Venture Capital In Argentina

Venture Capital In Argentina

Bragdon Heuser Kittredge Squires

CurtisJonathan Kevin Brent

VC-AR

• Introduction to Venture Capital

• Argentina: Climate and Opportunities

• Exit Strategies: US vs. Argentina

• Angels vs. Traditional VCs

• Trends and Conclusions

Intro Climate Exits Angels Conclusions

Introduction to

Venture Capital


Angels - Individual Investors

Venture Capitalists Are Funded By:

Wealthy individuals

Corporations

Financial institutions

Private foundations

University endowments

Venture Capital Basics


Entrance Requirements:

Management Team

Opportunity

Exit Strategy:

Initial Public Offering

Acquisition

Venture Capital Basics


1978: Rule changes for pension funds

1983: 100 IPOs, $4 billion in Venture Capital

Apple and Intel capture the public’s imagination

Inexperience investors flee market

Pension funds and mutual funds gain strength

IPO, M&A activity increase

10 year bull stock market

Historical Backdrop


544 companies went public 271 were backed by VC money Average offering size of venture-backed IPO:

$87.2 million Average post-offering valuation:

$502.7 million Average return achieved by VC this year:

62.5%

1999: The Boom Year


Trends• Growth of funds: numbers and size• Institutional players gain influence• Late stage players in the game to “flip”• Investment banks in space• Market downturn

– Valuations down– Retrenchment of investors– Negotiating power shift


StageEarly 3,502 24.9% 5,279 27.5% 10,777 22.4%Expansion 6,025 42.9% 7,986 41.6% 26,391 54.9%Later 2,801 19.9% 3,662 19.1% 8,764 18.2%Buyout 1,716 12.2% 2,286 11.9% 2,115 4.4%Total 14,044 100.0% 19,212 100.0% 48,046 100.0%

1997 1998 1999

Venture capital invested by stage

How much is enough?

USD (Millions)


USA80%

All Other Nations

20%

$45,931

$11,796

Total classic venture capital invested worldwide in 1999

Classic venture capital comprises investments in seed, early, startup, and expansion stage companies.

Sharing the Wealth?


Fundraising In Latin America

0500

1,0001,5002,0002,5003,0003,5004,000

Year

US

D (

Bil

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ns)

Corporate

Mezzanine

Venture Capital

Venture Capital Moves South


Argentina:Climate

& Opportunities


• Argentina viewed favorably by investors seeking venture capital opportunities for the following reasons:

– More stable economic and political climate as a result of recent reforms

– Extensive capital requirements – Limited capital availability

Investment Climate In Argentina


Investment Climate in Argentina• Comparative advantages for venture capital

investing in Argentina:– Solid economic fundamentals– Strong workforce– Existence of Mercosur– Positive relations with foreign investors– Presence of start-up and early-stage businesses– Similar accounting and reporting standards– Personal security and safety not an issue


• Comparative disadvantages for venture capital investing in Argentina:

– Current recession in Argentina– Limited options for exit strategy – Difficulty obtaining long-term risk capital– Expensive debt capital– Serious barriers to regional Internet growth – Difficulty with the due diligence process – Corruption and lack of trust in government

Investment Climate in Argentina


• Venture capital investment opportunities expected to arise from the following situations:

– Acquisitions of privately owned companies with growth constraints

– Companies with promising business models but inadequate capital structures

– Consolidation of fragmented industries– Spin-offs of divisions by companies– Leveraged buy-outs

Investment Opportunities in Argentina


• Future venture capital investing opportunities expected to be in the following industries:

– Technology used to improve businesses– Agri-business– Telecommunications

Investment Opportunities in Argentina


Exit Strategies:USA &

Argentina


United States:

IPOMergerAcquisition

Exit Strategies: The United States


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$5,000

$10,000

$15,000

$20,000

$25,000

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

To

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PO

s

0

10

20

30

40

50

60

70

Ve

ntu

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Amount of IPOs VC IRR %

VC IRR vs. Value of VC-Backed IPOs


International & institutional investors want a way to extract capital

IPO process is flawed No domestic stock exchanges with liquidity—

focus is almost entirely on acquisition Difficulties performing proper due diligence Sector influences—agribusiness doesn’t lend

itself to harvest

Exit Strategies: Argentina


The majority of high tech start-ups in Argentina are incorporated in Delaware or British Virgin Islands

IPO on NASDAQ is becoming the goal of more start- ups

Government policy of dollarization facilitates exit strategies

Exit Strategies: Emerging Solutions


Angels &

Traditional VCs


Angels and Traditional VCs

• From International Groups– Typically branches of funds from US or Europe

– Bring investment managers with backgrounds in banking and sometimes operations

– Also large banks, e.g. Chase $200M fund, BankBoston/ePagos

• Funds from family groups– Will co-invest with international groups

– Trend mid 1998-2000

Traditional


• Can offer experience and contacts

• Cashed out businessmen - tend to be local

• Managers from family groups

• Some entrepreneurs do not like angels

• Tax issues will impact angel financing– Top tax rate went from 35% to 42%– No capital gains tax

Angels and Traditional VCsAngels


Securities Laws

• Low flexibility - need revamping• Business concepts important to Angel & VC

financing do not exist or do not work– Funding round provisions, lock-up, vesting (term, cliff,

etc.), warrants, treasury stock

• Need more work with laws for fairness, control, disclosure, and minority shareholder protection

• May create problem with businesses incorporating in Argentina and getting angel funds


Angels: Comparison to US

• Both have industry experience, have cashed out, and want to help the next generation.

• US Angels are a critical stage for very early ventures, especially for first-time entrepreneurs

• Argentine Angels are where US angels were several years ago

• US angels do create arms length transactions, and do use NDAs once an investment is made


Trends &

Conclusions


Other Organizations

• IADB – Multilateral Investment Fund– MIF has developed a set of early stage funds with

harvest periods of 5-8 years– $100K-$1M (similar to US Angels)– Provides technical assistance

• Endeavor– Based in NY, with several LA field offices– Screens plans– Provides technical help and capital


Innovative• Nature Conservancy

– Fondo EcoEmpresas Project– Includes $6.5M fund for Latin America– $50K - $800K investments– Must have non-profit partner

• Ministry of Labor and Social Security– Funding from IADB– Ministry provides training– Focus on micro-enterprises


Softbank• SOFTBANK Latin America Ventures

– Provide funding & technical help for LA Internet companies

– Provide LA for Softbank companies– $150M; 18-24 months from 1/00

• SOFTBANK Emerging Markets– With International Finance Corporation– $200M fund with 75% Softbank– Focus on 100 emerging countries– Provides accelerator/incubator model


Impact on Entrepreneurs

• Importance of angels is in question, and the real role lies with international groups

• Counsel and advice is expensive and hard to come by

• Ability to raise capital and gain contacts hurts first time entrepreneurs


Sources 1

Please see notes section.


Sources 2

Please see notes section.


Documents

Venture Capital In Argentina