Capital According to the National Venture Capital

¶ … Capital

According to the National Venture Capital Association in the United States, venture capitalists help entrepreneurs "turn innovative ideas and scientific advances into products and services…" Venture capitalists do this by providing both funding and guidance, typically to small businesses that need this funding and guidance to take good ideas into the rapid growth stage of the business life cycle. Venture capitalists usually focus on new, innovative products and techniques. VC not only lends entrepreneurs they money that they need to bring a product to market, but also can provide managerial expertise, especially to firms that are otherwise run by scientists, engineers or investors. That business expertise helps to ensure that the business can manage its rapid growth through the IPO process.

A venture capitalist takes on a significant amount of risk, in that when the VC invests, the business idea has not yet proven to be viable in the market. The idea itself might be great, but when the VC enters the business the product or service is just in the beginning phase of commercialization. The venture capitalist takes an equity stake in the business, and then as the company enters the commercialization phase, the VC profits from the capital gains. This is why the VC provides management help to the company -- because that is how the VC can increase the odds of a strong appreciation in the value of the company. The venture capital locks in the capital appreciation when it sells out, either when it takes the company public with an Initial Public Offering or when it finds another buyer.

The Southern Cross team faces a number of challenges in Latin America. One is that the environment for venture capital differs significantly from country to country, depending on local laws and culture. The Latin American market is not as homogenous as many think, and as a result Southern Cross is not simply a "Latin American" fund, but a fund that must operate within many different countries, perhaps with only a single company in a country. The disparate countries also present challenges, as the attractiveness of the different countries varied over time depending on who was in government. Political and economic instability also makes it difficult to earn money in Latin America -- the outcomes of investment are not as predictable as in the West.

Southern Cross mitigates these issues in a few different ways. One way is that the company conducts extensive due diligence. This is important because of how the economic and political conditions vary by country. This level of diligence also decreases the risk to SC and ensures that SC makes the best investments. The company also mitigates risk by having one of its team members on-site. For example, Sotomayor moved to Santiago and set up next to La Polar's CEO after SC invested in that company. This gives SC direct knowledge of how its investments are doing, and a high level of control if necessary.