I was in San Francisco recently to speak at the Endeavor Entrepreneur Summit and to meet with tech investors who have been heading south to São Paulo and Buenos Aires to close their first deals in Latin America. I found that as the market for consumer Internet plays bubbles over in the US, the number of Silicon Valley VCs backing tech startups in the region is fast expanding.
The same demographic and growth trends that are driving investments in later stage private equity deals across Latin America are creating incentives for e-commerce investors. Young populations, booming demand for consumer goods and services from an expanding middle class and double digit growth in Internet usage have attracted top-tier venture firms to the region over the last two years.
E-commerce start-ups backed by international VCs include ViajaNet, a Brazilian online travel agency funded by Redpoint Ventures and General Catalyst; regional online restaurant booking service Restorando.com, backed by Atomico, the venture capital firm founded by Skype co-founder Niklas Zennström; and KaBuM!, an Internet retailer of consumer electronics and technology goods with minority investment from Insight Venture Partners.
Replicating established e-commerce models in emerging economies has been a core strategy for global venture firms looking for new growth markets in recent years. One manager I spoke with said that there are upwards of 25 Groupon knockoffs seeking funding in Brazil alone.
Ahead of that pack is Peixe Urbano, a deal a day website which has closed rounds from Benchmark, Tiger Global and General Atlantic. The firm was first backed by Eric Acher of Monashees Capital, who headed General Atlantic’s Latin American practice and was an active angel investor before setting up Monashees in São Paulo.
Role models and success stories are critical to the development of an entrepreneurial ecosystem and culture. The success of companies like Peixe Urbano in attracting global capital at competitive valuations, and Naspers’ acquisition of Brazilian online comparison shopping site BuscaPé for US $342m in 2009, send an important signal to would-be entrepreneurs. In Brazil, where business school graduates are coming of age in one of the world’s tightest labor markets, the opportunity cost of striking out on their own inevitably means turning down lucrative positions at established firms.
Finding Bed Fellows in Brazil
Identifying the right local partners and deal opportunities is even more challenging for early-stage investors than for private equity firms seeking a toehold in Latin America.
“Many of our managers are actively making investments in the region, both building direct relationships with the top entrepreneurs and partnering with local venture capital managers on deals,” Richard Lim of Greenspring Capital told me.
“Those managers are contemplating a number of structural approaches in the region including investing from the U.S, joint venturing with local firms, and setting up satellite offices in the region.”Greenspring, a US fund of funds and limited partner in many leading tech investment firms, has sent team members to Mexico, Brazil and Chile to map out the terrain.
One of the longest standing partnerships between US and Brazilian VCs was formed in 2007 when Draper Fisher Jurvetson acquired an interest in Belo Horizonte-based FIR Capital. Online video platform SambaTech is among the tech start ups in their portfolio.
Sami Haddad, the CEO of Rio-based TMT investor IdeaisNet, describes a “very rich exchange” between US venture firms and local Brazilian managers. IdeaisNet portfolio companies have been evaluated by many of the venture firms passing through Brazil, and some have liked what they’ve seen enough to come in as co-investors on second or third rounds. IdeaisNet is on the short list of LatAm tech investors with realized exits, including the sale of Netflix lookalike NetMovies to Tiger Global late last year.
While e-commerce deals may dominate headlines, they represent only one segment of the technology opportunity in Latin America today. In the growth equity space, Silver Lake’s investment in web-hosting company Locaweb and Apax’s US$500m acquisition of IT services firm Tivit stand out.
“We love the e-commerce story, but those companies are too small for us,” explains Francisco Alvarez-Demalde of Riverwood Capital. “Our strategy is tech broadly defined, and we see the most opportunities on the software services side, and in the growing tech spend by Latin American corporations.” Riverwood acquired Chilean IT services provider Synapsis in 2010, and ALOG, a Brazilian data center business, this year.
Other managers talked of attractive investment opportunities in mobile technology infrastructure, online media, and online education. LAVCA tracks deals in all of these segments and posts non-proprietary information here.
With many pundits pointing up inflated valuations for US tech startups, and others wringing their hands over the heated deal environment in Latin America, is it safe to assume that tech investing south of the border is bubbly by definition?
Alvarez-Demalde insists he is not concerned about a bubble. “However, in some of the opportunities below US$50m, given all the interest from US venture firms and now local investors too, we see a heating up of the market, and a more competitive environment.”
Technology deals and dealmakers will be an important focus at the 2011 LAVCA Summit and Investor Roundtable, when we will be partnering with the NVCA and Endeavor on the Venture Capital and Entrepreneurship Program on September 28th at the University Club in New York.