RACO Investment founder Randall Castillo Ortega discusses private investment tools in Costa Rica

Costa Rica, a country devoid of strategic raw materials, with a limited territorial endowment and whose main wealth, biodiversity can only be used on the condition that it is not destroyed. This situation places greater relevance on the need to stimulate innovative ventures in order to increase the productivity of its economy and improve the quality of life of its population. Randall Castillo Ortega, the founder of small- and medium-size private investment firm RACO Investment, discusses how the private investment panorama in Costa Rica is changing.

Despite the importance of the topic, several studies have pointed out that one of the key factors limiting entrepreneurship and innovation is the lack of a financial system that supports the management of entrepreneurship and innovation, since most of the products offered by the traditional financial market are aimed at consolidated SMEs, leaving a gap in the supply of capital programs aimed at supporting early-stage ventures.

To analyze how this situation has evolved, the HIPATIA platform created by the State of the Nation Program, since 2017, leads a consultation in which, to date, 35 financial system organizations and investors have participated at the national level. The results are publicly available in the interactive application “Capital for Entrepreneurship and Innovation.”

Says Castillo, “The application shows entrepreneurs in the technological area the different options of financing and capital offer for the development of their business ideas, available in the different regions of the country. Participating organizations include cooperatives, banking organizations, associations, incubators and accelerators, government institutions, and angel investors’ clubs.”

If you already have a good business idea or are looking to grow your SME, in the application you can locate anywhere in the country, organizations that offer capital or financial resources, the type of product they offer, the general conditions under which they grant them as well as the information to contact them. Whether you’re looking to develop the prototype that’s already been validated and devised in the business plan and requires seed capital to boot, or whether you’re in a later phase, have a startup – or start-up – and need “venture capital” to scale it up and reach new markets, the tool will show you the organizations that could support you. Additionally, if you do not have real estate to offer as collateral, or time spent in the market, you will be able to identify who and where you could be supported with more favorable entry threshold conditions.

Despite being an urgent issue to increase the country’s productivity, only 54% of the organizations consulted say they fund technological content innovation activities. Accordingly, 546 branches of public and private organizations distributed throughout the seven provinces would support SMEs wishing to innovate as long as the natural or legal person applying for financing meets the requirements for access to credit.

In the furniture segment, most of the products offered by these organizations apply for trust and mortgage guarantees to support financing. However, many entrepreneurs of technological innovation are young people who do not have real estate and other guarantees typically requested by traditional banking and sometimes only have the potential of their entrepreneurship. For this niche, the adoption of the Law on Furniture Guarantees No. 9246 and its Regulations, including intellectual property (IP), which includes patents and other ways of protecting knowledge, is particularly important.

Despite the international trend of increasingly valuing IP assets on classic assets (such as machinery or real estate), limitations persist on the part of the financial system, such as the scarcity of IP-assessing experts who recognize the economic and commercial value of patents as well as the limited development of the secondary market in the country. Explains Castillo, “This is a bottleneck of the national financial system to drive technological innovation by affecting the real possibilities of access to capital to high value-added ventures, and restricts the country’s development options supported by a knowledge-based economy.”

While with regard to the risk implied in technological innovation, the financial processes of the domestic banking sector are considered conservative, new actors from the private sector have gradually appeared. These new options have been in addition to public instruments, which, although with limited amounts, have previously been in force, as is the case with the Propyme fund. This fund supports innovation and technological development projects in SMEs duly registered with the MEIC and that are up to date on the payment of social obligations.

“Risk capital” (or entrepreneurial capital) is required by an entrepreneur at a later development stage who seeks to scale or even internationalize a growing business. It targets startups and small and medium-sized enterprises as large ones are already consolidated and have access to banks or financing through public debt issues.

In addition, the application identifies five organizations that offer seed capital or venture capital under conditions of more favorable entry thresholds, such as no market stay is required and no guarantees are requested at all or less demanding guarantees such as inventory, current assets, receivables and IP are requested.

Adds Castillo, “While identifying the emergence of new players who could support technological innovation, their number, as well as the conditions of access to these funds, still represent a challenge in catalyzing such high-value-added ventures.”

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