November 4, 2012
Interviewed by: David Snow
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Latin American Venture Capital

The Latin American ecosystem linking entrepreneurs and venture capital firms is growing, but it presents challenges for those seeking to create and back innovative businesses, according to experts in this panel discussion: Susana Garcia-Robles of the Multilateral Investment Fund (a division of IADB); Ariel Muslera of CAP Ventures; and Philip Bass of EY. The conversation is moderated by Scott Voss of HarbourVest Partners. This program is sponsored by EY.

The Latin American ecosystem linking entrepreneurs and venture capital firms is growing, but it presents challenges for those seeking to create and back innovative businesses, according to experts in this panel discussion: Susana Garcia-Robles of the Multilateral Investment Fund (a division of IADB); Ariel Muslera of CAP Ventures; and Philip Bass of EY. The conversation is moderated by Scott Voss of HarbourVest Partners. This program is sponsored by EY.

Scott Voss, HarbourVest Partners: Welcome and thanks for joining Privcap. Today I’d like to introduce our panelists. To my left I have Susana Garcia-Robles of the Multilateral Investment Fund. Next to her is Ariel Muslera from CAP Ventures in Argentina. And next to him, Philip Bass who’s with EY.

And the topic of today’s discussion is how to build a thriving startup environment in Latin America. And I thought before we jump into some questions for our panelists, I’d read a quote from Joseph Schumpeter who is best known for commenting on the nexus between entrepreneurship and innovation.

And what Schumpeter said is entrepreneurs disrupt the market equilibrium by introducing new product market combinations into a market, teaching customers to want new things, and driving out less productive firms as their innovations advance productivity. The result is higher productivity and economic growth.

So on that, Susanna, you’re probably one of the most active investors in venture capital in Latin America. And when you look into your portfolio, what innovative themes do you see playing out in the portfolio today?

Susana Garcia-Robles, Multilateral Investment Fund: That’s a great question. Because I know, historically, Latin America has been seen as a region with many problems. And maybe innovation was not the seal of Latin America.

And yet, that situation is changing and I would say changing drastically. There is a new way to look at the innovation. It’s not, oh, Latin America has not produced the next Google. It’s how Latin Americans are able to find and adapt something that has been developed in another market but for their markets. And they are for proving that that company is not just a local company, but going global.

So what I see in our portfolio for over 50 funds innovation is a lot of technology applied to different sectors. The typically innovated products will be on the software side, mobile payment. But the resource of technology applied, for example, to other business– taking a lot of latest technologies and being able to make a [INAUDIBLE]. Productive lands for the specific crops that are in demand in China, in the US, in Europe. That is an innovation that has been really noticed by investors overseas.

But then you also have innovation looking at the growing demand of the middle class that is moving into consuming more. They obviously have leap frogged. They don’t need fixed lines of telephone. They just call to the latest smartphone.

And all that creates, well, what are the products that we are going to offer for this younger generation. So we have seen a lot on the area of software development, let alone a lot of online games. I would say Latin America is showing to have a very interesting crop of innovators– entrepreneurs that have to be innovative also because they don’t have the perfect ecosystem. They are challenged every day. And they are not only overcoming those obstacles, but in the meantime creating companies with a global outlook.

Voss: I want to pause on the entrepreneur for a minute. What are societal perceptions of entrepreneurship in Latin America? It’s very much embraced in some parts of the world. And actually frowned on in other parts of the world. Ariel, will you take that question? 

Ariel Muslera, CAP Ventures: Yeah. I think that changed dramatically in the last few years. I think that right now because of the ability of local Latin American entrepreneurs to look up to Silicon Valley, to just take a plane and spend some time with entrepreneurs here. That made the whole ecosystem change. And entrepreneurs normally now are looked up in most of the countries.

I mean, I know that there are some societies that are more conservative than others. But from my experience looking at Argentina, having lived in Brazil, being very close to Uruguay– even Chile, which a few years ago was considered to be a relatively formal society, I think now we can see a crop of entrepreneurs that are very happy to be entrepreneurs.

And the society and friends around them are also happy for them. And they want to follow their path. So I think that that changed a lot.

Voss: And Phil, with your involvement in venture capital and private equity, where do you see that entrepreneurs and management teams need the most help from an organization like yours?

Philip Bass, EY: Well, we’ve done a lot of research into the topic. And I think when you talk about venture capital and private equity, surely they’re able to fill that capital gap– the need for financing. But I think venture capital and private equity just bring a lot more to the table.

It’s really around helping the entrepreneur execute on their business plan and really ultimately, whether it be an IPO or driving an exit– an incremental value down the road– what venture capital and private equity bring is really their network– so it’s their expanded network, it’s management talent.

Many times, we find that they may have a core management team that’s good. But as they continue to grow, they need additional expertise. So it’s really leveraging the network, leveraging the management talent of the venture capital and PE firms. And what they can bring to the table really adds quite a bit. Financing– we touched on.

The other thing, I think, is strategy and operational expertise. Really it’s many of the venture capital firms and private equities have done it before. So they bring not only strategy, but really operational expertise to the table really to help execute with that plan– again, teaming with that entrepreneur on that plan.

So I think there’s quite a bit. You know, everybody thinks it’s just about capital. But it’s quite really around operational expertise that I think really makes the difference.

Robles: If I may pitch in there, I think also that entrepreneurs now, as Ariel said, are more valued. But still, there are two challenges. First of all, none too many entrepreneurs are entrepreneurs. They are beginning to be found.

And out of those, none too many are comfortable saying I failed one– two times. And then the third time was charm time, and I got it right. Still that is something that culturally we need to work on in Latin America. You still want to introduce yourself always as a winner.

Voss: It’s interesting because when you think about the equilibrium between the different components of a thriving startup environment, it’s oftentimes the availability of capital that will either push the equilibrium one way or the other. And it’s my sense that there still is a scarcity of venture capital in Latin America. When you work with entrepreneurs and portfolio companies, how do you strategize the fundraising? How do you manage the financing from startup to exit with a lack of capital in the region?

Muslera: When we look at a company, and we’re ready to invest, one of the first questions we ask is who will be the next funder of this company in a year or two? And we have a lot of discussions with entrepreneurs to understand what’s the roadmap and how can we help. And many times we pass on deals because we just feel that we’re not the right partners to help them get to that point.

It’s not about the company. It’s not about the team. It’s just about a good match between the venture capital firm that is investing right now and the next step that the companies have to make.

Voss: Maybe to conclude, I think the ultimate goal of a venture capital investor is to achieve a liquidity event and a very positive outcome. And it’s probably the goal of the entrepreneur as well. What are the challenges of the capital markets in the liquidity options in Latin America? And how do you think about managing a company to a profitable exit? Phil, do you want to start off with that?

Bass: Well, I think it’s just really picking up on that last point. It’s really identifying really at the time of investment what is the likely options for the exit– so for the next investor and ultimately, what’s available and what makes the most sense, given the sector they’re in– given the size of the company.

The IPO markets in Mexico and Brazil are improving at times, but at the same time impacted by the global markets. The rest of Latin America is a little bit more challenged from an IPO standpoint. But yet at the same time, there have been IPO exits. Strategics are very interested and continue to be interested in Latin America. And we think that it’ll continue over time.

One of the trends that we do expect to see is increased secondary– so sales from VC and the smaller PE firms– the local firms in the market, too– and where the global and some of the larger private equity firms– really, the opportunity to take advantage of the market– that next step, really, whether it be to expand locally, expand regionally, or make it a global enterprise.

So we do think there’s opportunities. I think all three play a role. But at the same time, the exit environment still is a bit challenging.

Voss: And maybe to complete that thought, Ariel and Susana, can you share with us your favorite venture deals in Latin America that have gone full cycle and generated profits for both the entrepreneur and their investors?

Robles: Sure. I can tell you of a deal last year in Mexico. It was a typical software development deal. And it was bought by Motorola in record time, providing over 2,000% out to the investors. So we were very happy. It was during the investment period of the fund, so the fund manager was like, oops, I am returning more money than you have dispersed into my fund

This is a different kind of problem. Latin America needs those kind of good stories. They are there, but the only ones who know them are the investors and the fund manager and the entrepreneur that was involved in that deal.

Muslera: One of the things we see is that there’s always a tension between the fund and the entrepreneur, which I don’t see happening here in the US. We see that most entrepreneurs will be happy by taking a smaller exit early on and making sure that they have some money in the bank. And they lack the ambition of going for the IPOs or the $100 million exits.

And in a way, for a fund and for a strategy of a fund, that has a huge impact because you have to pick the winners. But you also know that the winners will probably not be $100 million ticket winners. So that in essence makes you take less risk.

And it goes back to the innovation discussion we had at the beginning. I think if there’s something that hopefully will change over the next few years is that entrepreneurs from Latin America will realize that they can make $100 million exits. And then everybody will be very happy.

Voss: Well, that’ll be good to watch. And it’ll be interesting to watch the evolution of innovation, entrepreneurship, and venture capital over the next cycle.

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