Silicon Valley is the epicenter of tech entrepreneurship for good reason – far-sighted founders established a new model of finance, venture capital, that suited the innovative spirit of technology and entrepreneurs. They have capitalized on their initial successes by inventing new models of finance: angels, super-angels, microVC, etc.; all fueled by the wealth released by the sale of pioneering companies via IPOs and acquisitions. The capital generated is re-invested into the next generation of ground-breaking companies, which, like a well-stoked furnace, gets hotter and hotter.
Brilliant ideas and motivated founders exist everywhere, but the capital infrastructure that supports those founders is very shaky in all but a few places outside of the Valley, namely New York, Tel Aviv, Los Angeles and increasingly places like Austin and Boulder. Success feeds off itself, therefore the lack of strong company exits that produce angel investors and the dearth of early stage tech-focused risk capital – in places like Mexico City, Santiago, São Paulo, Buenos Aires and Bogotá – means promising companies are starved of capital when it is most necessary.
This is not to say there is nothing there. The governments of Chile, Colombia, Brazil, Mexico and the City of Buenos Aires are pursuing innovative capital programs to encourage founders. Private sector actors like NXTP Labs, 500 Startups, 21212, Wayra and others are investing at the incubator stage and in some follow-on financing. But without the next stage of capital – Series Seed or pre-Series A rounds – graduated companies are in danger of withering on the vine.
I believe the solution involves all players in the ecosystem. First, big actors like governments need to start encouraging funds to invest at the right capital stage – namely post-accelerator in the US$200,000-US$750,000 range. This would provide runway for these companies to generate revenue, enable cross-region growth and become attractive to local Series A level players like KaszeK Ventures, Alta Ventures, Inversur and others. Chile is adapting its CORFO funds to do just that, adding administrative grants to allow funds to invest without high management fees.
Second, accelerator programs and entrepreneurs themselves need to start focusing on revenue at the early stage rather than focusing on Silicon Valley style growth. Longer acceleration times are necessary to provide space for those companies to build the muscle necessary to survive. Focusing on regional growth in multiple markets is also important to overcome the small market disadvantages of most Latin American countries.
Finally, entrepreneurs and investors need to think about exits, and how that will shape the products they are developing. Latin America has real advantages in mining, agriculture, biotech, health and beauty, fashion and hardware production. Focusing on these advantages will overcome the prejudices later stage US investors and potential acquirers have about non-American companies, and enable more, larger and more consistent exits. Exits mean angels, and with a strong pool of angels Latin America can start to develop a full-blooded investment ecosystem, and fuel the furnace of growth.
Derek Footer is the Managing Partner of Origo Ventures, a fund focused on early stage technology companies throughout the Latin American region, and the CEO of HardTech Labs, a firm focused on building hardware and biotech ecosystems in the San Diego/Baja region.