Innovation is a scary word to many.
“There are a minority [of Latin American corporates] that are well-advanced [in their thinking on innovation] and have a mature thesis, but the vast majority are far behind,” Fabiana Fagundes, founding partner at Brazil-based law firm FM/Derraik, tells Global Corporate Venturing.
She draws a parallel to the human brain, where the pre-frontal cortex is responsible for the higher functions such as cognitive behaviour and decision-making while other parts of the brain are responsible for our more basic responses: our survival mode, our lizard brain.
At the upper echelons of too many corporates in Latin America, innovation is still met with a response from that reptilian, fight-or-flight part of the collective psyche.
“When [board members who are used to the old economy] see something so new in terms of concept, growth, economics, fundamentals and scalability, they tend to feel threatened. And when you are threatened by innovation, your first move is fight or fly,” she says.
Harkening back to when investment firm 3G Capital co-founder Jorge Paulo Lemann, one of Brazil’s richest people, described himself as a “terrified dinosaur” during a panel on innovation in the food industry, Fagundes describes how it is therefore the role not just of the professional CVCs, but also the advisers and outside counsels, to educate and smoothly ease the old-school thinkers into new ways of doing things.
Fagundes explains: “I think that when you’re in survival mode, you don’t realise that extinction is right there. If you don’t start innovating, you will see many other companies completely disrupted.
“And if they don’t invest in startups and they don’t get an education on what is happening, what they will end up doing is just those usual board meetings where they try to discuss the rolling budget and what to do in the next quarter, and they will fly from the discussions that they don’t dominate because they all feel threatened by you.”
At the same time, boards shouldn’t be rushing into establishing a CVC unit without first laying the groundwork in terms of their culture of innovation. Things like accelerators, hackathons, partnerships and open innovation initiatives should be used to acclimatise the corporate before establishing a new entity, which according to Fagundes should be the last step taken to boost innovation.
Boards need to be made to understand what to expect when building a venturing unit – that mistakes will be made along the way and to not always look for the quick wins because it is a long-term endeavour.
Simply put, survival mode stops corporates from innovating, but if they want to survive, they will need to stop living in a world that no longer exists.
“It’s just like The Matrix. What is the pill that you want to take? The red one or the blue one?”
Time needs to pass
There is no quick fix – the passage of time is what it will take, allowing an organic awareness of CVC and its benefits to grow.
It will be the early movers that will benefit most, however, especially in terms of building their team. Telecommunications company Telefónica and fund manager Vox – which manages CVC funds for the likes of Hospital Albert Einstein and Banco do Brasil – were among the earliest to build venture teams in Brazil and have been reaping the benefits in terms of qualified personnel.
Others have been less lucky. For companies looking to do business in Brazil, this means having far poorer visibility into the local deal flow without a foothold in the local workforce.
“People are desperate and they ask us all the time if we know someone that they could hire. This is a question that only time will solve, I think. Whoever comes first will get served first,” says Fagundes.
The mindset is in their nature
Mindset is a theme that keeps coming up with practitioners in the region. In a recent interview on the Global Venturing Review podcast, Qualcomm Ventures vice-president and North America managing director Carlos Kokron explained how some CVCs in the region still have some learning to do.
“Some of them are still asking: Oh, I want exclusivity, I want right of first refusal. These are things that, in our view, don’t tend to go well. If you ask for exclusivity, you’re probably limiting the size of the company,” he says.
While board members or C-suite executives may know that such covenants could put a cap on the growth of their investments, they just can’t seem to pivot away from the controlling M&A mentality which something like a right of first refusal is a mainstay.
“It’s their essence. Some of them know [it limits startup growth], some of them don’t know, but none of them can do differently,” says Fagundes, using as an analogy the fable of the scorpion and the frog, wherein the scorpion stings the trusting frog – who was under illusions of mutually assured destruction – halfway across a river, drowning them both, because that’s just its nature.
“When you go to CFOs, for example, it simply doesn’t make any sense for them to invest without control. They’re control freaks by nature – that’s what they have to do; otherwise, the company goes bankrupt. Not to blame them, they’re in their role.”
Changing winds
Despite significant hurdles to be overcome in the business mentality, it’s a good time to be a CVC in the region. There is momentum, and the relative insulation the region has from current geopolitical conflicts, paired with the economic downturn, is providing an opening.
Fagundes says: “Where people see crisis, I see opportunity. Since the valuations have melted down over the last month or two – especially for institutional venture capitalists – this is becoming, at least in LatAm, a huge opportunity for CVCs to bring something more than just money.”
Before the institutional VCs began pulling back due to the current economic conditions, it had been much harder for CVCs to get a place on the cap table. Now, they’re rushing in to fill the void left behind by the money men.
Brazil is obviously the largest market, and in years past it would have likely been the only one people looked at, but that is quickly changing. Mexico has grown by leaps and bounds, and countries like Colombia are becoming hotbeds for developer talent, according to Kokron.
The result has been not just an increase in investment, but a decrease in brain drain from up-and-coming markets like Colombia, where in the past entrepreneurs might have gone down to neighbouring Brazil to start their business, but are now opting to stay.
“Now [entrepreneurs] are like: Hey, I can start my company from here and run it from here and grow big from here. [Delivery app] Rappi is a great example of that,” says Kokron, who also explains that the rise in large-scale exits in the region is also drawing investors who would have previously not bothered.
