David Thomas discusses Latin America’s technology sector, investment strategy and
his new seat on LAVCA’s Board of Directors

March 28, 2005 Chicago IL — For Intel Capital Latin America’s new leader, venturing into new territory is part of the job on more than one level. David Thomas, an industry veteran with over 50 venture capital and private equity transactions under his belt, is charged with accelerating the convergence of Latin America’s nascent VC/PE industry and the cutting edge of technology.

Mr. Thomas has been quick to demonstrate his commitment to building the industry. A new Board member with the Latin American Venture Capital Association (LAVCA), Mr. Thomas is spearheading a LAVCA initiative to develop a venture capital guide for Brazilian entrepreneurs. The guide, slated for distribution later this year, will be subsequently modified for entrepreneurs throughout Latin America. Mr. Thomas’ motive for supporting such initiatives is three-fold; to raise the level of investor sophistication through standards, to educate entrepreneurs and policymakers on attracting capital, and to share models of success critical to growing the region’s base of players.

“Until you know what’s been happening, where the success stories are,” stated Mr. Thomas, “you’re going to have a hard time getting new investors to the region and creating positive energy around venture capital.”

On joining LAVCA’s Board this March, Mr. Thomas agreed to a frank discussion with the LAVCA Reporter about prospects for growth in Latin America’s technology sector and Intel Capital Latin America’s strategic approach to investing in the region. Mr. Thomas discussed Intel Capital’s core mission in Latin America and offered insights into improving the region’s investment climate. Throughout the conversation Mr. Thomas affirmed the critical relationship between technology and venture capital in accelerating economic development and improving the quality of life in emerging markets.

LAVCA: Can you tell us a little about Intel Capital Latin America and it’s investment preferences?

David Thomas: Intel Capital is the investment program within Intel Corporation. Our mission is to make financially attractive investments for Intel’s strategic initiatives. What that means is, we look for companies that are good investments financially and that, if they are successful in the marketplace, will ultimately help Intel’s core business, either today or at some point in the future. That is basically the overriding mission for Intel Capital.

Within Latin America–it’s obviously an emerging market and a market that’s very important to Intel–we’re looking at opportunities to accelerate the adoption of information technology and to develop the market. There are several areas of particular interest to us. We’ve made investments across the region with a focus primarily on Brazil and Mexico. In our portfolio today we have a couple of system integrators–a large system integrator in Chile called Sonda, which is the largest independent system integrator in Latin America. We have another named Qualita, and basically they work with large enterprise customers to deploy information technology solutions–both hardware and software–and they provide services as well. Our goal is to understand what’s happening in the marketplace and educate these companies on Intel roadmaps and where we can work together–where we see opportunities for technology to be deployed more efficiently, more effectively in the future.

Mobility solutions are also a very important area for Intel. You may have seen through our product roadmaps the importance of wireless technologies with, for example, the Centrino launch. This is a good example of how Intel Capital can help with a product launch. We invested in a number of companies that helped develop the ecosystem for the Centrino technology.

Wireless is an important part of everything Intel does as people access data anytime, anywhere on any device. This is true globally and of particular interest to us in merging markets like Latin America. We have invested in a company called Spring Wireless here in Brazil. They provide mobile enterprise applications, so for example, a sales force that uses a PDA, they can use this application to interface with the company’s main IT systems. We have another company called Neovia, which is in the wireless arena as well but is more focused on wireless deployment. Basically they have built a wireless ring in Sao Paulo and they’re providing wireless access services to residential buildings. That’s important as more and more people want to get broadband access in their homes.

We think wireless technology in general and WiMax more specifically are very interesting solutions in emerging markets like Latin America where you have high concentrations of population and these types of deployments can cover a wide range very effectively given the amount of investment required. This is opposed to the large investments in infrastructure that developed countries have made when wireless technologies were not available. We think there’s a great opportunity now, as the masses start to get internet access, to tap into this.

We’ve also made investments in several software companies that support small to medium sized businesses. There’s a company called Pulso in Brazil that’s focused on financial services. They actually provide a solution for large financial services companies for an interface for their customers through the web, so you can access your account in a secure way with these financial institutions.

Why is Intel Capital active in Latin America?

Latin America is important to Intel, as are many emerging markets, as Intel continues to search for growth opportunities. Emerging markets where technology isn’t as widely deployed as some of the developed countries represent a huge opportunity. These markets are very important to Intel for long-term growth. That really was the driver for us to start making investments in Latin America and in other emerging markets.

We’ve been active in Latin America for roughly seven years, in terms of Intel Capital’s efforts. And as I’ve said, we’re mainly here to help with the build-out, and to help with the market development and ecosystem for technology. The main driver, though, is that Intel as a company sees markets like Latin America as huge growth potential, as more and more people get access, get computers, and see how technology can improve their lives. We invest in companies that are pieces in the puzzle, that will encourage companies and individuals to buy technology.

What developments and initiatives in the technology sector are most exciting to Intel Capital Latin America?

Well, I’ve mentioned mobility, so wireless technologies, WiFi, WiMax and beyond, are really attractive for us in Latin America. Intel is interested in accelerating data and multimedia in handheld devices and cellular networks–there are a number of programs that we have in place to help with that and we’ve actually made an investment here [in Brazil] in that arena that will help to bring data (text and multimedia) to “smart phones.”

We’re very interested in e-business build-out and the whole concept of small to medium sized businesses adopting technology and mission-critical solutions. We’re also interested in the concept of digital inclusion. There are a number of programs in different countries in South America, what we call government-assisted PC-purchase programs — we feel Intel Capital can play a role in those types of initiatives, accelerate them. Another area is the digital home-we see this convergence occurring, not only in broader communications but also within the home between consumer electronics and PCs. As that convergence continues to happen there may be opportunities for Intel Capital to play a role.

Why is venture capital the right tool to stimulate these technologies in Latin America?

In addition to our investment efforts, Intel Capital has put a significant amount of resources into helping nurture the venture capital industry, not only in Latin America but also in other parts of the world. The main reason for that is that we see that innovative start-up companies and the whole spectrum of financing-from seed capital, venture capital, mezzanine, private equity-when combined with human capital is good for the technology industry in general. A large portion of the start-up activity that occurs happens around technology.

We also see the importance of venture capital for job creation and economic development. If you look at other parts of the world-the U.S., Israel, Taiwan-these are good examples of how venture capital as an industry has accelerated and created jobs and has improved the quality of life for the population at large. The industry is good for development and, in the process, more and more technology is going to be adopted. This clearly is of interest to Intel and we want to facilitate and accelerate this adoption.

What has been your experience in Latin America with regard to venture capital?

I don’t think this is a surprise to anyone, but Latin America is a challenging region for investments. That is for a number of reasons, but there are a couple fundamental things. The environment itself is not as conducive to early-stage investment activity. The length of time it takes to start a business in Latin America is high relative to world averages. There are not the right incentives in place for investors to put money into companies, in terms of private property protection and rights. The environment is just not as sophisticated as in the U.S., where you have a mature investment community with standardized term sheets and articles of incorporation, bylaws, etc., so an investor knows what he’s getting into and knows that his rights will be upheld. That’s not nearly as developed in Latin America and is something that, as a corporate citizen, we’ve been trying to change. We’ve met with government officials in several countries in Latin America and have outlined recommendations for them.

Probably the biggest issue is a complicated situation that is difficult to solve with just one thing, but the markets for liquidity, the markets for corporate control-the public capital markets-are not as well developed. As an investor in Latin America it’s not as easy to see the financial rewards of these relatively high-risk investment activities. I think that’s the biggest challenge for the region. For example, last year Brazil had seven IPOs, which was a hot year. You look at the IPO market in the U.S., although it’s slowed down in the last few years, and it’s just a whole different ballgame. The number of shares that get traded, the liquidity capital flows and the buy-out activity, the mergers of small companies-all these things drastically change the risk reward and trade-off for an investor. In Latin America that trade-off, that hurdle, is much higher than in other markets.

That’s one of the reasons I joined the LAVCA Board, because we’ve got some great things to do, to benchmark, to educate the industry. I think there’s a lot of positive energy, a lot of interest in Latin America right now, not only on the private equity side but also on the venture side.

What is most attractive about Latin America from an investor’s perspective?

I think Latin America has the critical mass, has the population, has the raw numbers in terms of opportunity. I think it is just a matter of when. As technology gets less expensive and is more broadly adopted, it improves the quality of life for everyone. Technology can help increase the overall quality of living in Latin America. Brazil and Mexico are our focus areas although we have a physical presence in Chile as well. The main driver for that is the critical mass again. They represent the lion’s share of population and business activity in Latin America, though Intel Capital looks anywhere opportunistically for companies that are relevant to Intel. I would say Brazil is the most advanced private equity and venture market in Latin America, looking at the number of funds, the dollars raised and the investment activity. It’s more mature.

Are there any unique aspects to venture capital and private equity in Latin America?

I don’t think there’s any fundamental difference between the industries in Latin America and the U.S. It’s all about risk and reward. Investments are going to follow those parameters in the most efficient manner possible. But I will say that after being here and seeing what’s happened in the region, that’s it’s really important to have longevity and to have a local presence. We’ve seen this happen before where funds come and invest for a few years and then exit the region. I think it’s much harder to really understand what’s happening locally unless you are here and can weather the fluctuations in these local economies. It may require a slightly longer investment horizon than you typically see in the U.S.

In addition, the type of activity we do with the companies is probably a little bit different. We find that we need to roll up our sleeves a bit more in terms of getting involved, helping with company-building. As a strategic investor, Intel generally co-invests with financial investors that are experienced in making VC-type investments. Intel Capital globally looks to provide expertise in other areas, for example technology roadmaps, strategies, etc. But with markets like Latin America what we’ve found is that there are fewer co-investors that meet our criteria–that have experience, have been in it for a long period of time. If you have fewer it’s obviously more challenging finding partners. So we find that we need to do more of the activities that a typical VC does in Latin America vs. other regions in the world. We don’t operate the company but we do get involved at a strategic level and find ourselves more involved in helping and nurturing the companies.

How would you characterize the talent pool for local management?

I think the local talent pool for management in Brazil is very strong. We have not had problems finding strong local managers for our companies. But I think that as a region, what would be helpful is to see more senior-level executives with international experience have success in their own countries. We’re seeing today that managers get educated in other countries with large international companies, and they see opportunities abroad that are more rewarding financially and from a career standpoint. There has to be a better way to get those individuals back home so they can be the success stories that will foster new company formation among the next generation. I think you can find strong management in all the countries, but in my opinion, in Brazil there’s more critical mass, which is consistent with the population and investment activity.

Do you feel the venture capital industry in Latin America is maturing?

I wouldn’t say maturing in the sense of being established, but I would say that it’s on a development path that’s very exciting. There have been a number of things that have taken place in the last few years-LAVCA is one of them, and local venture capital associations that have been established that are really important for the whole venture environment, in terms of benchmarking and helping to educate governments and entrepreneurs. In the last several years there have been significant improvements. It’s probably in the early stages of what the VC industry in the U.S. was 20 years ago. In the early 80s and late 70s the venture capital industry was very new. There weren’t that many funds out there, and I think Latin America is in a similar situation. Although there’s a lot of momentum and a lot of exciting things happening I would not say that the industry is maturing.

How can Latin America maintain that momentum?

I think the efforts of LAVCA and the national associations are very important. Educating governments, entrepreneurs, and just being a voice for venture capital is really important to keep the momentum going. Governments that are starting to consider putting policies in place that are VC-friendly need to do so in such a manner that the policies survive the government, are independent of what might happen over time, have longevity. I hope to see LAVCA continue this energy to coordinate and provide tools to help the industry this development phase.

LAVCA’s mission is to promote the growth of the venture capital and private equity industry in Latin America through research, education, networking, best practices, and the advocacy of sound public policy. LAVCA is a not-for-profit trade association serving a core membership of venture capital and private equity firms that invest in emerging companies.

For more information on LAVCA and its activities, please visit www.lavca.org. For inquiries regarding LAVCA’s 2005 Executive Briefing on Latin American Private Equity, please contact:

Ramona DeNies
Communications Manager
Latin American Venture Capital Association
1.503.239.7449 Pacific Standard Time
[email protected]