Foremost among the attractions is the idea that investors that feel they missed the dot com boat in the US can still get in at the beginning in Latin America. The mantra is that Latin America now is where the US was three years ago some versions reckon it's four.
Chase Capital Partners was in at the beginning. A would-be Latin portal called StarMedia was looking for funding in 1997. "It was extremely difficult," recalls Steve Heller, StarMedia's CFO. "There was no such thing as the Latin internet in the minds of the international investment community. There was no capital available."
It has reached the point now where early-stage start-ups would rather get local angel financing than international venture capital. But three years ago, Latin America's moneyed classes were generally the most risk-averse in the world. Most of them were happy with a Citibank money-market account in New York or Panama.
When Heller did find prospective investors, he was generally given short shrift. "With the Latin investors," he says, "it was: 'There is no Latin internet, why would I invest in it?'"
Eventually, Heller found a possibility in New York. His general problem had been that Latin funds didn't feel comfortable with dot coms, and the dot com world knew nothing of Latin America.
For all the internet's much-vaunted global capabilities, in 1997, as far as the US stock market was concerned, it was all about the home market. When the Asian crisis first hit, the first US stocks to succumb were multinationals such as Coca-Cola and Philip Morris; the last stocks standing were the dot coms, which were seen as purely domestic plays.
So Heller found his angels in a combination of Chase Capital Partners and Flatiron Partners. Chase knew Latin America, Flatiron knew how to read a dot com business plan. "Chase and Flatiron together got each other over the hurdles," says Heller.
Susan Segal, principal at Chase Capital Partners, recalls the novelty of the combination of Latin America and the internet. "With our partner Flatiron," she says, "between us we could see what others couldn't see."
StarMedia went on to become the archetypal Latin American internet company, the one everybody else wants to emulate. Although it's been losing ground recently to aggressively funded rival portals, its route from initial investment to headline-grabbing IPO went by the book.
StarMedia found financing infinitely easier to come by once it had its first round complete and could leverage the cachet of Chase Capital and Flatiron. As early as the second round of financing it got industry funds in the form of capital from Intel, as well as cash from GE Capital. By the time all StarMedia's pre-IPO rounds were finished, its investors were a who's who of the technology financing world, including Warburg Pincus, KKR (Kohlberg Kravis Roberts), Morgan Stanley and Robertson Stephens.
With a roster like that, raising money was, in the recent words of Inside.com co-founder Kurt Andersen: "As easy as getting laid in 1969." The momentum building up behind StarMedia was there for all to see. "By the time we were doing our C-round financing," says Heller, "we did the largest financing ever done by a private internet media company" not just in Latin America, but in the world.
The IPO was a great success, again setting the template for subsequent companies. StarMedia was headquartered in New York, was a US company listed on Nasdaq, had charismatic executives fluent in English, and generally was as friendly to the small dot com investor as it possibly could be.
In the case of Argentine portal El Sitio, venture capital from Hicks Muse and industry investments from Impsat and Intel were enough to propel the company to an IPO that raised $150 million, enough to finance the next two years. "Our very strong shareholders made possible the IPO, and also made possible all the business plan," says El Sitio's CEO, Roberto Cibrián, who points out that Impsat's involvement greatly facilitates El Sitio's move into broadband.
White heat of revolution
Subsequent Latin internet companies might not have gone quite as far as StarMedia El Sitio, for instance, is defiantly headquartered in Buenos Aires but they all list on Nasdaq, follow US accounting principles and generally try to insulate themselves as much as possible from Latin American country risk.
At the same time, however, they tend to be keen to push the fact that they are exclusively in Latin markets. The Latin internet became white-hot the day that StarMedia floated in June 1999, and has remained hot ever since. Investors aren't seeking discounts from US multiples to compensate them for the country risk they're taking. If anything, they're paying even more for the opportunity to get into the Latin market.
It doesn't take much to prompt Chase Capital's Segal to start to wax evangelical about the Latin internet. "This is just the beginning," she says. "The internet's technology is changing Latin America for ever. It has created venture capital before our eyes. All of a sudden, Latin America is globalizing."
Emerging-market economies don't need to go through all the stages that mature economies have gone through. America laid copper telephone cables and then low-bandwidth cable-TV cables across the country. Emerging-market economies can jump straight into mobile telephony and high-bandwidth interactive fibre-optic cable for much of their telecoms infrastructure. And whereas US or UK retailers had to spend billions building national chains of high-street stores, Latin retailers can go straight into their target consumers' homes.
In the retail sector, says Segal, "unlike the US or the UK where you have choice, in Latin America there is no choice. The internet can create choice." Cities outside the large urban centres of Buenos Aires, Santiago or São Paulo might miss out on large retail developments but the broader population in Argentina, Chile and Brazil already has much more access to many more products than anybody could have foreseen only a few years ago.
And though in Latin America personal computers remain for the time being the property of the elite, the advent of free internet service, affordable handheld computing devices and cheap third-generation mobile telephony will bring the power of the internet to the Latin masses in next to no time.
For the most part, the story of the internet in Latin America is about taking a successful formula in the US market and trying to replicate it in Spanish, Portuguese or both. Dozens of sites are now competing to be one of the top two portals, or auction sites, or B2B vertical portals, or whatever else the flavour of the week is.
But discernible behind the race to the billion-dollar valuations is often a broader democratic enthusiasm, an idea that somehow the internet can enable Latin America to become as freely meritocratic as western Europe is. The internet, in other words, by pushing Latin America from cronyism and corruption to freedom and democracy in a severely foreshortened time frame, will finally allow Latin America to enjoy the kind of annual growth rates that the Asian tigers used to consider their sole domain. And in turn, this kind of utopianism is fuelling valuations in the Latin market that can be at least as frothy as those in the US or Europe.
The market, though, is little more than a year old: StarMedia's IPO was in June 1999. "We created the market," says StarMedia's Heller, who sees no chance that any future companies will ever encounter the reception he was seeing in 1997. "Is it going back there? Absolutely not. There is an enormous amount of capital focused on Latin start-ups."
Finding a horse to bet on
For instance, UBS Capital Americas has $1.5 billion to invest, of which $500 million is dedicated to Latin America. Even at over-inflated dot com valuations, $500 million can still buy you a lot of start-ups. The problem for venture capitalists now is not so much the risk that they're backing the wrong horse as the risk that they won't be allowed to bet on a given horse in the first place.
"Often you get involved in an auction process," says Mark Lama, principal at UBS Capital Americas. "You're coming in competing with strategic buyers, who never used to get involved this early on."
Segal at Chase Capital Partners sees the same trend. "If the strategic investor is a horizontal portal, they can bring a lot of traffic to your site," she says. So to compete, she takes a very close interest in the companies in which she invests, and tries to give them a lot of benefits over and above the initial cash investment. "I get emails from my entrepreneurs almost every day," she says. "We're close to them, they can trust us."
After its investments in StarMedia and Patagon.com, the region's top financial internet company, Chase Capital is a legendary institution in Latin America. Chase's name on a project gives it instant credibility and can open a lot of doors. "I like to think that Chase Capital is the closest thing you can get to having a strategic investor while having a financial investor," says Segal.
Even Chase, however, sometimes declines opportunities to invest in companies it's interested in, because in Segal's view the valuations are still far too rich. Too many early-round financings are being done on late-stage valuations, she says: "We like early-stage investing with the possibility of early-stage returns."
So from a venture capitalist's point of view, the recent implosion in the dot com world was almost entirely a good thing. Valuations came down from the insane to the merely ridiculous, and companies started needing more than just a bright idea before they could begin raising seven-figure or even eight-figure sums.
It might not even be over yet. "The market will come down even more," says Segal. "I think some valuations have more to come down, to get more realistic."
Already, the months before the crash are being seen as some kind of prelapsarian era, albeit one that, like Eden, clearly contained the seeds of its own destruction. "Four months ago, anybody with a business plan could have raised $1 million on a $10 million valuation," says Mike Shalom, CEO of Latin internet service provider IFX. Now, he says: "I personally do not feel that it's going to be very easy to raise money unless you have an absolutely rock-solid business case on a go-forward basis."
The general consensus seems to be that the dot com crash hasn't slowed the pace of equity financings so much as having lowered the valuations at which they're being done. The real way in which it has changed the market's landscape is in exit strategies.
After the StarMedia IPO, everybody wanted to follow suit, get some name-brand investors and make a killing on Nasdaq. For the moment, however, IPOs are unthinkable, and consolidation is the name of the game. "Today, I wouldn't even be contemplating doing an offering," says Shalom.
"Most of the Latin American companies were so young that they shouldn't have been doing IPOs anyway," says Segal. "I didn't have any expectations of any of my companies going public this year."
Says StarMedia's Heller: "A large number of these companies suddenly realized that acquisition is a more viable proposition than an IPO. Inevitably, in each of the vertical spaces you get consolidation."
The advantages of consolidation are many, beyond offering work for investment banks suddenly seeing their IPO fee income dry up. With each merger, any given company's chance of getting into the crucial top-two tier in its sector increases. And while valuations are depressed, M&A activity can continue regardless, since it's based not on market capitalization but on relative value.
"In these consolidations, absolute values are not important, only relative values," says Segal. "If there's a consolidation and my companies are merging but it's not an exit for me, then I'm interested in the relative values, not the absolute values."
UBS Capital's Lama is also sanguine about the prospects of his investments not going all the way to IPO. "Would I be disappointed? Absolutely not," he says.
Lama is interested in a lot more than just dot coms, in any case. "I see a lot of opportunities on the telecom side," he says.
Telecoms are interesting in the Latin market because though they are more stable than the dot coms, they also need much more money to keep going. IFX's Shalom, for instance, reckons that he can build a pan-regional network that will become profitable before the $50 million he's already raised has run out. In Argentina, by contrast, high-bandwidth play Impsat is always looking for more money on an opportunistic basis.
"This is a big capital expenditure game, for which you need tremendous amounts of money," says Impsat's CFO, Guillermo Jofré. "The key element was access to financing. It was key to structure all the company in a way that all that could be assured."
To that end, Impsat, like StarMedia, set up a very investor-friendly US holding company based in Delaware that issues all the company's debt and equity.
However, though Delaware companies and Nasdaq listings are great for equity investors, they generally don't impress bond investors, who are much more interested in the sources of cashflow and the difficulties that might come when a company attempts to repatriate coupon payments from volatile Latin American countries to its US parent.
Wielding the mighty dollar
So Impsat which is reliant on issuing large amounts of debt to keep going had to beef up its bond offerings with lots of guarantees. "We structured a whole lot of covenants and features in the bonds to make sure there was no impediment to sending the money upstream to the holding company," explains Jofré.
The trick is to understand the difference between bond investors and ratings agencies. The agencies, which tend to work backwards from a sovereign ceiling, tend to be very worried about transferability and convertibility risk. "The investors," says Jofré, "are more concerned about the devaluation type of risk" something that can be easily rectified by denominating nearly all the company's contracts in dollars.
Jofré made a conscious decision not to go after dedicated emerging-market bond investors. "We were targeting the dedicated telecom investors," he says: the type of people who were happy lending to emerging telecommunications companies in the US, and enjoyed the yield pick-up they got from lending to a Latin company.
Jofré has seen enormous progress in the state of financing for Latin technology companies in the five years he's been Impsat's CFO. "In 1995, each of our companies was financing its own operation, with local banks," he says. Impsat is a pan-regional company, each of whose operating divisions is wholly owned by the Delaware parent.
From the days of local bank finance, Impsat moved to various exim banks, especially in the countries from which it was buying telecommunications equipment. Impsat also received funding from the Inter-American Development Bank's private-sector lending arm, the Inter-American Investment Corporation. Only then did it start to issue public debt.
Because the bonds were issued by a Delaware company, they weren't eurobonds or global bonds but rather simple US high-yield debt. There have been three so far: a $125 million seven-year bond in 1996, a $225 million 10-year bond in 1998, and a $300 million five-year in February 2000.
Even though Impsat is a high-risk telecommunications company, Jofré added no optionality, convertibility or equity kickers to the offerings. "We tried to position our issues as standard as possible," he says. "We wanted to position ourselves as a high-quality issuer."
In any case, in Impsat's case the bond issues came before the equity issue, which tends to reduce the value of equity kickers since there might never be an IPO, and makes simple convertible bonds all but impossible.
Impsat's equity rounds followed much the same path as those of the dot coms, despite the differences in size and age. Morgan Stanley came in as an investor relatively early on, which helped in the private equity round. Demand was so high for a piece of the Impsat action that when British Telecom wanted in, Impsat felt perfectly comfortable telling the UK giant that it wasn't interested in having a strategic investor, and that any stake it took would have to be purely financial.
"They had no presence in Latin America up to that moment," says Jofré. "It was a beachhead into the region." BT took Impsat up on the deal anyway, and ended up with a 20% stake in the company.
With British Telecom and Morgan Stanley on board, the IPO was much easier. "Both were prime quality investors," says Jofré. "It's a way of validating the strategy, the management, and our case."
And though Impsat has not performed as well postIPO as many had hoped, that's probably only to be expected given the performance of other companies in the same sector, such as Global Crossing in the US and Colt Telecom in the UK.
In any case, says Jofré, he doesn't need to raise any more capital in the near term. "While the market now has closed, we are in a privileged situation," he says. "We're prefinanced for a couple of years. When the market normalizes, we will have access again."
Jofré is open about the fights he had with his board to get his bond deals done. They were expensive, especially considering that Impsat did not immediately need the money. But with hindsight, it's crucial that Impsat did come to market when it did: otherwise it might be running dry very soon. Jofré is adamant that should the opportunity arise, he will prefinance again, as much as he can. "It's key," he says, "to reduce the financing risk." *
