PECAP, the Peruvian Association of Seed and Venture Capital, calculates the opportunity for venture capital in Peru over the next four years at $145 million.
This opportunity comes from the gap between expected demand for capital (founders in Peru ecosystem with high potential startups that fit within early stage investors criteria) and the local supply of capital (committed capital in Peru for investment in startups).
The good news for investors is that demand is increasing, both in quantity and quality, while availability of local venture capital funding is not growing at the same rate.
There has been a historical gap between attractive early stage dealflow and invested capital from local venture capital investors
Missed opportunities. Over the past three years, local Peruvian investors have passed on investments in startups that sophisticated international investors have subsequently backed. For example, Apurata recently entered top global accelerator Y Combinator, after looking for seed funding in Peru. Crehana raised $4.5 million in Q1 of 2019 from Acumen after brining on Edtech venture funds in the United States as investors.
Undisclosed international funding rounds. Startups from Peru’s ecosystem have recently raised rounds of over $1 million led by international investors. The startups include Turismoi, Xertica, Keynua, and Runa. These rounds are highlighted in the PECAP quarterly report, but not all of the funding amounts were disclosed.
Large and fragmented local angel rounds. Over the last three years, various startups have raised seed rounds of $500,000 from local angel investors. This round size could be considered Pre-Series A in Latin America and could be led by venture capital funds.
Early exits. The PECAP report highlights recent acquisitions of startups in Peru. Some occurred while startups were at the seed stage. The transactions demonstrate that the startups still had great potential to grow and potentially receive venture capital funding.
There is a growing gap between future demand and the small number of existing local funds
Reaching a critical mass. Startup funding in Peru has been growing at 25% annually. In addition, StartUp Peru continues to support high impact startups and more startups are graduating from an increasing number of local accelerator programs. These means more startups are receiving money to get to their next milestone, and possibly funding round.
Lower opportunity cost. Building a startup and raising money will never be easy, but the current ecosystem is lowering the opportunity cost of jumping in the arena. Experienced operating executives, recent MBA grads, Silicon valley-trained Peruvians, will see an opportunity to launch startups. This all means more founding teams that venture capital investors will be excited to back.
Local venture capital funds Some active venture investors exist in Peru, however the total amount of local invested capital in 2018 was $9 million, not enough to make up for the growth in quality demand.
Investors are identifying the gap and taking advantage of the opportunity
New entrants. Recently announced initiatives include the launch of a venture capital fund of funds, by COFIDE, the Peruvian Development Bank, which will be a key anchor investor for emerging managers. Last month, a new venture fund from local investment firm Salkantay that was selected by Ministry of Production to receive operating support for a Series A fund.
Downstream capital. Funding of startups across Latin America has doubled each year over the past two years. Most of this capital is directed toward Brazil and Mexico, but is starting to have a “pull” affect for startups founders in Peru. The availability of downstream capital for later investment rounds makes local investors see a clearer path to future exit opportunities.
By the numbers. It is not unreasonable to imagine a $25 million round for a Peru startup in the next four years. That would take a good chunk of the estimated gap. In addition, it would take 100 rounds with a size of $250,000 to $500,000, 25 rounds with size of $1 million to $2.5 million, and five early stage rounds of $5 million to $10 million.
The progress of the Peru startup ecosystem and strength of local actors will allow the observed $145 million gap to become a $145 million opportunity for the local venture capital industry.