Colombia's venture capital investment bolstered by innovative start-ups


Gross venture capital (VC) investment in Latin American start-ups reached a record $780m in the first half of 2018, representing year-on-year (y-o-y) growth of 63% from $476m. The total number of VC deals was similarly up by 61.1%, from 90 to 145, according to data from the Association for Private Capital Investment in Latin America (LAVCA). The association projected VC investment for all of 2018 to top $1.5bn, against $1.1bn in 2017 and $500m the year prior.

Across 2017 and the first half of 2018 Latin American start-ups secured a total of 235 VC deals worth $1.9bn. Brazilian firms led the way in this trend, capturing $1.4bn, or 73%, of investments by value. Colombian start-ups came second, concluding 23 investments worth $188m, followed by businesses in Mexico and Argentina, which secured $154m and $110m in VC deals, respectively.

A Small Piece of the Pie

These figures underscore Colombia’s recent emergence as one of the region’s most dynamic VC markets. However, most of capital continues to be raised from international sources. Domestic equity managers have found the fund-raising environment to be challenging, owing to the high cost of capital, a shortage of institutional investors, and the long-standing inflexibility of the country’s regulatory and fiscal regimes.

According to industry players, while VC firms in Colombia can structure their businesses under the existing private equity framework, the costs associated with operations and reporting are currently ill adapted to VCs, making the viability of standalone funds challenging. Of the 111 private capital funds active in Colombia in June 2018, 19 were registered as VC firms. These investors accounted for $106.7m of the $15.9bn in private capital committed in the local market at that time, equivalent to 0.8%.

While that sum indicates that VC investors only play a modest role in financing entrepreneurship, it is nevertheless encouraging for the segment that half of the funds founded in the first half of 2018 were VC projects, according to ColCapital.

Recent Deals

Colombia has recently been the site of some of the region’s largest VC deals. In August 2018 Rappi, an on-demand delivery service founded in Bogotá in 2015 and currently operating in 35 Latin American cities, secured $220m from a consortium that included Hong Kong-based DST Global, as well as Andreessen Horowitz and Sequoia Capital, two tech-focused funds run out of Silicon Valley. With the move, the mobile app broached $1bn in value to become Colombia’s first “unicorn”. In April 2019 the company announced that it had solicited another $1bn from the Innovation Fund, a $5bn pool established by Japan’s SoftBank to support ventures in Latin American technology. This deal exemplifies the targets for regional investors, who have been seeking scalable projects that can be replicated across borders through the utilisation of new technologies.

At the end of 2018 the online contact lens shop LentesPlus concluded a round that raised its total capital to $9m, following commitments from VC funds Palm Drive, Ignia and InQlab, which are based in the US, Mexico and Colombia, respectively. In February 2019 Playvox, a provider of software quality assurance, closed on $7m from US-based Five Elms, while the digital logistics platform Liftit secured $14.3m in Series A funding from a group that included the International Financial Corporation and the Brazilian VC firm Monashees, which recently finalised a $150m fund for investment in Latin America. That same month, the online supermarket Merqueo garnered $14m from two additional US money managers, Portland Private Equity and Endeavor Catalyst. The online restaurant manager MUY Tech similarly attracted interest from abroad, receiving $4m from the Spanish investor Seaya Ventures in April 2019.

Despite these successes, Colombia faces challenges in cultivating an ecosystem friendly to VC investment. According to LAVCA, many potential financiers are wary of committing funds before they observe VC-backed businesses complete a funding cycle. Success in progressing from seeding stages into secondary and tertiary rounds of investment could establish credibility and allow second-generation start-ups to earn the trust of investors.

Promoting Ventures

The Colombian government has recently implemented several policy reforms to support start-up development. The 2016 passage of the Spin-Off Law enables public universities to launch, incubate and sell off technology companies to promote their research and development work. The following year, the administration passed the Projoven Law to exempt young entrepreneurs from early business expenses like registration fees and the cost of their first renovation.

In May 2017 the administration of President Iván Duque passed the Orange Law, which targets the growth of creative industries like music, fashion and gastronomy, as well as technologies and innovation in domains like video games, software and advertising. Among other measures, the law established new lines of credit for creative endeavours, extended exemptions to income and value-added tax (VAT), and reinforced a “Made in Colombia” stamp.

In addition, the fiscal reforms enacted at the start of 2019 are expected to support long-term private investment. The overhaul will reduce the corporate tax rate from 33% in 2019 to 30% by 2022, apply a 19% VAT on capital goods, and exempt PE and VC funds from income tax (see Tax chapter).

Moreover, following the reforms businesses with annual income less than 80,000 tax units will be able to replace several obligations with the SIMPLE tax regime. This is expected to facilitate the development of Colombian small businesses. However, the fact that the distribution of dividends remains subject to income tax will continue to present an obstacle to attracting VC funding, highlighting the need to boost entrepreneurship through the continued simplification of fiscal and regulatory procedures.

Colombia’s national business development bank, Bancóldex recently announced the launch of a fund of funds dedicated to providing VC to early-stage, orange economy start-ups that demonstrate high growth potential. Of the initial $30m targeted by fundraisers, 50% is expected to come from a consortium of public agencies, including Bancóldex itself; the National Training Service at the Ministry of Labour; iNNpulsa, a supporter of entrepreneurship financed by the Ministry of Commerce, Industry and Tourism; and the Administrative Department of Science, Technology and Innovation. The other half is expected to be drawn from the $5bn SoftBank fund.

The fund of funds is the newest element of Bancó ldex’s capital programme, which was founded in 2009 to support local entrepreneurs. To date, the programme has provided COP184bn ($62.9m), which has been used to mobilise $1.6bn for 114 companies. Some 42% of programme spending has been allocated to VC portfolios, which have provided COP110bn ($37.6m) to 32 Colombian enterprises.

Local Funding

While regionally focused funds like SoftBank’s usually consider backing Colombian ventures, they tend to invest in a few big-ticket projects, rather than a large and varied set of small programmes. Thus, local funds and incubators remain central to the maturation of the start-up ecosystem.

However, institutional investors remain sceptical of funding VC initiatives, according to a June 2018 survey from the Colombian Private Equity Association. Data showed that combined outstanding commitments made by pension funds were valued at roughly $6.8bn, a little more than two-fifths of the $16.6bn committed to the country’s 125 active and closed funds. However, these same accounts serviced 4.5% of the $113m committed to VC funds. Other institutional investors like university endowments and social security funds, which frequently furnish stable capital streams in mature markets, are currently prohibited from supplying capital to VC funds.

Corporate Support

Given the challenges to raising money locally, some of Colombia’s biggest investors have sought to create corporate funds. Empresas Públicas de Medellín (EPM), a public utilities provider and the department of Antioquia’s largest conglomerate, created Ventures EPM to act as a corporate investment vehicle. Ventures, in turn, has partnered with Ruta N, a public joint venture charged with supporting the innovation ecosystem in Medellín, and local public incubator Creame to provide support to three new Colombian firms.

The investment conglomerate Grupo Santo Domingo launched InQlab to act as a VC arm and invest in early-stage start-ups across several sectors. Similarly, the VC firm Veronorte operates three independent corporate venture programmes on behalf of Grupo Argos, Grupo Sura and Grupo Nutresa.

The changes made to Law No. 2555 of 2010, which allowed financial institutions to invest in financial technology start-ups, has made this segment one of the most sought after, with Grupo Sura creating its Sura Ventures arm to target start-ups and private equity and VC firms involved in financial services.

In 2019 the Colombian Software Federation partnered with consultancy Araujo Ibarra to launch Colombia Venture Capital IT, an investment vehicle designed to spur the growth of domestic IT start-ups.

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