Latin America Business: SoftBank is putting its stamp on
LatAm's venture
capital scene
SoftBank ,
whose $5 billion (£3.91 billion) Latin America fund has showered regional
startups with cash, is also courting local venture capital funds, an unusual
move for the Japanese investor that has jolted the region’s tech scene.
SoftBank usually puts money directly into startup
companies but in Latin America has targeted venture capital funds in a
departure from the Japanese conglomerate’s global approach.
Venture capital is still a relatively young
business in Latin America and SoftBank’s investments will help to foster
innovation, particularly for late-stage tech businesses, which are SoftBank’s
main target.
But industry sources said Softbank’s venture capital
cash comes with strings attached that not all potential beneficiaries are happy
about.
Sources familiar with the matter said one of
SoftBank’s requests was for a right of first refusal if one of the companies in
a given venture capital fund’s portfolio were to decide to raise extra money or
were to be put up for sale.
This could give SoftBank an advantage as a
potential leading investor in future fundraising rounds and could also give the
conglomerate an advantage over other investors in the same fund, some of the
sources said.
These sources said that Softbank’s desire to take
this position in a fund could upset other investors in the fund that would also
like to have the chance to co-invest.
Two Brazilian venture capital funds have rejected
such proposals because of the terms, two sources with knowledge of the matter said.
SoftBank also requires venture capital firms it
invests in to accept a non-compete clause and to give priority to the Japanese
conglomerate when it is interested in early stage startup investments, one of
the sources said.
The venture capital business is still small in
Latin America, with investments totalling just $2 billion last year, although
that was quadruple the amount in 2016.
In Brazil, Latin America’s largest economy, venture
capital makes up just 0.04% of GDP, while in the United States it is 0.43%, and
in China, 0.33%, according to a McKinsey & Company report.
In the first half of 2019, venture capital
investments in the region totalled $2.6 billion, more than three times the $780
million from a year earlier, according to The Association for Private Capital
Investment in Latin America. More than a third of that came from SoftBank’s $1
billion bet on a single company, Colombian delivery-app Rappi.
SoftBank has said it intends to deploy nearly $500
million of the fund’s capital in third-party venture capital funds, but it has
not disclosed how much it has already invested.
Reuters reported in September that SoftBank had
sealed deals to invest in funds run by at least two venture capital firms:
Brazilian firm Valor Capital and Argentina’s Kaszek Ventures, which recently
announced it had raised $600 million in fresh capital.
Existing investors in venture capital firms often
lead successive funding rounds in startup companies where the valuation can
increase with each round.
But one of the sources said it was considered best
practice both for venture capital funds or other investors leading the funding
rounds to allow a different party to weigh in on the valuation for successive
funding efforts.
The failed public offering of office rental company
WeWork, which Softbank had invested in, highlighted how other investors
disagreed with the heady $47 billion valuation set in WeWork’s most recent
private funding round.
University of Columbia Professor Donna Hitscherich
sees the demand to lead successive funding rounds as a “natural demand for an
investor or venture capital fund that bet on a company since the beginning”, as
a way to avoid dilution.
Softbank has yet to be involved in successive
funding rounds in any Latin American company, since it has only just launched
its dedicated fund for the region.
Colombia’s delivery app Rappi’s valuation has
tripled from a funding round led by DST Global in Sep. 2018 to the SoftBank-led
one in April.
Source: Reuters