CAN MIAMI SHIFT ITS CAPITAL TO STARTUPS?

Investors must be wooed away from real estate if Miami’s startup scene is going to boom.

Miami is rich.

Maseratis and Ferraris scarcely draw a glance on the streets; cigarette boats prowl Biscayne Bay; downtown is a forest of cranes topping off condo high-rises — the city is a shrine to conspicuous consumption.

But to an entrepreneur trying to raise capital, Miami can be like a locked candy store. The money he wants is on display, but out of reach.

Last year, the Miami metropolitan area was the eighth largest in population, but ranked only 24th for venture capital invested, according to PricewaterhouseCooper’s MoneyTree survey. That put it ahead of Cleveland, but behind Baltimore and Salt Lake City.

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A “key weakness”

Endeavor, a global nonprofit accelerator that opened its first U.S. program in Miami, called the lack of funding a “key weakness” in the entrepreneurial ecosystem. Endeavor’s assessment found VC investment for Florida is only $10 per resident, compared to $71 per resident for the whole country; there are few local firms making early-stage investments; and many entrepreneurs don’t understand the investment process.

Wifredo Fernandez, co-founder of The LAB Miami, a co-working space in the Wynwood neighborhood, said the lack of capital hurts his members: “A lot of people talk about what happens to startups when they need to raise the next big round of funding. I think a lot of people here, they’re finding initial rounds of funding, but they don’t have that next level of funding.”

So why isn’t more of that money on conspicuous display flowing into startups, like it does in Boston, New York and San Francisco?

The problem is that wealth in Miami isn’t there primarily to make more money; it’s there to be kept safe. Much of the wealth here was earned elsewhere — in Russia, in Spain, in Argentina, Columbia and Venezuela — and its owners sent it to Miami to shelter it from tax collectors, unfriendly governments, political and economic instability, and a downturn in the owners’ fortunes.

There is so much foreign money in Miami that it took the No. 7 spot in a recent survey of the most important global cities to the world’s wealthy. It outranked every other city in the Western Hemisphere with the exception of New York (No. 2) in the annual Wealth Report from the London-based real estate consultancy Knight Frank. Miami also is second only to New York in its number of international banks. An industry group estimated that international banking boosted Florida’s economy by $2.1 billion last year.

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Much of this foreign wealth is controlled by family offices, private companies that manage investments and trusts for single families and ultra-high-net worth individuals, many of whom are from Latin America. The people who run these offices invest in personal and commercial real estate, family businesses and other relatively safe vehicles, not risky startups.

“I jokingly call Miami the Treasury bill of Latin America,” said Jaret Davis, a Miami attorney who represents and mentors tech startups. He and others are trying to convince those investors to back entrepreneurs.

Angel investors can be motivated by a desire to help their community as much as by profit, he said, but foreign investors don’t have that same sense of civic duty in Miami.

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“Slowly, but surely, there are discussions with the Morgan Stanleys, the Banks of America, the J.P. Morgans; they’re realizing this is a service they can provide to their clients.”

Accelerated Growth Partners, a group of angel investors backed by the Knight Foundation, is trying to convince investors to consider startups instead of real estate. Eventually, it hopes to open a Series A fund.

Managing Director Nico Berardi said the group is educating family offices and ultra-high-net worth individuals (those worth $30 million or more) about the benefits of investing in startups.

One message is that VC investing in Miami is a bargain compared to Silicon Valley, where the best deals can be overvalued and oversubscribed. Another advantage, he said, is that family offices and the ultra-wealthy are comfortable taking the long view on returns.

Successes needed

Andres Moreno, co-founder of Open English, which offers online English courses in Latin America, has raised more $120 million, much of it in South Florida. He said it’s getting easier.

“I think for credible teams there is certainly capital around. One thing about Miami is that it is a very wealthy place. It’s just a matter of being able to capture it and meeting the right folks and having the right credibility to raise it,” he said.

Nothing attracts money like money, said Brian Brackeen, CEO of Kairos, a facial recognition software firm that raised $1.2 million earlier this year. “I think we just need a really, really big exit,” he said. “A really big superstar that sells for a couple of billion dollars, just to show folks, ‘Hey, I can get a really good return here. Maybe I should diversify my investments in tech as well.’”

Larry Williams, CEO of the Beacon Council, an economic development organization, has worked in Seattle and North Carolina’s Research Triangle and he sees a similar momentum gathering in Miami.

“What I’m seeing, it might be a long way, is quality deal flow building here and getting that critical mass to really give us the attention we need,” Williams said. “And if you have quality deal flow, capital will flow, whether it’s local capital or capital from other places.”

Miami/Ft. Lauderdale success stories:

  • CareCloud – The cloud-based EHR and medical billing provider has raised $55 million in VC investment.
  • .CO Internet — The Colombian domain name register was bought this year for $109 million.
  • MAKO Surgical — The manufacturer of medical robotics was bought in 2013 for $1.65 billion.
  • Open English — Investors have put more than $120 million into this startup that offers online English courses in Latin America.
  • Terremark — The IT company was bought by Verizon in 2011 for $1.4 billion.

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