The $5 billion SoftBank Innovation Fund plan is interesting news for startups across Latin America. It’s both a brave and no-brainer decision for the fund to make, in terms of investing significant money in what is still, a nascent market, yet devoid of significant local growth-stage investment dollars.
In theory, the arrival is a great fit, as raising Series A money in Latam is usually a very hard graft. The capital suffocation hinders growth because unlike the European, or US sandboxes, the territory has less unification on both a geographical and legislative context. Overcoming this requires the cash to match the ambition.
SoftBank is arriving at a time when the market has matured to a new phase, where seed investing has become more selective, and Series A deals have remained steady. The successful seed cohorts of 3–5 years back have matured and, as seen in other geographies, those fortunate enough to reach Series A are raising more money.
At the seed stage, there is a healthy pool of angels, family offices, accelerators and VC funds to invest. Thereafter it gets difficult and is not helped by slow exits and, the occasional scandal. SoftBank, therefore, should be a welcome arrival to many.
To succeed in Latin America through, SoftBank will need a far different playbook to what it has used before. Here are some ideas as to what that could be.
1. Hub & Spoke HQ
On the one hand, some could say that SoftBank doesn’t even need to locate itself in Latin America physically. With Miami clearly springing to mind. The visibility of the companies that it will invest in will be pretty evident from afar and will arrive through relationship-building and inbound/outbound interest.
Doing this though would be a missed opportunity, by ignoring the local talent that exists in Latam. Fortunately, SoftBank has already earmarked four locales.
A large shortlist is a clue, because the two obvious candidates, São Paulo and Mexico City are not mutually exclusive territories. They encompass very different markets (and languages) and would each require an individual presence. Likewise, Buenos Aires and Bogotá have merit, and I’m surprised that Santiago is not on the shortlist.
Instead of having a local “HQ”, to encourage parity I would say to avoid it completely, with each country having a local and independent presence. This will negate politicking and promote a more balanced approach. Presence could range from set offices with “SoftBank Latin America Local Hub” services (more on that later), to lone scouts hustling in more emergent places, such as Peru.
2. Needs Some Kind of a Platform Value-Add
When SoftBank invests in Uber or WeWork, they are investing in companies that are well on their way. In Latin America, they will need to be able to offer more sweat support to the investments.
Dropping a $100m cheque into a company that has previously raised fractions is a dream scenario for many CEOs. But post-investment there will be immediate changes required: both in terms of growing rapidly, but also to filter away the inevitable moths to the flame and to hire great talent quickly. This will all require some assistance.
The inflationary effect of a significant investment in a Latam startup will be exponentially greater than say, in a western one. It, therefore, is important for SoftBank to ensure that money is spent wisely because the funding distortion will have a butterfly effect on the local market.
Having local talent in each investment hub will help investments adapt, and this can be augmented with more bigger-picture growth, marketing and HR playbooks from SoftBank’s international network.
3. Get Involved with Acceleration
SoftBank should look into levelling up, or disrupting, the Latam accelerator mentality. In the long run, this will be its deal flow machine, and right now, this area of the market is not in an optimal state. Many of the successful startups in Latin America aim to enrol in foreign programs like Y Combinator. For those not so lucky, they are left with the local options.
While some are good, the majority are not. They tend to offer half-baked programs packaged up as sponsored content opportunities for service providers, with passive mentoring and option-based investing: “we’ll invest only if others do first.”
Some of the most prominent startups to come from Latin America are variants of success stories from abroad. In my opinion, this is due to the paradigm of their owners either being educated or accelerated/funded by foreign markets, thus arrives the moment of enlightenment: “why don’t we bring x to Colombia?” Similarly, investors can also fall into such mindsets.
Cloning is obviously a fine strategy for being a first mover. But it creates a winner-take-all mentality that can further exacerbate the wait for exits, as it becomes a musical chairs game of acqui-hires and death by a thousand cuts.
But in the long run, the transformational ideas will come from local solutions being devised by local means. Accelerators need to help the masses to become inspired to do this.
If SoftBank lends some resource to this sector, it will ensure it has a healthy investment pipeline for long into the future.
3. Bigger Picture Investment Sectors
SoftBank said the new fund will focus investments on industries like e-commerce, health care and digital financial services, among others
Investing up to $5 billion in an emerging market requires a mentality of tackling trillion dollar challenges. With failure rates higher and local currency unit economics lower, returns will only be yielded by investing in truly transformational industries.
When I read that e-commerce was an area of focus, my first thought wasn’t internet shops, but actually how to encourage the environment of e-commerce. That comes down to the wider picture of financial inclusion, logistics and local production supply chains (to remove the need to import).
Early investments will no doubt focus on recent success stories like Rappi. But in the long-run, the big-big wins will come from looking at local problems that can serve a full suite of customers across the income spectrum.
in Latam, SMEs account for 90% of all businesses and a quarter of GDP. Tech that serves the digitisation of this economy will be a huge opportunity, once someone cracks it.
Even looking away from traditional “tech investments”, Latin America’s economy has traditionally been based on commodity extraction. Tech to improve this process and keep its value chain within the continent will have significant knock-on benefits. The COO of the Innovation Fund, Marcelo Claure, is from Bolivia, a country with the second largest reserves of Lithium in the world, the power behind all of our batteries.
4. Keep Local Investors Involved
For local investors, SoftBank’s arrival will be a revelation. A SoftBank investment has game-changing signalling properties and earlier investors will obviously be keen to showcase their wares. I’m assuming the reason there is no website yet for the fund is to avoid the initial deluge of welcomes being offered.
VC investing in Latin America is a brave game and there is always the tendency to look for a quick exit. Many angels, in particular, try to cash out immediately in the next round, instead of holding on for greater gains in the long-term. I guess this comes from the historic culture of safe(ish) real-estate investing.
SoftBank though, should not arrive and look to shoe-horn in control and buy-out the cap table. They should keep local investors on their side for their knowledge and restraint. This will create healthy governance structures and remove the perverse incentives to flip investments irresponsibly. The skill-sharing for both sides will be invaluable in the long-run.
5. Getting the SoftBank Latin America Local Hub right
Just as interesting as the fund new, was the concept of the SoftBank Latin America Local Hub, which aims to:
Partner with companies that are already in SoftBank’s investment portfolio to help them break into the region
This makes total sense and suggests towards the wider play that SoftBank is aiming to make throughout its extensive portfolio, by leveraging skills and services across its businesses.
It also plays to the theory that SoftBank is not so concerned by immediately realising liquidity from its investments and instead, is aiming for a longer-term conglomerate-play. Where capital can be sought in private markets indefinitely, and investments will be held until it’s optimal to liquidate, instead of conforming to portfolio timing constraints.
The hub concept should work in both directions though, for also assisting Latin American businesses to expand overseas. If it’s just a one-way process for foreign businesses, then I can’t see how it will have many synergies with the local investment activities.
But… let’s see how it all plays out! Either way, it should be a fascinating exercise to observe.
The prospect of $5 billion of foreign direct investment into private sector startups is a once-in-a-generation opportunity for any emerging market. You have to admire SoftBank’s cojones here.