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How do investments for startups work in Latin America?

How do investments for startups work in Latin America?

Posted by Juan Gavasa on August 04, 2014

Even though some fixed terms such as seed capital, angel investment and venture investment are similar in many parts in the world, the reality is that in Latin America, with its particular context and implementation practices, these terms have totally different meanings.

Each stage in a startup requires investment; however, investors also impose certain critical requirements. These requirements must be met in time and form by each founder of the region mentioned above in order to obtain a successful investment.

1. Initial stage: seed capital

The first stage consists of looking for seed capital. Though we are just beginning, in Latin America it is necessary to fulfill one of two requirements: we should a) have a record of success in our entrepreneurial past, or b) have a proven and successful idea from first world countries to then “copy and paste” locally.

For example: Peixe Urbano is a clone of Groupon in Latin America, OLX took its idea from Craigslist, Eventioz is the local copy of Eventbrite or even oMT which is a clone of MoneySuperMarket.

In other parts of the world, seed capital is provided to almost every entrepreneur without major prerequisites; however, in this region that capital is only for a few who comply with the requirements mentioned above.

Unfortunately this investment medium is not used locally to focus in new founders during the first steps, when they are looking for people with high potential and impact plus signs of commitment and passion.

If a new entrepreneur with no previous experience wants to develop something innovative, it is probable that they are not going to get any investment support in this Latin region.

Only those previously successful entrepreneurs who have something innovative to develop, or conversely a new entrepreneur but with a proven business model that is working in other places in the world, could get this investment

In Latin America, if you are seeking seed capital for your enterprise, you have some options (not many). In recent years, some alternatives that did not even exist before are appearing and this is extremely positive for the entrepreneurial world growth:

The first option is Wayra from Telefonica:

Another interesting option, not only for capital but also for the experience (know-how) that the founders can give (ex-entrepreneurs like Ariel Arrieta) is Nxtplabs:

The last — and for me one of the best — is Startup Chile:

As in different countries of Latin America seed investment options are growing we hope that over time the competition between them will increase so that the requirements to apply to capital may become more accessible. In general, the investments go from US$10 000 to US$25 000.

2. Intermediate stage: angel investment

This form of investment is one of the best known at a global level, though in this region it is in its first stages.

In order to access this kind of capital, the angel investors being very few, at least we have to present a prototype not only running, but also with some customers already paying for it with the aim of demonstrating the business model and the revenue generation.

As can be seen, having the idea or a simple prototype to show it functionality is not enough for us to to receive angel investment it is necessary to have an entrepreneurship already running; we must show that we as entrepreneurs are able to turn an idea into reality.

Generally, the ones who ask for a running revenue model that generates profits are the venture investors; however, this is advanced in Latin America. Without going any further, if we do not have a business model that generates positive results, even though we may have new users every day, obtaining this investment is complicated.

Take the social network Twitter as example; Twitter has not generated income until today. Unfortunately, this project might hardly have succeeded in this region if anyone would have wanted to pursue it.

Angel investments in Latin America usually range from US$30 000 to US$100 000. If we do some calculations, due to the cost of human resources, rent and food, this investment can be very meaningful and can be a help for about six months to two years to keep a new startup alive.

Apart from the things that have been described, a problem –In this region—is the scarcity of angel investors. This is mostly due to the lack of entrepreneurial culture. It is for this reason that the few existing angel investors are ex-entrepreneurs such as the founders of Mercado Libre (the copy of Ebay in Latin America) and the founders of OLX (copy of Craigslist).

3. Final stage: venture capital

Once we have gone through the above steps successfully, we must think about reaching a round of Venture Capital. This stage of the process is only focused on the ability to scale our enterprise.

To have the possibility of accessing this option, as a primary requirement, our business model should be working perfectly, generating revenue and returning a really interesting profit for current and future investors.

In Latin America, raising a venture investment is exclusively for those entrepreneurs that will use the money to make their business grow rapidly and also when this clearly represents an entry barrier for others and / or future competitors.

A specific example of this is Open English, which has so far raised over US$100-million in order to grow and spread across Latin America by teaching English through the internet.

As we can see, each one of these steps is feasible today in Latin America (mainly Brazil, Mexico, Chile and finally Argentina) whereas before they were not even an option: they didn’t even exist, actually.

From Chile, NAZCA Ventures:

From Argentina and Brasil, Kaszek Ventures from Hernán Kazah Co-Founder of Mercado Libre:

The last one is the newest one QUASAR from Andry Freire and Santiago Bilinkis both co-founders of Officenet (purchased by Staples in 2004).

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