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Startups face steep challenges to access funding in Latin America

Startups face steep challenges to access funding in Latin America

Posted by PanamericanWorld on January 11, 2016

Agu De Marco is the Argentine co-founder of Wideo, an online video creation platform he launched in his home country.

Wideo is just one of many nascent companies to spring up across Latin America in recent years. With numerous incubator and accelerator programs such as Start-up ChileBrazil 21212SEED, and others, the region has seen dynamic activity from its entrepreneurial tech communities.

But when De Marco decided to expand Wideo’s reach earlier this year, he looked not to Argentina, but to South Korea.

“Breaking away” from Silicon Valley

Not only did he see Wideo as a good fit for the country’s tech-savvy market, but he was also attracted by the South Korean government’s efforts to attract entrepreneurs. De Marco found a supportive startup culture and funding opportunities, and he saw South Korea as a gateway to the Asian market.

“They’re really aggressive about helping entrepreneurs in South Korea, but they’re making sure that (startups) stay there and that (South Korea) receives the benefits,” he said.

“Survivors of our own chaos”

In a post on Medium, De Marco wrote that South Korea presents unique options for startups “who wish to break away from the noise in Silicon Valley.” But it’s also an alternative to struggling for capital in Latin America, where investment options are slowly growing but remain scarce in comparison with more developed tech scenes.

“The reality of the investment scene in Latin America is way different than in the United States or Europe,” De Marco said.

The reality reflects decades of political and economic turmoil that haven’t left the investment landscape fertile for emerging tech communities, said Juan Diego Carluccio, an entrepreneur and angel investor from Uruguay who now lives in Silicon Valley.

“The whole continent has lived the last 60 years changing from corrupted political parties and military governments. Our economies (have) suffered cycles of crisis and enormous prosperity where we sometimes had something to do, and sometimes we were just sitting on the side lines. We are survivors of our own chaos,” Carluccio said via email.

“In so much chaos our societies have turn into conservative and risk adverse positions. The people want steady jobs and monthly payment. Risk is not well taken.”

Sebastian Vidal is an investor and the executive director of Start-Up Chile, a state-funded accelerator based in Santiago. He shares a similar view as to why Latin American investors are reluctant to back risky startups.

“Latin American investors are traditional investors. They’re used to investing in tangible things, such as natural resources or real estate,” he said. “They need to see some examples, what results (investors) are having in order to give money. They don’t want to take the risk yet.”

Vidal said that companies solving the problems of emerging markets – energy, location, and logistics issues – fare best when pitching to local investors.

Stumbling startups

Michele Golodetz, an investor with Chile Global Angels, said that on the contrary, she has seen angels within this network back a number of software companies. But a lack in entrepreneurial vision often has founders damaging the process.

While incubators and accelerators help Latin American startups access early-stage funding and mentoring, Golodetz said some companies come out of those programs with a false sense of their market value.

Founders pitch to investors without a clear understanding of how they’ll reach their projected growth.

Alejandra Pérez Fabres, who is also an investor with Chile Global Angels, said she sees founders who present with “a good idea and passion, but an unclear cost and income structure.”

The ultimate red flag, she said, is a “theoretical business plan,” where founders talk about rapid growth and expansion into other Latin American countries but demonstrate little understanding of how to adapt the product for different audiences and have no access to those markets.

“It’s easy to have good ideas and develop them. The difficult part is to go to market. It takes time. It’s very difficult, and it’s expensive,” Golodetz said.

Money problems

Startups also face problems accessing middle- and late-stage funding because the ecosystem simply isn’t there yet. There are few VCs (Venture Capitalists) in Latin America willing to invest in companies at that stage, Carluccio said. But he said few companies make it to that point.

“To become middle stage … you would already (have) had to conquer your own local market, but you don’t even get to that. Why? Because of funding,” he said.

Money constraints trumped any kind of legal or infrastructure barriers startups might face, according to Carluccio.

But all of the investors interviewed for this piece agreed that the landscape is evolving.

As companies grow and see successful exits during the next several years, investors will take interest, Vidal said. He added that the relationship between big corporations and startups will change as they collaborate on projects, creating further opportunities for funding and growth.

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