International Two Studies Confirm Latin Internet Heat –

The Internet continues to be the rage in Latin America for private equity investors.

In the past 14 months private equity groups and venture capitalists have allocated at least $1.52 billion to Latin American Internet companies, according to a study by consulting firm Bain & Co.

From September to December 1999, investors committed an estimated $945 million to Internet projects in the region. While that number doesn’t come near the $18.7 billion spent on Internet specific funding in all of 1999 in the U.S., Latin America’s rate of investment could double or triple by the end of this year, according to Bain, which estimated that as much as $3 billion of private money will be chasing South American Internet deals by the end of this year.

Daniel Baranowski, a vice president at Bain and the managing director of the Sao Paulo office, and Stefano Bridelli, an associate consultant at the firm, who organized the June report, said the sudden interest-mostly since this time last year-is due to explosive growth, even despite recent U.S. stock market jitters.

Latin America is one of the fastest expanding Internet markets in the world. It will have a projected 67 million users and $8 billion in B-to-C e-commerce by 2005 according to Jupiter Communications research. Internet Service Provider Terra Networks and portals StarMedia and El Sitio have created approximately $15 billion in market value. Despite the recent Nasdaq turmoil, more than 12 Latin Internet companies plan to go public this year or in 2001, raising several billion dollars, including AOL Latin America, Yupi, Universo Online, Submarino, and Mercadolibre.

The Bain study found that Latin American B-to-C companies, including portals, e-tailers, and auctions, have the potential to create more than $15 billion in market value by 2003. To date, approximately $1.5 billion of this value has been captured, meaning huge opportunities for current private players and potential new ventures. The B-to-B sector is even more promising because it is expected to be more than 12 times the size of the B-to-C market by 2003.

International and Latin American based venture capital and private equity investors are eager to cash in on the region’s Internet potential. In the U.S., Chase Capital Partners, Flatiron Partners and Hicks, Muse, Tate & Furst have been among the leaders. Softbank set up a $150 million Latin American fund, and in Brazil, Banco Opportunity and GP Investimentos will make an estimated $495 million available for Internet ventures. Additional Internet money will come from technology funds such as the $250 million Latin American Technology Fund, a Mexico-based joint venture between Promecap and BancBoston Capital, said officials at Bain.

In 1999 portals received the most attention-and dollars-capturing 37% of an estimated $579 million invested in the region’s Internet companies. But there has been a dramatic shift this year: 58% of the funds committed to date have gone toward free ISPs (itself a trend in Latin America), and B-to-C ventures. Investments are now shifting away from portals, e-tailers and auctions, as these spaces are already crowded.

Surprisingly, investments of only $32 million have been announced for B-to-B ventures, equivalent to 2% of total funds. This pales in comparison with the $2.5 billion of venture capital invested in B-to-B ventures in the U.S. in 1999. The lag in investment may be due to the higher investment requirements and complexity of B-to-B ventures as well as to low Internet and EDI penetration in the region. However, the B-to-B investment trend should catch on in Latin America soon, as regional businesses start to go online in search of lower costs and streamlined procurement processes, the report stated.

Several key investment funds are now spending the bulk of their efforts to engineer major B-to-B initiatives rather than trying to launch the 20th auction site or online bookstore. B-to-B exchanges in huge economic sectors, such as construction, health care and automobiles will soon go live. In industries with highly concentrated buyers or sellers, brick and mortar companies will be active investors in B-to-B exchanges, as has happened in the U.S.

Looking ahead, Internet infrastructure, specifically in both broadband and wireless, should capture considerable attention from investors. Additionally, brick-and-mortar companies’ Internet ventures should receive significant funding. In Brazil, the largest Latin American Internet market, retailers Lojas Americanas and Po de Acucar, banks Bradesco and Unibanco and media conglomerate Globo have been the early movers. In Mexico, media company TV Azteca and banking concern Banacci are investing heavily in Internet initiatives. In Argentina Musimundo, a music company, just received $10 million in funding for its online operations.

These Latin American bricks-and-mortar companies have many advantages over start-ups, concluded Bain. These include brand name recognition, supplier relationships, distribution networks and in-depth customer knowledge. They have learned from the experience of U.S. bricks-and-mortar companies and are positioning themselves for online success.

Mexico Calls North

Another new study, “Mexico’s Internet Development: Hype or Hyper-Growth?” from the International Trade Administration in Washington, D.C., focuses exclusively on the Internet in Mexico.

The report begins, “It is impossible to miss the Internet boom in Mexico: highways are lined with billboards promoting a myriad of dotcom companies; television and radio commercials promote a vast array of dotcom firms; and Mexican magazines are dotted with ads for dotcoms.”

It then goes on to ask, however, what business, if any, are these firms doing, for despite the quantity of advertisements and the number of hits and page views, the growth of the Internet in Mexico remains difficult to predict, and miniscule compared with the U.S.

Most analysts agree, for example, that there is only a 3% rate of Internet penetration in Mexico-compared with almost 50% in the United States. Current estimates of home computers in Mexico range from 2.5 million to 5.8 million. For more than 100 million Mexicans there are only 10.8 million telephone lines. As a result, it is estimated that last year a maximum of 2.5 million people in Mexico surfed the net, and less than 20% of those made purchases. Total sales in 1999 amounted to a meager US $200 million, although that is up from $180 million in 1998.

These statistics leave more than a few people wondering why so much money is being poured into the Internet in a country with high levels of poverty (between 40% to 50%) and illiteracy, stated the report.

In terms of B-to-C, part of the answer lies with the way in which Internet access is offered. Gerardo Villarreal, who is the general director of T1msn, a portal joint venture between Mexico’s telephone giant Telmex and Microsoft, “Internet access will not always be through the PC.”

Gerardo said he foresees Internet access provided through public kiosks, in libraries, Telmex offices, workplaces, and in Internet cafes throughout Mexico. He also boasts that through programs like those offered by Telmex, which allows consumers to buy a computer and a year of Prodigy access for US$50 a month, more Mexicans will continue to come online.

The study concluded that “while there are plenty of problems facing a rapid take off of the Internet in Mexico, there nonetheless remains much opportunity.” And the real growth opportunity lies in B-to-B e-commerce.

Mexican’s largest companies are highly automated and already opening Web sites. The Internet research group Forrester Research projects 8.4% percent of Mexican trade will be online by 2004, with total spending reaching some US$107 billion, and 16.6% of’ Mexico’s GDP coming from online business. Other estimates of Mexican Internet growth are not quite as optimistic; nonetheless, they project huge growth in the Mexican Internet and e-commerce sectors.

According to Merrill Lynch, “Mexico represents the third largest market for Latin American Internet users, which should exceed 50 million by 2003. (Based on a 10% penetration rate).” The research firm IDC states that the U.S. is still the number one market for Spanish language Internet content, but Mexico has become a runner up and should generate e-commerce sales revenue of $8 billion by 2003.