Latin America Venture Capital: A Two-Tier Market Emerges

Shifting Dynamics in Early-Stage Venture Capital

This week, The Exchange examined the landscape of early-stage venture capital. The focus was on understanding why some startups secure larger seed funding rounds before pursuing Series A financing, while others raise their first lettered round during the initial phases of scaling.

This investigation stemmed from insights shared by Rudina Seseri of Glasswing Ventures. She noted that the abundance of seed capital available in the United States empowers founders to achieve significant progress before initiating a Series A raise, effectively extending the time between funding stages.

The "Slow As, Fast Bs" Phenomenon

However, once these startups complete their Series A, subsequent Series B rounds often follow quickly. This acceleration is fueled by later-stage investors entering earlier-stage deals, aiming to secure equity in promising companies.

Further discussion with Seseri and other venture capitalists revealed another key trend. The conventional early-stage funding model is evolving due to the increasing prevalence of preemptive rounds, where standard metric expectations are often disregarded.

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Series A funding is now occurring just months after seed rounds in some instances. Simultaneously, the anticipated revenue benchmarks for Series B rounds are decreasing, driven by “large, multiasset players” offering distinct investment terms.

Evolving Revenue Expectations

These new investors provide rapid term sheets, minimal post-investment involvement, substantial investment amounts, and elevated valuations.

Traditionally, a startup needed to achieve $1 million in annual recurring revenue (ARR) to attract a Series A investment. This benchmark is now frequently bypassed.

Some startups are strategically delaying their Series A rounds until they reach $2 million in ARR, leveraging ample seed funding. Conversely, others are securing Series A funding with as little as a few hundred thousand dollars in ARR.

The difference lies in “elite status.” Startups considered highly promising can accelerate to their Series A, while others require more time to accumulate sufficient seed capital and achieve the necessary scale for an A round.

A Global Trend

This two-tiered venture capital market isn't limited to the United States. It’s also becoming apparent in Latin America, a significant and rapidly growing startup hub. For example, Brazilian fintech Nubank recently secured $750 million in funding.

Today, we will delve deeper into the Latin American venture capital market and its early-stage dynamics. We also have observations regarding the European venture capital landscape, with further analysis planned for next week.

Emerging Trends in Latin American Startup Funding

Large funding rounds are increasingly common throughout Latin America, evolving from exceptions to a prevailing trend. Recent months have witnessed the announcement of progressively larger investment sums.

These announcements frequently highlight the size of the funding: the $100 million Series B round secured by Colombian proptech company Habi, for example, was publicized as the largest Series B for a Colombia-based startup. This builds upon previous 2021 milestones, including the largest Series A round in Mexico—$65 million for Jüsto, an online grocer—and the largest Series A ever obtained by a Latin American fintech company—$43 million for Belvo, a platform often described as “the Plaid of Latin America.”

However, a closer examination reveals that these substantial funding rounds are not evenly distributed. They predominantly concentrate on startups operating in the fintech, proptech, and e-commerce sectors. More significantly, these investments tend to favor startups perceived as having “elite status.”

Elite Status Criteria are outlined by VC firm Magma Partners, including factors such as founders with educational backgrounds from Harvard or Stanford, experience in consulting or investment banking, and business models focused on adapting existing concepts to the Latin American market ("X for LatAm").

Additional indicators of this elite status include prior experience successfully implementing Rocket Internet-style strategies at established startups, and, unfortunately, socioeconomic privilege or expatriate status.

The potential for bias and a lack of genuine innovation are concerns. Interestingly, Y Combinator (YC) is emerging as a notable exception to this pattern. YC has dramatically increased its investment in Latin American founders, and becoming a YC alumnus provides a significant advantage in accessing elite funding circles.

This increased support from YC offers encouragement for Latin American founders with novel ideas and non-traditional backgrounds, though substantial progress is still needed to eliminate the disadvantages created by pattern-matching investment strategies.

Nathan Lustig, co-founder and managing partner at Magma Partners, explains, “Because access to capital is generally more limited in Latin America, and capital naturally gravitates towards capital, the large rounds raised by elite startups at the pre-seed, seed, and Series A stages can inadvertently limit funding opportunities for underestimated founders who demonstrate comparable or even superior traction.”

Furthermore, conventional metrics for assessing traction appear to be less rigorously applied. Startups are now securing funding rounds ranging from $4 million to $10 million even while still in the conceptual stage, as noted by Lustig.

These funds frequently originate from leading investment firms, including those based in the United States, with firms like GA, Softbank, Accel, Lightspeed, Tiger, D1, Index, Coatue, Greenoaks, DST, Ribbit, and a16z investing at earlier stages in Latin American companies than previously observed.

Series B Funding Dynamics

However, when considering Series B funding in Latin America, a shift towards a more performance-driven evaluation appears to occur. Federico Antoni of ALLVP explained to The Exchange that Series B rounds can materialize rapidly following a Series A, sometimes exceeding initial fundraising goals.

The advantage enjoyed by startups with founders from prestigious backgrounds doesn’t disappear entirely, but demonstrable progress becomes increasingly significant at this stage. Antoni noted that accelerated Series B rounds are frequently “preempted or oversubscribed,” particularly for founders with a proven track record and strong traction.

A recent example illustrating this trend is the e-commerce company Merama, focused on the Latin American market. Following a Series A round that valued the firm at over $200 million, its CEO reported receiving substantial interest for a Series B round.

While pedigree remains a factor, results gain prominence at the Series B level, which is logical. Series B investments are typically directed towards more established startups than Series A rounds, making metrics a more reasonable basis for evaluation.

Lustig elaborated on this dynamic, stating that intense investor competition arises for Series B rounds “when a clear leader emerges within a specific market category.” This presents an opportunity for founders who may not have attended elite institutions to demonstrate their potential through strong performance. “Founders who are underestimated often compete with fewer resources, but can secure funding with impressive traction at the Series B stage,” Lustig added.

The rapid growth and attractiveness of the Series B market in Latin America are fueled by a combination of local investment and capital from other regions. Consuelo Valverde of SV Latam Capital indicated that both local and international funds are contributing to these earlier Series B investments.

Historically, the inflow of foreign capital has been inconsistent, Valverde acknowledged, but it is improving. “Latin America, and especially Mexico, is attracting increasing attention from VCs outside the region. Mexico had previously lagged behind Brazil, but is now catching up,” she stated.

Our observations align with this trend of increased external investment in Latin American startups. We have noted a growing number of rounds in the region, often at higher valuations.

Despite the maturing and accelerating venture capital landscape, the startup ecosystem in Latin America still trails behind more developed markets. A recent analysis of unicorns by investor Elad Gil revealed that Brazil leads Latin America with the highest number of $1 billion startups (12).

Furthermore, Brazil is the sole Latin American country featured in the top 15 globally. For comparison, China boasts 159 unicorns, while the United States has 369.

Increased capital infusion is expected to foster the development of larger and more valuable startups in the region. As more funds flow into countries like Mexico, as Valverde highlighted, we may witness other Latin American nations ascending the global unicorn rankings, potentially beginning with Colombia. Expedited Series B rounds will undoubtedly contribute to this progress.