Why More Colombian Startups Are Forming and Finding Funding Abroad

For many entrepreneurs, raising capital in Colombia is not an option, and instead they look for partners abroad

Among the possible solutions to the lack of investment in Colombian startups, Felipe Santamaría, director general for Latin America of Dutch startup accelerator Rockstart, mentioned the importance of having legal stability in the country, and generating tax incentives for entrepreneurs.
August 26, 2022 | 04:40 PM

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Bogotá — In a globalized context, more and more Colombian startups have opted to raise capital abroad given the perception of some that doing so in the country has more obstacles and is more costly, while others argue that the money is coming from outside because it is the same external funds that are looking for companies.

These difficulties were mentioned by the CEO of Sweden-based Svenir, César Suárez, who is Colombian, and who, with his geolocated NFT startup, managed to raise a pre-seed round for $125,000 and a complementary round for $75,000.

Now the company is moving forward to achieve a third round of investment, but does not see raising it in Colombia as an option, where it would be more expensive, complex and result in less capital, Suárez says.

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“Yes, it is indeed much more convenient to do it [raise capital] abroad than here in Colombia. In Colombian entrepreneurs’ first funding stages, many take place here, but for a second round one is already outside,” Felipe Santamaría, director general for Latin America of Dutch startup accelerator Rockstart, told Bloomberg Línea.

He added that a reflection of this situation is that 50% of the companies are currently incorporated directly abroad as their holding company, either in the Cayman Islands, in Delaware (US), or in other jurisdictions.

This shows, according to Santamaría, that “Colombia is not attractive in terms of venture capital to make early stage investments”, for reasons ranging from country risk to the lack of knowledge that investors themselves have of the jurisdiction.

“Colombia is not a favorable jurisdiction for foreign investors, who take all the risk, but when it comes to getting returns the tax on this is quite high,” he says. “There is an income there, there is even an occasional gain as well, then there ends up being a very high tax burden.”

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Camila Salamanca, executive director of Endeavor Colombia, explains to Bloomberg Línea that “historically it has been seen that several factors make it difficult in Colombia to raise some rounds in the $1 million to $5 million range, and this means that they have to look outside, without this indicating that it is easier or cheaper”.

She says that this is because, on the one hand, the capital market is still immature and illiquid and, therefore, there are not so many local players willing to make this type of risk investment. Furthermore, once the investments are made, the capital does not rotate, and therefore there are no outlets to reinvest these resources in new ventures.

On the other hand, “due to the lack of experience of some actors, sometimes the needs of the companies do not match the interests of entrepreneurs, or local investors ask for a very high participation in the company for low investment amounts, and this reduces the share of the entrepreneur and makes it unattractive for subsequent rounds”.

Affecting both sides

For Rockstart’s Felipe Santamaría, the regulatory and tax burden impacts not only startups but also private equity funds that invest in such companies in the country and also raise funds.

“It is affecting both sides,” he said, explaining that for such funds and international investors it is supposedly “not attractive” to raise capital in Colombia, “and this means that there are very few capital funds in this jurisdiction”.

Among the possible solutions, he mentioned the importance of having legal stability in the country, and generating tax incentives for entrepreneurs.

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However, the tax reform project proposed by the new government could generate “potential impacts on the capital market”, which would result “in an increase in the tax burden for entrepreneurship, in some cases exceeding 60%”, according to a report by the Colombian Securities Market Self-Regulator (AMV).

As a consequence, the AMV indicates that this may generate “a more challenging environment for the creation and attraction of new companies to the Colombian market”.

For the executive director of the Colombian Association of Private Equity (Colcapital), Paola García Barreneche, the ecosystem of venture capital funds in Colombia is in a moment of growth, and although the country has gained ground in Latin America, there are still few local investors that lead investment rounds and have the capital available to invest in ventures.

“It is true that there is an asymmetry between supply and demand, with supply being lower and with limited capital versus. the number of ventures, which can generate a bottleneck. Therefore, it becomes important for entrepreneurs to open up options to new networks in other markets to broaden their spectrum and achieve greater capital injection opportunities for their companies,” Berreneche told Bloomberg Línea.

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Among the solutions to boost the growth and consolidation of the startup ecosystem in Colombia, he recommended sharing knowledge and educating potential investors to achieve a higher level of understanding of what it means to invest in venture capital, as well as boosting angel networks.

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Money coming from abroad

Vanessa Bello, leader of the scouting division for Latin America at Wayra, considers that the focus “is not that startups are going to look for funds outside the country, but that it is the same external funds that are looking for Colombian startups in order to invest in them”.

“The United States and Europe have an older venture capital development culture than Latin America, but this does not mean that local funds are not gaining traction, with experienced teams in this industry,” she said.

For Bello, capital is being diversified in the places where it can give the highest return, as is the case in Latin America.

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“Proof of this was the $15 billion that has been invested in the region during 2021, which is equivalent to four times what was invested in recent years,” she said.

And in the case of Colombia, she pointed out that in 2021, $1.6 billion of investment was allocated in 58 startups, while in 2022 the amount has already hit $859 million in 56 companies.

“In short, data points to the fact that money is coming from outside to be invested in the country,” she said.