Only a few years ago, Latin American green businesses hungry for capital had one main option: to get grants or low-interest loans from nonprofits. But now venture-capital funds also are assisting sustainable businesses, backing everything from an environmentally certified tropical-plywood producer to windpower projects.

The trend, to be sure, is in its early stages. Green entrepreneurs still must improve their nuts-and-bolts management skills to succeed—and to earn the confidence of investors. And even if they do, they might see their prospects dim as capital flows thin due to adverse world economic trends since the Sept. 11 terrorist attacks.

Yet to those who gathered here last month for a conference on green ventures, sustainable business in Latin America appears to have made headway. John Michael Forgach, president of the A2R fund-management group, estimates some $2 billion in venture capital already has been made available for investments in sustainable forestry, organic agriculture, renewable energy and other green or so-called socially responsible businesses in Latin America.

The growing commitment is reflected in the activity of A2R itself, which has raised and committed $205 million for Latin American green businesses and hopes to boost that number to $500 million by 2005.

“When we started to invest in green businesses in Latin America six years ago, there was no one,” Forgach says. “We were considered the clowns, the dreamers, the romantics.”

Forgach was one of 200 attendees at last month’s New Ventures Investor Forum organized by the New Ventures division of the World Resources Institute (WRI), a Washington, D.C. think tank. The annual forum showcases top Latin American green entrepreneurs and brings them together with nonprofit environmental-fund managers and venture capitalists.

At this year’s event, three green businesses won awards for their business plans—a Mexican start-up planning to make hybrid-technology delivery trucks, a Peruvian eco-lodge operator and a Peruvian wood-products company that stresses low-impact logging, reforestation and local employment.

Until recently, such businesses traditionally sought capital mainly from nonprofit environmental funds that receive loans or grants from governments and such multilateral agencies as the Inter-American Development Bank’s Multilateral Investment Fund (MIF) or the UN’s Global Environment Facility.

Nonprofits continue to play a key role in nurturing sustainable business. They aren’t as risk-averse as most venture-capital funds and can offer grants and low-interest loans.

“We have resources that the private sector doesn’t have,” says Gerardo Martínez, a Brazil-based specialist with the MIF. “I think the private sector has a very clear objective, which is to make money. We have a development objective in mind.”

Indeed, the number of nonprofit green funds in Latin America has risen from a half dozen 10 years ago to more than two dozen today, says Lorenzo Rosenzweig, director-general of the nonprofit Mexican Fund for the Conservation of Nature.

Collectively, these funds have some $200 million earmarked for or already invested in green-business start-ups, conservation initiatives and environmental-education projects, says Rosenzweig, who also is president of RedLac, the Latin American Network of Environmental Funds.

Still, the demand for capital is outstripping the supply, so green entrepreneurs also are turning to venture capital funds. Among those doing so is Sean O’Hea, chief executive officer of Vehizero, the Mexican start-up preparing to manufacture hybrid delivery trucks.

O’Hea says Vehizero’s prototype, which is powered by a combination of electricity and combustion fuel, cuts fuel costs by 80% and dramatically reduces emissions of CO2 and other gases. But the company needs $300,000 to finish additional prototypes, obtain certification to put the trucks on Mexican roads and finish the design of an assembly plant. Then it will require another $3.2 million to build the plant and start production. Says O’Hea: “We are leaving no stone unturned.”

The success of such efforts hinges in large part on green entrepreneurs’ management skills, says Luiz Ros, director of WRI’s New Ventures division. New Ventures tries to improve those skills by linking sustainable businesses to a free-of-charge network of mentors, consultants and risk analysts.

A vital goal is to make the businesses attractive to investors. “We help businesses get better access to investment,” says Ros, who worked previously as director of Brazil’s nonprofit National Environment Fund and as a manager in Brazil for the World Bank’s biodiversity fund. “Until a few years ago, environmental people didn’t know what a business is.”

Sandra Doliner, who helps manage $130 million in venture capital as senior vice president at the Arlington, Virginia-based Environmental Enterprises Assistance Fund (EEAF), agrees that management training is key. “When companies fall behind projections they should immediately call us, but they usually don’t,” says Dolinger, whose fund makes long-term investments in Latin American sustainable businesses. “Time is money, and many ecological entrepreneurs don’t know that.”

Pressured themselves by investors who want to see returns of 20-25% a year, venture-capital funds can’t afford to stand by as the companies they back make mistakes. So some now school entrepreneurs directly. EEAF tries to help clients stay on top of their target numbers, provide for security margins and learn how to manage growing numbers of people. Meanwhile, A2R, through its Brazilian Institute for Education in Sustainable Business (Ibens) has begun working with schools and universities to train green-business managers in such skills as identifying markets and preparing business plans.

The goal is to ensure green projects are sustainable in both the environmental and business sense. Says Forgach: “If a person doesn’t tell me he wants to make money, he won’t make it to a second consultation.”

Acquiring and using business know-how has begun paying off for such companies as JOLYKA Bolivia, an environmentally certified producer of hardwood flooring made with wood from managed Amazonian forests. For three years after its founding in 1995, the Cochabamba-based company could not boost sales above $850,000 a year. But last year it received a $400,000 investment and a $200,000 loan. The infusion allowed JOLYKA to boost inventory and carry out a major contract.

Meanwhile, JOLYKA and its investment partners tapped New Ventures for help in writing a final business plan. Drawing on the advice of a team of MBA candidates from George Washington University, the company targeted a new niche: the green building-design market.

JOLYKA says the new focus—and the company’s selection as one of last year’s winners in the New Ventures competition—has helped it gain credibility among investors and land contracts for large projects in Boston, New York, Washington, D.C., and Miami. The company reports its sales have tripled since October of last year and its workforce has grown to 113 from 75. It also is awaiting final approval of a $400,000 investment from the EcoEnterprises Fund of Arlington, Virginia, and plans to use the money to expand its factory.

As Latin America’s green businesses come of age, their financial needs eventually could outstrip the capacity of venture-capital funds such as A2R or EEAF.

Their next stop would be large, mainstream investors such as banks or pension funds. Yet, these only will consider deals with returns of 25%, says Ros. “This third group hasn’t come on board yet,” he says. But he adds that with the Internet sector less attractive now, large investors eventually may pay more attention to green business.

Two major investment players attended the New Ventures Forum. One was Randolph Freiberg, head of investment banking in the Mercosur area for Salomon Smith Barney Citigroup. The other was Luiz Tarquino, president of Latin America’s biggest pension fund, Brazil’s Previ, which has $13.9 billion in assets.

Neither man signaled immediate plans for sustainable-business investments. However, Freiberg said Citigroup will begin helping New Ventures to provide management training for green entrepreneurs. Ros believes large financial institutions will start investing at a later stage, once green companies have grown.

“We need to get these guys interested now and prove we have good companies,” he says. “Five years ago, the type of conversations we’re now having with these big guys would not have been imaginable.”

Those conversations, however, have been tempered by doubts about global economic trends—particularly in the wake of the Sept. 11 terrorist attacks on the United States. Sustainable businesses in Latin America might find it far harder to attract private capital if investment flows to developing countries that are considered high-risk continue to slow.

“Each day more people realize the importance of investing in sustainable businesses,” Citigroup’s Freiberg says. “But there is a big question mark. The global economic situation is uncertain right now.”

Wind farms and handbags

But it’s possible not all sustainable-business sectors will be affected. Costa Rica-based Fernando Alvarado, regional manager of the green-investment fund E and Co, thinks the outlook for renewable-energy companies remains bright due to growing Latin energy demand.

E and Co provides early-stage assistance of up to $150,000 for small hydroelectric power plants in Guatemala and Costa Rica. It expects to invest in a 50-megawatt, Argentine wind farm next year. Says Alvarado: “Energy is one of those sectors that only have a growth trend.”

Aside from financing, another key to bolstering green business is lining up large corporate buyers of sustainable products. This trend has begun—in the area of certified timber, for instance—but roadblocks remain. In Brazil’s Amazon, fragile transport links prevent products from getting to market on time and in sufficient quantity.

Still, such problems can be overcome.

Consider Couro Vegetal, a Brazilian company that has turned traditional crafts from rubber tappers and local Indians into a competitive product on global markets. It takes latex from rubber harvested in reserves in the states of Acre and Amazonas and combines it with cotton, linen and other textiles to produce handbags, backpacks, hats and agendas.

When it was formed in 1994, the company received $1 million in financing from Brazil’s state development bank, BNDES, to make its plant-based products. Now it has grown to the point that it can supply large corporate clients. Recently, Couro Vegetal won a contract from French luxury retailer Hermès.

Such successes not only boost sales, they also spell change for company employees.

“When we started, 90% of the rubber tappers and Indians who deliver our raw materials didn’t have I.D. cards or birth certificates,” says João Andrades Fortes, the company’s vice-president. “For the state, they simply didn’t exist. Today, they all have bank accounts.”