Seed Capital in LatAm: an overview

The seed and venture capital funds aim to support small businesses to gain competitiveness in the market.

Investments in Latin American startups are booming. In 2018, the early funding stages of the region obtained a record figure by raising 2 billion dollars of investment that boosted the emergence of new unicorns on the continent such as iFood, Nubank, and Rappi.

This success in Latin American investments attracted new players like Softbank who this year have injected more capital into the entrepreneurial ecosystem. However, the Latin America companies still have to find a way of obtaining funding in the early stages, from the conception of the idea to the business plan. In other words, how to get seed capital.

The seed and venture capital funds aim to support small businesses to gain competitiveness in the market. In this way, they help companies grow faster not only with capital but also with advice. Most of seed capital funds encourage the companies to improve their corporate governments and achieve greater efficiency in the use of its resources.

In 2013, the Organization for Economic Cooperation and Development (OECD) noted the lack of investment in the early stages and the expansion of enterprises as a weakness of the region. In these years, Mexico had no government support for seed capital. Colombia and Peru had just started a seed capital program. In Argentina, a seed capital fund was in the development phase, and only Brazil and Chile had an initiative in operation.

Investment in the initial stages of a startup has improved in the leading economies of the region. However, Latin America is still lagging behind the rest of the world. In 2016, of 27 billion dollars invested in venture capital, the United States accounted for 41% of this amount, Asia 35.9%, Europe 11%, and 12.1% went to the rest of the world.

Latin American countries have promoted programs to offer seed capital and support technological startups with rapid growth and internationalization potential to counteract this scenario. According to the OECD, public policies that encourage seed capital offer incentives for the development of the financial industry at an early stage.

However, policies for entrepreneurs must also consider other factors that stop the growth of companies, such as the lack of business management capacity of researchers and innovators, as well as legal barriers to financing.

Public policies must offer entrepreneurs training in business capacities and physical spaces for innovation, such as incubators to tackle these problems. The governments of the most important economies in the region have done this task in addition to solving the funding problem.

Argentina undertakes despite the crisis

The recent economic crisis in Argentina does not seem to affect entrepreneurship. In 2018, the seed capital grew compared to 2017, which had already taken a significant leap compared to the previous year.

In 2018, Argentine entrepreneurs received $11.3 M of seed capital, with an average investment of $180 K per startup, according to a study by the Argentine Association of Private Capital, Entrepreneur and Seed (ARCAP), together with EY Argentina and the Latin American Observatory of Financing for Entrepreneurs.

The positive numbers of this sector, during an economic crisis, do not surprise specialists such as Juan Giner González, director of ARCAP. Giner points out that these funds are intended as medium and long-term plans, so they usually escape short term crises.

In Argentina, the government has opted for technological ventures for several years, which has allowed the emergence of unicorns in this country despite recurring economic crises. Also, Argentina is one of the benchmarks in IT outsourcing services in the region due to the high level of training that its software developers and engineers have.

Brazil, the most attractive market in the region

Investments in early stages of Brazil stand out in the continent. This achievement is even though the seed capital funds in Brazil are in development and usually request greater participation in the company for a smaller amount.

In 2016, Brazil received $1,326 M from the $2,074 M invested in the region. The National Bank for Economic and Social Development (BNDES) of Brazil is partially responsible for this success. The BNDES announced in 2012 the creation of a fund of more than 25 million dollars to support small and medium-sized technology development companies, known as Criatec.

This fund showed great success in its first version, and BNDES replicated the experience with new versions of the program. In addition to offering to finance, the fund accompanied entrepreneurs to improve the management and governance of the company.

Colombia hides unicorns

The success of Colombian startups such as Rappi has helped entrepreneurship in this country be considered a priority for the government, to the point that this year it will offer $24.6 M in seed capital.

In Colombia, two government funds offer entrepreneurs resources to start a business. One is iNNpulsa Colombia, the Business Growth Management Unit of the National Government to promote entrepreneurship and innovation. Another one is the SENA Entrepreneurship Fund (National Apprenticeship Service). SENA Fund sponsors the creation of new companies with forgivable loans, in addition to seeking social inclusion in the enterprises.

The iNNpulsa Colombia program grants non-reimbursable cofinancing options that cover a part of the projects to be developed and makes calls throughout the year aimed at ventures at different stages of development.

The SENA Fund opens four calls throughout the year. In 2018, this fund delivered $ 596,800, promoting 7,360 new business plans in 70 cities in Colombia.

Despite this support, in Colombia 70% of startups are still financed with entrepreneurial resources, while only 7% get seed capital, says Sergio Zuluaga, Executive Director of the Association of Entrepreneurs of Colombia.

Chile has long experience with seed capital

Chile is one of the Latin American countries with the oldest tradition in programs to boost entrepreneurs. Government support for seed capital in Chile has been in existence for more than 18 years. These supports began with the Seed Capital line that subsidized 101 projects with $ 4,500 in the first five years of operation. Over time, the government and private initiative have created new initiatives to boost startups in early stages, such as Innova Chile or Startup-Chile. Since these years, funds for the creation of companies in Chile increased steadily until 2016.

Among the government programs in Chile to support entrepreneurship, the Technical Cooperation Service has the Capital Seed Emprende program, which grants up to $ 730 for business management and marketing actions. The program offers a minimum of $ 300 for marketing actions.

Although every year, more and more entrepreneurs submit applications to access the seed capital that Chile offers, this support has been reduced since 2017. This fact sparked criticism from organizations that indicate that the ventures have generated a return on investment to the State three times higher in tax collection than the expense to boost them.

Peru, a growing investment ecosystem

In the last three years, investments in startups have increased in Peru by 67%, according to the Peruvian Association of Seed and Entrepreneurial Capital (PECAP).

The government of Peru has boosted seed capital since 2013 with the Startup Peru program. This program began by granting up to $ 45,000 in non-reimbursable seed capital to technological enterprises with growth potential to internationalize.

Startup Peru began in 2013 with a fund of $5,500 M, which has been increasing over the years. In the first quarter of 2018 alone, five Peruvian startups closed rounds of financing with a seed capital of 1.6 million dollars.

The seed capital in Peru is the first link to boost entrepreneurship. Javier Salinas, director of Emprende UP, points out that the government mainly drives these funds and that they involve 100 million dollars per year from the state budget.

Mexico, a developed ecosystem

Based on the OECD Report that warned about the consequences of the lack of seed capital in Mexico, the government created the National Entrepreneur Institute (Inadem). This institute gifts support to non-repayable grant to finance entrepreneurship in the country, in addition to training for entrepreneurs.

However, the current Mexican government has stated that it intends to eliminate the Inadem, although it said that support for entrepreneurs would continue to be granted. The intention, according to the group in the Senate of Morena (the majority political party), is to reduce bureaucratization and eliminate intermediaries for entrepreneurship.

Despite the cuts in Inadem, Mexico still has a variety of private investment funds for seed capital that make it a dynamic country for investment. Some seed and venture capital funds in the country are 500 Mexico City, Alta Ventures, Dalia Capital, or Venture Partners.

The Inter-American Development Bank (IADB) considers the Mexican entrepreneurship ecosystem as one of the most developed in Latin America, although it warns that lack of seed capital for entrepreneurship projects. This situation opens up an opportunity area for the ecosystem, especially for early-stage projects.

Public and private universities in Mexico have played an essential role in solving the lack of support for young innovators. For this reason, they have driven enterprises from their early stages with incubators, hubs, learning communities, and open campuses.

Funds for Latin America

In addition to government funds by country, there are funds from international organizations and venture funds that offer to fund to startups since the development of their business plan in Latin America.

The Multilateral Investment Fund (MIF) of the Inter-American Development Bank Group (IADB) offers technical assistance to the private sector in Latin America, as well as investing in microfinance and entrepreneurial capital funds. This IADB fund works primarily with local and, mostly, private partners. For example, in 2011, the MIF invested four million dollars in C-Ventures Primus, a seed capital fund that works in the southern states of Brazil (Santa Catarina, Paraná, and the Rio Grande do Sul).

The MIF will also invest in the impact investment fund of NXTP Labs, another private fund that operates in Argentina, Chile, Colombia, Mexico, and Uruguay. NXTP Labs will provide seed capital to 32 companies, in addition to special programs for Agtech and Fintech companies in Latin America.

A particular case in funds that offer seed capital is LATAM Fund, as it is the first venture capital investment fund born in Silicon Valley. This fund invests without asking for equity in the company and provides capital for technology-based companies in the region that are focused on the Hispanic market in the US.

All these funds for seed capital will have little impact on the region while Latin American governments invest little in Research and Development (R&D). The countries of the region invest less than 0.5% of GDP in science and technology, except Brazil, which reached 1.2% of investment in its GDP. The OECD average is 2.4%. The investment in these items is vital for the creation of disruptive ventures.