The Latin America startup ecosystem is having a great year, with mega-rounds being announced at breakneck speed and new unicorns minted almost monthly. This is mostly due to the clearly maturing startup scene in the region, with proven successes such as Nubank, Cornershop, Gympass and Loggi helping to bolster LatAm’s credibility.
Interestingly, many of the region’s rounds are led by or saw participation from investors based elsewhere. Firms such as SoftBank, Tiger Global Management, Tencent, Accel, Ribbit Capital and QED Investors are pouring money into LatAm. Some are even seeing more opportunity than in the U.S. — Latin America, they believe, has historically been ripe for disruption, especially in the fintech and proptech sectors, due to the significant underbanked and unbanked population in the region and the relatively unstructured real estate industry.
Last month, my colleagues Anna Heim and Alex Wilhelm found that structural factors such as strong digital penetration and quick e-commerce growth are among the key reasons Latin America is breaking venture capital records this year. One Mexico-based VC even declared that the story was about “talent, not capital.”
Local VCs are raving about the human capital in the region, but for some global investors, the appeal of Latin America extends beyond the talent to the general populace. Shu Nyatta, a managing partner at SoftBank who co-leads its $5 billion Latin America Fund, pointed out a dynamic that might seem obvious but is rarely articulated: Technology in LatAm is often more about inclusion rather than disruption.
“The vast majority of the population is underserved in almost every category of consumption. Similarly, most businesses are underserved by modern software solutions,” Nyatta explained. “There’s so much to build for so many people and businesses. In San Francisco, the venture ecosystem makes life a little better for individuals and businesses who are already living in the future. In LatAm, tech entrepreneurs are building the future for everyone else.”
Accel Partner Ethan Choi says the region’s consumer markets are growing rapidly thanks to a fast-growing middle class and “technology permeating through every aspect of consumers’ lives.” This has spurred demand for digital offerings, which has led to more startups, and consequently, investor interest.
Brazil and Mexico riding the gravy train
One look at the dollars pouring into LatAm this year is enough to convince anyone of the skyrocketing interest.
Latin America saw a total of $6.2 billion in incoming venture capital in the first half of 2021, more than double the $2.6 billion in the same period last year, and even beating the $4.1 billion invested across all of 2020, according to preliminary data from LAVCA (the Association for Private Capital Investment in Latin America — LAVCA used a different methodology than CB Insights, in case you’re wondering).
Unsurprisingly, Brazil leads the pack in terms of investment dollars, with $3.7 billion raised across 145 deals in the first half of 2021, compared to $2.39 billion across 282 deals in 2020. Mexico is a decisive second to Brazil in terms of dollars raised and deal volume. In the first half of 2021, Mexico saw $1.56 billion invested across 52 deals compared to $831 million invested across 94 deals in all of 2020, according to LAVCA, reflecting larger investment rounds and the maturing startup scene.
Before we dive deeper, we’d like to point out that this trend of burgeoning venture rounds is not restricted to LatAm. Julie Ruvolo, LAVCA’s director of venture capital, notes that while Latin American startups raised at least $6 billion in the first half of 2021, according to preliminary data, other regions such as India, Africa, the Middle East and Central and Eastern Europe are also seeing similar trends.
“It’s already been a blowout year in Latin America, but we’re seeing investment activity scaling across the tech ecosystem. It’s not just about the big tickets; 2021 is on pace to be a record year for seed and early-stage investment as well,” she said.
While fintech and proptech have historically dominated funding in LatAm, the region is now seeing meaningful investment in food tech, brand aggregators and resale marketplaces as well. For example, NotCo, a Chilean food technology company making plant-based milk and meat replacements, in July announced a $235 million Series D round that valued it at $1.5 billion. And Mexico City-based Valoreo secured $80 million in debt and equity this year to roll up LatAm e-commerce brands.
The dollars are also going in more directions. Brazil still gets the most investments, but unicorns are sprouting quickly in Mexico (Clip, Bitso and Kavak), as well as in Chile (NotCo) and Argentina (Mural, Auth0 and Uala).
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NXTP’s Gonzalo Costa told Alex and Anna that his firm cares more about where startups focus than where they are based. ALLVP’s Federico Antoni agreed that while talent is everywhere, most teams eventually target Mexico or Brazil to access the two biggest prizes in the region.
The sheer size of the two countries is not insignificant, according to LAVCA’s Ruvolo. She said that the fact that Mexico and Brazil are the largest recipients of funding may seem like an oversimplification: “Venture capital has been available in these markets for longer. And Mexico and Brazil have sufficiently large populations for a startup to base out of and focus there before expanding.”
That said, Ruvolo also points out — as did Antoni — that Argentina, Chile and Colombia are alongside Mexico and Brazil in being on track for record venture investment this year.
She also said that the fact that Brazil’s official language is Portuguese, unlike the rest of the Spanish-speaking region, has not been a problem in investment circles. “We can’t speak to the startup perspective, but it doesn’t seem to matter to investors — we’re seeing increasing cross-border investment among local and global investors alike,” she said.
The allure of “healthy unit economics”
Japanese investment conglomerate SoftBank has definitely increased its pace of investment in Latin America this year, according to Nyatta. He observed that the market for growth equity globally has become “much more frenetic and competitive.”
“Rounds are happening more quickly at higher valuations,” Nyatta told TechCrunch. “We have tried to balance our usual rigor with more agility because we don’t want to miss great opportunities. That has resulted in significant capital deployment in LatAm.” Latin America, in particular, has seen a flood of money from U.S. funds recently, he added.
So just what about LatAm makes it so attractive to investors? Nyatta says it boils down to the fundamentals.
“There are almost 700 million people and GDP per capita is 4x higher than India and 2x higher than SE Asia, both of which receive a lot more venture capital,” he said. “The region has just been chronically undercapitalized. This actually creates better founders, because they need to build businesses that make sense and can be self-sustaining rather than just count on investors to fund them for the long term. So we’re finding lots of early businesses with healthy unit economics and very rigorous founding teams.”
Unlike most growth funds in the region, SoftBank makes private as well as what Nyatta describes as “opportunistic public investments.” For example, its largest investment in the region is in Banco Inter, a publicly traded neobank in Brazil that Nyatta says is “a full-service financial institution, very similar to Tinkoff in Russia” with a market cap of over $10 billion.
Other SoftBank investments in the region include:
- Kavak, a used car marketplace born in Mexico but now also operating in Brazil and Argentina. “Think of Carvana, but for emerging markets.”
- Rappi, where “DoorDash-meets-Instacart,” operating across Latin America.
- QuintoAndar, a Brazilian real estate marketplace.
- Creditas unlocks the equity trapped in homes and cars and other important assets for Brazilians.
- Gympass is a marketplace for fitness and wellness, provided through the enterprise to employees.
SoftBank isn’t in a hurry to realize its ROI on its bets. “In terms of exits, we believe in the long-term potential of all these businesses and are not in a rush to ‘exit,’” Nyatta said. “We have the advantage of permanent capital, so we don’t need to make suboptimal short-term decisions when it comes to selling shares in these great companies.”
“These headwinds have now become tailwinds”
Palo Alto, California-based Accel has also ramped up investments in Latin America. It has poured in almost $100 million in LatAm so far this year, which is approximately six times the amount it invested last year, according to partner Ethan Choi.
As well as a fast-growing consumer market and increased adoption of technology, he said the use of video conferencing due to the COVID-19 pandemic has broken down historical barriers for investors traveling to the region. “As a group, we have become more comfortable backing entrepreneurs after several Zoom meetings,” Choi said.
The number of quality entrepreneurs has also increased, thanks to more experienced executives starting companies after stints at first- or second-generation tech firms, as well as founders returning to their home countries after working in the U.S. and elsewhere, he added.
Accel was one of the first investors in Cornershop, an on-demand grocery delivery service operating in the U.S., Peru, Brazil, Colombia and Canada that was acquired by Uber for $1.4 billion this June. Accel was also an early investor in Elo7, the “Etsy of Brazil,” that was acquired by Etsy for $217 million in June.
Accel in February led a $12 million investment in Flink, a Mexican app-based brokerage platform that aims to simplify and enable equity trading for over 1 million consumers. Then in March, it led a $90 million investment in Nuvemshop, a leading e-commerce platform for over 80,000 SMB and mid-market merchants in Argentina, Brazil and Mexico that last week raised another $500 million at a $3.1 billion valuation. And in April, the investment firm led a $2.7 million investment in Atrato, a rapidly growing buy now, pay later fintech.
“The pandemic year was pivotal in driving step function growth in e-commerce, banking and payments. Historical headwinds such as lack of e-commerce penetration, a heavily underbanked population and heavy cash economies are being transformed by software and consumer services,” Choi said. “These headwinds have now become tailwinds and are creating a fertile environment for startups seeking to further digitize all aspects of consumers’ lives.”
He pointed to digital payments, which are accelerating in the region with support from government initiatives such as open banking and new payment methods such as PIX in Brazil. These positive regulatory tailwinds and the explosion of fintech activity should help drive digital payments penetration across the region, according to Choi, whether it be in countries on the lower end like Colombia (with about 40% penetration) or those on the higher end like Argentina, which has a higher rate of penetration (around 87%).
While LatAm is the fastest growing e-commerce market in the world, it is also still relatively under-penetrated at approximately 6% of total retail sales, noted Choi.
“2020 was a transformational year where growth more than doubled versus prior years,” he said.
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Bank account penetration in the region, which has historically had a large underbanked population, is also quickly increasing from 40%-70% toward 99% penetration, as can be seen in developed markets such as the U.S., thanks to new app-based neobanks, Choi added.
In it for the long run
In May, QED Investors proved its commitment to Latin America in the form of a $12 million fund dedicated exclusively to backing pre-seed and seed fintech startups in the region. Dubbed Fontes (Latin for fountains) the fund is aimed at expanding QED’s reach across the region, with an average check size of $300,000 to $500,000.
QED began investing in Latin America in late 2014. Its first investment there was Nubank, which has since grown to become one of the largest neobanks in the world. The firm has since made over two dozen investments in the region, mostly in Brazil or Mexico. Its portfolio includes Creditas, QuintoAndar, Loft, Kavak, Konfio and Bitso.
QED finds Latin America “very appealing” for a few reasons, according to Bill Cilluffo, a partner and head of international investments for the firm. “Five incumbents control over 80% of every slice of banking. Pricing tends to be very high and very expensive in Brazil. Interest rates are frequently higher than 100% annually. You also have a situation where historically these banks have probably underinvested in technology, the way that some other global banks have done. That leads to very expensive products and not so great customer experiences. We just see that as a very ripe situation for fintech to come in and really disrupt the status quo.”
Ana Cristina Gadala-Maria, a principal at QED, believes fintech is in the early stages in Latin America, particularly in markets such as Chile, Peru and Argentina.
“In some countries, there is a longer history, but in other parts, we’re starting to see more of an ecosystem building up, and more of those building blocks from an infrastructure perspective to allow more businesses to grow and more fintechs to be created,” she told TechCrunch. “We believe that in the next decade, the floodgates will open in fintech in Latin America and we’re excited to be at the forefront of that.”
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Looking beyond fintech and proptech
Edtech-focused Owl Ventures recently made its first investments in Latin America, backing UBITS in Colombia and Galena in Brazil. The firm sees strong potential for digital education products and services in the region, owing to a growing population that is increasingly moving online.
“Fintech investors have been investing in Latin America for a few years now, and we expect to see a similar acceleration in edtech funding in the coming years, especially given the region’s large, growing, digitally connected population,” Owl Ventures’ Ross Darwin said.
Local VCs are spending more time in the space, early edtech players are gaining scale, and more U.S. companies are expanding their presence in LatAm, bringing even more talent to the region, he added.
“Remote work is bringing in even more talent as companies look for employees outside the U.S. that can still work U.S. hours, which is a geographic benefit for LatAm,” Darwin told TechCrunch. “For Owl, all the progress in the region is exciting not just for our portfolio companies, but also for the learners these companies work with, who can now receive training that wouldn’t have been possible just a few years ago.”
Clocktower Technology Ventures in March announced the launch of its first fund — with a target of $25 million — focused on investing exclusively in Latin American fintechs at the seed and Series A stages.
As a journalist who has been following the rise of Latin America’s venture investment scene for several years now, I am not surprised by all the activity. However, I am a bit taken aback by the sheer number of rounds, the caliber of firms leading them and the sky-high valuations.
It seems that the region is finally, and deservedly, being taken seriously. This is likely just the beginning.
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