Startup Opportunities in Latin America - VCS Insights

Emerging Markets Attract Increasing Venture Capital

Areas previously disregarded by venture capital firms are now demonstrating substantial investment growth in recent periods. For a long time, African startups received minimal attention from the worldwide VC community.

Funding for the continent’s emerging technology businesses constituted a very small percentage of the capital allocated to next-generation companies in other regions.

Investment Surge in Africa and Latin America

However, investment in African tech companies has experienced a significant increase in recent years. Today, Juven announced intentions to expand its investments within the continent, and Google has earmarked $50 million for similar initiatives.

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Latin America’s startup ecosystem mirrors Africa’s in its growing appeal to external investors, though it is a bit more developed. The announcement of SoftBank’s additional $3 billion investment in the region’s startups was noteworthy, but not entirely unexpected last month.

The Japanese investment firm had previously deployed $5 billion into Latin American ventures.

Analyzing the Latin American Startup Landscape

Prior to the release of Q3 data, which will provide an updated view of the Latin American startup market, we aimed to examine the underlying structural factors influencing the region. The Exchange consulted with investors active in Latin America to gain deeper insights.

We spoke with Nathan Lustig of Magma, Julio Vasconcellos of Atlantico, and Antonia Rojas of ALLVP to refine our understanding.

We will explore the factors fueling capital inflows into Latin America, the current investment rate and its sustainability, the role of China in the investment landscape, and potential overlooked companies due to existing biases within investment institutions.

Let's begin!

The Engines of Growth in Latin American Tech

As of August, Latin America is home to 26 unicorn companies, as detailed in Atlantico’s 2021 report on digital transformation – a key resource for understanding the current landscape. This figure represents the creation of eight new unicorns throughout 2021, as clarified by Vasconcellos. In 2018, the region only had four unicorns, and the potential for public listings in the U.S. (like VTEX and dLocal) and Brazil wasn’t immediately apparent.

A significant indicator of growth is the doubling of the cumulative market capitalization of these Latin American unicorns. Atlantico data shows their combined post-money valuation increased from $46 billion in 2020 to $105 billion by August 2021.

This growth is also evident in venture capital funding. Crunchbase reports that funding for the region’s unicorns has reached $10 billion year-to-date. Marcelo Claure, CEO of SoftBank Group International and a strong advocate for Latin America, stated this validates the region’s potential and the positive impact of the SoftBank Latin America fund.

Furthermore, SoftBank anticipates deploying between $8 billion and $10 billion in capital into Latin America during 2022, according to statements made by Claure at TechCrunch Disrupt.

Unicorns are fostering a positive feedback loop, as explained by Rojas of ALLVP to TechCrunch. Uber’s acquisition of Cornershop, a company within ALLVP’s portfolio, created a “virtuous circle,” boosting investor confidence globally and demonstrating the possibility of substantial returns while disrupting traditional industries.

Vasconcellos agrees, observing that the surge in unicorns and IPOs originating from the region demonstrates the viability of success and attracts increased global investment.

However, the underlying driver of these trends is what Atlantico’s report terms “the second wave” of digital transformation. Vasconcellos, in a TechCrunch guest post, describes this as the “second- and third-order effects of the [COVID-19] crisis,” which has accelerated the “continentwide tech expansion” beyond previous forecasts.

While the pandemic acted as a catalyst for digitalization, it also instigated fundamental shifts. For example, the growth of e-commerce necessitated significant improvements in the quality and scale of logistics, payment systems, and e-commerce platforms, as noted by Vasconcellos.

More broadly, the region’s inherent structural challenges continue to present opportunities for startups utilizing technology to provide solutions.

Is the Current Momentum Sustainable?

Favorable structural factors are beneficial, but they don't fully address whether the Latin American technology ecosystem will sustain its present investment levels. A thorough assessment requires categorizing the region's startups into two primary groups: those in their early stages and those more established.

The performance of late-stage Latin American startups is demonstrably strong, as evidenced by the recent surge in unicorn companies. However, the rate of early-stage activity is crucial for determining future investment in these more mature ventures – the companies capable of securing substantial funding rounds.

A greater volume of early-stage startups today translates to increased opportunities for cultivating future unicorns and companies ready for initial public offerings. According to Atlantico’s Vasconcellos, the outlook for these emerging tech companies is positive.

He notes that throughout his decade-plus of experience investing in early-stage Latin American startups, he has “not observed a period with greater activity in terms of both the number of new ventures launching and the caliber of the founding teams.”

Vasconcellos further stated that his firm has experienced a “more than 70% increase in qualified investment opportunities year-to-date, a truly exceptional surge.” (Atlantico operates a separate fund focused on even earlier-stage investments, providing a consistent stream of potential deals.)

This data suggests not only the potential to maintain current investment levels in Latin American startups, but also the possibility of an accelerated growth trajectory. If an even larger number of early-stage companies demonstrate the potential for significant expansion, the demand for late-stage funding – and its absorption by Latin American companies – could increase.

Therefore, the current investment momentum in Latin America is indeed sustainable, and may even gain speed.

Shifting Global Dynamics

The Atlantico report identifies a significant trend: the expanding influence of China in Latin America. This expansion is driven by increased trade, substantial investment, and the rising prominence of Chinese tech companies.

China’s involvement was particularly noticeable during the COVID-19 pandemic, as it played a crucial role in the distribution of vaccines throughout Latin America. Simultaneously, brands like TikTok, Shopee, and Xiaomi have rapidly gained widespread recognition among consumers in the region.

Factors Supporting Continued Chinese Engagement

Vasconcellos suggests that Chinese tech firms and investors will likely maintain their focus on emerging markets like Latin America. This is due to the increasing challenges of expansion within the U.S. market, stemming from political considerations.

Furthermore, domestic growth within China itself has become more complex. The emergence of Latin American companies that successfully replicate popular Chinese startups demonstrates a parallel in consumer preferences.

This similarity in consumer behavior may also account for the reported growing interest in the Latin American market from companies originating in other Asian nations.

The U.S. Position and Potential Shifts

Despite China’s growing presence, Vasconcellos anticipates that the U.S. will remain the leading foreign influence in Latin America.

Changes in China’s regulatory environment could further solidify the U.S.’s dominant position. Specifically, increased governmental scrutiny and potential restrictions on investments by major Chinese technology companies could impact deal flow.

Key Takeaways

• China’s influence in Latin America is increasing through trade, investment, and tech.
• Political and economic factors are driving Chinese companies to explore emerging markets.
• The U.S. is expected to remain the dominant foreign player, potentially benefiting from regulatory changes in China.

Investment patterns and consumer behavior are key indicators of these evolving geopolitical dynamics.

Opportunities Remain in Startup Investment

The competitive landscape for promising startups in established markets has led many investors to explore emerging regions. The expectation is that areas with less intense competition for investment allocations could present opportunities for more favorable pricing and, consequently, potentially higher returns.

Investment growth in African startups isn't driven by altruism, but rather by their capacity to deliver substantial returns at more accessible valuations compared to startups in more mature tech hubs. This makes them an increasingly attractive option for capital deployment.

Similarly, Latin America continues to offer potential for significant gains. Magma’s Lustig highlights a distinct dynamic within the region’s startup investment landscape, where perceived founder credibility heavily influences valuation.

Investors who are prepared to support founders without relying on traditional credentials may unlock considerable returns. This approach allows for identifying undervalued opportunities.

A significant oversight exists in the Latin American market. A large proportion of startups outside of Brazil and Mexico remain largely unnoticed by U.S. investors. While Colombia presents some exceptions, the focus remains heavily concentrated on the two largest economies, particularly for founders lacking established networks.

This limited attention suggests that the Latin American market still possesses untapped potential for capital absorption. Many founders are currently missing out on the recent funding surge.

A broader investment perspective within Latin America could prove beneficial for early-stage founders in the region. This expansion could ultimately foster the emergence of more unicorns and larger funding rounds. However, this relies on the continued availability of investment capital.

Further Considerations for Investors

The current trend suggests that investors willing to look beyond conventional metrics and geographic concentrations may discover undervalued opportunities. This requires a shift in focus and a willingness to assess potential based on factors beyond established credentials.

Key Takeaways from Latin America

• A two-tiered investment market exists, driven by founder credibility.
• Startups outside of Brazil and Mexico are often overlooked by U.S. investors.
• Untapped potential remains for capital absorption in the region.

Implications for Founders

Founders in less-established markets should focus on demonstrating their potential and building strong business fundamentals. Securing funding may require proactive outreach and a compelling narrative that transcends traditional investment criteria.

Strong returns are still achievable in emerging markets, but require a strategic approach from both investors and founders. Identifying and capitalizing on these opportunities will be crucial for navigating the evolving global startup landscape.