‘There’s a lot of capital that wants to come into VC’

The world was already transforming digitally prior to the coronavirus crisis, which has given the process a mighty boost.

It has helped spur innovation and this – coupled with buckets of available capital looking to be deployed – has supported a vibrant operating environment for tech-focused VC funds.

In terms of VC activity in the region, dealmaking data speaks for itself. In January-October, the number of VC operations in Latin America grew 21% as the number of overall deals fell 15.3%, according to research firm Transactional Track Record.  

To find out about general trends, investment targets and more, BNamericas spoke to Alex Horvitz, CEO of VC fund HCS Capital Partners.

With operations in Miami, Santiago and Tel Aviv, HCS has a corporate venture fund and a tech fund. Target startups are fintechs, insurtechs and cybersecurity ventures.

Companies in its portfolio include connected car B2B2C platform Jooycar, regulatory technology firm Ceptinel, pet insurer Figo and crowdlending platform RedCapital.

BNamericas: What trends are you seeing in the sphere of venture capital?

Horvitz: There is more and more conviction in the VC community that there are so many industries and business models that can be disrupted with the use of technology. This creates a tremendous opportunity to create value. 

Also, there’s a lot of capital that wants to come into VC because there have been some very good experiences, again, on the value that can be created as an investor.

Thirdly, this pandemic, with all the terrible things it has brought, one good thing is that it has digitized the world in months … the world was ready, but the pandemic has tremendously accelerated this transformation. 

Since a lot of what VC does is invest in new technologies that are transforming business models, this shock – use of technology in everyday life – has been a very positive event. 

The amount of sheer innovation you see is just tremendous, in every sector from healthcare to banking and insurance to food production and agriculture. 

These factors have accelerated VC around the world. The one negative, in a sense, is that, at the same time, VCs are concerned about the exuberant valuations that we get sometimes. For example, companies selling US$200,000 believe the company is worth US$20mn or companies that keep on losing money for 10 years in a row but [say] it’s great because they’re growing.

BNamericas: Alex, you mentioned that there is a lot of money wanting to enter VC. Could you please expand a little? For example, are we talking about the likes of family offices?

Horvitz: There are different sources. Large family offices around the world are putting a lot of money into it, there are sovereign funds, university endowment funds … indeed I would say that one of the most active investors in VC are, actually, endowment funds. The one that set this trend many years ago was the Yale Endowment Fund which invests up to 20% of its fund into this asset class and generates spectacular returns. 

Another source is institutions, established companies, have also decided to do more VC and many times they ask VCs like ourselves to run a corporate program for them: we are actually doing that with Consorcio in Chile. There are many others: Sura has one, Allianz in Germany set up a 1bn-euro fund for this purpose. These large established players also want to see what is happening, what are these business models that are emerging, how they can collaborate, how they can invest and potentially buy these companies. One of the vehicles they use is VC firms to go and do it for them.

Chilean company Copec created a fairly big fund here in the US; they are based in Palo Alto. They do corporate VC, only for Copec. It is thematic and very focused, leveraging Copec’s skills and experience and VC experts that come on board. They are very active in the market and am sure they will have a lot of success.

BNamericas: Could you please expand a little on the topic of valuations?

Horvitz: Because of the acceleration of the digitization of the world and the amount of money there is out there that wants to invest, valuations have tended to go up; that’s for sure. 

Even in Latin America, which is not a huge VC market – we have been active in Latin America for five years in VC – I have seen prices go up very fast. 

BNamericas: How do you tend to discover potential investment targets?

Horvitz: There are mechanisms you have to develop like networking; once the startups you have invested in are more known and become successful, this attracts new startups that want to collaborate with you. I would say that this takes time but at the end it’s fairly easy: the difficult thing is knowing where to invest and how to help the startups to be successful. 

BNamericas: What opportunities do you see in Chile? 

Horvitz: We at HCS Capital are focused on banking, insurance and cybersecurity. Of course, there is also a lot happening in food-tech, agri-tech, and clean tech: we’d love to have funds to do that, but we don’t.

In insurance, there is a lot of very interesting companies. Even though Chile is a very small insurance market, it is an extremely competitive market. You have the big firms, Zurich, HDI, Sura, so many of the international players. It’s a highly optimized market. Therefore, if you can come up with an idea that would work in Chile, chances are it’s going to work in any country in Latin America and possibly the US.

In Chile, if I take a company like Zurich or HDI, they work with the same standards and sophistication as in Europe – or Liberty as in the US. So, if a startup can break into that market that means they’re pretty good, and the case is Jooycar [works with HDI, Zurich, Consorcio, Sura]. When they moved to Peru and they won a contract with Rímac, from a technical point of view, it was straightforward: they knew exactly what to do. And then they went to Mexico, and they got the No. 1 player in Mexico, which is Qualitas. And again, they knew exactly what to do because whatever they developed in Chile was 100% exportable.

And then they came to the US and, here, the market is a little more complex because of the size and so on, but within six months they had the product up and running and now they are selling it here and generating amazing market interest.

BNamericas: Does VC investing tend to be linked to economic cycles?

Horvitz: Not really. Right now, we have a pretty bad economy in almost every country and the amount of innovation that I see is equal, if not higher, than before. People see opportunities. 

Also, when people don’t find a good job and they have a little bit of savings, they say, ‘you know what, now is the time to take the risk’.

The other trend that helps a lot is that because of the economic downturn the margins of banks, insurance companies, retailers are under a lot of pressure; therefore, these companies are looking for technology partners to lower their costs and lower their complexity and at the same time accelerate their digital transformation. So when there is less money you need to be more productive thus hiring or buying from startups – insurtech, fintech, etc. –  is a lot easier. 

BNamericas: What’s your general outlook for Latin America’s startup industry, innovation?

Horvitz: I’m very positive about the LatAm market. Traditional investors [in regard to Chile] are seeing, more and more, that it is not only theoretically possible to create value in VC but they see that startups are managing to expand outside Chile and go all the way to the US – and all this fast and successfully. 

There are more and more examples of super successful startups in many areas in Latin America. That is something to salute and to celebrate, both the innovators and the startups, and the investors in Latin America that are waking up to this trend.  

I think there is a lot of innovation happening in Latin America, in Chile … in Colombia it is fantastic the amount of innovation and how the government support is accelerating the trend. Same goes for Argentina, even though they have issues, and of course Brazil, which is a whole world of innovation.

Now the more challenging side of the success of startups in Latin America is that a lot of the large international investors – the big VC funds – say ‘wow, there is something to be done in Latin America’ are coming to Latin America and the valuations go up very quickly. But I think, all these events are good for the industry.  

Especially for Chile, the industry has been very successful, but it should be a bit careful – Corfo is doing a great job in promoting the risk capital and innovation ecosystem – but when one injects so much capital into an asset class such as VC, this could create some asset mispricing. Additionally, it is very important that the VC takes a significant part of the financial risk related to the success of each investment. Finally, it would be ideal the government supports the innovation ecosystems by promoting regulation and laws like the fintech law which should promote competition and collaboration to improve the quality and cost of financial services in Chile.

BNamericas: What type of startups are you currently interested in?

Horvitz: We are very keen to invest in blockchain, blockchain applied to insurance, to banking to any type of contract. The amount of productivity gains that different industries will gain by using blockchain is amazing. You could literally cut up to 70% of the overhead of a contract management process using blockchain. 

We are actively looking for the use of blockchain in insurance contracts, in banking, in private debt, custody and settlement, because this is a force that will revolutionize these areas. 

The other area where we are looking for companies – and we are [already] talking to some – is the cost of operating a bank or an insurer. In insurance, we’re typically talking about claims handling; in banking we are looking for assets in collections, credit origination, risk pricing. 

In insurance, it is possible to reduce the cost of processing a claim by up to 50% using new digital technology, using analytics, machine learning, image processing and so on. Everything that is related to lowering the operating cost of a bank or insurance company is very attractive to us.   

Another area where we are massively looking for companies is around cybersecurity and cyber risks. Everything related to protecting data, access, networks, measuring and managing cyber risks – that is one of the reasons we created the office in Israel, in Tel Aviv, because there is a lot of knowledge coming from military training which is one of the best in the world.

Other areas related to banking infrastructure are collections and payment processing. Anybody that can lower transaction costs can create substantial value for clients and banks.

And anything that is distribution: we invested in a company in Canada, PolicyMe, that distributes, sells life policies, 100% digital at a cost that is 30 to 50% lower than the physical channels. 

Finally, we believe the retirement planning and investment areas are starting to be massively disrupted by digital technology. This combined with the retirement gap in almost every country, especially in Latin America, create an amazing opportunity.

Anything that is 100% digital that gives you two things – lowers processing and costs of sales and at the same time increases satisfaction of the client, whether it is banking or insurance – is a massive opportunity.

That’s just a few highlights of areas where we are actively looking for investment opportunities.