The Growing VC Opportunity in Peru
By Camille Chouan, Senior Associate
This article was co-written with Dan Block, a Senior Associate at I-DEV’s Investment Advisory Group in Latin America
Most people think of Machu Picchu and amazing gastronomy when we say we live in Peru. And even though those are fairly amazing perks, there’s another much bigger reason why Lima is the headquarters of I-DEV’s Latin America operations: with one of the fastest growing economies in the region, Peru is investing in technology and knowledge-based sectors at increasing rates and becoming one of the region’s most exciting and potent innovation labs.
The Peru Venture Capital Conference organized by UTEC Ventures on June 13–14th in Lima confirmed this. It was the first Peru-focused VC conference held in Lima, and more than 400 people turned up, including high profile Latin American-focused VC funds like Velum Ventures, NXTP Labs, Axon and the Dubai-based Abraaj Group. Even more telling for how quickly the space is evolving is the 370% rate at which VC investment (in US$) grew in Peru last year, compared to the country’s yearly average from 2011 to 2015, making Peru the third largest VC market in Latin America (by US$ invested) in 2016, according to LAVCA.
In 2016, Peru was the third largest VC market in Latin America by US$ invested, after Mexico and Brazil
Despite progress, Peru is far behind leading VC markets like Mexico and Brazil, which represented 70% of Latin American deals. Only 6% of regional VC went toward Peruvian companies, and 1/3 of the $31M invested was toward microfinance. High profile exits like Cinepapaya’s acquisition by the leading digital network Fandango in 2016 are signs of a developing investment market, yet entrepreneurs still face less-than-desirable exit options leaving limited room to negotiate.
It’s a bit of a chicken and egg problem, really. Investors blame the lack of investible deals, while entrepreneurs lament the lack of start-up capital and liquidity in the market to support growth. These are valid barriers, but solving the early-stage capital gap in Peru will require strengthening ties across the different building blocks of the start-up ecosystem.
Angels, Lead the Way
The growing number of angel investor networks in Lima is a strong sign of market optimism. Mexico-based Angel Ventures launched a branch office in Lima three years ago, and has been laying the groundwork for angel investing in Peru since. More recent networks have started up as well, including BBCS Capital, UP4Angels, Capital Zero, and PAD. All told, these 5 networks — which joined forces last month to create the PECAP (Peruvian Start-up & Seed Capital Association) — are comprised of 150 or so local high net worth individuals looking to invest seed capital in catalytic start-ups. Along with support from government initiatives targeting entrepreneurship through the Ministry of Production, COFIDE (Peru’s development bank), and foreign outfits such as SwissContact, start-up investments are starting to gain traction.
The growing number of angel investor networks in Lima is a strong sign of market optimism.
However, the number of deals, active investors, and dollars deployed remains slim at this point in time. In addition, few local investors and family offices have dedicated funds or portfolio strategies to invest in early-stage ventures, making it more challenging for angels to build momentum and drive deal flow. To boost angel investing in Peru, more investors need to collaborate and come together on syndicated deals rather than trying to go it alone. Such deals with each party investing small amounts de-risks the opportunity and leverages a broader network and resources.
The Smart Capital Learning Curve
The concept of “smart capital” — where investors wear many hats and bring a magic combination of funding, know-how, network and mentorship to the table — is not new, but in Peru where most traditional investors are still hesitant to dip their toes in the start-up space, an investment “mind-shift” is required for investors and entrepreneurs to consider each other as long-term, strategic partners, and even colleagues.
As active advisors in businesses they support, early-stage investors — especially angels — need to be willing to roll up their sleeves and embrace the challenge of building a company alongside founders, by contributing to strategic planning, opening doors, and patiently supporting entrepreneurial value through several (2–3) rounds of financing rather than setting unrealistic return/exit expectations.
An investment mind shift is needed for entrepreneurs and early-stage investors in Peru to form strong relationships and drive value through “smart capital”
And while Peru’s aspiring entrepreneurs require support to hone their value proposition, position for regional expansion, develop competitive data strategies, and pitch their business effectively, investors too would benefit from training on how to analyze, invest in, and build value for such companies. Additionally, building knowledge around market-appropriate seed investment instruments, to incentivize and de-risk angel activities as well as position businesses to attract future investment is essential. Programs that bring leading angels to share their experience with the community are valuable, like those of SwissContact, which has sponsored the visit of keynote speakers such as Nelson Gray from Firth Ventures and the founder of priceline.com, Jeff Hoffman, both within the last 12 months.
However, it will take patience and both investor and entrepreneur education to create a strong VC culture in a country where trust is often hard-earned and influenced by long-developed personal relationships.
What’s missing?
Peru needs more reference cases of successful, innovative Peruvian start-ups scaling across the region and achieving attractive exits. Moving the needle will require stronger ties across different players in the ecosystem, from incubators, start-ups, and universities to corporates and investor networks, in order to build trust and foster collaboration.
Corporations can play a pivotal role in filling the VC investment gap in Peru, by betting on start-up innovation rather than trying to compete in a zero-sum game, as the recent case of Joinnus shows. In a landmark deal for the market, the Peruvian mobile ticketing app raised $500k from news outlet RPP for a minority stake, to support the start-up as it grows and extract synergies across RPP’s network.
Finally, governments, academia and professional service providers also need to factor in the needs of start-ups and develop targeted support services across their lifecycle, from R&D to expansion, especially as businesses look to compete in other markets, regionally. Addressing the local tech talent gap is also critical to enable Peruvian start-ups to build in-house technical know-how and robust teams that attract VC investors.
The Peruvian Ministry of Production has taken an active role in supporting start-ups, through its seed program Start-Up Peru, which provides equity-free grants of up to $50k, and Innovate Perú, which supports a wide range of actors across the ecosystem (incubators, accelerators, investors, innovation firms, etc.). UTEC Ventures, Emprende Up and Start-UPC are just some of the many seed-stage incubator programs being run out of Peruvian universities today, not to mention the increasing presence of internationally renown start-up accelerators like Wayra, Endeavor and Fledge.
With all of these encouraging signals to the market, Peru is gaining increasing attention from VCs and larger regional investors waiting to make their move. The turning point will come when local investors and entrepreneurs are able to successfully work together to develop unique business value propositions, which will enable local start-ups to compete successfully and on par with the rest of Latin America.
The ecosystem has made quantum strides over the last 18 months, and we expect to see accelerated change in Peru’s aspiring entrepreneurs and growing investor base in the second half of 2017. Stay tuned!
