Scaling up innovation

Mobilizing $$ from Wealthy Families in Peru (& L. America). And Why Family $ is Not Angel $—Day #3 in Lima, Peru

- Updated December 14, 2017

Entrepreneurs’ most frequent complaint is how challenging it is to raise money, especially risk capital: founders in developing countries have even more difficulty since the amounts of venture money for investment in most emerging countries is less vs. the USA.

Yet with the millions invested in food & beverage, fast moving consumer goods, retailing, wholesaling, and construction to name a few in the developing world, why does so little of this money flow to tech enterprises—from Peru to Paraguay to the Philippines, Beirut to Buenos Aires to Bangalore—or from Moscow to Manila to Mexico City? One reason is the mismatch between risks sold enthusiastically by entrepreneurs and risks willingly purchased by investors.

Investors are as frustrated as you are—having the means to invest for impact, but not presented with the right venture capital, corporate governance and tech business model solutions required to open their wallets.

On Day #3 in Lima, I met with five of the wealthiest families in Peru—discuss solutions, business models and financial instruments to unleash capital for innovation, 1st time entrepreneurs and early stage SMEs. The business interests of these families range from construction to real estate, insurance, banking and financial services, consumer segments like food to clothing to entertainment, mining/minerals and agriculture—mainstream sectors of economic growth in Peru, and sectors which are heavy users of technology.

Much to my surprise, each family had made small investments in tech start-ups and learned that angel investing is not for them.  It’s not that the investment went bad (some did, others performed well), it’s that they are not organized nor structured to invest and manage angel investments. I’ve found this to be true of family wealth in other countries too, Russia, Kazakhstan, Croatia, Slovakia, Slovenia, S. Africa, Kenya & Tanzania as well.

A better instrument for domestic capital is investment in structures like funds—committing capital in bigger chunks, divorced from making individual investment decisions, and the management of a portfolio of young companies.  They want and seek to be ‘active’ investing sponsors by opening their networks and contacts to drive the revenues forward.  Yet in some countries and legal regimes, such direct involvement violates the principles of limited liability in LLPs, and puts families at risk greater than just the capital invested in a fund.

It’s critical that the fund invest in markets which wealthy families know, understand & where they can add value—how to enter a customer segment, secure a beachhead and execute, recruit ‘friends’ to help open doors, when to zig and when to zag as examples.  It’s not technology which frightens domestic wealth so much as it is markets targeted for new innovation and customers’ willingness to adopt untested solutions. Fund managers must finance {and entrepreneurs must create} business models/tech products for industries where local wealth made their billions, sectors like fishing and farming, oil/gas & minerals, retailing, banking and financial services as examples—industries which they have deep understanding of to help achieve positive investment outcomes.

So for example, look closely at industries at the foundation of economic growth in L. America, sectors in need of solutions to drive them forward in the 21st century. One Columbian start-up took such an approach to successfully raise money.

This start-up inserts RFID chips into cows.  The chip sends a signal to a receiver on the neck of a bull with a ‘damaged’ penis.  The bull chases the cows, but can’t copulate.  Columbian ranchers can now easily identify cows in heat for insemination.  This start-up is now deploying its solutions beyond Columbia to ranches and haciendas in L. America.

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If wealthy families are not angel investors in L. American, who are?  Besides the normal cast of characters like other entrepreneurs and accelerators, I have two specific suggestions for you:

1. Seek capital from general partners and senior managers of private equity (PE) funds investing in your country, not money from the funds they work for.

I met such guys from international, regional and Peru-specific funds with offices in Lima, Bogota, Buenos Aires and San Paulo.  These general partners have the personal cash and net worth to invest as angels or in angel syndicates.  They possess the skills and experiences to make such investments and manage a small portfolio + access co-investment networks.  Some of these angel investments will ‘grow up’ to be investment opportunities for their PE funds.

Yet when I asked these PE managers how many seed investments they made in emerging growth SMEs, their answer was none—because entrepreneurs had not approached them & entrepreneurial support organizations like accelerators and incubators had not engaged them!?

2. Corporations—and I don’t mean attempting to convince corporates to create internal venture funds as multinationals like Intel, Siemens, Shell Oil, etc., have done. 

Instead create business models which support the industry restructuring efforts of domestic corporates. Let me give you an example.

Peruvian insurance companies are purchasing hospitals and clinics—a counter intuitive strategic initiative to their core business. Yet these insurers are doing so to improve the delivery and quality of health care services to citizens in Peru—a logical and rational strategy to reduce health care claims—thereby increasing profits of insurers. Certainly much of the innovation implemented to accomplish this objective will be foreign tech purchased from giants like General Electric, Siemens and Philips as examples.  But plenty of room exists for Peruvian entrepreneurs to clone & localize health care business models from the West & the East + innovate new solutions for the genetic specifics of Peruvian citizens.

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Plenty of domestic $$ exists to finance all the innovation and entrepreneurs in all developing countries.  Domestic wealth has more intense personal interests vs. other sources of capital in alleviating poverty, creating jobs/new wealth in the local economy. And families make investment decisions faster vs. alternative sources of money.

Yet they are as frustrated as you arehaving the capital to invest for impact, but not presented with the right venture, investment and tech business models required to open their pocketbookssolutions which must match their behavior to risk.

 

 

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