This article was reprinted with permission from the June 15th, 2012 edition of Venture Equity Latin America, published by Thomson Reuters/WorldTrade Executive. For more information go to VELA, or call 978 287 0391.
By Dan Weil
Endeavor, a non-profit group that supports entrepreneurs in Latin America and other emerging markets, has launched a passive co-investment fund to invest in some of the businesses with which it is involved.
The new fund, Endeavor Catalyst, made its first two investments in Latin America, where Endeavor has offices in Brazil, Mexico, Argentina, Uruguay, Chile and Colombia. In January, the fund invested $2 million in Globant, a software developer based in Argentina. In March, the fund co-invested with Intel Capital, placing an undisclosed amount in Minha Vida, a broad-based health information website in Brazil.
Endeavor Catalyst currently has over $13 million of committed capital, with a target of $50 million. This money was raised through donations, and early contributors include eBay founder Pierre Omidyar and LinkedIn co-founder Reid Hoffman.
VELA recently chatted about the fund with Baily Blair Kempner, director of growth and sustainability initiatives at New York City-based Endeavor.
VELA: Can you tell us how the fund works?
Kempner: The fund serves as our endowment. We invest growth equity capital directly in Endeavor entrepreneurs. Whenever one of our entrepreneurs raises at least $5 million in primary equity capital from a qualified institutional investor, then we will contribute 10 percent of the deal, up to $2 million, if asked. Approximately 20 percent of returns will fund Endeavor operations, and the other 80 percent goes back to Catalyst to finance more entrepreneurs.
We go through a rigorous process to choose our entrepreneurs. We’re looking for those who can create the highest impact in terms of jobs and revenue and who would be role models to inspire the next generation of entrepreneurs. Over 15 years, we have accepted less than 3 percent of candidates and now have a portfolio of 430 companies. Globant was initially turned down.
We believe in our selection process to the point that we’re putting our money where our mouths are. We will align our future viability and our ability to support the next generation of entre- preneurs with the success of the entrepreneurs we’ve already chosen. Instead of investing our endowment in stocks and bonds we’re invest- ing in our own entrepreneurs. There’s no more authentic way to grow than along with our own entrepreneurs.
VELA: What is the reasoning behind the $5 million minimum?
Kempner: The $5 million threshold represents a neutral way of outsourcing the due diligence process and ensuring we’re investing in a profes- sional round.
We have many entrepreneurs doing deals under $5 million. To guarantee investment in them, we need more capital than the $13 million we’ve raised to date. Over time we anticipate reducing the threshold.
VELA: Can you talk about the emphasis which you place on your entrepreneurs giving back?
Kempner: To be eligible for investments, entrepreneurs must be in good standing with their Endeavor office, which entails giving back to Endeavor and the local entrepreneurial community. We ask our entrepreneurs to give back $10,000 every year to their local Endeavor office and 2 percent of their equity in liquidity events.
But it’s more than these donations. Two-thirds of our entrepreneurs mentor or invest in other entrepreneurs. Our entrepreneurs have returned to speak with thousands of students at their uni- versities, for example, to inspire the next generation of entrepreneurs. We’re trying to inculcate mentoring just like in Silicon Valley. The idea is to help people understand you can be the next Bill Gates of your country.
VELA: Do you expect to grow in Latin America?
Kempner: We’re looking to double the number of countries in which we operate and entrepreneurs we serve by 2016. Latin America is where we have our deepest roots, with six of our most successful offices there. So in the next two years, at least, we’ll be looking elsewhere for new countries.
Our Latin American entrepreneurs want to see us expand elsewhere as they look for international opportunities for their own companies. They’re especially excited about the Mideast, where we operate in five countries, including Saudi Arabia, our most recent addition.
As for the next Latin American country where we’ll place an office, Peru always comes up. A lot of exciting things are happening there. We aren’t currently looking at it, but you never know.
Are you seeing strong growth in Latin America’s venture capital industry?
Kempner: Yes, we’re seeing a 100 percent increase year-on-year in the number of deals being done in Latin America. Brazil dominates, but we’re beginning to see promising local venture players emerge in Argentina and Chile. And U.S.-based venture funds are beginning to look for opportunities in Uruguay, Mexico and Colombia.
Do you think you’ll be investing in more Latin American companies soon?
Kempner: Absolutely. We anticipate closing a handful more of investments there within the year. Most of the pipeline we see for the next few months is in Brazil and Mexico, with a little in Argentina. The majority of these companies are in the technology or consumer goods and services sectors.