Article

Latin American Internet Investment Explosion

Par Daniel Baranowski and Stefano Bridelli

First published on juin 07, 2000
min


The Internet is hot in Latin America and private investors are taking notice. In the past 14 months private equity groups and venture capitalists have allocated at least $1.52 billion to Latin American Internet companies, according to a study by consulting firm Bain & Company. In the first four months of 2000 alone, such investors committed an estimated $945 million Internet projects in the region. While that number is dwarfed by comparable cyber-sector funding last year in the US - an estimated $19 billion—Latin America's rate of investment could double or triple by the end of this year. An estimated $3 billion of private money will be chasing Internet deals south of the Rio Grande that by the end of 2000. Why the sudden interest? It's all about growth. Latin America is one of the fastest expanding Internet markets in the world. It will have a projected 67 million users and $8 billion in B2C e-commerce by 2005 according to Jupiter research. Internet Service Provider (ISP) Terra Networks and portals Starmedia and El Sitio have created over $15 billion in market value. Despite the recent NASDAQ turmoil, more than 12 Latin Internet companies plan to go public this year or in 2001, raising several billion dollars. Expected offerings include AOL Latin America, Yupi, Universo Online, Submarino, Latinstocks.com and Mercadolibre. The Bain study found that Latin American B2C companies, including portals, e-tailers, and auctions, have the potential to create more than $15 billion in market value by 2003. To date, only about $1.5 billion of this value has been captured, meaning huge opportunities for current private players and potential new ventures. The B2B sector is even more promising since it is expected to be more than 12 times the size of the B2C market by 2003. International and Latin American based venture capital and private equity investors are eager to cash in on the region's Internet potential. In the US, Chase Capital, Flatiron and Hicks Muse have been the leaders. Softbank, a Japanese based company, set up a $150 million Latin American fund. In Brazil, Banco Opportunity and GP Investimentos will make an estimated $495 million available for Internet ventures. Additional Internet money will come from technology funds such as the $250 million Latin American Technology Fund, a Mexico-based joint venture between Promecap and BankBoston Capital. In 1999 portals received the most of attention, capturing 37% of an estimated $579 million invested in the region's Internet companies. However, 2000 has seen a dramatic shift, as 58% of the funds committed to date have gone towards free ISPs and B2C ventures. Investments are now shifting away from portals, e-tailers and auctions, as these spaces are becoming crowded. Surprisingly, investments of only $32 million have been announced for B2B ventures, equivalent to 2% of total funds. This pales in comparison with the $2.5 billion of venture capital invested in B2B ventures in the US in 1999. The lag in investment may be due to the higher investment requirements and complexity of B2B ventures as well as to low Internet and EDI penetration in the region. However, the B2B investment trend should catch on in Latin America soon, as regional businesses start to go online in search of lower costs and streamlined procurement processes. Several key investment funds are now spending the bulk of their efforts to engineer major B2B initiatives rather than trying to launch the 20th auction site or online bookstore. B2B exchanges in huge economic sectors, such as construction, health care and automobiles will soon go live. In industries with highly concentrated buyers or sellers, brick and mortar companies will be active investors in B2B exchanges, as has happened in the US. Moving forward, Internet infrastructure, such as broadband and wireless, should capture considerable attention. Additionally, brick and mortar companies' Internet ventures should receive significant funding. In Brazil, the largest Latin American Internet market, retailers Lojas Americanas and Pão de Açucar, banks Bradesco and Unibanco and media conglomerate Globo have been the early movers. In Mexico, media company TV Azteca and banking concern Banacci are investing heavily in Internet initiatives. In Argentina Musimundo, a music company, just received $10 million in funding for its online operations. These Latin American bricks and mortar companies have many advantages over start-ups including brand name recognition, supplier relationships, distribution networks and in-depth customer knowledge. They have learned from the experience of US bricks and mortar companies and are positioning themselves for online success. Daniel Baranowski (daniel.baranowski@bain.com) is an Associate Consultant at Bain and Company, Boston. Stefano Bridelli (stefano.bridelli@bain.com) is a Vice President at Bain and the Managing Director of the Sao Paulo office. A special thanks to Bain Manager Jim Kunihiro for his insights and contributions to this article. Bain and Company is a global strategy consulting firm with over 2,500 professionals and 26 offices around the world.

The Internet is hot in Latin America and private investors are taking notice. In the past 14 months private equity groups and venture capitalists have allocated at least $1.52 billion to Latin American Internet companies, according to a study by consulting firm Bain & Company. In the first four months of 2000 alone, such investors committed an estimated $945 million Internet projects in the region. While that number is dwarfed by comparable cyber-sector funding last year in the US - an estimated $19 billion—Latin America's rate of investment could double or triple by the end of this year. An estimated $3 billion of private money will be chasing Internet deals south of the Rio Grande that by the end of 2000.

Why the sudden interest? It's all about growth. Latin America is one of the fastest expanding Internet markets in the world. It will have a projected 67 million users and $8 billion in B2C e-commerce by 2005 according to Jupiter research. Internet Service Provider (ISP) Terra Networks and portals Starmedia and El Sitio have created over $15 billion in market value. Despite the recent NASDAQ turmoil, more than 12 Latin Internet companies plan to go public this year or in 2001, raising several billion dollars. Expected offerings include AOL Latin America, Yupi, Universo Online, Submarino, Latinstocks.com and Mercadolibre.

The Bain study found that Latin American B2C companies, including portals, e-tailers, and auctions, have the potential to create more than $15 billion in market value by 2003. To date, only about $1.5 billion of this value has been captured, meaning huge opportunities for current private players and potential new ventures. The B2B sector is even more promising since it is expected to be more than 12 times the size of the B2C market by 2003.

International and Latin American based venture capital and private equity investors are eager to cash in on the region's Internet potential. In the US, Chase Capital, Flatiron and Hicks Muse have been the leaders. Softbank, a Japanese based company, set up a $150 million Latin American fund. In Brazil, Banco Opportunity and GP Investimentos will make an estimated $495 million available for Internet ventures. Additional Internet money will come from technology funds such as the $250 million Latin American Technology Fund, a Mexico-based joint venture between Promecap and BankBoston Capital.

In 1999 portals received the most of attention, capturing 37% of an estimated $579 million invested in the region's Internet companies. However, 2000 has seen a dramatic shift, as 58% of the funds committed to date have gone towards free ISPs and B2C ventures. Investments are now shifting away from portals, e-tailers and auctions, as these spaces are becoming crowded.

Surprisingly, investments of only $32 million have been announced for B2B ventures, equivalent to 2% of total funds. This pales in comparison with the $2.5 billion of venture capital invested in B2B ventures in the US in 1999. The lag in investment may be due to the higher investment requirements and complexity of B2B ventures as well as to low Internet and EDI penetration in the region. However, the B2B investment trend should catch on in Latin America soon, as regional businesses start to go online in search of lower costs and streamlined procurement processes. Several key investment funds are now spending the bulk of their efforts to engineer major B2B initiatives rather than trying to launch the 20th auction site or online bookstore. B2B exchanges in huge economic sectors, such as construction, health care and automobiles will soon go live. In industries with highly concentrated buyers or sellers, brick and mortar companies will be active investors in B2B exchanges, as has happened in the US.

Moving forward, Internet infrastructure, such as broadband and wireless, should capture considerable attention. Additionally, brick and mortar companies' Internet ventures should receive significant funding. In Brazil, the largest Latin American Internet market, retailers Lojas Americanas and Pão de Açucar, banks Bradesco and Unibanco and media conglomerate Globo have been the early movers. In Mexico, media company TV Azteca and banking concern Banacci are investing heavily in Internet initiatives. In Argentina Musimundo, a music company, just received $10 million in funding for its online operations. These Latin American bricks and mortar companies have many advantages over start-ups including brand name recognition, supplier relationships, distribution networks and in-depth customer knowledge. They have learned from the experience of US bricks and mortar companies and are positioning themselves for online success.

Daniel Baranowski (daniel.baranowski@bain.com) is an Associate Consultant at Bain and Company, Boston. Stefano Bridelli (stefano.bridelli@bain.com) is a Vice President at Bain and the Managing Director of the Sao Paulo office. A special thanks to Bain Manager Jim Kunihiro for his insights and contributions to this article. Bain and Company is a global strategy consulting firm with over 2,500 professionals and 26 offices around the world.