The country’s biggest CVC-as-a-service firm says it is an optimal time to invest in startups as corporate interest in innovation soars.
While corporate innovation in Latin America lags behind more mature markets such as North America and Europe, more companies in the region have the desire but not the tools to invest in startups. The result has been a boon for the budding CVC-as-a-service segment in the region.
CVC-as-a-service firms provide venture capital services to corporations. The industry is growing rapidly as corporate venture capital is increasingly viewed as complementary to M&A and new business development.
The largest such firm operating in Latin America’s biggest market – Brazil – is Valetec Capital. It counts the likes of biopharmaceutical company Eurofarma, steel producer ArcelorMittal and conglomerate Algar among its corporate partners.
“CVC has been growing at 30% each year since 2010. This is an effect of innovation becoming faster and more prevalent. Brazil is catching up with this wave, though a little late if you compare it to the United States, Europe or even China,” says Valetec’s founder and chief executive, Peter Seiffert.
Valetec operates seven funds. Regulated under Brazil’s Comissão de Valores Mobiliários, the funds are structured between eight and 10 years. Each has between three and four dedicated staff.
Valetec launched in 2006 while Seiffert was still at aerospace manufacturer Embraer, where he worked in new business development and as head of corporate strategic planning before becoming its head of corporate venture capital in 2012 – the result of a hard-fought battle to establish a CVC at the company.
“Between 2001 and 2012, I tried to do CVC at Embraer several times. It was denied more than three times over more than a decade,” he says. He finally managed to get a CVC unit approved in 2012 following a call to tender for entrepreneurial projects.
The first fund became operational in 2014 and was followed by three more before Seiffert left to run Valetec full time.
The CVC-as-a-service trendlines seem promising. “CVC is understood in the market as an important strategy, and very complementary with other key strategies like M&A, R&D and new business development. It’s another warrior in this battle to put a corporation in the mainstream of the potential new business,” says Seiffert.
Outsourcing CVC in Brazil
“The concept of open innovation has been adopted in Brazil and Latin America, I would say, since 2015,” says Seiffert. This includes not just activity with startups but internal company cultures, relationships with universities, R&D institutes and other partners.
“I would say in the past four to five years, the growth in interest in startups [in Brazil] has been phenomenal.”
He describes his amazement at the record number of new funds and committed capital that Brazil has seen this year compared with 2021, particularly as they sprung up despite the rise of interest rates, the Ukraine war, the economic downturn and falling valuations.
Finding qualified professional investors in Brazil that specialise in corporate venture capital, however, is one of the major hurdles that corporations face if they want to establish their own units, further pushing up demand for firms like Valetec.
“CVC is very expensive and there aren’t enough qualified professionals to do CVC in Brazil because it’s a new activity,” says Seiffert.
With available capital piling up across the market, competing against other investors for a place at the cap table is easier to do with a purpose-built team that is confident in its ability to execute. “The investment arena is very competitive nowadays. You need to decide fast and be professional, otherwise you won’t be investing in the best startup. It’s very crowded and there’s a lot of dry powder being deployed by angel investors.”
Even in the Brazilian CVC-as-a-service segment, new competitors are popping up at a rapid clip. “We are the market leader but out of the five main players in Brazil, Valetec being one of them, at least three are no more than nine months old,” says Seiffert.
The inside track
Experience in a corporate setting translated well into an outsourced investment firm, according to Seiffert. “The main advantage in my case was that I really understood the needs, the mindset and the culture of my potential clients because I had already been in their shoes in the past. We used those insights to design a service and a solution with a strong value proposition,” he says.
The first fund that Valetec approved, for biopharmaceutical company Eurofarma, came in June 2019. The firm is now setting up three to four funds a year.
Corporates’ growing awareness and demand for CVC is also manifesting itself in the questions they ask Valetec about things such as the optimal vehicle structure to invest inside the country. “Questions from corporations are changing a lot from last year to this year. What kind of vehicle would be perfect to invest with – an LP outside or FIP in Brazil? This kind of discussion has become more and more relevant nowadays because FIP has become a typical choice.”
FIPs are a type of legal structure for an investment vehicle in Brazil that has tax benefits
The appetite for CVC services may be growing in Brazil, but that doesn’t mean Valetec’s eye doesn’t wander to other, more mature markets. The firm is working towards setting up operations in the US. “Our key agenda now is to go overseas to do the internationalisation of Valetec,” says Seiffert.
Valetec is the largest player in the Brazilian CVC-as-a-service segment – a growing fish in a growing pond – but entering other markets means competing against firms like Touchdown Ventures, Pegasus Tech Ventures and Mach49, and differentiation will be a challenge that Seiffert says will be solved through strong partnerships.
“The challenge is to gain entrance into the ecosystem. We solve that by matching with the right partners. The key is to be embedded in the market with a strong network and a data bank of startups in each segment that we’re investing in,” he says, adding that it will take some time to earn a foothold.
“You don’t build it all from one year to another, you build it over five to seven years of operation.”