LatAm’s VC Market Takes Flight

Guadalajara is often referred to as Mexico’s Silicon Valley, thanks to its deep pool of technology talent, government commitment to the high-tech sector and a burgeoning startup scene. Now Guadalajara and other Latin American cities are starting to resemble their California namesake in another important way. Like California’s Silicon Valley, Latin America is grabbing the attention of deep-pocketed venture capitalists.

News of increased venture capital (VC) activity in Latin America has grabbed headlines of late. For instance, Monterrey-based Alta Ventures recently closed on a $70 million technology start-up fund in Mexico, and a recent Deloitte study shows that Brazil is upbeat on tech investment. Smaller countries like Uruguay are giving the big boys a shake, too.

“Despite the global crisis, Latin America is still attracting interest from financial investors,” says Ricardo Carvalho, a Deloitte partner in São Paulo. “More recently, large private equity funds have started putting more focus on the region.”

Carvalho says this is because Latin America’s GDP growth is higher than other, more problematic regions that were hit hard by the global downturn. Latin America has also made improvements with regard to political maturity and overall economic development. All of this didn’t happen overnight, of course.

Building a Startup Culture

“A few people have been working for a number of years to build interest in the Latin America tech scene,” says M. Christopher Johnson, a former Booz Allen Hamilton consultant now with Bedouin Ventures in Mexico City. “Their long-term efforts are starting to pay off in the form of foreign investors becoming interested in LatAm companies.”

In Latin America, a bourgeoning entrepreneurial culture is coming into its own, as was seen recently when dozens of young Latin American entrepreneurs made a splash at Disrupt San Francisco 2012. It was also big news when Mexico City-based startup accelerator Mexican.VC was acquired by Mountain View, CA-headquartered 500 Startups. To have a U.S. VC company take over a Mexican counterpart is a rare event, and offers material proof of substantial opportunity.

A 500 Startups blog post references the “amazing opportunity “ in Mexico, mentioning Mexico is the 12th largest economy in the world, growing even faster than Brazil and has had a manageable debt for more than a decade. The country also has the 5th largest population of Facebook users and the 7th largest Twitter user base in the world.

“Investments from 500 Startups and Alta Ventures should help ignite the critical mass of entrepreneurship that has built up in Mexico,” says Johnson. “On the macro level, Latin America has been largely insulated from the financial crises of recent years; stable, growing economies make good environments for startup cultures to grow.”

Super Size Confidence

Although Mexicos’s economy grew faster than Brazil’s last year, with its 2012 GDP growth expected to double the southern giant’s, Brazil is still strutting its stuff. Deloitte’s July survey, Global Trends in Venture Capital: How Confident Are Investors?, was notable for how upbeat investors were in Brazil.

How upbeat? Brazilian respondents self-reported the greatest confidence of all home economies, and also the highest overall confidence for investing in Latin America. And Brazil’s outsized confidence appears to be spreading across the region.

“We are seeing interest in IT Services, clean tech, renewable energy, biofuels, logistics, health care and value-added services related to the telecom industry,” says Carvalho. “This isn’t just in Brazil – it’s across Latin America.”

Policy changes in Latin America are making a big difference, too. For example, it takes only nine days to set up a business in Mexico, and the country ranks an impressive sixth in the World Bank’s “Ease of Doing Business” table. Other countries, including Brazil, are doing their best to create a favorable climate. When respondents to Deloitte’s survey were asked to assess overall confidence in their home country’s “ability to enact government policies that support the domestic investment in the next year,” Brazil leapt to the front of the pack.

Spreading the Wealth

The money at play can be significant.  JP Morgan Asset Management, for example, has invested $45 million in Dafiti, Brazil’s biggest online store. In its first two years DafIti has pushed into Mexico, Colombia, Chile, and Argentina. Johnson sees the potential for that kind of investment in Mexico, as well.

“I’m confident that there is enough money in both countries to support financing of intelligent startup ideas once word spreads that they are good investments,” says Johnson. “Startup accelerators like 21212.com in Brazil and Mexican.VC/500Startups in Mexico are starting to provide funding.”

Johnson also notes that when Monterrey-headquartered Alta Ventures closed its $70M fund, it did so largely with money from Mexican investors.  Led by the Multilateral Investment Fund (MIF), other Alta Ventures investors included the International Finance Corporation (IFC), Fondo de Fondos (CMIC) and the Guadalajara Angel Investment Network (GAIN). Their support extends beyond the simply financial to encompass the ins-and-outs of building and running a successful business.

“Mentor figures are more accessible to would-be entrepreneurs in Latin America than they were even a few years ago,” says Johnson. “Incubators and business accelerators will help that process develop.  I’m starting to see some more sophisticated business transactions happen between companies that are products of exactly those incubators, accelerators and investors.”

Rising on the Radar

This kind of domestic momentum is making a difference in smaller markets, too. Uruguay, tucked between Argentina and Brazil, is benefitting from the increased activity due to its location, multilingual population, low corruption rate and business-friendly climate. And it’s not alone.

“Outside of Brazil and Mexico, we are also seeing increased VC activity in Colombia and Chile,” says Carvalho from Deloitte.

This is a story that has legs – and that could create significant wealth in the years to come.

‘It’s only a matter of time before U.S. and European investors start coming to LatAm en masse,” says Johnson.  “And when they do, entrepreneurs here will know what to do with a term sheet.”