“We did a pretty thorough analysis,” recounts Carl Adams. “Everyone was talking about the BRICS back then. But Mexico came out on top.” A principle at Alta Ventures, a venture capital firm focused on emerging markets, Adams is telling the story of his company’s 2008 entry into the Latin American venture capital scene. “Everyone thinks of murders, cartels, and corruption when they think of Mexico,” Adams says. “But Mexico, on a macro level, is quite stable.” He goes on to enumerate some of the factors that made the country an attractive prospect: low debt, a fairly solid economy, a huge export market and a robust STEM educational system. To the last point, Mexico graduates 60% as many engineers as the United States, despite having only 30% the population.
A 2015 PricewaterhouseCoopers report lists liberal foreign investment laws, numerous free trade agreements, low inflation, a mild climate and ongoing privatization of the public sector as additional qualities that make Mexico such a draw for industry. For all of these reasons, according to Carl Adams, international companies — particularly from the United States — use Mexico as a beachhead from which to engage other Latin American economies. This is exactly what Alta Ventures did. After launching a couple of successful Mexican funds, the company branched into Peru, Argentina, Brazil, Colombia and Chile. Many other companies do the same: Home Depot’s Latin American headquarters are in Mexico, as are those of a number of other well-known multinationals.
Latin America is not homogenous
What works in one country may totally fail in another. “Many people make the mistake of seeing Latin America as a single bloc,” says David Utrilla. “It’s not. Each country has radically different dynamics.” Born and raised in Peru, and now the Honorary Consul of Peru in Utah as well as the CEO of U.S. Translation Company, Utrilla has seen the errors businesspeople have made trying to start ventures in Latin America. “People get excited. Their product is succeeding in Chile, so they jump into Brazil, Argentina, Colombia, assuming it will have the same reception across the continent.” This is not necessarily true — the quirks of local markets have to be analyzed on a granular level. Assumptions are almost certain to lead to some hard lessons in reality.
Alta Ventures understood this, and studied each market on its own merits. Peru, they realized through prior research, was not ready for large-scale venture capital. So, the company started a number of smaller programs: micro seed investing, government partnerships, meet-ups and other strategies appropriate to the investment climate. In Argentina, with its more developed economy and hi-tech workforce, Alta decided to work through an Argentinian partner agency. They took a similar approach in Brazil.
Even though each country is unique in its business culture and regulatory environment, four Latin American nations share a special bond: Chile, Peru, Colombia and the aforementioned Mexico. This foursome comprises the Pacific Alliance, which confers some significant commonalities across its members. According to a March 14, 2015, article from The Economist, it standardizes a shared commitment to “free markets, free trade and democracy.” The Alliance’s liberal ideals distinguish its member countries from “state-led, protectionist, and in some cases authoritarian governments” found elsewhere in Latin America. Each of the four ranks within the World Bank’s top 60 countries for ease of doing business. In contrast, none of the member nations of Mercosur (another Latin American trade bloc which counts Brazil, Venezuela and Paraguay among its ranks) appear in the top 90. The Pacific Alliance has, since its founding in 2011, integrated its four constituent stock markets into the Mercado Integrado Latinamericano; it has removed visa restrictions between its countries; and it has launched joint trade missions to various parts of the world. Free trade agreements between the Alliance and other regions (such as North America, Asia and other Latin American countries) have been signed.
Multinationals should have a smoother time doing business with Pacific Alliance countries as a result of the abovementioned efforts. According to Jason Marczak, director of the Latin America Economic Growth Initiative, the Alliance “seeks to function externally as a unified commercial entity instead of a mere agglomeration of countries.” That is, it tries to give outside companies a streamlined entry process into a single economy, a goal that, as of 2016, remains more theoretical than actual. Still, industry from the United States and other regions gains benefits by trading within the Pacific Alliance. These countries are eager to do business with the outside world. Such enhancements may include tax benefits, customs benefits and other incentives.
The value of relationships
“Relationships matter, and especially so in Latin American culture,” Utrilla says. “It’s sort of built into the cultural fabric throughout the region.” This Latin commonality demands a different pace of business; a pace based less on calendar and clock time, and more on the rate at which relationships develop. As one builds local ties, one should seek to deepen them into business relationships. You may have false ideas about what is and is not viable, but if you’re bringing locals on board, they’ll set you straight. This means less trial and error in the long run. Locals with a stake in the venture are more likely to tell you the hard truths that you need to hear. If, on the other hand, you’re just asking friends what they think, they’re more likely to tell you what you want to hear because they don’t want to hurt your feelings. Partners, however, want to succeed above all else. An invested partner will be your biggest ally and salesperson; once they have made the decision to invest time, money or emotional energy into your business, they will be loath to lose face (or funds).
Seeking local buy-in also functions as a litmus test for how practical your venture is in a particular market. If you find you have people scrambling to invest and partner with you, you’ve got a pretty good signal that your plan is a solid one. The reverse is also true. If people won’t touch your business, if you can’t find anyone interested in being part of what you’re doing, you probably need to take a serious look at why they’re responding in that way.
Local buy-in as a strategy
When Alta Ventures launched their first Mexican growth fund, they regarded local support as a test of viability; what is more, they considered it the most effective sales strategy they could possibly develop. Their approach was deceptively simple. Develop relationships with the most prominent families, industrial magnates, academics and other influencers. Get them to be early investors into the fund. Then, pure self-interest — after all, these high-profile citizens want their investment to grow — drives these investors to tap their networks. It worked for Alta Ventures. Phenomenally well, in fact.
“We got 30 of Mexico’s top families to invest,” Adams says — influential families not tainted by cartel connections. “We did a lot of background research on potential investors. One of our criteria was that they were not tied to drug money and organized crime.” Out of the firm’s investigations, these 30 families were prequalified by lack of cartel besmirchment and by their prominence.
One such family was behind Mexico’s premier institution of higher education: Instituto Tecnológico y de Estudios Superiores de Monterrey. Tec de Monterrey, as it is commonly known, is revered as the MIT of the Latin American world. Its chairman had his fingers in a number of other ventures, including a controlling stake in a large bottling plant. The Tec de Monterrey chairman and his family and friends proved to be the catalyst that launched Alta Ventures. From their enthusiastic promotion of Alta’s fund, other prominent investors began seeking them out and making introductions. The CEO of SENEX, a global cement conglomerate, invested early, as did executives from GRUMA, the world’s largest producer of corn products. All in all, Alta Ventures raised $75 million for their spearhead fund. They went on to start additional funds, and, as noted, to branch into other parts of Latin America.
As Alta Ventures probed into Peru, Argentina and various other Latin American countries, they used the same relationship-based strategy. In Peru, for example, they enlisted a well-connected politician who had drafted the legislation that had allowed pension funds to invest in the private equity class. “Previously,” explains Adams, “Peruvian pension funds could only invest into public securities.” After said legislation, pension funds were free to invest in any security that a regular person could. Obviously, Alta had allied themselves with a person passionate about capital investment. Through him, they connected with a number of other people who helped them launch their seed programs.
Making it personal
Most readers will be in industries other than venture capital. So, how can they translate the Alta Ventures approach to their own internationalization projects? The recipe is the same: get community buy-in, which can take different forms. For example, a machinery exporter might seek to set up family-owned dealerships (the Caterpillar model) with incentives to foster a long-term growth commitment. A software firm, opening an office in Lima, might offer local business leaders a chance for investiture in return for their serving as an advisory board and opening contacts within the community. A mining company might demonstrate its commitment to environmentally sound practices by allowing stakeholders to tour facilities; it could also fund educational programs that promote responsible mining as a career path option in local schools.
Community buy-in, then, can involve direct cash infusions (the Alta Ventures approach), the enhancement of an enterprise’s social capital or in any number of other ways. Ultimately, though, a multinational will need the support of the community in which it sets up shop. Locals, or at least some locals, will need to feel that they benefit from this foreign presence; that it brings opportunities that previously did not exist for them.
Relationship-building is the most effective pathway to success in Latin America. That and understanding the intricacies (cultural, economic, political, geographic) of each region and microregion that you are attempting to enter. Apply both — strong community relationships combined with solid research and analysis — and your chances of success are greatly increased.
