Flea market investing in Latin America
Tuesday, June 8, 2010 at 6:11PM I've always been fascinated with the prospect of finding treasures where others don’t think to look. Growing up, my family lived in places like Lima, Peru and Ljubljana, Slovenia; where visits to the local flea markets on Sundays became my childhood Disneyland. I still remember the thrill of walking away with my $10 allowance transformed into a unique jewel worth far more.
I had a similar feeling last week while interviewing Lorenzo Lara, the founder and President of Negocios Digitales, a Venezuelan early stage investment group. Since 2000, Lorenzo has been leading his firm to invest in companies that as he put it, “have a Venezuelan flavor”. Some are based in Venezuela, while others are headquartered abroad but have Venezuelan founders. Today Negocios Digitales has three active portfolios with over 20 investments. Perhaps most notable is the fact that they have already exited 9 out of the 10 companies in their first portfolio, including the well known “Classified Media Group” which was acquired by Mercado Libre (the LatAm “ebay”) in 2008 for $19 Million.
Few US investors would place their bets in Venezuela’s current environment. A quick search of the country’s recent news will bring up troubling stories of currency restrictions, energy shortages and the nationalization of the private sector. But Negocios Digitales (ND) decided to stay in the country and become its preeminent provider of early stage venture capital. Back to the flea market analogy, ND is now the only one showing up on Sundays to explore the hidden treasures that the Venezuelan entrepreneurial community has to offer. While much of the mainstream venture capital is following competed deals that command premium valuations; ND’s bold investment approach has helped them carve out an uncontested space where opportunities come at accessible prices. As a clear example, they entered the Classified Media Group deal at a $500,000 valuation.
Unlike the traditional VC model, Negocios Digitales doesn’t raise a fund but rather secures commitments from their network of investors. Their role is to find exciting deals, conduct the required due diligence and then take the most promising opportunities back to their group for final approval. When investments are made early, they often take a board seat and become very active in helping the company achieve its milestones. The success of their model has led them to kick off their third portfolio from which they plan to make 20 investments with an average participation of $500,000. And they are moving quickly; four of these twenty slots have already been taken. The first is Music Intelligence Solutions, a Barcelona-based venture with Venezuelan founders that developed a patented technology to help music producers tell if a song will succeed or fail. The service has already been featured in the Economist and Harvard’s Business Review. The San Francisco Chronicle described it as the “FICO score for music”.
ND’s second investment was Blue Condor Solutions, a developer of aeronautical software solutions for the Latin American market with sales offices in Miami, Vancouver and Mexico City. Their team of developers works out of their Caracas, Venezuela back office.
They’ve also invested in Panama City-based Container Consultants and Systems, a provider of information and management solutions focused on the ocean freight transportation industry. The company got on ND’s radar because of their close ties to Venezuela’s premier business school, IESA.
Their fourth investment is a testament to the group’s category agnostic approach. They decided to fund Ricardo Rodriguez’s career, a local 17 year old tennis player being groomed to become the “future face of Venezuelan tennis”.
ND’s local network of connections and regional know-how gives them an unfair advantage in a market ripe with talented human capital and no shortage of promising business plans. Being the flea market lover that I am, their investment strategy resonates with me. If I had a small fund, say $10-20 Million, I would much rather invest in 10-20 exportable ideas born in overlooked markets than in 1-2 mainstream deals.
Hopefully ND's example will embolden others to search for the next great idea where others wouldn't think to look.
Reader Comments (1)
On the topic, another book you might add to the list is "The Second Bounce of the Ball" by Ronald Cohen. Cohen co-founded Apax Partners and was one of the founders of private-equity in the EU.