Latin America: Latin American Internet Deals Go B-to-B

As the firm that most aggressively supported Latin American Internet start-ups over the past three years, Chase Capital Partners’ (CCP) recent investment in Brazilian logistics company Total Express Air stands out as representing a sea change in Latin American Internet investing.

Firms in the region today are moving rapidly from business-to-consumer toward business-to-business. Sao Paulo-based GP Investimentos, itself the largest Brazilian organization to invest in technology in Brazil, went in with CCP on the deal.

“[Total Express is] the leading last-mile delivery company in Brazil,” said Susan Segal, the head of CCP’s Latin American group. “[Their infrastructure focus] is very synergistic to everything else we’re doing.”

On a more macro scale, Segal said there will be a series of b-to-b investments, although she declined to cite specifics.

“It’s the point in time in the cycle when people are starting to circle b-to-b, she said. “They’ve invested in and been through b-to-c spaces.”

And Segal is not alone.

“The b-to-b space is very attractive in Latin America,” said Octavio Lopes, a partner with GP Investimentos. “We still believe b-to-c is attractive, that there are consumer-oriented opportunities, but b-to-b is less developed.”

Roberto Thompson, also a partner with GP Investimentos, added, “the consumer side has developed more rapidly, [partly because] in b-to-c you can build a start-up independently. With b-to-b, you have to get in touch with large companies, and if you don’t have anchor investors, it won’t fly. B2B [also] requires a lot of knowledge about what makes sense here [in terms of] market regulations by sector and scalability.”

Too Much of a Good Thing?

It’s true that after more than a year of intense activity in the region, the b-to-c market is becoming saturated. For example, there are now roughly 15 auction sites throughout Latin America, and investors are looking to fresher frontiers.

Couple that saturation with the numerous stumbling blocks investors have run into from the start in b-to-c, and the allure of b-to-b plays becomes clear.

An example of this can be seen in the warehousing industry. Many dotcoms can’t afford warehousing because there aren’t enough customers, but when a customer does order, the item is out of stock because the company can’t afford warehousing.

In Brazil, with two-thirds of the totalLatin American population, anywhere from three to 11 million people used the Internet last year. At the same time, only 333,000 Latin Americans actually bought something online, according to International Date Corp. (IDC).

Some industry watchers predict that the number of online consumers will reach 1.1 million, spending on average $675, or three times today’s numbers, by 2003. Still that amounts to less than 1% of total Brazilian retail sales.

At the same time, there’s a six-to-one ratio in advertising spending versus receiving for Latin American Internet portals.

“Without IPOs, that’s a burn rate that doesn’t go away,” said Robert Linton, of Sul America. Fourteen IPOs have been scheduled this year, but none have gone forward yet due to the Nasdaq’s recent volitility.

IDC has reported that in Brazil only 2% of online users buy or sell items over the Internet, compared with 78% who use email, 46% who use preferred sites and 10% who bank and perform other personal finance transactions online.

Another recent survey from IDC indicated that among 500 businesses surveyed in Latin America, only 10% are presently engaged in online selling, while 25% are buying online.

However, 70% of those businessesnot presently engaged said they expect to be so by year end. The communications industry is the most active in terms of making purchases, while the finance sector is the least active – but it is the most active in selling products and services.

What Time’s the Revolution?

Forrester Research Consulting Co. believes the boom in Internet trade won’t happen until 2008 in Latin America as companies begin to realize the Internet will reduce costs in purchasing products and services.

The Economist Intelligence Unit, however, believes that companies with enough buying clout will soon make sure that offering merchandise over the Internet is not a supplier’s option, but an obligation. Bradesco, Brazil’s leading private bank, believes businesses can save between five and 25% on purchases by conducting their transactions and bargaining online.

For example, Ford Brazil saved $20 million recently in a tire-buying auction. It was prepared to spend up to $90 million, but found a bidder for $70 million via the Internet.

“For a company that spends $10 [billion] to $15 billion a year, that’s serious procurement,” said Sul America’s Linton.

Alternative Access

Jupiter Communications, a provider of e-commerce research, maintains that “those looking to claim victory in the Internet commerce market in Latin America [going forward] must devise strategies to separate the market’s opportunities from its many barriers.”

One such opportunity is to provide Internet access through non-PC devices, as so few Latin Americans own computers.

And indeed, private equity firms are already jumping in. The Southern Cross Group has invested in, a company that provides the hardware and content necessary to get online through a television set. The box is not unlike a cable box that sits on the television. It costs Brazilians $170, and partner Ricardo Rodriguez of Southern Cross noted that most Brazilians have a TV set, and most people use the Internet for e-mail.

Another example is Brazilian health-care portal, which just received a cash injection of $12 million from CCP, GP Investimentos, Warburg Pincus, Softbank and TH Lee Putnam Internet Partners to progress in its b-to-b strategy. The first four firms invested $2.5 million each, while TH-Lee contributed the rest.

“B-to-b will be even bigger in Latin America as people realize it makes basic business more effective,” said Segal.

Gary Nusbaum, managing director of Warburg Pincus, said investing in fits in well with his firm’s health-focused strategy. Warburg was an early investor in HMOs in the U.S.

“It’s one of the core areas of our firm,” he said. “Connectmed is taking online a lot of things that are today done by hand – checking eligibility, payments. It will develop relationships between doctors, insurance companies and labs.”

Warburg Pincus made its investment through two funds, the $5 billion Warburg Pincus Equity Partners, L.P. global fund, and the $800 million Warburg Pincus Ventures, International, L.P. fund.