State support programmes and a growing appetite from private investors are helping fuel the rise of innovative firms

As economic growth brings investment into the country and business opportunities for domestic firms increase, Colombian start-ups are being encouraged from many angles. This support is coming from a combination of both government-led financing schemes and capacity-building initiatives, and through an environment in which private equity funds, business angels and entrepreneurship networks are coming together to take advantage of emerging opportunities.

A stronger emphasis on entrepreneurship came with the government’s 2010-14 Strategic Plan for Science, Technology and Innovation, which took clear, specific measures to promote start-ups. This was the basis for the 2012 establishment of the Development and Innovation Unit within Bancoldex, Colombia’s development bank. Encouragement of entrepreneurial activity is also happening at a regional level. In each of Colombia’s 32 districts, local governments have developed their own strategic plans for entrepreneurship to better coordinate resources and ensure that opportunities for new companies to emerge are not centred solely in the major cities.

State Programmes

A strong push for innovation and start-ups has come from the creation of Innpulsa in 2012. Financed by the Ministry of Commerce, Industry and Tourism and operated by the Development and Innovation Unit of Bancoldex, Innpulsa’s mission is to support new companies, from financing seed capital in the start-up phase to their later expansion into bigger businesses. Besides supporting entrepreneurs and SMEs directly, the agency focuses on enhancing the general coordination between all of the various actors that affect entrepreneurship, through capacity-building programmes with young entrepreneurs and by connecting new businesses to needed venture capital. By working alongside the market and linking up existing capabilities, Innpulsa aims to reshape the atmosphere in which Colombian start-ups are incubated.

Much of this drive comes from financing and support programmes. In 2013, Innpulsa offered seed capital to innovative start-ups, with grants of up to 70% of their initial capital or a maximum of COP350m ($175,000). Out of 600 companies that applied from all sectors, Innpulsa supported 52. “The number of applications was clear proof that in Colombia there are innovative companies with game-changing technology,” Sergio Zúñiga Bohórquez, manager of early-stage financing at Innpulsa, told OBG.

For 2014, Innpulsa is focusing its support on sectors with high potential. One of its grant programmes will allocate COP500m-1bn ($250,000-500,000) in seed capital co-financing to start-ups in the field of biotechnology. Another will support start-ups that develop new technology services or products. The aim is to use public money to encourage private investment in innovation by co-financing investors betting on new ideas. The grants, which may be used for either start-ups or spin-offs, will match a private investor’s contribution up to COP500m ($250,000).

Innpulsa also helps firms at a later stage of development by supporting innovation at companies with a track record and proven market. The Innpulsa Mipyme programme has been functioning as a modernisation fund to support businesses with at least two years of activity. Through a co-financing system that involves investment from participating companies, Innpulsa can grant up to COP400m ($200,000) to develop specific innovative products or services, or to help small and medium-sized enterprises (SMEs) to strengthen their position in their sectors. For 2014, the funds for the programme will reach COP50bn ($25m). As of April 2014, it had granted COP90bn ($45m) since its inception in 2012, and attracted another COP35bn ($17.5m) from the private sector, according to Innpulsa.

Direct support has already helped to improve businesses’ competitiveness, but Innpulsa is also trying to reduce the risk environment, so that capital can flow more easily towards innovative businesses. Currently under development is a system of bank guarantees to give the commercial banking sector the confidence to invest in entrepreneurial activity.

The long-term strategy is more ambitious. “The biggest goal is for Innpulsa to disappear, to create such a strong environment that its primary job becomes simply to manage relations,” said Zúñiga Bohórquez. “We want the entrepreneurship environment to have its own sustainability, so we can stop giving out grants and transition into becoming investors, not grant givers.”

Another state institution, the National Service for Learning, runs an entrepreneurship fund, Fondo Emprender, that supports university students and graduates with seed capital to develop their own businesses. According to the OECD, the fund financed 2811 new firms between 2005 and 2011, at a total investment of COP170bn ($85m).

Angel Investors

Recent improvements are helping to build more confidence in the risks and rewards that come with betting on new business ideas. This in turn has led to the creation of a raft of private funds and investor groups. Support from the Inter-American Development Bank (IDB) has allowed the establishment of the Bavaria Angel-Investor Network, which groups private investors to boost support for innovative firms in Colombia. The network currently has 63 angel investors across the country, and is actively searching for new opportunities. Another important network is Medellin-based Ruta N, which is equally supported by the IDB. It currently has 25 business angels and has supported 14 new start-ups, investing $70,000-100,000 per firm. A clutch of business competitions and incubation programmes has also opened new opportunities.

Such networks are crucial. The mindset of Colombian investors is still marked by a strong tendency to channel capital towards tangible assets with established returns, such as real estate. Pooling the resources of high-net-worth investors willing to accept greater risks for the prospect of higher return, as angel networks do, will foster an environment that promotes innovation and disruptive technologies. Such efforts are bringing more attention to the potential returns of certain emerging sectors, and are proving a critical source of seed capital.

Venture Capital

A wave of new venture capital funds is helping some firms jump from start-up potential to consolidated business, as macroeconomic stability draws private capital towards new ventures and proven business concepts. The number of venture capital funds in Colombia rose from one in 2012 to four in 2013, according to a report by Bancoldex. As of April 2014, there were five. In another positive trend, capital commitments to such funds rose by 568% in the year to September 2013. Several other venture capital firms are currently in the capital sourcing stage.

Such companies are few but active. Private equity firm Promotora runs a $21m fund to invest seed capital in Colombian start-ups. It also manages a second, $44m fund that bets on SMEs that have an established market but need capital to expand – including Ecoflora, one of Colombia’s more successful agro-technology companies. Another venture capital firm, Velum, manages a fund worth $12m, and directs investments of COP200m-1bn ($100, 000-500,000) each towards IT start-ups. Some regional funds, such as Alta Ventures, are also surveying Colombia for promising start-ups to invest in.

Evidence Of Ability

A good example of the country’s innovative potential came in late 2013, when Colombian start-up Keraderm won a gold prize at MassChallenge, one of the world’s most important entrepreneurship competitions on the international stage. Keraderm won $50,000 for its technique to cure skin burns by cultivating tissue from the patient’s own skin, a process that is cheaper and less painful than any previous technique.

The avenues opening up are many. Given Colombia’s broad biodiversity, biotechnology has proved a fertile breeding ground for new start-ups. So have medical sciences, technological applications and clean energy solutions. Colombian entrepreneurs have even proved capable of moving into high-tech sectors with considerable barriers to entry. Bogotá- based Sequoia Space, which began operations in 2007 as a builder of nano-satellites, now offers a full service in the trade, from manufacturing to launch. The company has received support from Innpulsa, and has already designed and launched satellites for the Colombian army as well as institutions in Ecuador, Chile and Peru.

Colombia’s entrepreneurial environment has improved immensely in recent years. Despite the low rates of success that are typical of start-ups, the clear support of the government, combined with rising participation from private capital, is showing the measurable impact that innovation can have on returns as well as on growth in the broader economy.