Executive Briefing: Argentina Builds Momentum as a Global IT Hub

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A decade ago Argentina was at the forefront of Latin America’s internet bubble, and its entrepreneurs and start-up companies were making inroads into international markets with high-profile IPOs on the Nasdaq exchange. Today the country is successfully positioning itself as a global player in IT-related industries including software development, business process outsourcing, internet businesses (social networks, semantics web, marketplaces, etc.) and video games and online social gaming.

The crux of the strategy is to leverage Argentina’s well-educated labor pool and creative talent to launch businesses that can compete on a global scale, often with a senior team member in the US and a back office in Buenos Aires. A number of ventures have attracted backers from Silicon Valley, and others have been snapped up in strategic sales to industry leaders in the US or Europe.

Riverwood Capital, a Menlo Park PE firm targeting global opportunities in IT services, invested in the BPO sector in India and Asia before expanding into Latin America. In December 2008 they took a stake in Globant, a Buenos Aires based offshore provider of software product development services with major customers in the US and the UK and delivery operations across Latin America.

“Within Latin America, we regard Argentina as a very attractive country for off shore IT services”, says Francisco Alvarez Demalde, a founding partner at Riverwood.  “The labor pool is deep and well-educated, and although salaries are higher than in India, you can find talent that provides an attractive balance of quality and cost.”

Globant was founded in 2003 but is growing rapidly, in tandem with the industry. CESSI, a chamber representing Argentina’s IT services and software industry, projects the sector will generate revenues of $2.8bn in 2010, a 22% increase over 2009, with $629m coming from export markets.

“Argentina is even more attractive for services that involve creativity and customer interface, as the workforce is well prepared to work on global projects, understand the consumers from the developed world, and interact with customers frequently”, says Alvarez Demalde.

Angel Gambino, an angel investor and serial entrepreneur who has worked in the US, Europe and Latin America agrees. “When I was heading up Viacom’s TV distribution, commercial licensing, digital businesses and strategy internationally, we always discussed how the best creative came out of Argentina.”

One of Gambino’s most recent investments was in Sonico, a Latin American online social network with 48 million members. She recently left London for Buenos Aires to work as an interim business development executive for Sonico and to scout investment opportunities in Brazil and Argentina.

“When I told colleagues and friends in Silicon Valley about my move, some were skeptical, but now many of them are asking for introductions in order to outsource design and development.

At Sonico, we base our primary operations out of Argentina where the costs are lower than Brazil and yet our largest customer base is in Brazil.  This model ensures much better margins where we can exploit large scale disposable income in Brazil.”

One niche industry where Argentina is establishing a global presence is social gaming.  Silicon Valley angel investor Mike Hennessey describes changes in the video game industry that are creating opportunity in Argentina. “The video game industry is rapidly morphing from the consoles and major titles dominated by large players Sony, Microsoft and EA with social gaming companies like Zynga, Crowdstar and Playdom bursting on the scene. The shift to platforms like Facebook and others social networks means that social game developer talent can be found in smaller companies across the globe.”

In March of this year Playdom acquired Buenos Aires-based game development studio Three Melons and staked Argentine social gaming company MetroGames with $5m in series A financing.  Both Playdom and game distributor 6Waves have hired key personnel to manage future growth in the Latin American markets.

According to Hennessey, “the competition for talent, cultural similarities, cost structure benefit, and the increased sophistication of the artwork may be why we are seeing US companies seek out the creative and technical talent present in Latin America.”

Argentine entrepreneurs are also innovating to create businesses at the cutting edge of internet technology. In the semantics web space, companies like Popego and Socialmetrix are developing technologies to interpret human language and apply them to analytics, while Smowtion and Adfunky have positioned themselves in the fast-growing business of ad networks. These firms have already received at least one round of financing and are looking to raise additional capital to gain scale.

While a handful of global investors are starting to target opportunities in Argentine IT-related businesses, local investors have major advantages which have translated into successful track records. Alvarez Demalde is a native Argentine with a resume that includes stints at KKR and Eton Park before co-founding Riverwood.

Susana Garcia-Robles of the Multilateral Investment Fund, which has invested in five Argentine VC managers over the last decade, describes the profile: “They are typically young people who have studied and/or worked overseas but want to return to Argentina, because they miss the quality of life. Upon returning, they are eager to invest in local companies that resemble those of the developed countries that turned out to be home runs. They know how to look for these companies in places that would pass unnoticed to foreign eyes, and, because of their local knowledge and the lack of VC funds available in the country, they have a first mover’s advantage when approaching the entrepreneurs.”

Among the managers Garcia-Robles has backed is Lisandro Bril, who has invested through the Holdinvest Technology Fund (HTF) and now through the PYMAR Fund. HTF took a stake in Technisys, a software/IT firm with financial services industry clients across LatAm, Europe and the US, and PYMAR is targeting technology projects in mobile applications, video games and other IT-related businesses.

Argentina is also represented by the generation of technology entrepreneurs that launched successful businesses during the internet boom, and are now into their second or third round of startups. Wenceslao Casares and Alec Oxenford are involved in startups including Bling Nation and OLX, as both angel investors and CEOs. And Constancio Larguia, who co-founded Patagon with Wences Casares, has recently announced a new startup called Weemba, a marketplace for loans targeting the US, Spain and Argentina.

LAVCA recently opened a regional office in Buenos Aires to establish a physical presence in Latin America and outsource website and back office functions. The office is headed by Ariel Muslera, an Argentine with a track record as an entrepreneur. While he acknowledges the country’s entrepreneurial talent, he also cites institutional hurdles.

“Unfortunately Argentina lacks standardized regulation for setting up and operating VC/PE funds, and laws that limit the flow of capital in and out of the country generate an extra burden for fund managers who have to resort to highly complex investment vehicles”, says Muslera.  ARCAP, an industry association launched in 2009 by some of the country’s most influential fund managers and investors is working with the local authorities to resolve some of these issues.