VCs are pretty good at crunching the numbers. But it’s not financial projections and cash-flow forecasting they should be concerning themselves with. Instead, it’s census data.
In particular, one new statistic from the U.S. Census Bureau is grabbing the attention of forward-looking investors: By 2042, whites will no longer make up a majority of this country. They will gradually be supplanted by Hispanics, who currently make up about 15% of the population and will account for 30% in 2042.
Savvy VCs are attempting to grab a slice of the increasingly important Latino market and its substantial spending power. Indeed, Hispanic buying power is projected to reach $1.2 trillion by 2011, about six times what it was in 1990, according to the Selig Center for Economic Growth at the University of Georgia.
“VCs love big markets, and this is one of the biggest of them all,” says Saar Gur of Charles River Ventures.
The market is not only big, but it’s also largely untapped. “The venture business as a whole is over-capitalized and over-firmed,” says Darryl Wash, a managing partner at Ascend Venture Group. “We need to find new pockets of opportunity and points of differentiation that can lead to substantial returns. The Latino market is definitely one of those areas.”
But unlike, say, clean energy or wireless technology, the number of deals targeting this market is still quite small. In the past year, just four companies targeting Hispanic customers have raised about $24 million, according to Thomson Reuters (publisher of VCJ). Since the start of 2007, a total of 11 Hispanic-focused startups have raised less than $140 million. By contrast, 138 cleantech companies have raked in more than $2.6 billion this year alone.
Why should VCs pay attention to the U.S. Hispanic market? Here are a few reasons to consider: U.S. Latinos had the sharpest increase in disposable income from 1990 to 2002 of any racial or ethnic group, according to the Selig Center. What’s more, they spend 21% more than other consumers on a typical shopping trip, and the average age of U.S. Hispanics is 27.4 years, which means they still have time to build wealth—and to develop lifelong consumer preferences and brand loyalty.
Yet a good chunk of the Hispanic population is largely ignored by major companies, especially financial institutions. That’s one of the reasons why CRV’s Gur decided to invest in Progreso Financiero (aka Progress Financial), a financial services firm aimed at the Hispanic market. CRV invested alongside Greylock Partners and the Center for Financial Services Innovation in an $11 million Series B for Progreso in May.
We need to find new pockets of opportunity and points of differentiation that can lead to substantial returns. The Latino market is definitely one of those areas.”
Gur says many Latinos are excluded by banks and credit card companies because they typically have scant credit histories. “Because of inefficiencies in the consumer finance system, the Hispanic community is hugely underserved,” he says.
Progreso Financiero offers unsecured credit to under-banked Hispanic families that lack FICO scores, credit histories and traditional banking relationships. But instead of charging them exorbitant interest rates like many predatory pay-day lenders, Progreso provides loans at much fairer interest rates—typically about 20 percent. The company also offers loan contracts in Spanish and sets up small weekly or bi-weekly payment schedules to help customers better manage their cash flow and loan obligations.
Gur says many Hispanics have been burned by financial institutions. By providing a positive experience, Progreso hopes to forge an emotional bond with these consumers and build life-long customers, potentially offering them a host of other financial instruments down the road.
“One of the great things about the Latino market is that it’s inherently viral,” says Gur. “The community is very tight-knit and families tend to live together. If you provide a good experience to one person, they’re likely to tell many others.”
Perhaps one explanation for lack of venture deals in the Hispanic market is that only about 56% of U.S. Hispanics use the Internet, compared with 71% of non-Hispanic whites and 60% of non-Hispanic blacks, according to the Pew Internet and American Life Project.
Steady move to online
But even that is starting to change. The number of Hispanics online climbs to 67% among 18- to 27-year-olds. These “new generation” Latinos are active participants on social networking sites and, like all young groups, represent an attractive target for advertisers.
That fact alone led John Kim, a managing director at H.I.G. Ventures, to invest in Batanga, a Hispanic-focused online media and entertainment company based in Miami. “We believe the next Internet wave will be the proliferation of super-vertical sites that are geared to the passions and interests of a specific market, such as Latinos,” Kim says. “These kinds of sites require a different approach both in terms of content and advertising.”
The company, founded in 2000, raised its first significant round of venture capital, $30 million, in July 2007 from H.I.G., TriState Investment Group and Tudor Ventures. It has raised a total of $37 million to date, not counting $7 million in venture debt it pulled in this past June from H.I.G., TriState, Tudor and others.
One of the great things about the Latino market is that it’s inherently viral. If you provide a good experience to one person, they’re likely to tell many others.
Even though mainstream sites like MySpace and Facebook have made moves recently into the Latino market with Spanish-language versions of their sites, Kim believes it is highly focused startups such as Batanga that will capture the lion’s share of the market.
“Batanga understands their target audience better than anyone,” he says. “You can build better products and execute more effectively when you really know what your customers want.” The company gets about 9 million unique visitors per month and continues to experience triple-digit growth.
Advertisers are starting to take notice. Kim says that Hispanic advertisers were slow off the mark when it came to moving their ad buys from traditional media like magazines and television to online media. But as more Hispanic get online, advertisers are starting to follow, representing a burgeoning opportunity.
Even some online companies that started in Latin America are now turning their attention to the U.S. Hispanic market. One such company is Sonico, a social networking startup based in Buenos Aires that raised a $4.3 million Series A in June from DN Capital.
Sonico has 20 million registered users and 500 million page views per month. While those numbers are highly impressive, it’s a well-known fact that CPM advertising rates are relative low in Latin American, especially compared to the United States. This makes it harder for a company like Sonico to effectively monetize its traffic.
But with a strong U.S. presence, the game suddenly changes. “We want to appeal to global brands,” says Steve Schlenker, a managing partner at DN Capital who led the Sonico investment. “Appealing to, say, a wireless provider in Mexico is good, but it’s even better to have global advertisers like Proctor & Gamble and McDonalds. By crossing borders Sonico can capture those global brands rather than just the regional ones.”
But why would U.S. Hispanics be interested in a site like Sonico rather than, say, a Spanish-language version of MySpace or a homegrown entity like Batanga? “Our belief is that U.S. Hispanics still want to have ties to the homeland,” says Schlenker. “Even if your grandparents emigrated from Brazil or Honduras or somewhere else in Latin American, there are emotional strings pulling you back there and you want to be on a network where you can communicate with people from your country of origin.”
Risk in complexity
VCs who are betting on the Hispanic market say one of the biggest challenges is the heterogeneity of the market. The population, of course, does not solely consist of first-generation Mexicans. Latinos come from many different countries with diverse cultures. Some are new immigrants and others have been in the United States for generations.
The next Internet wave will be the proliferation of super-vertical sites that are geared to the passions and interests of a specific market, such as Latinos.”
“It’s hard to pin down the Hispanic market,” admits Gur. “You might find a really interesting company in New York that nails the Puerto Rican community, but then you discover it offers nothing of interest to Mexicans in California.”
With Hispanics representing 15% of the population, H.I.G.’s Kim believes that any investment he makes has to have the potential to reach the entire community. “I’m not interested in investing in a niche within a niche,” he says. “That’s no way to generate a healthy exit.”
Kim says he’s seen a few deals recently that he chose to pass on. One was a cable station with Caribbean content for Latinos. The other was a children’s TV station targeted at Hispanics. “Companies we invest in have to be applicable to every Latino,” he says. “If you’re just a subset of the market there’s no way to become large enough.”
Darryl Wash at Ascend Venture Group would not entirely agree with that approach. He believes that no company can be all things to the entire Hispanic population. Instead, he likes to focus on what he calls “addressable markets” within the segment. “There are definitely pockets within the Hispanic market that are large in and of themselves,” he says.
One such market is language learning. According to U.S. Census data, there are about 15 million Hispanic adults in the United State who have limited proficiency in English. Ascend hopes to address that need with Retention Education. It helped fund a $7 million Series A for the company in February along with Ironwood Capital Advisors, OCA Venture Partners and MK Capital.
Retention believes that empowering U.S. adult Hispanics with English-language skills will positively impact the economy and the community. The company’s flagship product, Sed de Saber, is currently teaching conversational English to roughly 55,000 Hispanic workers in the food service, hospitality and construction industries. Customers include employers such as Marriott, Jack in the Box and PepsiCo, which offer the self-paced curriculum to their workers.
So what does the typical Silicon Valley VC have to know before diving into the Latino market? “For one thing you don’t need to be Latino yourself, but it does help to have someone on your team or in your network who’s very well versed in this population,” says Kim, who is Asian American.
Gaar, who is white, admits that prior to investing in Progreso Financiero, he had almost no direct exposure to Latino companies or culture. But he knows a great opportunity when he sees one: “I see lots of VCs going to India and China, but there’s a huge market right here at home that’s going untapped.”