REPORT 2015 vol. 6 Forward-thinking articles from our global network of innovation ecosystem experts KFR Staff KF Board of Directors Publisher Brian Dovey, Chairman Kauffman Fellows Press Domain Associates Executive Editor Tom Baruch Phil Wickham Formation 8 Managing Editor Jason Green Anna F.Doherty Emergence Capital Partners Associate Editor Karen Kerr Leslie F. Peters Agile Equities, LLC Production and Design Audrey MacLean Anna F. Doherty Stanford University Leslie F. Peters Susan Mason Printer Aligned Partners Almaden Press www.almadenpress.com Jenny Rooke Copyright Fidelity Biosciences © 2015 Kauffman Fellows. All rights reserved. Christian Weddell Under no circumstances shall any of the information provided herein be construed as investment advice of any kind. Copan About the Editor Phil Wickham Anna F. Doherty is an accomplished editor and writing Kauffman Fellows coach with a unique collaborative focus in her work. She has 20 years of editing experience on three continents in a variety of business industries. Through her firm, Together Editing & Design, she has offered a full suite of writing, design, and publishing services to Kauffman Fellows since 2009. Leslie F. Peters is the Lead Designer on the TE&D team. www.togetherediting.com www.kauffmanfellows.org Town & Country Village • 855 El Camino Real, Suite 12 • Palo Alto, CA 94301 Phone: 650-561-7450 • Fax: 650-561-7451 Singularity and Growth in Latin America: Nine Drivers of Category-Leading Companies Ariel Arrieta Class 18 Enterprises like Google, Facebook, Airbnb, I believe that during the next Dropbox, Instagram, Whatsapp, and Twitter are decade, twice as many Latin unique in the high level of impact they have on the world. With billionaire valuations, they American companies will reach redefine ways of doing business and are at the $1+ billion valuations. Furthermore, I forefront of consumer trends. Investors are argue that this exponential growth rate can be always looking for that one innovative startup maintained—a Moore’s Law for Latin American able to become life-changing for millions of companies with global reach—but only if the people. region can take advantage of the These game-changing startups are real— unexplored verticals that present and they are also occurring in Latin America. this unparalleled opportunity. While the list of Internet companies founded As a serial entrepreneur in the Internet- in Latin America that have already managed company space since 1994, and currently Co- billionaire valuations is short (figure 1), these founder and Managing Partner at NXTP Labs, few have paved the way for other Latin American an accelerator and seed fund of Latin American companies to envision themselves becoming Internet-based startups, I have long had a global players. keen interest in the question of identifying and Rank Company Sector Valuation Founded Status 1 Mercado Libre E-Commerce $6.3B 1999 Public 2 B2W E-Commerce $3.7B 2006 Public 3 Despegar Search $1.0B 1999 Private 4 OLX Classifieds $1.0B 2006 Private 5 UOL Telecommunications $1.0B 1996 Private Figure 1. Latin American Internet Companies with $1+ Billion Valuations. Author’s figure; data from L. S., D. H., and P. J. W., “Start Me Up,” The Economist, 7 July 2014, http://www.economist.com/blogs/ graphicdetail/2014/07/daily-chart-6?fsrc=scn/tw_ec/start_me_up. Kauffman Fellows Report volume 6, 2015 www.kauffmanfellows.org © Kauffman Fellows Press 15 Singularity and Growth in Latin America supporting so-called unicorn investments in The rapid growth of companies Latin America. In this article, I outline nine key such as these is not just a wish or drivers supporting the development of category- leading Latin American companies over the next desire. Rather, it is the expected ten years. To discuss those factors, I refer to and plausible result of the companies that are raising the most funding transformation of nine key drivers. and are on track to becoming the next Latin American leaders (figure 2). Driver 1: Emerging Markets Have Momentum There has been sustained economic growth Company Sector Country in emerging Latin American countries such Navent Real Estate Argentina as Chile, Peru, Colombia, Brazil and Mexico.1 Enterprises competing and working together Internet UOL Brazil across these emerging markets have facilitated Services the consolidation of companies throughout the VivaReal Real Estate Brazil region.2 The growth in number of Latin America’s Global Open English E-learning $1+ billion companies is attributed to the Venezuela expansion of the global market itself—around Satellogic* Satellites Argentina 50% of connected Internet users come from emerging markets, and 73% do not have English Regional as a mother tongue.3 In the 1990s and before, NetShoes E-Commerce (Based in to be a great company required a strong (if not Brazil) exclusive) presence in the English-centered Dafiti E-Commerce Brazil markets—but no more. As the numbers above reflect, Avenida E-Commerce Argentina there are now significant opportunities to build a great Mobile YellowPepper Regional company outside the English- Payment language markets. Global (based Technysis Finance One good example of this shift is OLX, an in Argentina) online classifieds company founded in 2006 that NuBank Finance Brazil has grown to 1,200 employees and operates in 40 countries—making it, in 2013, the largest Mobile Spring Wireless Global marketplace in India, Poland, and Brazil. As of Solutions October 2014, OLX had reached the 200-million- Movile E-Commerce Global user milestone (same as Instagram) without having a strong foothold in English-centered Online Restorando Regional markets.4 reservations 1 Personal Bloomberg, “Bloomberg Visual Data, Best Emerging Markets 2014: Compraraonline Chile Countries,” http://www.bloomberg.com/visual-data/best-and- finance worst//best-emerging-markets-2014-countries. 2 Luvciano Ciravegna, “The Silicon Valleys of Latin America – Hotel Urbano Travel Brazil Searching for ‘Shared Value’ Development Models,” European Business Review, 11 January 2013, http://www.europeanbusinessreview. com/?p=2134. Figure 2. Companies Likely to Become the 3 Olivia Nottebohm, James Manyika, Jacques Bughin, Michael Chui, and Abdur-Rahim Sayed, Online and Upcoming: The Internet’s Impact Next Latin American Category Leaders. on Aspiring Countries (McKinsey, January 2012), 6, http://www. Author’s figure; data based on LAVCA, Venture mckinsey.com/~/media/mckinsey/dotcom/client_service/high%20 Investing Snapshot: LATAM Trends (2014), 4, tech/pdfs/internet_in_aspiring_nations_report_april_2012.ashx. 4 Erin Griffith, “Meet OLX, the Biggest Web Company You’ve http://lavca.org/2014/08/28/venture-investing- Never Heard Of,” Fortune, 29 October 2014, http://fortune. snapshot-latam-trends/. com/2014/10/29/olx-emerging-markets/. 16 © Kauffman Fellows Press www.kauffmanfellows.org Kauffman Fellows Report volume 6, 2015 Kauffman Fellows Report, vol. 6, 2015 Driver 2: Role Models and Success nature and so present a high level of risk; Stories Affect Aspirations therefore, the first resources made As the whole industry is being consolidated, accessible to high-potential success cases are coming up gradually—and startups come from angel continue to define themselves over time. The definition of success in the late 1990s was to investors. create a company and then sell it, but success is Since 2010 angel investors in technology projects have formed and consolidated networks now redefined. Today, being successful within national and regional Latin American means creating a company ecosystems.8 Though some studies suggest that that lasts and transcends Latin America has 21 active angel networks technological change—in no small encompassing more than 700 investors, we part because of the timeframe to at NXTP Labs know that the number of create a billion-dollar company. It investors is bigger and is growing takes about seven years in the United States, rapidly in the emerging countries eight in Europe,5 and the global average is likely of the region: Argentina, Brazil, to be longer. Colombia, Chile, Mexico, and Therefore, since the mid-2000s, the model 9 of a successful entrepreneur has also changed. Peru. Previously, the role model was of entrepreneurs Angel investors in Internet-based companies like Wenceslao Casares: as a student, he created most often are, essentially, recycling capital. Patagon, a portal for financial operations that Angel investors usually fit the profile of after several investment rounds managed to sell entrepreneurs who managed to make money in 2000 for $750 million.6 Other founders and starting Internet companies and then returned startups then developed the objective to be sold to invest in what they believe in. They perceive to strategic companies who were already big risk in a very different manner than traditional players in the market. investors, and are reinvesting the This aspiration to find the right big buyer capital generated in their own changed in Latin America in 2007 when experiences in the industry. MercadoLibre launched its IPO on Nasdaq (MELI) This recycling is supported by several under the leadership of its CEO and Founder, factors. Angel investment is catalyzed by Marcos Galperín. The company now surpasses those investment funds that are led by a $4 billion valuation, and is catalogued by technology entrepreneurs, such as Kaszek, Forbes as one of the most innovative technology my own NXTPLabs, Fabrice Grinda, and José th 7 companies in the world (18 out of the top 100). Marín. Behind them are countless technology- entrepreneurs-turned-angel-investors, Driver 3: Angel Investors Recycle betting once again on “safe” investments. In Capital general, this angel money is also followed by In the consolidation of the technological entrepreneurial know-how gained from the industry linked to the Internet, angel investors success that made them investors. Finally, are key agents. Internet startups exist within interests are aligned in a wider ecosystem that an immature business segment by their very finds value in the progress of startups. 5 Manish Madhvani, Alessandro Casartelli, and Oana Chimina, These trends are supported by the numbers.