Latin America finance: The rise and fall of internet investments

Last year started off with great optimism for the nascent Latin American Internet industry as investors flocked to fund new ventures at a frenetic pace. In fact, according to Bain & Company research, private equity and venture capital firm invested at least $2,577 million in Latin American Internet ventures during 2000, up 268 percent from 1999. However, the large majority of these funds were actually committed between January and April, before the NASDAQ crashed. Afterwards, deal flow dropped dramatically each month and these days funding for new Internet ventures is almost non-existent.

During the first half of 2000 investments were aimed at B2C, free ISP and portal projects. However, these segments became ice cold during the second half of the year, as most new money went to project focusing on B2B and value-added services, such as logistics and consulting. Although incubators and e-business accelerators also received considerable funding commitments last year, much of that money may never be invested due to the current market conditions and the lack of attractive projects. Two broadband Internet infrastructure companies, Diveo and Velocom, have received $538 million in funding over the last two years. However, existing telecom and cable companies such as Telefonica and Brazil's Globo will finance most Internet infrastructure project.

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During 2001 we expect practically no investment in new Internet start-ups, although a few breakthrough technology companies may be funded. Private investors will continue to selectively support some of their portfolio companies with follow-on investments. An example of this as the recent second round of funding received by Tecto, a Brazilian construction and architecture portal backed by ABN Amro, JP Morgan, Bank Boston, and Bain.

Moving forward, many new investments will be aimed at supporting the
Internet initiatives of large corporations. An early example of this was Votorantim Venture Capital teaming up with construction companies Tigre and Pirelli to launch Estrutura.net, a B2B portal.

Contributed by Daniel Baranowski, an associate consultant at Bain &
Company and Stefano Bridelli, a vice president and the managing director of the Sao Paulo office of Bain and Company.