The Internet Party Didn't Last Long

Funding is drying up for Latin America's Net startups

Despite the lounge music blaring above the fluorescent-lit dance floor, the mood at First Tuesday in Buenos Aires is more funereal than festive. When the monthly gatherings for Internet industry folk were launched almost a year ago, this was one of the hottest parties in town. As many as 2,000 Netrepreneurs and venture capitalists would cram into the upscale Ribera del Este club for an evening of extreme schmoozing. On this November night, there are barely 700 people--and the beer is free. And judging from the absence of red badges, there are hardly any investors in the house.

That's a disappointment for Diego Lanus, a 25-year-old Argentine who's the founder of, a site that allows users to make free calls to North America over the Internet. Since it was launched in May, has signed up 25,000 users. But Lanus needs $1.5 million to move ahead on his business plan. "I've been scouting for investors for six months now, and everyone keeps saying try again after the [Argentine] summer is over," he says.

TORRID. Around the world, investors are suddenly discovering what a profitless wonder the Net really is. But in Latin America, the love affair with the Net, though it may have been torrid, was shorter than elsewhere: not even a year. Latin America boasts one of the fastest growth rates in Internet use on the planet. The number of Latins online is expected to soar from 16 million this year to 66.6 million by 2005, according to Jupiter Media Metrix Inc. in New York. And e-commerce is forecast to grow from $537 million to $8.3 billion over the same period. Trouble is, competition is heating up even faster, with new Web sites sprouting up daily. According to a study by Boston Consulting Group (BCG), the region boasted 1,338 e-commerce sites as of June, a threefold increase from May, 1999. "It was too much, too soon, too quickly," says Jan Boyer, the president of Softbank Latin Ventures, a $150 million venture capital fund set up by Japan's Softbank.

Now, investors are realizing that the U.S.-style Internet outfits they backed will not register a profit any time soon--if ever. Many of those ventures failed to take into account regional idiosyncrasies: high Net-access charges, supply bottlenecks, and consumer reluctance to give out personal information online.

The sudden reversal in investor sentiment is evident in the stock prices of the few Latin Net companies that trade publicly. StarMedia Network Inc., the New York-based Spanish- and Portuguese-language portal that most embodies the region's Web revolution, is trading at around $7 a share, well below its initial public offering price of $15 in June, 1999. Still, StarMedia is doing better than most. Countless smaller sites have been forced to merge with rivals or close down.

Other Latin Net pioneers are feeling the heat. "All our actions are aimed at getting new customers," says Antonio Bonchristiano, the founder of Brazil's, an e-tailer with operations in five countries that once billed itself as Latin America's Bonchristiano admits that Submarino's backers will have to kick in more cash to keep it afloat until the end of 2001, when he hopes to break even.

Consolidation is all but inevitable. Latin America's Internet industry is heavily concentrated: The top ten sites in each major country account for 57% to 80% of the market, compared with 38% in the U.S., according to BCG. "Anybody who's not a top-tier player [will] have difficulty surviving without some kind of partnership with an established player," says Lucas Graves, Latin America analyst at Jupiter Media Metrix.

That's the route the Buenos Aires-based Web portal El Sitio chose. At the end of October, El Sitio Inc. said it will merge with Ibero American Media Partners, a media group owned by Venezuela's Cisneros Group of Cos. and Dallas buyout firm Hicks, Muse, Tate & Furst Inc. The union will give birth to Claxson Interactive Group, a content company with $600 million in assets. "This is a moment to balance the skills of the Old and New Economies," says El Sitio co-founder Roberto Vivo.

In fact, brick-and-click alliances may have the best chance of getting funded. South-Net, a Net incubator based in Buenos Aires, seeks out non-Internet partners for all the ventures it backs. For instance, a restaurant supply site has been paired up with a supermarket. "The trend will be more and more merging online with offline," says South-Net CFO Sebastian Villa.

HEADACHE. That's because barriers to e-commerce are high in Latin America. Poor infrastructure and a dizzying array of tariff and customs regulations make cross-border distribution a headache for e-tailers. And ownership of credit cards is low--only 62% of online purchases in Latin America are made by credit card, vs. 96% in the U.S. That means sites must set up alternative payment methods, such as bank transfers. But the main problem is convincing Latin Americans to buy online. Many sites fall short in terms of product selection and prices, while customer service is abysmal. So there's little repeat business.

For those Netrepreneurs who want to keep flying solo, cost control is key. Take, an ultra-hip portal that targets the Latin youth market. The bare-bones operation has spent just $14 million since it was launched in July, 1999. Loquesea has offices in 10 cities but a staff of just 185, and its witty ads are created in-house. "We haven't focused on [launch] parties, we haven't focused on an expensive branding campaign," says CEO and founder Carlos Lizarralde. The 34-year-old native of Venezuela expects to close the year with revenues of $2.5 million, mostly from the fees the site's users pay to play online games and download music. Loquesea is also on the verge of closing a third round of financing.

The Internet Party Didn't Last Long (int'l edition)

The irony is that some Latin Net companies spent fast and furiously in their early days, because that's just what their backers wanted them to do. Startups were urged to achieve scale by setting up offices all over the region, not just in the big three markets--Brazil, Mexico, and Argentina--which together account for 74% all Net users in Latin America. But operations in smaller countries delivered almost nothing in the way of sales and eventually had to be closed.

Investors who are in for the long haul argue that the Latin Internet industry is learning from its own mistakes. "In Latin America the last mover is the best mover," says Softbank's Boyer, going against the conventional wisdom that companies first to market will wind up winners. That's good news for the new crop of Netrepreneurs such as Diego Lanus in Argentina. Now, if he could just get his hands on some of Boyer's money.

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