Main menu

Private Equity & Venture Capital in 2012: A Look at Technology Deals in Latin America

December 07, 2011

Speakers:

  • Francisco Alvarez-Demalde, Founding Partner, Riverwood Capital
  • Andres Barreto, President and Co-Founder, OnSwipe
  • Jon Karlen, General Partner, Flybridge Capital Partners
  • Michael Nicklas, Managing Director, IdeiasNet
  • Cate Ambrose, Latin American Venture Capital Association (Moderator)

Summary

On December 7, Americas Society/Council of the Americas hosted its third annual private equity and venture capital panel in partnership with the Latin American Venture Capital Association (LAVCA). Since 2008, investments in technology-related businesses have grown at triple-digit rates among private equity and venture capital funds active in Latin America. Investors are backing a wide range of IT businesses, including e-commerce, software development, data storage, and mobile applications. A panel of technology investors and entrepreneurs discussed drivers of growth, opportunities, and risks going forward.

Technology deals take off in Latin America

Cate Ambrose of LAVCA opened the discussion by providing a brief overview of the organization. LAVCA has over 120 member firms ranging from large private equity firms to small local firms, from Mexico to Argentina. The organization provides information on the private equity and venture capital environment in Latin America through an annual publication. Ambrose explained that, between 2009 and 2010, the number of technology deals and dollars invested in the sector saw a rapid increase, but was slightly skewed due to Apax Partners' half-billion-dollar investment in TIVIT, an IT services and outsourcing company in Brazil. In addition to that deal, technology investments have grown quickly in the last two years.

Tapping into Latin America’s entrepreneurial potential

Panelists represented various roles within the technology sector, from entrepreneurs to mid-market private-equity investors. All of the panelists saw immense potential in the region, as well as local demand for technology services, such as e-commerce and innovative software. Andres Barreto, a 24-year-old entrepreneur and the co-founder of OnSwipe and Grooveshark pointed to the region’s vast talent pool, especially in engineering, as evidence that Latin America can support creative entrepreneurs in technology. In 2007, he started Grooveshark in Gainesville, Florida, creating a company which now has over 100 employees and 30 million users. Barreto found that Gainesville’s isolation and lack of an entrepreneurial ecosystem was very similar to the state of technology and innovation in Latin America. He said, “My philosophy was: if I was able to start this in Gainesville, imagine what would happen in Latin America—where you have the same access to technology and the same or better access to talent with lower costs.” He then started Pulso Social, an online publication and communication portal that connects the social media, technology and entrepreneurial ecosystems in Latin America. In 2008, he started OnSwipe, a platform to publish content for tablets, which was built in Guadalajara in three weeks with one engineer. Yet Barreto found that there wasn’t a viable environment to harness the booming talent pool in the region. “What I see today is that there’s all this talent, all these start-ups, and local investors are missing out.”

Americans are now looking to capitalize on tech opportunities in Latin America, said Michael Nicklas of Ideiasnet, a publicly traded venture capital group with 15 portfolio groups based in Rio de Janeiro. John Borthwick was one of the first investors who took his company, Fotolog, a photo-sharing site, to Brazil in 2005. Originally, he had trouble gaining traction in the United States and Europe—his original target markets. Many American investors, including Nicklas, followed Borthwick’s lead. Nicklas started an angel fund in Brazil and later joined Ideiasnet.

Creating a start-up environment

The founding partner of Riverwood Capital, Francisco Alvarez-Demalde, said that a sound angel investment and start-up environment lay the foundation for the growth of innovation and small business in Latin America. One of Riverwood’s largest investments in the region is in Globant, an online software development company founded in 2003 by four Argentine entrepreneurs. Globant has seen astounding growth and is now competing on a global scale, exemplifying the region’s potential to breed leading innovators. Jon Karlen of Flybridge Capital Partners also saw the region’s growth potential in the technology sector, especially in the field of online education. Flybridge invested in Open English, an online education portal that has gained traction because of the immense education gap in the region. “You find yourself in emerging markets because this is where the gap is the biggest,” says Karlen. He noted the potential for technology as an opportunity not only for developing innovative businesses, but for socioeconomic growth as well.

Barreto commented on the recent growth of entrepreneurial hubs in Latin America. Silicon Valley-type environments have emerged across the region, such as Palermo Valley in Argentina and Tequila Valley in Mexico. Barreto also highlighted the importance of government support for entrepreneurs, citing the Chilean government as a success case that has channeled public funds to local innovators through organizations like Start-Up Chile and Corporación de Fomento de la Producción.

Where’s the talent in Latin America?

Panelists agreed that Brazil, Chile, Mexico, and Colombia are leaders in supporting technology entrepreneurship. They believed Brazil in particular has immense potential in terms of consumption. Alvarez-Demalde noted that due to the country’s booming growth and global competitiveness, Brazil’s large companies are now investing in IT. Nicklas pointed out that the large talent pool means greater opportunities. He cited an example in which Ideaisnet tracked consumer interest in the region and subsequently invested in Brazilian e-commerce sites similar to iVillage, Paypal, and Shoe Dazzle. Karlen also pointed out that inherent cultural differences are important to consider when investing in a technology start-up. But venture capital firms are not just replicating U.S. e-commerce models in Brazil—consumers are shaping local web, social gaming, and e-commerce trends.

Panelists diverged in their opinions about the potential for technology deals in Latin America to grow on a global level. Risk can prevent private equity and venture capital investors from taking technology start-ups international. Alvarez-Demalde also noted that the “ideal entrepreneur”—a talented innovator with business sense and technological know-how—is difficult to find in the region. In this sense, Silicon Valley still reigns as a top location for innovation and technology entrepreneurs. On the other hand, the growing demand in local Latin American markets presents less risk than international ventures. To this end, investors are partnering with local companies to mitigate risk on a country level, said Nicklas.