Venture Capital In Argentina Bragdon Heuser Kittredge Squires CurtisJonathan KevinBrent VC-AR

Introduction to Venture Capital Argentina: Climate and Opportunities Exit Strategies: US vs. Argentina Angels vs. Traditional VCs Trends and Conclusions Intro Climate Exits Angels Conclusions

Introduction to Venture Capital Intro Climate Exits Angels Conclusions

 Angels - Individual Investors  Venture Capitalists Are Funded By: Wealthy individuals Corporations Financial institutions Private foundations University endowments Venture Capital Basics Intro Climate Exits Angels Conclusions

 Entrance Requirements: Management Team Opportunity  Exit Strategy: Initial Public Offering Acquisition Venture Capital Basics Intro Climate Exits Angels Conclusions

 1978: Rule changes for pension funds  1983: 100 IPOs, $4 billion in Venture Capital  Apple and Intel capture the public’s imagination  Inexperience investors flee market  Pension funds and mutual funds gain strength  IPO, M&A activity increase  10 year bull stock market Historical Backdrop Intro Climate Exits Angels Conclusions

 544 companies went public  271 were backed by VC money  Average offering size of venture-backed IPO: $87.2 million  Average post-offering valuation: $502.7 million  Average return achieved by VC this year: 62.5% 1999: The Boom Year Intro Climate Exits Angels Conclusions

Trends Growth of funds: numbers and size Institutional players gain influence Late stage players in the game to “flip” Investment banks in space Market downturn –Valuations down –Retrenchment of investors –Negotiating power shift Intro Climate Exits Angels Conclusions

Venture capital invested by stage How much is enough? USD (Millions) Intro Climate Exits Angels Conclusions

$45,931 $11,796 Total classic venture capital invested worldwide in 1999 Classic venture capital comprises investments in seed, early, startup, and expansion stage companies. Sharing the Wealth? Intro Climate Exits Angels Conclusions

Venture Capital Moves South Intro Climate Exits Angels Conclusions

Argentina: Climate & Opportunities Intro Climate Exits Angels Conclusions

Argentina viewed favorably by investors seeking venture capital opportunities for the following reasons: –More stable economic and political climate as a result of recent reforms –Extensive capital requirements –Limited capital availability Investment Climate In Argentina Intro Climate Exits Angels Conclusions

Investment Climate in Argentina Comparative advantages for venture capital investing in Argentina: –Solid economic fundamentals –Strong workforce –Existence of Mercosur –Positive relations with foreign investors –Presence of start-up and early-stage businesses –Similar accounting and reporting standards –Personal security and safety not an issue Intro Climate Exits Angels Conclusions

Comparative disadvantages for venture capital investing in Argentina: –Current recession in Argentina –Limited options for exit strategy –Difficulty obtaining long-term risk capital –Expensive debt capital –Serious barriers to regional Internet growth –Difficulty with the due diligence process –Corruption and lack of trust in government Investment Climate in Argentina Intro Climate Exits Angels Conclusions

Venture capital investment opportunities expected to arise from the following situations: –Acquisitions of privately owned companies with growth constraints –Companies with promising business models but inadequate capital structures –Consolidation of fragmented industries –Spin-offs of divisions by companies –Leveraged buy-outs Investment Opportunities in Argentina Intro Climate Exits Angels Conclusions

Future venture capital investing opportunities expected to be in the following industries: –Technology used to improve businesses –Agri-business –Telecommunications Investment Opportunities in Argentina Intro Climate Exits Angels Conclusions

Exit Strategies: USA & Argentina Intro Climate Exits Angels Conclusions

 United States: IPO Merger Acquisition Exit Strategies: The United States Intro Climate Exits Angels Conclusions

VC IRR vs. Value of VC-Backed IPOs Intro Climate Exits Angels Conclusions

 International & institutional investors want a way to extract capital  IPO process is flawed  No domestic stock exchanges with liquidity— focus is almost entirely on acquisition  Difficulties performing proper due diligence  Sector influences—agribusiness doesn’t lend itself to harvest Exit Strategies: Argentina Intro Climate Exits Angels Conclusions

 The majority of high tech start-ups in Argentina are incorporated in Delaware or British Virgin Islands  IPO on NASDAQ is becoming the goal of more start-ups  Government policy of dollarization facilitates exit strategies Exit Strategies: Emerging Solutions Intro Climate Exits Angels Conclusions

Angels & Traditional VCs Intro Climate Exits Angels Conclusions

Angels and Traditional VCs From International Groups –Typically branches of funds from US or Europe –Bring investment managers with backgrounds in banking and sometimes operations –Also large banks, e.g. Chase $200M fund, BankBoston/ePagos Funds from family groups –Will co-invest with international groups –Trend mid Traditional Intro Climate Exits Angels Conclusions

Can offer experience and contacts Cashed out businessmen - tend to be local Managers from family groups Some entrepreneurs do not like angels Tax issues will impact angel financing –Top tax rate went from 35% to 42% –No capital gains tax Angels and Traditional VCs Angels Intro Climate Exits Angels Conclusions

Securities Laws Low flexibility - need revamping Business concepts important to Angel & VC financing do not exist or do not work –Funding round provisions, lock-up, vesting (term, cliff, etc.), warrants, treasury stock Need more work with laws for fairness, control, disclosure, and minority shareholder protection May create problem with businesses incorporating in Argentina and getting angel funds Intro Climate Exits Angels Conclusions

Angels: Comparison to US Both have industry experience, have cashed out, and want to help the next generation. US Angels are a critical stage for very early ventures, especially for first-time entrepreneurs Argentine Angels are where US angels were several years ago US angels do create arms length transactions, and do use NDAs once an investment is made Intro Climate Exits Angels Conclusions

Trends & Conclusions Intro Climate Exits Angels Conclusions

Other Organizations IADB – Multilateral Investment Fund –MIF has developed a set of early stage funds with harvest periods of 5-8 years –$100K-$1M (similar to US Angels) –Provides technical assistance Endeavor –Based in NY, with several LA field offices –Screens plans –Provides technical help and capital Intro Climate Exits Angels Conclusions

Innovative Nature Conservancy –Fondo EcoEmpresas Project –Includes $6.5M fund for Latin America –$50K - $800K investments –Must have non-profit partner Ministry of Labor and Social Security –Funding from IADB –Ministry provides training –Focus on micro-enterprises Intro Climate Exits Angels Conclusions

Softbank SOFTBANK Latin America Ventures –Provide funding & technical help for LA Internet companies –Provide LA for Softbank companies –$150M; months from 1/00 SOFTBANK Emerging Markets –With International Finance Corporation –$200M fund with 75% Softbank –Focus on 100 emerging countries –Provides accelerator/incubator model Intro Climate Exits Angels Conclusions

Impact on Entrepreneurs Importance of angels is in question, and the real role lies with international groups Counsel and advice is expensive and hard to come by Ability to raise capital and gain contacts hurts first time entrepreneurs Intro Climate Exits Angels Conclusions

Sources 1 Please see notes section. Intro Climate Exits Angels Conclusions

Sources 2 Please see notes section. Intro Climate Exits Angels Conclusions