LatAm Startup Funding: What Must Entrepreneurs Do to Attract Capital?

According to a recent op-ed by former Costa Rican President Oscar Arias, entrepreneurs get no support in Latin America, and the entrepreneurial spirit in general is lacking in …

According to a recent op-ed by former Costa Rican President Oscar Arias, entrepreneurs get no support in Latin America, and the entrepreneurial spirit in general is lacking in the region. Those are harsh words, so Nearshore Americas decided to explore the main determinant of success for startup ventures – the availability of funding. We spoke with Francisco Alvarez-Demalde, Founding Partner at Riverwood Capital, the financial backer to successful ventures like Globant and Allus Global.

Read his comments on the startup process in Latin America, what capital firms look for in a new company, and whether the funding is actually available for entrepreneurs in the Nearshore.

The view that Nearshore Americas has heard is that entrepreneurs get little to no financial support in Latin America. Would you say that’s true, and is it changing?

Alvarez-Demalde: I don’t think that’s entirely true. If we compare Latin America with Silicon Valley, then yes, there’s definitely less funding availability. But the way I look at it is by breaking it into three levels – startups, venture capital funding, and growth equity.

For start-ups in Latin America, I’d say there is actually a lot of entrepreneurship and angel investing happening in the region, even though the perception is different and the statistics don’t always show it. I’ve seen many new companies created in the last few years in markets like Brazil and Argentina. Venture capital on the other hand, I think is a very undeveloped industry in Latin America, as compared to the US. But now we’re starting to see several global players coming in and funding initiatives on an industry by industry basis.

On the growth equity side, there’s a lot of private equity money available now in Latin America versus five years ago, and the access to capital through fundraising has definitely been strong. It’s still small compared to other regions, but in terms of growth, it’s one of the highest in the world. That being said, most of the funds are generally country-focused, and not industry-focused funds. So when I look at the IT industry for example, I don’t see many funding players that have the same specific tech focus that we have at Riverwood Capital.

What are the main characteristics you look for when deciding whether or not to fund a certain startup venture? What characteristics must the company have?

Alvarez-Demalde: Especially in the LatAm region, you have to have a solid business plan, and there are two key factors in that plan. The first is a strong and dynamic management team. In startup or young companies, the management team is even more important than in larger established companies. Their decisions and leadership alone determine whether the company will take off or not. The second factor is to have a relevant market opportunity. I’ve seen lots of good ideas but often I don’t see the analysis or strategy required to really address a large market. It’s crucial that you have that large market opportunity identified and written into the business plan.

Once you have these factors, it’s just a matter of creating a list of potential capital sources and then making an approach.

Is there a specific kind of firm that you or other funding companies like yourself would be more likely to back?

Alvarez-Demalde: Riverwood Capital does not do too much venture capital. Instead we look more for growth capital, investing in slightly more established companies. We limit our investments to the technology industry, so usually the first thing we look for is whether a given company has a tech component. The reason is because technology is driven by macroeconomic growth and economic and political changes, and this is especially true for Latin America in recent years. What we’re seeing in the Nearshore is a catch-up of IT spending and very rapid growth of the markets there, which offers us many opportunities.

Within technology companies, we categorize them into different sub-sectors. We look at their strategy, their competitive positioning, the potential market growth and the current market size, and if we see a strong player with the potential to dominate that sub-market, we get really excited.

Your firm backs successful ventures like Globant and Allus Global. What specifically did they have that attracted you to them?

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Alvarez-Demalde: Well in the case of Allus, we saw a great opportunity to consolidate the BPO sector in Latin America. About five years ago, the only companies that had a regional footprint across the Nearshore region were the multinational players. We wanted to create a regional BPO player in Latin America that could provide a strong local alternative to those multinational players, and Allus had the required expertise and strategy to make that happen.

In the case of Globant, we really backed their international focus and amazing management team. The company started from scratch serving the US and European markets, with no local customers – a very global vision that we hadn’t seen in any other Latin American ITO companies. The company was created to serve as an offshore provider and create an alternative to India.

Ex-Costa Rica President Oscar Arias recently, who told us that the entrepreneurial spirit in Latin America is just not there. Would you agree with that? Is that what you’re seeing?

Alvarez-Demalde: I don’t have any data to back this up, but my perception from my exposure in the region is that it has a lot to do with the culture of the country. Some countries have a more conservative approach or less dynamic economy, but when I look at countries like Brazil or Argentina, I see a lot of entrepreneurship. There are hundreds of business being created every year, and some of them are successful not just at home but also internationally. Of course the more the better, and Latin America definitely must improve in this department. But no, I wouldn’t say that there is no entrepreneurial spirit in the region. I actually see a lot of entrepreneurs, and I think Brazil and Argentina in particular are great examples of that.

What are the main challenges for startup companies in Latin America?

Alvarez-Demalde: I would say the main issue is the really the legal framework and tax structure in many Nearshore countries. Especially in Brazil, these requirements are extremely burdensome on entrepreneurs and new companies, causing a lot of bureaucracy and extra work that make the initial startup cost very high. On the other hand there are much better LatAm countries like Chile that have completely modernized their tax and legal system to make it easier for firms.

 

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