By Patrick J. McGinnis
In markets where capital is scarce, regulatory conditions are adverse, and the entrepreneurial environment remains challenging, entrepreneurs must be resilient, creative, and unrelenting to succeed. Of course, they must also have good business plans.
Given this reality, Accelerators have taken on a critical role in the start-up community in Latin America. By providing initial seed capital coupled with hands-on guidance, these groups help to separate the wheat from the chaff while increasing the likelihood of success for the businesses that graduate from their programs.
So What Are Accelerators Anyway?
Accelerators are enterprises that are in the business of helping other companies to grow by providing a combination of capital, mentorship, technical support, infrastructure, and other critical resources. The model is based on two key elements, according to Ariel Arrieta, the Founder of NXTP Labs. Arrieta, who looks to Y Combinator for inspiration, views the key to success for an Accelerator as having: (i) a leadership team of experienced investors who can share their experience to their companies, and (ii) a method of integrating and aligning an ecosystem of mentors, entrepreneurs, investors, funds, universities, and NGOs.
My own involvement in the accelerator space dates back to about a year ago when I became an investor and mentor in NXTP Labs (www.nxtplabs.net) in Buenos Aires. Since that time, I spent time at NXTP Labs for the kick-off of their 2nd class of companies and then flew over to Rio for the 21212 (www.21212.com) Demo Day. More recently, I was introduced to Agora Partnerships (agorapartnership.org) and their impact-driven approach to the accelerator model.
Although NXTP, 21212, and Agora, are among the most talked about Accelerators in Latin America, there are other players in the space as well, including Acceleradora (Brazil), Start-up Factory (Mexico), Start-Up Chile, and Wayra (pan-regional).
Why Accelerators Make Sense in Latin America
In a previous Growth Capitalism column from 2011 called “Venture Capital in Latin America: Perception vs. Reality,” I discussed the factors that have traditionally limited investor interest in Latin start-ups. Among the factors I cited at the time were investors’ concerns that VC is inherently too risky as well as a belief that Latin America’s entrepreneurial ecosystem is deficient. Accelerators address these issues in several ways:
- Accelerators Reduce Execution Risk: In essence, an Accelerator program is a funnel that selects the strongest set of ideas and entrepreneurs from a large pool of candidates. Once the pool is whittled down to a class of companies (typically 10-20), the accelerator puts the class through a rigorous incubation period that pushes each team to validate its business plan and prepares them to raise capital.
- Accelerators Make it Safer to Take Risks and Even to Fail: Following the “lean start-up” approach, accelerators make small investments, typically US$25,000 or less, that allow a management team to prove out a concept or design a basic prototype. A management team can test its model, experiment, and adjust the business – the (in)famous “pivot” – as needed.
- Accelerators Provide Infrastructure and Support: Over a period of 4-6 months, the accelerator provides its companies with basic infrastructure, hands-on mentoring, and connections to the wider business world. Both NXTP and 21212 provide office space, connectivity, and other basic services.
In parallel, accelerators enrich the entrepreneurial environment by serving as hubs that bring together mentors, companies, investors, and other members of the ecosystem. Attend a demo day at NXTP Labs or 21212 and you’ll see all the major players in the Latin start-up scene in one room. Accelerators are also stitching Latin America into the international tech community by cross-fertilizing talent and capital from all over the region and even the world. Walking through NXTP Labs in Buenos Aires is like attending a UN summit, with participants from Argentina, Uruguay, Chile, Ecuador, Italy, Spain, and the United States. In Brazil, 21212 maintains a physical presence in New York and its network includes a number of New York and Silicon Valley-based investors and mentors who drive a continuous flow of talent, ideas, and capital between the United States and Brazil. In that vein, 21212 partnered with Silicon Valley Bank and LAVCA to bring a delegation of US VC’s to its inaugural Demo Day in April 2012. At the event, PagPop (www.pagpop.com.br), a 21212 company, was selected by Silicon Valley Bank to travel to California and meet with a number of VC firms in the Valley.
Early results are promising. With 32 seed investments to date, Arrieta tells me that NXTP Labs has funded double the number of companies backed by all the investment firms operating in the space in Argentina. In Rio, 21212 accelerated 10 companies in its inaugural class, a number of which raised outside capital. Currently, 21212’s second class is underway with an additional 10 companies.
The Impact Model: It’s Not Just About Tech
While 21212 and NXTP Labs focus on early stage tech investing, Agora Partnerships is a non-profit organization that is applying the accelerator model to the impact investment space. There is significant interest among global impact investors in the region, and the specific needs of these investors, like the ability to measure social impact, offer challenges and opportunities to entrepreneurs. Originally, Agora raised capital and started putting money to work as an impact investor, investing in 10 early stage companies in Nicaragua. According to Agora CEO Ben Powell, those early experiences convinced the team that the expense of finding companies that are investment ready, rather than a lack of capital, is the greatest challenge for early stage impact investors in Latin America.
Given this insight, Agora has created the Agora Accelerator that works with select companies from anywhere in Latin America to make them investment ready in advance of the Impact Investing in Action Conference (a demo day equivalent) every May. It selects a class of companies for a 6-month program designed to give outstanding small businesses access to the social, human and financial capital needed to accelerate growth. Agora takes no equity and invests no cash, but rather charges a fee to program participants and also structures success fees if entrepreneurs chose to use its deal closing consulting services. With 18 graduates to date, the team would like to significantly ramp up the number of companies in its program in the coming years.
Networks and Mentors: It’s Not Just About Cash, Offices and Infrastructure
The importance of mentorship, technical support, and networks within Latin American accelerators cannot be overstated.
In terms of practical expertise, each of the accelerators offers a focused set of resources to its companies. NXTP’s leadership has a deep track record in digital marketing and maintains standing relationships with legal, tax, and technology resources. Similarly, 21212 leverages a team of founders with experience spanning both the United States (i.e., Sling Media, MTV, Microsoft) and Brazil (Movile/nTime and Vostu). Moreover, 21212 maintains a staff of 10-15 professionals that includes in-house developers, designers, business professionals, and a lawyer. At Agora, entrepreneurs work with mentors, fellows, social media experts, and MBA consulting teams to sharpen their business plans and pitches. Given Agora’s non-profit mission, it is often able to attract high quality and like-minded talent at a low cost.
Of course, these firms also recognize that their networks will play a critical role in their companies’ ability to make the right commercial connections and to raise capital. Looking through the firms’ websites make this point clear – it’s like a “Who’s Who” of the Latin business community. 21212 has Adriana Cisneros on board and NXTP counts Wences Casares and Alex Oxenford among its mentors. In addition to these well-known individuals, all three groups have assembled networks of people with expertise across a number of functions.
While the benefit of these types of relationships is clear from the perspective of the companies in the incubator, participation in the accelerator benefits the mentors as well, as they gain access to quality deal flow.
So What Does All of This Mean for Investors?
In a region where investors may perceive risks as outweighing rewards, the risk mitigation provided by accelerators is a game changer. It also makes accelerators far more important in Latin America than they are in the United States and Europe. The sheer rigor of the accelerator programs ensures a minimum level of quality among the companies. Thanks to a competitive application process and months of coaching, investors have some comfort that the teams and ideas have been vetted. A half-baked idea or unproven thesis should be weeded out by the time demo day rolls around.
That said, investors should also realize that companies that pass through an accelerator are not the unpolished gems that they will find on the campus of Unicamp or in the coffee shops of Palermo Soho. These companies having been getting advice from industry players and their sophistication with respect to deal terms will reflect that reality. Moreover, the public nature of demo days ensures that the best ideas and companies are widely seen in the investor community. My advice to prospective investors? Pre-empt if there’s something you like and become a mentor so that you get a first look at deal flow.
That All Sounds Good, So What’s the Catch?
Not to kill the party, but in spite of their benefits, accelerators still work with companies that are often very early-stage in nature. Teams are vetted, but may very well fail. Even though the accelerator process meaningfully mitigates both execution and business model risk, investors must still do their diligence. On the positive side, they should have access to far more data than they would have in the absence of the incubators.
My more fundamental concern with regards to accelerators is whether there is sufficient angel and venture capital targeting Latin America to provide funding for the companies that graduate from accelerator programs. So far, NXTP Labs, 21212, and Agora, have good track records in this regard. Still, the jury’s out on how accelerators will perform in the long term. Given the proliferation of accelerators in Latin America and the sheer number of companies that are set to graduate in the coming years, success will elude some players. My guess is that there will be winners and losers, but that one or more of these accelerators will produce the next MercadoLibre, Despegar or Grameen Bank.
Growth Capitalism is a regular column in the Latin America PE/VC Report from Patrick McGinnis. McGinnis has been a private equity and venture capital investor in Latin America and the emerging markets for over a decade, first at Chase Capital Partners/JPMorgan Partners and later at AIG Capital Partners (now PineBridge Investments). He is the founder of Dirigo Advisors and is a co-founder of Real Influence. Patrick is actively involved in the Latin technology space, with investments in NXTP Labs (www.nxtplabs.net), InBed.me, and Altodot. He also sits on the Board of Directors of The Resource Group, a global BPO company. Fluent in Spanish and Portuguese and an avid traveler, he blogs about travel at www.huffingtonpost.com/patrick-mcginnis. He can be reached at [email protected] or on Twitter: @pjmcginnis