VC FUNDING IN LATAM - The need for a LATAM focused accelerator fund- Part 2

This is part 2 of my blog, which hopes to provide some background and further evidence for the development of a bridge accelerator fund that selects top startups from Latin America and helps them globalize at an early stage by investing in them and bringing them to the US ecosystem. In the first part of my blog HERE, I described some of the challenges faced by startups in the region but also some of the recent efforts by local governments to foster and improve the local startup ecosystem. In part 2, I take a deep look into one potentially crippling challenge; Funding. The blog relies heavily on Coller Capital LAVCA Latin America Survey 2015, OCDE Progress Report on Entrepreneurship 2015, Impact of Early Stage Equity Funds in Latam (Lerner, Tighe, Dew, Bosiljevac, Leamon, Díez-Amigo), EY Estudio de Capital Emprendedor Mexico 2015 & NXTP Labs Harvard Business Case (Lerner, Fernanda Miguel, Urdapilleta)

The VC & Early Stage Investment Environment

Despite the economic instability of the 2000’s, Latin American PEVC has shown signs of improvement in recent years. Based on a recent paper on the impact of seed stage investment in LATAM (Lerner, Bosilijevac, Diez-Amigo, April 2016), 2014 saw record fundraising, with nearly $10.4 billion committed to LatAm-focused PEVC vehicles. However, the industry still has much room to grow, particularly in the early stage investment space. In a 2015 survey of 113 LPs, Coller Capital and LAVCA found that 95% of Latin American LPs planned to increase their exposure to the region’s private equity in the coming year, compared to 61% of Latin American LPs that reported the same in 2014. LPs responding to the survey ranked Latin America ex-Brazil as the most attractive emerging market for investment for the second year in a row.

Such findings, however, should be viewed with some skepticism. The Coller Capital-LAVCA survey and similar studies combine later-stage private equity and early-stage VC investment activity and their results tend to hide the relative weakness of early-stage investment in Latin America.  

Funds Raised

VC dollars raised had also experienced a steady grow since 2011. The region’s funds, raised $458 million in capital in 2014, down from $714 million in 2013. The drop in fundraising may be due to the fact that many VC firms that raised money in the earlier years were focused on investing that capital.

VC Fundraising in Latin America 2011 – 2014:

Source: LAVCA, 2015 LAVCA Industry Data & Analysis: LAVCA, 2015.

Investments

In 2014, VC funds invested a record $526 million through 186 deals, with 50% of the deals and 75% of the total capital invested in Brazil. Mexico and Argentina followed with $45 million invested across 31 deals and $35 million invested in 26 deals, respectively.

VC Funds invested in 2014 across the Region

Source: LAVCA, 2015 LAVCA Industry Data & Analysis: LAVCA, 2015

Exits

Exits, pose significant challenges in Latin America. In 2014, Latin American VC funds realized $99 million in exits. Most exits occur via strategic sale, often to larger competitors. In addition, Latin American companies with private equity backing have exited via IPO, as seen in Argentine software company Globant’s listing on the New York Stock Exchange in July 2014. A major challenge for many of the funds is to realize profitable exits from their portfolio companies.

Something to note is that IPOs are not common, even among top VC firms in developed markets. Yet, Latin America’s lack of a reliable IPO exit route has created a tendency among some entrepreneurs to accept early offers that undervalue their companies. This limits the incentive of potential entrepreneurs to continue growing their companies rather than accepting early, low-priced buy offers.

VC Exits in Latin America 2011 – 2014:

Source: LAVCA, 2015 LAVCA Industry Data & Analysis: LAVCA, 2015

Room for Growth

There is no doubt, Venture Capital in Latin America has come a long way from the early 1990s. According to the 2015 LAVCA report the number of fund managers active in the region has risen steadily to at least 250.

However, Latin America still has room to grow. For instance, according to the National Venture Capital Association, a US-based industry research organization, there were 803 VC firms managing 1,206 VC funds operating in the US in 2014. As the most recent full-year data from EMPEA show, Latin American countries lag way behind many of their peers in the developed world in terms of the proportion of VC investment relative to the GDP. This results in many startups not being appropriately funded, being forced to accept unfavorable terms or even worse not making through the early years. #Latam#Opportunity

VC Investments as % of GDP, 2014:

Source: Impact of Early Stage Investment Funds in Latin America, 2016