’s rapidly growing middle class is a magnet for new businesses and investment capital alike. Fifty-two percent of Brazil’s population of nearly 200 million is considered middle class, with a third of those people joining its ranks in just the past 10 years.[4]
LAVCA also credits Brazil’s strengthened regulatory framework for fund formation and the quality of its accounting standards. It notes, however, that the country is still challenged by perceptions of corruption and an inefficient judicial system that makes enforcing property rights time-consuming and expensive.
**Sector trends.**The number of IT deals in Latin America has grown faster than any other sector in the last five years, driven by early stage investments. In 2008, for example, the region saw just 18 IT deals, while in 2012, the number of IT deals grew to 104.[5]
At the same time, the consumer/retail sector was most popular in terms of invested capital, garnering 27 percent of the total. This was followed by Financial Services with eight percent, while IT and Manufacturing tied with seven percent of 2012’s total private equity and venture funding.[6]
**Hello, Silicon Valley.**It took time, but Latin America is now clearly on the minds of Silicon Valley’s funding community. Sequoia Capital, Accel Partners and General Catalyst Partners are among those that now have Latin American companies in their portfolios. Showing even greater commitment to the region, the likes of Intel Capital, Bessemer Venture Partners and General Atlantic not only have Latin American companies in their portfolios, but also have opened local offices.
**Fast-evolving environment.**In its 2013 Scorecard, LAVCA ranked 12 nations in the region on a range of criteria that define a favorable investment climate, including political, legal, regulatory, tax and other risk measures. Chile, Brazil and Mexico respectively scored highest, while Argentina and El Salvador respectively scored lowest.[7]
In April, LAVCA sponsored a forum to discuss its findings and get the views of several venture capitalists with long-standing interests in the region, myself included. All agreed that the trends for private equity and venture investments in the region are positive and will help drive the growth of Latin America’s entrepreneurs.
As noted, investors from outside the region, especially Silicon Valley, have gotten more comfortable with funding Latin American companies.
An important distinction must be made between investors who are financial buyers and those who are strategic buyers. The former are more characteristic of the wealthy families who expected to acquire a majority stake in an early stage enterprise, while providing little guidance and help in its destiny and success. For strategic investors it was just the opposite: They seek a smaller, more reasonable stake for their risk and provide the value-add of guidance and assistance to vastly improve the company’s chances for success.
**Fresh ideas.**In my view, increasing numbers of Latin America’s entrepreneurs are spawning fresh ideas that have tremendous potential outside the region—a very positive sign of the region’s entrepreneurial maturity. One example is Open English, a fast-growing online provider of instruction in the English language for Spanish and Portuguese speakers in the Americas. Its model can be extended to other languages and geographies, and this fact was recently recognized by the company securing tens of millions of dollars in additional funding.
Open English illustrates the kind of new initiatives that are emerging from Latin America’s entrepreneurs. These are not only adapting successful business models from elsewhere for the region, nor are they ideas to address North America’s fast-growing Hispanic market.
Social media is helping to stoke this entrepreneurial transformation in Latin America. The level of information-sharing across borders and oceans is astonishing, accelerating the pace of entrepreneurs learning what’s required to raise capital, to deploy it effectively and to grow their businesses.
Latin America’s entrepreneurial climate is developing fast, with less and less regard for borders at the same time political and regulatory environments are stabilized. As more international private equity and venture capital find success in the region, a positive feedback loop or so-called virtuous circle will bring even more funding. The future for Latin America’s entrepreneurs is bright indeed.
Boris Hirmas Said is Entrepreneur-in-Residence at Miami Dade College. He is also the Chairman of Tres Mares S.A. (Santiago, Chile) an innovation driven holding company with investments in the Americas.
[1] LAVCA 2013 Scorecard-The Private Equity and Venture Capital Environment in Latin America; Latin American Private Equity & Venture Capital Association; New York, N.Y. 2013, page 1.
[2] IBID, page 2.
[3] Ambrose, Cate. Update on Venture Capital in Latin America; forum presentation; Miami, Fla. 2013, page 6.
[4] Ferreira, Francisco H.G. et al. Economic Mobility and the Rise of the Latin American Middle Class; The World Bank; Washington, D.C.; 2013.
[5] Ambrose, Cate. Update on Venture Capital in Latin America; forum presentation; Miami, Fla. 2013, page 5.
[6] IBID, page 9.
[7] LAVCA 2013 Scorecard-The Private Equity and Venture Capital Environment in Latin America; Latin American Private Equity & Venture Capital Association; New York, N.Y. 2013, page 5.