Foreign Investment in Latin American Startups

Latin America's Startup Evolution: Beyond the Recent Hype

Considerable attention has recently been focused on the successes of startups in Latin America, and justifiably so. During the first six months of 2021 alone, these companies secured $9.3 billion in funding, nearly twice the total amount raised throughout all of 2020. The prevalence of mega-rounds is also demonstrably increasing.

Despite the industry's celebration of the region’s expanding ecosystem and the proliferation of unicorns, the narrative of Latin American startups extends far beyond recent developments. This historical context is crucial for entrepreneurs and investors as they shape the region’s future trajectory.

Challenging Preconceived Notions

A common inquiry I receive centers on the distinctions between consumers in Brazil and those in other markets. Questions regarding the behavioral differences between the Peruvian market and the United States are also frequent. These lines of questioning often fail to acknowledge the intrinsic value of each country, instead fostering an expectation of unpredictability stemming from the region’s historical economic challenges.

In reality, the progression of business demonstrates significant parallels across nations, more than is often recognized. Latin America’s market has undergone a lengthy period of development – comparable to that of Silicon Valley and other established innovation centers. The region possesses a global perspective, boasts esteemed universities, a diverse populace, and a substantial entrepreneurial base.

A Natural Progression

Therefore, the emergence of unicorns and substantial funding rounds should not be viewed as surprising occurrences. They represent the logical outcome of ecosystem maturation, with increased capital fueling further success after years of dedicated effort.

Shifting Investment Landscape

Concurrently, the competitive landscape in the United States has intensified. Venture Capital firms are operating with unprecedented levels of capital, and investment costs in North America are steadily rising. Consequently, VCs are actively seeking diversification through high-potential opportunities in international markets.

Major investment funds are now specifically allocating resources to Latin America. This is evidenced by initiatives such as SoftBank’s creation of a region-focused fund and Sequoia’s commitment to increased regional attention.

The Importance of Strategic Investment

However, these incoming investors must offer more than just financial resources to foster sustainable growth within Latin American entrepreneurship. A localized strategy, positioning investors as valuable assets to the region’s startup ecosystem, is essential for maintaining a balanced and healthy development.

Identifying High-Potential Investment Landscapes

A significant number of Latin American firms achieving unicorn status and subsequently becoming publicly traded were founded approximately in 2012. This developmental timeframe closely mirrors that observed in more established markets, such as the United States.

Consider, for example, the parallel emergence of MercadoLibre in Argentina alongside the rise of eBay; the timing is remarkably similar.

Expanding Investment Horizons

This observation suggests that astute international investors should prioritize monitoring developing opportunities that extend beyond the frequently analyzed markets of Brazil and Mexico.

A substantial chance exists to replicate the success achieved by domestic investors in Brazil and Mexico in prior years.

This involves actively participating in the subsequent growth phases of nations exhibiting burgeoning market activity, including Colombia, Peru, and Uruguay.

Key Takeaways for Investors

• Focus on markets with recent startup activity.
• Look beyond established investment hubs.
• Consider the growth trajectories of companies in Colombia, Peru, and Uruguay.

Foreign investment in these emerging economies has the potential to yield substantial returns, mirroring the successes seen in more mature Latin American markets.

Limited U.S. Investment in Latin American Startups

Since 2017, venture capital funding for startups across Latin America has experienced significant growth, accompanied by a parallel increase in angel investment activity.

However, a substantial portion of this capital originates from investors based within Latin America and the surrounding regions.

Brazil, in particular, boasts angel investor networks connected to each of its leading universities.

Furthermore, investors operating in the Andean region actively support startups in Peru, Chile, and Colombia.

The current vibrancy of the Latin American startup ecosystem is largely attributable to the proactive involvement of these native investors.

U.S. Investor Caution

Despite the overall growth, the participation of U.S. investors remains notably limited, particularly during the initial phases of funding.

Securing interest from foreign investors proves considerably more challenging for startups in the pre-seed or seed stages compared to those that have already progressed to Series A or B funding rounds.

When U.S. investment does occur, it often happens on a case-by-case basis, frequently facilitated through existing professional connections.

Currently, foreign investors represent the exception rather than the norm in Latin American startup funding.

The Need for Early-Stage Involvement

Increased engagement from investors outside of Latin America is crucial, especially during the early fundraising stages when founders require comprehensive support.

A strategic, long-term approach to investment is needed to foster greater stability and consistency within the regional ecosystem.

Long-term consistency will be key to unlocking the full potential of Latin American innovation.

The Importance of Dedicated Resources Beyond Capital Investment

The value an investor provides extends significantly beyond financial contributions. This is particularly true when investing internationally, where a lack of familiarity with the local market and limited on-the-ground connections can present substantial hurdles.

Although investors often highlight their standard offerings – such as networking access and connections to the U.S. market – these may not always translate effectively. Existing recruitment channels might prove unsuitable for companies operating within Latin America, and insights derived from the U.S. market may not accurately reflect the nuances of the Latin American landscape.

It's important to acknowledge the established presence of numerous VC firms that have cultivated relationships with local startups over many years. Latin America presents an accessible and receptive market, with local investors and accelerators readily collaborating with foreign investors, even in the context of deal-sharing arrangements.

A key element for success is the establishment of incentives within the regional ecosystem. Similar to the North American model, this primarily involves connecting founders with exceptional opportunities. This process frequently occurs naturally in North America due to active engagement and participation in local events, awards programs, grant applications, and partnership initiatives.

Replicating this dynamic in Latin America necessitates a committed investment of both personnel and capital from foreign investors. A thorough understanding of the local industry and the availability of mentorship for founders with varied backgrounds are essential.

My experience assisting companies like EA, Pinterest, and Facebook with their Latin American expansion consistently demonstrated the necessity of having dedicated personnel, either locally based or remotely focused, on the region. These teams concentrated on product localization and conducted research to identify both commonalities and distinctions in user behavior. This approach is crucial for successful corporate product launches and should be mirrored by VC investment strategies.

Key Considerations for Foreign Investors

• Local Expertise: Invest in understanding the specific dynamics of the Latin American market.
• Dedicated Teams: Allocate resources specifically for regional commitments.
• Mentorship: Provide guidance and support to local founders.
• Ecosystem Engagement: Actively participate in local networking events and initiatives.

Successful investment in Latin America requires more than just capital; it demands a sustained and focused commitment to the region's unique characteristics and opportunities.

Strategic Disruption for Investor Value

Foreign investment should prioritize a balanced approach, fostering disruption only when it facilitates startups’ expansion into international markets. Rather than seeking to radically alter established, successful internal development, the focus should be on enabling outward growth.

This can involve advising companies to establish incorporation in the United States, streamlining investment processes for global investors. Alternatively, it could mean preparing businesses for broader international operations.

Local investors play a crucial role in guiding newcomers, providing insights into which aspects of the regional landscape should remain stable and which are ripe for innovation.

Emerging Market Trends

The growth currently observed in Latin America is anticipated to replicate across other developing regions, including Africa and Asia. This expansion isn't driven by external, unconventional strategies.

Instead, it stems from cultivating an environment that empowers local expertise and sustains robust, organic development. Sustainable growth is key to long-term success.

Creating the right conditions for local talent to thrive is paramount. This involves nurturing existing strengths while strategically embracing opportunities for expansion.

• Focus on outward expansion, not internal overhaul.
• Utilize US incorporation for easier global investment.
• Leverage local investor knowledge for informed disruption.

Ultimately, the goal is to support a healthy and enduring ecosystem for startups in emerging markets. This requires a nuanced understanding of local dynamics and a commitment to fostering sustainable progress.