Corporate Venture Capital and the Nearshore Opportunity

The pandemic has accelerated the push to digital transformation, with corporate venture capital (CVC) on the move. This global phenomenon includes Latin America, where CVCs are extending their reach.

“CVC thrives when there is disruption and opportunities, and Latin America has a lot of both,” says James Mawson, founder of Global Corporate Venturing. “Even ten years ago, tech was an afterthought for many people and businesses. Now, places like Brazil have among the world’s highest use of internet, social media and other tech.”

Corporate venture activity continued to rise during the pandemic. By the third quarter of this year, 25.8% of deals had a CVC investor. However, CVC investments have been uneven.

“Some corporations are seeing rising sales and free cashflow, and their venturing units are doing more deals than last year,” says Mawson. “Others haven’t done any CVC deals, and have been disrupted or affected by Covid-19 in their core business.”

According to Mawson, one upside is the disruption might spur companies in Latin America to explore possible investments, because venture capital can provide easier access to the upper end of a “K-shaped” recovery.

“Latin America has had relatively few experienced CVCs from corporations headquartered there,” says Mawson. “This puts them more in the second part of the upside ‘K’ – that is, a spur to tap into venturing in order to understand innovation trends.”

As it stands, some big players in Latin America have been flexing their muscles. In March, Argentine e-commerce giant MercadoLibre (known as MercadoLivre in Brazil) bought Lagash, a software development startup headquartered in Buenos Aires. And in July, Nubank – a fast-growing  Brazilian digital bank – purchased U.S. software consulting firm Cognitect Inc.

Latin America: On the Map

Data from Global Corporate Venturing indicates that up until the end of Q3 2020, most CVC deals in Latin America have been focused on the industrial sector, with 11 deals. This was followed by financial and consumer services, each with five deals. Information technology (IT) had four deals.

However, in the context of digital transformation, there is a cross-over of interest, wherein IT is of integral value to almost every industry. For example, neo banks are disrupting financial services, machine learning and artificial intelligence are transforming manufacturing, and digital supply chains are changing the face of consumer-based sectors.

“IT has effectively eaten the world, and Covid-19 has only accelerated the drive to digitization,” says Mawson. “All sectors are effectively IT now.”

The numbers tell the tale. In 2019, 1,866 corporations took a minority stake in other organizations, surpassing the 2018 record of 1,671. This year, there have already been 1,733 deals, and analysts expect that 2020 will be another record year, with tech and telecom giants expanding their footprint.

This expansion includes Latin America – as exemplified by the Extreme Tech Challenge (XTC), which came to Brazil for the first time on October 30. XYT is the largest startup competition in the world, and is sponsored by 40 corporations, including star participants Samsung Catalyst Fund and Qualcomm Ventures.

Telecom and Tech: In Search of Innovation and Markets

Speaking recently as part of a webinar sponsored by Silicon Valley Bank, David (Dede) Goldschmidt, VP and Managing Director of Samsung Catalyst Fund, and Carlos (CK) Kokron, VP and Managing Director of Qualcomm Ventures, outlined key elements that drive interest from their CVCs.

“We look for a strong team that can solve a significant problem, that has a defensible technology and addresses a very large market,” said Goldschmidt. “In parallel, we ask: what would be Samsung’s cooperation?”

Perhaps not surprisingly, from a global perspective, a solid majority of CVCs taking minority stakes this quarter – 76% – were investors that had done at least one previous deal. Nearly one in every four CVC investments – 23% – represented a corporation’s first minority stake.

“Now more than ever, digital transformation is real,” said Carlos Kokron

This is a significant trend, and not specific to the quarter. According to Global Corporate Venturing, newcomers now comprise roughly a fifth to a fourth of all corporate investors. This could have a significant impact in Latin America, where CVC activity has historically been lower than in the United States or Europe.

“We are at a tipping point,” says Mawson. “Most of the established corporations in the United Sates and Europe have venturing activities, so growth comes from other areas. As well, support has trickled out to other parts of the world.”

Mawson is confident that big IT companies will want to control more of the value chain by building/acquiring more smart resources in Latin America. “In Brazil, there’s more interest in entrepreneurs, and more role models like Mercado Livre or Movile,” he said. “Throw in Chile or Brazil’s supportive ecosystems, and change can happen rapidly.”

Interestingly, the Brazilian Trade and Investment Promotion Agency (Apex-Brasil), has partnered with Global Corporate Venturing, and includes specific messaging for CVCs as part of its development plan.

CVC is Here to Stay

The fact that liquidity is not an issue during this pandemic speaks to the depth, and permanence, of corporate investments in their venture capital operations. Many CVCs are independently funded, with capital having already being committed. As a result, the economic disruption brought on by the pandemic is radically different from the tech bubble of 2001, and the global financial crisis of 2009.

“Now more than ever, digital transformation is real,” said Kokron. “Unlike the internet bubble 20 years ago, liquidity has not been an issue this time around. As well, CVC is a much more mature concept than it was 12 years ago, in the 2009 crisis.”

From a Nearshore perspective, it is possible that a CVC in Latin America could see value in a BPO operation that had invested in developing proprietary processes and technologies. This would be distinct from a pure investment play, as with One Equity Partners’ purchase of Central American BPO OneLink in 2017. It would also differ from consolidation, as when Globant acquired Belatrix, or Indecomm Digital Services purchased Avantica Technologies. Instead, a CVC investment might come from a non-BPO company, and possibly allow the BPO to provide captive services to a minority investor, while still operating independently.

“CVC is intertwined with the innovation programs of corporates,” says Goldschmidt from Samsung Catalyst Fund. “Now, bringing in startups is a well-developed practice. It is not a ‘nice to have’ – it’s part of the core vision of the organization.”