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FOCUS-How SoftBank is putting its stamp on LatAm's venture capital scene

Carolina Mandl and Tatiana Bautzer

SAO PAULO, Nov 14 (Reuters) - SoftBank, whose $5 billion Latin America fund has showered regional startups with cash, is also courting local venture capital funds, an unusual move for the Japanese investor that has jolted the region's tech scene.

SoftBank usually puts money directly into startup companies but in Latin America has targeted venture capital funds in a departure from the Japanese conglomerate's global approach.

Venture capital is still a relatively young business in Latin America and SoftBank's investments will help to foster innovation, particularly for late-stage tech businesses, which are SoftBank's main target.

But industry sources said Softbank's venture capital cash comes with strings attached that not all potential beneficiaries are happy about.

Sources familiar with the matter said one of SoftBank's requests was for a right of first refusal if one of the companies in a given venture capital fund's portfolio were to decide to raise extra money or were to be put up for sale.

This could give SoftBank an advantage as a potential leading investor in future fundraising rounds and could also give the conglomerate an advantage over other investors in the same fund, some of the sources said.

These sources said that Softbank's desire to take this position in a fund could upset other investors in the fund that would also like to have the chance to co-invest.

Two Brazilian venture capital funds have rejected such proposals because of the terms, two sources with knowledge of the matter said.

SoftBank also requires venture capital firms it invests in to accept a non-compete clause and to give priority to the Japanese conglomerate when it is interested in early stage startup investments, one of the sources said.

The sources spoke to Reuters on condition of anonymity because the information is not public.

Softbank declined to comment.

The venture capital business is still small in Latin America, with investments totalling just $2 billion last year, although that was quadruple the amount in 2016.

In Brazil, Latin America's largest economy, venture capital makes up just 0.04% of GDP, while in the United States it is 0.43%, and in China, 0.33%, according to a McKinsey & Company report.

In the first half of 2019, venture capital investments in the region totalled $2.6 billion, more than three times the $780 million from a year earlier, according to The Association for Private Capital Investment in Latin America. More than a third of that came from SoftBank's $1 billion bet on a single company, Colombian delivery-app Rappi.

SoftBank has said it intends to deploy nearly $500 million of the fund's capital in third-party venture capital funds, but it has not disclosed how much it has already invested.

Reuters reported in September that SoftBank had sealed deals to invest in funds run by at least two venture capital firms: Brazilian firm Valor Capital and Argentina's Kaszek Ventures, which recently announced it had raised $600 million in fresh capital.

Spokespeople for Valor and Kaszek declined to comment.

VALUATION

Existing investors in venture capital firms often lead successive funding rounds in startup companies where the valuation can increase with each round.

But one of the sources said it was considered best practice both for venture capital funds or other investors leading the funding rounds to allow a different party to weigh in on the valuation for successive funding efforts.

The failed public offering of office rental company WeWork, which Softbank had invested in, highlighted how other investors disagreed with the heady $47 billion valuation set in WeWork's most recent private funding round.

University of Columbia Professor Donna Hitscherich sees the demand to lead successive funding rounds as a "natural demand for an investor or venture capital fund that bet on a company since the beginning", as a way to avoid dilution.

Softbank has yet to be involved in successive funding rounds in any Latin American company, since it has only just launched its dedicated fund for the region.

Colombia's delivery app Rappi's valuation has tripled from a funding round led by DST Global in Sep. 2018 to the SoftBank-led one in April.

(Reporting by Carolina Mandl and Tatiana Bautzer; Additional reporting by Sam Nussey, in Tokyo; Editing by Jane Merriman and Christian Plumb)