US funding firm Partners for Growth wants to bring venture debt more popular in Latin America
Photo: PFG/Courtesy

US funding firm Partners for Growth wants to bring venture debt more popular in Latin America

And, to do so, it has a $325 million global credit fund to invest in LatAm companies. In an interview with LABS, Julia Figueiredo, head of PFG's operation in the region, tells us what the firm is looking for in LatAm startups and the pros of venture debt

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The US investment firm Partners for Growth (PFG) announced this week that Julia Figueiredo will join the PFG team to continue its work funding Latin American startups. With more than 200 clients financed to date, six funds (the seventh in the process of raising capital), and $750 million in assets under management, PFG has built up decades of experience focused on a funding modality that is still uncommon in Brazil and other Latin American countries: the venture debt and growth funding. 

Unlike a venture capital round, in which entrepreneurs sell a percentage of their company to investors, in a venture debt round entrepreneurs get a loan from the investment fund. This amount invested – this debt – must be paid back within a certain period, either with money from a new funding round, or with profit generation or a liquidity event. It is an ideal financing modality for companies that have already reached a growth pace to avoid excessive equity dilution. 

In recent years, Figueiredo has worked as head for Latin America at Silicon Valley Bank. At SVB, Figueiredo worked on a pilot debt venture fund of $30 million launched in 2020 in partnership with PFG and IBD Invest, the Inter-American Development Bank’s investment arm. 

Julia Figueiredo. Photo: Courtesy

Now in charge of finding good business opportunities in Latin America for PFG, Figueiredo will focus her efforts on Brazil, Mexico, Chile, and Colombia, currently the most relevant economies in the region which amass the largest sums of venture capital.

The money for Latin American startups will come out of PFG’s $325 million fund six. The company does not say exactly how much intends to invest in the region, but Figueiredo’s goal is to finance up to 10 Latin American startups in 12 months, with checks ranging from $2 million to $50 million. PFG’s fund is expected to close its first debt rounds with two fintechs, one Brazilian and one Colombian, adding up to $60 million.

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PFG is agnostic about the sector and divides companies into two broad categories: technology companies performing in diverse areas (such as health techs, prop techs, ed techs, among others) and fintechs. 

“We divide it that way because in fintechs we can invest between $10 million and $60 million, and we also look at early-stage companies, according to their business model. In technology, a group that includes several areas and several business models, we look for growth-stage companies and invest between $2 million and $25 million,” she said.

Here are the highlights from Julia Figueiredo’s interview with LABS:

Make debt financing more popular

“The team at PFG has been dealing exclusively with debt funding for over 30 years, but in Brazil and other Latin American countries, this type of financing is relatively new and sometimes has a negative connotation, as if a company goes for debt financing only because it didn’t get a venture capital round. We want to change this idea. Equity has its value, especially when it comes to early-stage companies that are at a point when it is not even advisable to raise debt. We want venture debt and growth debt to be seen as alternatives and complements to venture capital. 

This is, at the end of the day, about educating people, about deconstructing this common idea that debt rounds are a negative signal, or at least not as good as venture capital rounds. This work involves both founders and VC funds. That’s our biggest challenge, to promote education and brand awareness.” 

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What PFG looks at in a company before investing

“The key is growth planning and revenue. The company doesn’t need to be turning a profit, but it needs to have very clear planning of what path it is going to take to become profitable. It is not necessary to have raised venture capital investments, we look at the so-called bootstraps as well, but it is a facilitator. Because a company that has already raised venture capital comes with due diligence from the VC firm. We also look at the company’s journey, the business model and the demand it meets.”

Venture debt benefits

“With a debt funding, the entrepreneurs don’t have to dilute the company’s equity; they are able to preserve 80 to 90 percent of the equity they would give up in a venture capital round. It’s a cheaper cost of capital for the company. It is an ideal resource for hiring a team, buying certain types of assets, for an acquisition, or for offering credit. A debt funding firm also does not take a place in the company board, it does not interfere in decisions regarding the operation.”

READ ALSO: SoftBank’s Rodrigo Baer: “Build a business. Don’t overfund your company.”

Tailored product

“The debt product is very tailor-made to the needs of each company. So a founder tells us what he or she needs, we structure a custom growth capital loan and price it for the risk.

We also help this founder to understand what is the ideal arrangement for him, the ideal check size for him, and in which areas this capital should be allocated. It is not a resource to be raised when the company has a short cash runaway, for example, but to boost an existing growth, complement a VC round, or improve the position for the next round. For example, if the company wants to do a Series B and needs to improve the valuation or reach some metrics, it can use debt funds to do that.”

What PFG expects for Latin America in 2022

“In 2021, Latin America got four times more venture capital than in 2020 and many international investors started looking at the region. But we have seen some signs of venture capitalists potentially slowing down, either due to the global economic scenario or, on the regional level, the election-related prospects. While venture debt is an attractive type of growth funding in all market environments, we see companies even more attracted to debt funding when equity funding conditions get tighter and venture capital becomes more challenging or expensive to raise.”