RDVP Finance SIG (10/28/2004)

Dave McClure, Margarita, Mans, and I met to continue the discussion of the local “MicroVC” model that we started last week. Most of the time focused on the nitty-gritty financial details of the model. We looked at four different general types of investment:

• Businesses that serve the local economy in an urban setting
• Businesses that serve the local economy in a rural setting
• Businesses that support a tourist destination
• Businesses that support expat retirement

We looked most closely at #3, thinking about the cluster of businesses needed to support “eco / cultural tourism.” Mans objected to the term, arguing that what we were proposing was really just plain “tourism” and not the sort of “zero negative impact” programs that eco-tourism suggests. He’s right–it’s mainly to distinguish the proposal from existing tourism sites: what’s proposed is creating small scale “destination resorts” centered around an area of natural beauty or with unique local customs. A reinforcing set of businesses (lodging, transportation, agricultural/cultural goods, telecom, food service, tourism/guide services, internet cafe) along with a basic infrastructure (water, sanitation, electricity) enable a community to receive international tourists that bring currency into the local market. Our model called for a local partner to find appropriate entrepreneurs to run these businesses, and invest in them, working with a fund of approx. $1M. The local partner would be responsible for putting up about 10% of the investment fund. In exchange, he would earn approximately $50K per year, plus 20% of profits (for his management role), and 10% of the remaining profit (for his initial stake). Not fully worked out yet is the revenue stream that accrues to investors. We assumed that for the first 3 years they would receive nothing during the “investment” stage. After that time, a combination of capital appreciation and cash thrown off as dividends would yield a 15% annual return. (Roughly 4X over 10 years).

The overall fund would be structured as a set of these local partners (probably about 20) with a few “corporate” employees with expertise in real estate, marketing, and perhaps key businesses like hotel management. We imagine that would add another $2M of expense to the overall. While we recognize that venture investing, especially in the developing world, is inherently risky, we hope that the “hard assets” (land and infrastructural improvement) that we would end up owning set a floor below which the overall value of the investment would not fall. We would seek locations where the government was favorably disposed to such projects (tax breaks?) and where property rights are sufficiently strong that we are confident of solid ownership.

Next time: We were undecided between doing a deeper dive on the “expat retirement” idea, and switching to a different topic for the week. Add a comment if you feel strongly for a particular topic.