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Venture Capital:
An Option for Financing Latin America’s
Small and Medium Enterprises
FOR DISTRIBUTION
By Everett J. Santos
CEO, Latin America
Emerging Markets Partnership
AIG-GE Capital Latin America Infrastructure Fund
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Introduction
Latin America and the Caribbean (LAC) have undertaken considerable reforms during
the late eighties and early nineties. However, notwithstanding those reforms, the region
has not matched its potential with competitiveness, growth and economic performance.
Despite the region's efforts to increase its participation in the global economy, the region
falls short in its share of the world's export of goods and service. The thirty-three
countries in LAC represent 8.2% of the world's GDP and 8.4% of the world's population.
However, in terms of exports, the region represents only 4.7% of the world's exports,
slightly more than half its pro rata share. Given the wealth in natural resources the region
should be a major exporter, not only of those resources, but also of their derivative
manufactured goods. Similarly, in terms of agriculture, LAC can be and may eventually
become the bread basket of the world, giving rise to many agro-industrial opportunities,
which have up to now been mostly untapped. The region’s work force, which the
immigrant pool in the United States has proven, is an industrious, willing and energetic
source of labor. LAC’s demographics are quite favorable: it is young with a small
portion of its population of retirement age and a decreasing percentage below working
age. The region’s strong labor pool should also have permitted the region’s economy to
grow more rapidly.
Historically, in any period, developing countries have outpaced the growth of advanced
economies. But Latin America has been a drag on the performance of emerging markets
since the beginning of the eighties. During the ten year period 1984-93 (in real terms),
advanced economies grew at 3.2% while developing countries grew at 5.1%. LAC
turned in a meager 2.9% of growth, ten percent lower than developing countries. From
1994 to the present the same scenario existed: advanced countries grew by 2.7% lagging
developing countries that grew at a healthy 5.2% rate. During the same period, the region
grew at a dismal rate of 2.5%. It has been more than two decades since developing
countries as a group lagged advanced economies in GDP growth. But LAC’s growth in
six of the last ten years trailed that of advanced economies.
Many reasons have been advanced for this paltry performance: geography, culture,
climate, education, religion, institutions, infrastructure, demographics, values and the list
can go on. While some of these enumerated factors may indeed complicate the region’s
ability to match potential with performance, one of the contributing factors to Latin
America's underperformance is the inadequacy of its capital markets and the unsuitability
of its institutions to promote broad based growth.
The measure of any capital markets is its ability to promote optimal savings and allocate
that savings efficiently to productive enterprises maximizing growth and equitably
distributing the resulting wealth. The absence of any one of these measures handicaps a
country’s ability to realize its potential. In the case of LAC no one would suggest that
any of these factors are present. The region produces insufficient savings to meet its
investment needs. The allocation process has impeded growth and produced a horrid
distribution of wealth.
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LAC has failed to encourage innovation and develop sufficient new small and medium
business ventures to grow and provide full employment. It must be asked whether the
financial infrastructure of the region is not in part responsible for these failings. Recent
developments in the United States indicate that providing the appropriate environment
and structure leads to growth and stimulates the development of new industries,
technology, products and services.
The number of formidable companies that have developed in the Silicon Valley as a
result of venture capital raises a question as to whether there is a model that can be
adopted by LAC to promote growth. It is noteworthy that the likes of Sun Microsystems,
Cisco and Intel, to name but a few, are the direct result of the financing received from
venture capital funds. It would be tempting to suggest that the existence of venture
capital funds in and of itself leads to the creation of new industries and great innovations
and remarkable product break-throughs. Obviously this is nonsense. A venture capital
industry, which can lead to the creation of an Intel requires a myriad of preconditions,
and assumes an underlying industrial base and a legal and regulatory infrastructure,
which do not exist in the region, not even in Brazil or Mexico. Nonetheless, the venture
capital model can be used in LAC for other purposes and in distinctly different
environments to produce enterprises that are suited for the economies of the region.
While every country may wish to create its own Intel from scratch, it is fantasy to believe
that such will be forthcoming simply by instituting legal reforms, which promote the
development of a venture capital industry.
Definition of Venture Capital
There is no universally accepted definition of venture capital. In the United States it
consists of the investment by a specialized financial organization in high growth, high
risk enterprises which are in early stage of development and are in need of equity, and
specialized advice and direction. In Europe venture capital is much less differentiated.
There, any firm dedicated to providing risk capital is considered to be engaged in venture
capital. Any private equity provider or mezzanine financier in Europe providing risk
capital to seed stage, start-up phase, early growth, or expansions in a high risk enterprise
is considered a venture capital operation. Venture capital in Europe even extends to the
financing of management buyouts.
For purposes of this paper, venture capital in the LAC context means any high risk equity
capital1 operation, which combines financing and a substantial amount of value added
services and control.2 The needs of LAC for the combination of equity and value added
services such as are provided by consultants makes this definition of particular value for
the development of industry and promotion of regional economic growth.
1
This will include any security, which is convertible into equity or receives, within the context of the
country involved, equity type returns.
2
See Thomas Hellman, Venture Capitalists: The Coaches of Silicon Valley, email
[email protected].
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History of Venture Capital
Private risk capital, as opposed to today’s venture capital, has a long history. Exactly
when the activity was born will probably never be precisely identified. The discovery of
LAC was itself a venture capital operation in which Christopher Columbus received
capital to finance the opening of new business trading routes to China. Arguably
Columbus may well have been the most successful venture capital operation in economic
development terms in history. This financial support received had much of the same
characteristics as what is today considered venture capital: an enterprising sea captain
with an idea, searching for capital and a willing investor. For his efforts Columbus
would be entitled to a percentage of the profits derived from the voyage and all future
trade with the Indies. In turn the venture capitalists, Ferdinand and Isabela, would
receive a substantial part of the revenues derived from the expedition and all future
revenues. The missing element was the existence of a blind pool funded from various
sources and managed by a professional investor. Nonetheless, there is some irony in that
we are today discussing how to bring to LAC the same risk taking and business
development tools, which led to the region’s discovery and colonization.
Venture capital in the United States is the product of the evolution and marriage of
merchant banking and professionalized investing by high wealth individuals.3 In 1958, in
recognition of the value that private equity financing played in promoting new ventures
and stimulating growth and employment, the United States government passed the Small
Business Investment Act. A quarter of a century earlier the importance of governmental
support for business development prompted the New Deal to create the Reconstruction
Finance Company, which ultimately led to the establishment of Alcoa and the synthetic
rubber industry. The formation in 1956 of the International Finance Corporation, part of
the World Bank Group, was also an attempt by the international community to provide
venture capital in support of private sector activities promoting growth and development
in the developing regions of the world.
By the early 80’s the United States had formed a recognizable venture capital industry,
albeit small4. It is estimated that a mere $610 million was invested by venture capitalist
in 1980. In the span of a decade that sum grew four fold and yet another four fold in the
following eight years, reaching $12.5 billion in 1998. The number of companies
receiving financing followed a parallel development increasing from 504 in 1980 to 1824
in 1998.5
The United States has a stock market-centered capital market, unlike Europe and LAC,
which have bank-centered capital markets. The reasons why a stock market-centered
3
See generally, Jack S. Levin, Structuring Venture Capital, Private Equity, and Entrepreneurial
Transactions, Kirkland & Ellis (2002).
4
With respect to any statistics used herein relative to “venture capital” the definition of the term adheres to
the definition of the country or region to which it refers. This creates a problem making comparisons
between countries and regions as term has a restrictive meaning in the US and a comprehensive one in
Europe and other regions.
5
Hellmann, supra note 2 at p.2.
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capital market evolved in the US are numerous6: the size of the country, the Glass-Stegall
Act (which forced a break-up of bank-dominated financial intermediation), a supportive
common law jurisdiction, “path-dependent evolution” and a variety of other factors.
There is a symbiotic interdependence between the growth of venture capital and the
innovations and discoveries arising from Silicon Valley and Route 128 corridor in
Massachusetts. The commercialization of the products developed in these two vibrant
university-linked centers is clearly a function of the availability of venture capital
resources capable of translating ideas into economically successful business operations.
A significant part of the economic efficiencies that produced the U.S. growth of the
nineties is a result of the ideas born in Silicon Valley and their ultimate
commercialization, both of which were possible by venture capital.
The European Union has recognized the value of venture capital in creating a supportive
environment for generating new industries and providing employment growth
particularly in high tech areas. In 1998, the Commission of the European Communities
adopted a Risk Capital Action Plan (RCAP) aimed at promoting a European approach to
venture capital. In its report, “Risk Capital: A Key to Job Creation in the European
Union”, Europe recognized that it had fallen significantly behind the U.S. in job creation
in the industries spawned by the new economy. Nonetheless it would be wrong to
assume that Europe had no venture capital industry prior to 1998. The industry was
embedded in the bank-centered, financial intermediation system, which dominates the
European Community. Europe has undertaken to address its lack of a venture capital
industry through the RCAP. Indications are that major progress has been made in the last
three years. Venture capital operations, which in European terms consist of seed, startups, expansions, and corporate restructurings, grew by 96% between 1999 and 2000,
increasing from 0.14% of GDP to 0.23%. More importantly seed and start-up
investments grew by 115%, surpassing the total investments in all aspects of venture
capital investments two years earlier.7
Europe has been equally successful in promoting an increase in investment by
institutional investors in venture capital funds. In 1999 11.5 billion euros were raised to
support the industry and another 20 billion euros were raised in 2000, a dramatic increase
reflecting the importance the community has placed on stimulating the growth of venture
capital investments. European pension funds have been unshackled from constraints
placed on them from investing in venture capital funds so that they now represent the
largest source of funds for venture capital.8
6
Bernard S. Black & Ronald J. Gilson, Venture capital and the Structure of Capital Markets: Banks versus
stock markets (1998).
7
Communication From the Commission to the Council and the European Parliament, On Implementation
of the Risk Capital Action Plan (RCAP), p.4.
8
Ibid. Note should be made that US pension funds accounted for a significant amount of the investment
increase as they searched for opportunities in Europe, particularly in England.
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Venture Capital in LAC
In comparison to Europe and the US, the venture capital industry in LAC is in its earliest
stages, although its bank-centered capital markets have provided over the years limited
amount of investments that could be considered as venture capital in European terms. By
1996 venture capital firms, broadly defined, invested US$ 1.49 billion in LAC. From
there the industry exploded to US$ 3.42 billion in 1997 and grew further to US$ 5.0
billion in 1998. Unfortunately that pace of growth was likely to decelerate and it did in
1999, actually dropping US$ 1.31 billion falling to US$ 3.69 billion. As the region started
to show signs of distress in late 1999 the total dropped in 2000 to US$ 2.77 billion. With
the serious retreat of the regions economies and the political uncertainties during 2001
and 2002, venture capital financing slid to below 1996 levels, first to barely over US$ 1.0
billion in 2001 and finally reached a low of US$ 709 million in 2002.
The numbers may represent a worse picture than the reality. A good portion of the
investing during 1997-2000 was the result of large privatizations, distorting the numbers.
The worrisome aspect of recent developments is the lack of interest in the region on the
part of foreign investors. It should also be noted that a substantial part of the resources,
in fact almost all, was sourced from outside the region. A favorable development in 2002
is that the deal flow during the period is more representative of the types of venture
capital operations associated with high risk / high reward investments leading to the
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establishment of new business operations.9 The investments represent small business
opportunities, which may ultimately lead to highly profitable businesses and sustained
economic development.
The Legal and Regulatory Framework
Despite the immense success that venture capital has had in the US, it was not the lone
factor responsible for the innovation and industry so often viewed in awe by other
countries wishing to replicate the model. There is a direct and empirical link between
what happened in the Silicon Valley and the availability of financing through venture
capital operations. The question that must be asked by all interested in development is
whether the American venture capital prototype has application to other countries,
cultures, societies and legal systems so that is may be transplanted in whole or with
modification to other environments. Will the model, without adjustments, wither in other
settings? If modifications are needed what ultimate form is best suited to achieve the
desired results?
Before discussing potential modifications to the US venture capital model, it is
fundamental that its characteristics be understood. As in so much of the US economy,
venture capital is a product of an empowering society, operating in a legal and regulatory
environment where what is not prohibited is permitted. Venture capital’s most
significant attribute is that it evolved – it was not a product of planning. Whatever
governmental support America’s venture capital industry received was the result of
operating in a favorable business environment. It was not forced fed. It was the product
of unanticipated consequences. In its most distilled form venture capital is nothing more
complicated than the result of contract negotiations between a financier, and an early
stage and dependent entrepreneur: private ordering.10 The industry’s underpinning
assumption is that a young, relatively inexperienced, small operation with a good idea
can enter into a contract with a benevolent devil (venture capitalist) with massive
experience and business acumen and that that engagement will produce an efficient
growing business in some cases. It is Faustian to its core. And it has worked in the
Silicon Valley for the simple reason that there is a mutuality of interest in the ultimate
outcome: a successful business venture. There is a twist: an early exit of the financier has
been part of the bargain.
Venture Capital’s Cast of Characters
There are five distinct roles played out in a typical venture capital operation: the capital
provider; the venture capital fund; the management or operator of the fund, which in the
jargon of the industry is the venture capitalist; the enterprise; and the exit. Each of these
roles has its own minor subsets and nuances.
9
Most of the information concerning LAC relative to venture capital is obtained from, World Trade
Executive, Venture Equity Latin America: 2002 Year End Report.
10
Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience,
Stanford Law School, Working Paper 248, November 2002.
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The Capital Provider
The venture capital fund or investor has to raise the resources from which investment will
be made. The typical “investor” may be a wealthy individual,11 pension funds, insurance
companies, corporate enterprises, endowments, banks, foundations or specialized
financial development organizations.12 As investors they become limited partners in the
fund, which will make the investments. The investors and the operator enter into a
contract, the Fund Document, delineating the obligations of the operator/general partner
and the respective rights of the limited partners. The Fund Document will also indicate
the target investment areas – either by sector or region or other parameters, limits on
investment size per investment, the distribution of assets, governance issues – such as
draw down procedures for calls on capital. The Fund Document will also set management
fees for the General Partner, which is generally also the management company. Most
importantly it will allocate the distribution of sale and other proceeds received from
investments. As a general rule the limited partner receives almost all of the proceeds
until the capital contributed, plus some hurdle rate of return13, has been achieved. After
the hurdle rate has been achieved the limited partners and the general partner share the
remainder in a ratio negotiated between them, which is typically 80:20.
The Venture Capital Fund
Venture capital funds in the US have limited life, generally no longer than ten years. The
rapid nature of high tech companies makes that ten year horizon an adequate time frame
within which a fund can perform its functions adequately. Typically the Fund is given
five years in which to invest the pool and another five years for divestments.14 The
preferred structure of the venture capital fund is a blind pool; i.e. the capital is provided
without any previous identification of the specific enterprise, which will be the recipient.
A blind pool allows the manager to perform the real role of screening the array of
opportunities to identify that unique case which will permit the optimal use of its scarce
resources. The standard used to screen those opportunities is that business providing the
highest return prospects to investors. The fund is a conduit by which the general
partner/manager calls on the limited partners to provide the monies needed to invest.
Significant penalties on the limited partners are embedded in the Fund Document for
failure to disburse on demand. The fund retains minimal cash, passing on to the investee
company immediately any sums received from fund investors pursuant to disbursement
11
The US securities laws provide parameters qualifying individuals and transactions, which may provide
funds in venture capital operations.
12
Specialized financial development institutions outside the context of the United States would include the
International Finance Corporation (IFC), the Inter-American Investment Corporation (IIC), the
Commonwealth Development Corporation (CDC), Corporacion Andino de Fomento (CAF), the Central
American Bank of Economic Integration (CABEI), and country specific development banks such as
Banobras of Mexico.
13
A minimum rate of return that must be earned before a sharing by the manager occurs.
14
Divestments can and often do occur within the investment period. Generally such divestments will
permit the venture capitalist to recapture the capital portion of any sales proceeds. Early divestments have
an enormous value as they favorably impact the fund’s ultimate internal rate of return (IRR).
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requests, and similarly passing back to the fund investors any sums received as dividend
or other distributions from the investee company, including sale of the investment itself.
Manager or operator of the fund (the venture capitalist)
The pivotal character in the industry is the manager of the fund. Consistent with the Fund
Document, he raises the money for the Fund, negotiates the Fund Document with the
limited partners, identifies investment opportunities, selects the investment, negotiates the
terms under which the Fund invests, provides advice to the investee, controls its
management decisions, molds it during a relatively short period, and then arranges an
exit. None of these activities is dictated by any specialized laws or regulations, which
apply exclusively to venture capital. Consistent with its evolved nature, the industry
operates in the ambiance of the business environment in which it finds itself. As a
general rule the manager is a partnership itself of investment professionals with
specialized knowledge and expertise in the field in which it operates. The professionals
meld together an assortment of talents individually and as a group, which permits it to
provide the value added which converts the investee into a successful operation and an
attractive target for an eventual sale.
The venture capitalist is described in some quarters as a coach.15 Clearly the value added
to the allocation of resources is created by the venture capitalist. But a more critical
contribution that the venture capitalist is expected to make is that of “coaching”, possibly
controlling the early stage development of a portfolio company. The venture capitalist
approval may be required for all significant governance issues. In all likelihood
management positions will be filled with the advice and consent of the venture capitalist.
The operating theory governing the relation between the investee and the venture
capitalist is that the expertise, not just the amount invested, will transform an infant
business to an attractive acquisition through an initial public offering (IPO) or merger.
For this to work the venture capitalists most valuable asset is its know-how and
reputation. The know-how must not merely be financial but must at least match the
technical knowledge of the company’s management and founders.
The Investee
The focal point of all the effort is the business venture itself. It includes as an organic
whole the innovator, the entrepreneur, and the other individuals who have developed a
product or identified an opportunity, and wish to transform it into a successful venture.
For the economy, all the value added in terms of production and jobs are centered in the
investee. It metamorphosizes into another Cisco or Intel, and becomes the ultimate
provider of goods and services, jobs and tangential business activity. The economic
success of venture capital as an industry is measured by and commensurate with the
success of the investee.
15
Thomas Hellman, Venture Capitalists: The Coaches of Silicon Valley, [email protected],
February 2000.
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The Exit
For purposes of understanding America’s venture capital industry, it is necessary to
personify a process: the Exit. The ultimate sale by the Fund of its investment is a critical
element in the sustainability of the industry. The exit recycles the resources within the
economy, provides additional resources for another round of investment, measures the
success of the business’s operations, attracts through that success more investments into
the industry, and differentiates and calibrates managers.
The differentiation and
calibration process makes it possible for the investors to distinguish among managers and
to channel more resources through the most successful managers. A proven track record
also augments the reputation of the manager increasing his/her credibility as a manager,
facilitating his/her ability to add value in the next business operation16.
In America the securities markets play an important and critical role in the exit. Many
venture capital operations are ultimately sold through an initial IPO. Those that are not
sold in an IPO are likely to be acquired themselves by firms that are publicly traded.
That acquisition may involve a swap of shares of the venture capital business for those of
a public company. Or there may be an intervening merger between venture capital
operations with the expectations of an eventual IPO of the merged entity. The point is
that in one way or the other a vibrant securities market plays a defining role in the
industry. Without a functioning securities market, investments get stacked up curtailing
the recycling of resources, impeding further money raising, and constraining growth and
development of the industry.
Strategic development policy necessary to support Venture Capital
The venture capital model is simple. It has few components. It can be fashioned to
conform to the peculiarities of the business venture requiring finance. However, the
model may be deceptively simple in theory but much more complex to implement as so
much of its success is a function of the legal and regulatory setting, the entrepreneurial
environment, the depth and breath of the securities market, the availability of institutional
investors and, finally, the existence of a cadre of venture capitalists with the skills and
management talent to implement a successful structure. As Europe has discovered,
although it has implemented a program to promote a venture capital industry and has
experienced a dramatic growth of its venture capital investments, the gap between its
industry and the U.S.’s has widened. “The size of the US industry is not only much bigger
but their investments have been growing at a faster rate. If this trend continuous (sic),
the ambitious objectives …, which go well beyond those in the RCAP (to foster economic
growth and job creation), would become unattainable.”17
16
The incentives from a track record of success are such that there is a danger that venture capitalists will
be tempted to rush companies to IPO before they have been sufficiently seasoned. See, Paul A. Gompers,
Grandstanding in the Venture Capital Industry, J. of Financial Economics 42 (1996) 133-156.
17
Communication from the Commission to the Council and the European Parliament, On Implementation
of the Risk Capital Action Plan (RCAP), p. 20 Oct. 25, 2001.
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In the case of LAC, can the venture capital model contribute to growth and job creation?
If it can, does venture capital have a role in supporting Small and Medium Enterprises
(SME’s)? What reforms or structural changes are needed within LAC to make venture
capital a vibrant part of the financing of high tech and SMEs?
Reforms Needed - The Capital Providers
LAC has a savings deficit and a dearth of financial intermediaries, which could provide
the resources needed to fund adequately a venture capital industry. As in the case of
Europe its capital markets are bank-centered. The dominant role banks play in the capital
markets of LAC require, at least initially, if the industry is expected to launch within the
foreseeable future, that the banks play a major role in providing the resources needed to
kick start the industry. However, because of the nature of venture capital operations
(high risk/high rewards), it may be improvident for any significant percentage of a bank’s
capital to be subject to the risks inherent in venture capital investing. Each country will
have to determine for itself the level of venture capital exposure, which can be prudently
exposed to these risks. Europe’s commission recommended the adoption of prudential
rules allowing institutional investors to invest in venture capital.18 LAC will have to
consider similar rules. Such rules will have to cover the array of institutional investors
present in the country. Issues involving double taxation and capital gains taxes may have
to be addressed to assure that no impediments or resistance to the formation of venture
capital operations exist.
America’s pension funds are a major investor in venture capital funds. Europe, with
some success, is promoting the increased participation of pension funds in the industry.
Obviously the trend and desire of governments to promote the development of a pension
industry in LAC is an encouraging development. As pensions become better endowed
efforts should be made to allow a prudent level of investment by these institutions in
venture capital.
Reforms needed -The venture capital fund
The complexity of incorporating in LAC is legendary. Venture capital funds are financial
institutions, which should be of limited interest to government regulators – other than to
assure that their existence is facilitated. If they are made to obtain all the approvals that
are required of financial intermediaries, the industry will be seriously handicapped.
Special legislation and regulation permitting the existence of blind pools may be required
in some jurisdictions.
Reform needed - The Venture Capitalist and the Investee
The relation between the venture capitalist and a portfolio company is controlled by
agreements between the parties. Most of the LACs have few impediments to what may
be agreed among consenting parties. Whatever constraints do exist, the needs of the
venture capital industry will be unlikely of sufficient countervailing importance to offset
18
Id. p. 26.
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whatever political pressure were that gave rise to those constraints. The real effort in
terms of reforms, which will meaningfully impact the venture capital process, should be
for governments to promote legal and judicial reforms to assure speed, honesty and
transparency in the enforcement of contracts. Too frequently the sanctity of contracts is
undermined by courts and by governmental fiat. Even when no venture capital operation
is involved every such instance further erodes the confidence of investors and with it the
ability to coax an industry into existence.
Reforms Needed - the Exit
Unfortunately for LAC it financial markets are bank-centered while the American
venture capital industry is stock market-centered. For venture capital industry to work at
its optimal an easy exit, which maximizes valuation is fundamental. Without a
functioning securities market, exits become more problematic, delaying the recycling of
funds and all the other benefits derived from monetizing the value created by the venture
capitalist.
LAC’s stock markets lack breath and depth. Very few listed or traded stocks have
sufficient trade volume to provide investors liquidity. What is even more of concern is
that the little capital markets development that has occurred seems to have concentrated
wealth, constrained growth, and complicated the allocation of capital to SMEs. By it
nature bank-centered economies are much less fluid, much more reliant on loans than
equity. There may well be a relation between the character and structure of a country’s
capital markets and its ability to support growth and distribute wealth equitably.
As
noted above, Latin Americas' distribution of wealth ratios are worse than any other region
of the world, excepting Africa. The region’s largest country has the worse distribution
ratio of any country of the world of significant size.
Nonetheless Europe has proven that a venture capital industry can be coaxed out of a
bank-centered economy. LAC would do well to promote the creation of a venture capital
industry. In time with other reforms directed specifically at fostering a securities market,
a stock market-centered economy can slowly evolve. Meanwhile a more contained
version of America’s venture capital industry can minister to the needs of SMEs.
Venture Capital for SMEs and the Equitable Distribution of Wealth
If one were asked what the two scarcest commodities in LAC were, funding for capital
investment and know-how would rank high in almost any fair assessment of the region.
In such an environment, a venture capital industry should flourish for the simple reason
that it marshals both money and know-how to the country’s benefit optimally. The forte
of the venture capital industry is its ability to mobilize resources for allocation to
industries with the highest potential rewards, albeit with commensurate risks. A further
strength is the industry’s capacity to bring to bear on a new business venture the
concerted effort of exceptional talent with unique know-how. Because venture capital
focuses on new businesses, SMEs will be overly represented. The effect will be to open
access to businesses that are less likely to be attractive to banks. Furthermore the
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marrying of SMEs with the professional financial and technical know-how of a fund
manager will accelerate the growth of the business. After all the real value of the
industry is not just the mobilization and marshaling of resources – which venture capital
does very well - but also the transformation of a group of small businesses into a heroic
successes, providing new jobs and stimulating spin-offs and correlated operations.
Promoting the development of a vibrant venture capital industry can do more to stimulate
and maintain a healthy growth rate and assure greater participation in the wealth created
than any other capital market improvement. LAC would be well advised to follow the
example of the European Union and adopt a risk capital action plan for each country and
the region as a whole. Undoubtedly, a RCAP for LAC would require the region to take a
real measure as to why its capital markets have not sustained growth for prolonged
periods, and why even the short spurts have been accompanied by wild and debilitating
downturns. An RCAP can promote a financial infrastructure, which will be friendlier to,
and better suited for, SMEs. A better functioning capital market can sustain greater
growth rates and has a chance of distributing wealth more broadly.
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