5 steps to foster venture capital in Peru

Over the last few months, I have received some input from founders, investors and advisors on suggestions for promoting the venture capital industry in Peru. 

Here are five steps that will improve the prospects for venture capital in Peru:

1. Reduce costs for startups. Tech startups in Peru face a withholding tax (retención) on technology services purchased from overseas. Vital expenses, like Amazon Web Services and Facebook Ads carry an additional burden that the startups are unable to deduct. This is counterproductive and hurts startups.
2. Implement tax reform that facilitates early stage investing. Today local investors pay a 30% capital gains tax for investments in foreign companies and 5% tax for Peru-based companies. Many of the most successful cases of Peruvian startups will end up (or launch) as US-based companies. An apparent incentive for investing locally becomes a disincentive for investing in startups.
3. Empower emerging managers. The government and local investors can take actions to incentivize the creation of early stage funds. As an example, IDB Lab has invested in 74 venture funds over the last 20 years. We should put the investment decision making power in the private sector and promote startup investing at a regional level (not just Peru-only investments).
4. Facilitate the entrance of local pension funds as Limited Partners. This is a hard one. And will take time. But we must start a dialogue now. In Mexico, an initiative that created Certificados de Capital de Desarrollo (CKD), allowed local pension funds to invest in funds as limited partners. Venture funds are small and carry risks, a hard combination for large pension funds. But pension funds are an essential investor in an industry that will have long term gains in innovation for the county. This will, in turn, benefit all peruvians.
5. Learn from our neighbours. We are behind in the region, but we can accelerate our learning curve as an ecosystem by building on the many success cases (and learnings) from other countries in Latin America. In Mexico, the number of the number of venture capital funds grew from 15 in 2011 to 63 in 2017. In Chile, CORFO has initiatives to promote venture capital by provided matching funds. 

It is in our interest as a startup community to promote these changes. Many ultimately depend on government legislation, but it is our job to begin making the case by articulating the benefits of these ideas in a collaborative way.

Thanks to Jose Miguel Porto, Aldo Franciscolo, Andres Benavides and Vicente Leon for their input on this post. I originally, put ideas together in Spanish for an article in Revista Procapitales. You can access the article here.