Living in Peru : your everyday companion

by
Diego de la Torre

Introduction

It was the Interamerican Development Bank annual meeting in Peru in 2004 and my Colombian friend Felipe Vergara, co-editor of this book, sent me an e-mail from Florida telling me that Mrs. Elizabeth O´´Halloran, Director of Intellectual Capital, Batten Institute, University of Virginia was coming to Lima to attend the conference. He encouraged me to meet her because we had a common interest in intangible assets and how to foster a more entrepreneurial culture. After finishing my lecture at 10.00 PM at the University in a warm summer night, I went to the “ Brujas de Cachiche” Restaurant, a native food restaurant in Lima where I met Mrs O´Halloran who was with a group of sharp and smart colleagues from Brazil and India who were also attending the IDB conference. We engaged in a brief but intense conversation about how intangible assets create value in corporations and the need to develop a more investment friendly culture in Latin America. Then, the topic of Angel Investing came up. A few weeks later I received the proposal from Felipe and Elizabeth to write this chapter about Angel Investing in Peru.

The Nexus Group Case:

As I mentioned before, Angel Investing is not part of the Peruvian Business culture. However, there is an interesting case of AI that was born in Lima in 1998. These native Angel Investors called themselves Nexus Capital Partners One. They decided that there was an important business opportunity developing a Cinema chain in the capital of Peru, Lima. With a population of eight million and an above national average per capita income and education, the idea seemed interesting given the precarious and old cinema network of the capital. The group was lead by a promminent businessman who did not want to be quoted mainly to the “low profile syndrome” mentioned. They started the company with three angels holding 51 % of the equity. The other partner with 49% was the Commonwealth Develoment Fund of the United Kingdom. By the year 2000 they had revenues of 4.5 million dollars and an EBITA of 0.5 million. Currently, the company owns seven cinema complexes with 14 million in revenues and 4 million in EBITA. Their peculiar approach to investment is based in the following principles:

1.- They analize business opportunities case by case.

2.- They take a majority interest in the business, no exceptions made.

3.- Preferably, the investment is no less than 5 million dollars

4.- Hands-on approach. They are deeply involved in the board and management

5.- Hire MBA’s from Ivy League universities

6.- Keep a low profile and develop ownnership structure that ensures confidentiality

The mechanisms in which the group incorporate new Angels is through references and contacts from the founding members. They are very careful in selecting them given the elitist nature of the group due to the high ethical standards required and minimum five million dollars investment criteria for each project. When I asked why they set this minimum, I was told that it ensures full commitment of the Angel Investor and a critical mass that allows the recruitment of highly trained managers, preferably from Ivy League Universities in the USA. Other consideration made was that it takes the same effort to asses a 0.5 million prospect or a 5 million one. The Group has developed an important knowledge about how to screen new members. Given the scarcity of individuals who can fit the demanding profile they are starting to develop a more rational methodology in order to get appropriate leads and candidates. They are considering to get in contact with foreign Angel Investors that already have a professional approach. This will actually be a challenge due to the fact that according to the research made, the typical Angel Investor is generally at half hour drive from his investment. However, the Nexus group investment has already attracted foreign partners and institutional investors. Thus, luring foreign Angel Investors can be feasible if this native group shows its past successes and standarize and structure the lessons learned and the peculiar processes they devised to achieve the positive results reached.

Lessons learned from the case: The need of the Business School Model from Spain

From the case we can conclude that this is a very peculiar type of Angel Investing. The minimum five million investment rule is quite sui generis as well as the presence of a foreigners as partners or companies to be acquired. Issues such as the confidentiality of the shareholder structure and the low profile syndrome mentioned is a very Peruvian characteristic. It is important to note that all the members of the group belong to the modern and westernized sector of the business community. They interact within a very selective social circle and they are not very proactive seeking new members. They are rather careful in this matter. One of the founders of the group told me that at the beginning they contacted about forty high net worth Peruvians with the cinema project and most of them showed a very risk adverse investment behaviour. This support the insights and comments of the private bankers when they described the uncertainty avoidance tendency of most potential candidates. Now, after the results achieved, many show a proactive interest in the Nexus Group. Thus, I think that there are important changes neeeded in the high net worth Peruvian investment culture. The change proposed can be summarized in the following graph:

The other path: Alliances with Overseas Venture Capital Funds operating in the country

I think we should not underestimate the contribution that venture capital funds can make to the development of an Angel Investing culture in Peru. In the USA, angel investors are acquiring increasing influence and make decisions much such venture partnerships and are an important source for funding an early stage-company. Venture capital funds bring the knowledge gained from investing in hundreds of companies and the lessons learned from the mistakes of their partners. That knowledge can be used to assit Angel Investors when faced with similar problems. One myth surrounding venture capital and angel investing is that the later focus on early or seed-stage rounds because venture firms no longer wish to do this type of early stage investing. This stereotype is wrong. There are venture funds such as the SEAF (Small Enterprise Assistance Funds), Peruvian chapter, that are allowed to make start-up investments although it is not the preferred investment. In addition, if a company has chosen angel funding to launch the idea, that will not be an impediment for the fund to invest on that company. Like most things, choosing venture or angel investing is usually not an either-or decision. The key is to recognize which option or combination of options is best for the entrepreneur. In fact, SEAF Peru is starting to make linkages with business NGO´s such as CONFIEP, Peru 2021 and financial institutions in order to get leads. In less than one year, SEAF analysed 130 companies from which 93 were incorporated companies and 37 start-ups. It is interesting to show the analysed investment opportunities by sector.

Source: Fondo Trasandino (Small Enterprise Assistance Funds, Peru)

It is clear that the sectors where there are more investment opportunities are manufacturing, services and agriculture. As mentioned in the introduction, there are important positive trends in the growing Peruvian economy, particularly in tourism. The advised minimum investment of the SEAF fund is 0.5 million dollars and it can go up to 2.0 million per company. According to the SEAF experience there are an important number of leads that require investments in the U$ 50,000-250,000 range, condition that do not fit with the investment policies of the fund. Then SEAF could inform of these cases to the Angel group formed with that purpose. If the entrepreneur finds an appropriate angel match that fill that gap, that will help him to become an attractive prospect for the fund. Thus, there are very interesting investment and management skills gaps to be filled in that segment. The Angel will not only provide the money but also the coaching to help the entrepreneur to professionalize the business in order to make it attractive for a later stage of funding through the SEAF fund or Angels with bigger pockets and/or sophistication. Therefore, a smart strategy to develop an Angel network in Peru can be to set up an strategic alliance between a local group of “angel investing champions” with the SEAF fund. In order to do that, proper legal agreements will have to be devised in order to ensure confidentiality and an ethics code of conduct. Furthermore, this alliance can provide room for co-investing strategies. The SEAF fund is very professionally managed and it has experience in emerging markets. With no doubt, an alliance with SEAF (www.seafweb.org) will add value to the Angel group.

The need of foreign Angels and the Globalization of AI

An interesting way to promote Angel Investing in Peru is throught the already developed Corporate Social Responsibility network. Important NGO´s with strong connections with high networth Peruvians such as Peru 2021 (www.peru2021.org) can significantly contribute to develop Angel Investing in Peru. As part of its board, I am seriously considering to start to design, with the help of overseas think tanks or academia, Angel Investing work shops for its members. In fact, writing this chapter is encouraging me to start an Angel Group myself. With twenty years experience as an entrepreneur and my ten years as a part-time academic I think it will be fun and exciting to look for investment opportunities and to help entrepreneurs in their start-up stage. An important source of sound business ventures are local business schools such as the Universidad del Pacífico with the creative and financially impecable business plans developed by the best students. I am also part of the investment committee of the SEAF (Small Enterprise Assistance Funds), and it has been a wonderful training about how to professionally asses early stage ventures and how to structure profitable and legally sound exits. It is also an excellent source of potential deals and co-investment opportunities as we have demonstrated. My involment in the academic world teaching general management to undergraduates and post-graduates was prompted by my willingness to promote a more entrepreneurial culture in Peru. During the last ten years I have developed a great concern for the role of private companies in the country development and their tasks as modernization agents, wealth creators and catalysts of society change. My meritocratic ideals called for a better social mobility in the Peruvian society based on a more energetic business culture and a legal-macroeconomic environment that facilitates and rewards wealth creation.

The following graph will show the main drivers of the globalization of Angel Investing and its impact in Peru:

Finally, I would like to thank Felipe Vergara and Elizabeth O´Halloran who encouraged me to write this chapter. The reader can be sure that if I become in the near future an active promoter and involved Angel Investor in Peru, they are going to be the people who made me discover this powerful and wonderful tool to actually “change the world” . I strongly encourage the academics and the people interested in developing Angel investing in Peru and Latin America to read the book “American Angel Investing” also edited by the Batten Institute. It has interesting insights and lessons in order to be learned from American angel investors. It also provides important information about powerful angel networks that might be willing to globalize or internationalize their portfolios with alliances with Peruvian and Latin American Angels. I want to finish this chapter saying that the future of angel investing is globalization. This can make Angel Investing more complex but much more interesting, fun and profitable. The feasibility and implications of this idea has not been researched yet. And remember, the rewards in business go to the man who does something with an idea.

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I read this interesting articles and the fact of Angel investing in Peru.

I would say that the best way to invest in Peru through this idea would be applying the Microfranchise concept that match perfectly with peruvian society.
In order to learn more about this concept I invite you to visit this web site : www.microfranchisesolutions.com
There are also some applications in Lima :

www.taxiexcel.com ( Taxi Industry)

http://www.youtube.com/watch?v=wdb6AUV-2AE  (video)

Hopefully we see soon many investments in Peru applying these interesting concept for the benefit of the local society

Diego,

What a fascinating and thorough article! I am a very active angel investor in North America (I am Chairman of New York Angels, and have invested in over 75 companies), and have just made my first angel investment in Peru. I led a group of international angel investors, from the US, UK and Peru, in funding an exciting startup venture called Por ti, Familia, (www.portifamilia.com) which has just launched an innovative health care solution serving the uninsured 'base of the pyramid' in Lima. The Founder and CEO of PTF is Enrique Coronado, who is Peruvian, but has an MBA from Columbia Business School in New York (which is where I met him when I was teaching there.)

I'd be delighted to discuss this with you in person the next time I'm in Lima (I try to get down every few months), and suggest that you reach out to Enrique to discuss his experiences.

This is a great article on a very important theme.  To the author, do you have the article available in Spanish to share with the directors of an ONG I am consulting?

Dear David and Randy:

Thank you for your comments, insights and information. In fact, the article is based in a chapter I wrote in 2005 about the Peruvian case for the book "Angel Investing in Latin America" published by the Batten Institute of the University of Virginia.

This year we have launched the first Peruvian Angel Invertor network called Invertir Peru. You can find more information about it in spanish at the following website (www.invertirperu.com). There you can also find a video where I describe the future structure of the network as well as the mission and objectives for the first year.
Again, thanks for your messages.

Diego

Interesting article.  I know there are a few countries in Latin America that use something called the Angel Investment Network.  For instance, there's a branch for business investment and entrepreneurs in Brazil - think they also have one in Argentina, Chile and Uruguay.

Are there any similar networks or groups for Peru?

Juan,

The "Angel Investment Network" is neither a real network, nor is it endorsed (or, for that matter, really used) by any official or organized groups, regardless of what their website claims. It is simply a templated web site that markets itself under many different names (although until you pointed it out I hadn't realized that they were targeting people outside the US these days.)

Aside from the national and regional associations of local angel groups (including the Angel Capital Association  in the US, the National Angel Capital Association in Canada, European Business Angel Network in Europe, etc.) the closest thing to an international network is Angelsoft, the web-based platform that provides the infrastructure running most of the organized business angel groups in the world (close to 500 of them, in 45 countries.)

www.angelsoft.net

-David

this is a very nice artical.

i have a question maybe is far of this artical. since a year i am reading and following peru economy news and some how i found it attractive for a small and medium business investment but i dont have enough information about peru regulation.

i need to know what is the minimum investment amount is allowed for the forigners? and if the investor can have a permement residency there or not.

the business size i am talking about is : 200 - 300 thousand US$

appriciate the update on my issue from anyone has information.

thanx

Hi Ernad
How are you?
We can support you and help you with the information that you are asking.
Send us a email to : peruadapters@hotmail.com
or contact us through skype : peruadapters
We have a Peruvian Business Market Adaptation Program for foreign investors
Thanks for thinking to invest in our amazing country

Regards

Diego,

Please allow me to congratulate and thank you for such a well written chapter regarding Angel Investing in Latin America, and particularly in Peru.

Well in line with those lines written back in 2005, INVERTIR PERU, I am sure, will be an awesome tool for all entrepenuors, with 1000s ideas of different ways to develop in all corners of this plentyfull country, with so many opportunities. Just to mention one example, the eastern Peruvian rainforests with such exagerated biological content, which in my opinion has been abused instead of intelligently worked.

I believe your recently opening of IP will aid our country, at the same time that opportunities will be opened to foreign investors whom will be allowed to participate, such as EMAD, and so many others that have been ¨listening¨to Peruvian news abroad. There is so much to be done here that there will be space for just everyone with desires to give our country a helping hand, and lets make sure Social Responsability and Fair Trade is always present.

Again, thanks for such good job.

Regards

Alvaro

Hi Diego,

Thank you for sharing such wealth of inspiring information. This is a great write up.

For now..just wanted to add my two cents and share with you and the readers, this weekly TV show on the ABC network, Shark Tank. It is about a group of investors that listen to business ideas of all types from everyday folks, and make a decision on wether to invest in the idea or not, in exchange for equity on the venture. They do this negotiation in less than five minutes. You can find full episodes on  http://beta.abc.go.com/shows/shark-tank/.

Good luck on your endeavors and hopefully we'll have a chance to discuss some investment opportunities in the near future.

Best regards,

Bruno

Bruno,  Shark Tank is fun to watch, but be sure not to confuse it with real angel investing :-).

-David

Yes, David..I agree with you....but as long as you're conscious of that fact, then I think something can be learned from the show. ;-)

Bruno