Latin American Startups: Why Global Investors Are Investing

Latin American Startup Growth

The startup landscape in Latin America is experiencing substantial growth this year. Mega-funding rounds are being announced frequently, and new unicorn companies are emerging on a nearly monthly basis.

This positive trend is largely attributable to the increasing maturity of the startup environment within the region. Success stories like Nubank, Cornershop, Gympass, and Loggi have significantly enhanced LatAm’s standing and credibility.

Foreign Investment Fuels Expansion

Notably, a considerable portion of investment in the region originates from firms based outside of Latin America. Companies such as SoftBank, Tiger Global Management, Tencent, Accel, Ribbit Capital, and QED Investors are actively deploying capital into LatAm ventures.

Some investors are identifying greater potential in Latin America compared to the U.S. market. They perceive the region as historically primed for disruption, particularly within the fintech and proptech sectors.

This opportunity stems from the large percentage of the population that is either underbanked or unbanked, coupled with the relatively undeveloped nature of the real estate industry.

Key Growth Drivers

Recent analysis by Anna Heim and Alex Wilhelm highlights that factors like strong digital adoption rates and rapid growth in e-commerce are central to Latin America’s record-breaking venture capital activity this year.

A venture capitalist based in Mexico City emphasized that the core of the story isn’t about access to capital, but rather the availability of talent.

Inclusion Over Disruption

While local VCs praise the quality of human capital, global investors are also drawn to the broader population dynamics. Shu Nyatta, a managing partner at SoftBank, articulated a key distinction.

He noted that technology in Latin America often focuses on inclusion, rather than simply disruption. This is a frequently overlooked, yet crucial, aspect of the region’s growth.

“A significant portion of the population lacks adequate access to essential services and products,” Nyatta explained. “Similarly, many businesses are not utilizing modern software solutions.”

“There’s a substantial opportunity to create solutions for a vast number of individuals and businesses. In contrast, the venture ecosystem in San Francisco often concentrates on improving the lives of those already benefiting from technological advancements.”

Expanding Consumer Markets

Ethan Choi, a partner at Accel, points to the rapid expansion of consumer markets in the region. This growth is fueled by a burgeoning middle class and the increasing integration of technology into all facets of daily life.

This heightened demand for digital services is driving the creation of more startups, which in turn attracts further investor interest.

Investment Surge in Brazil and Mexico

The substantial influx of capital into Latin America this year clearly demonstrates a rapidly growing level of investor interest.

During the first half of 2021, Latin America experienced a total of $6.2 billion in venture capital investment, exceeding the $2.6 billion recorded in the same period last year. This figure also surpasses the $4.1 billion invested throughout all of 2020, as indicated by preliminary data from LAVCA (the Association for Private Capital Investment in Latin America). It’s worth noting that LAVCA employed a different methodology than CB Insights for data collection.

Brazil currently leads the region in attracting investment, securing $3.7 billion across 145 deals in the first half of 2021, a significant increase from the $2.39 billion across 282 deals in 2020. Mexico holds a strong second position, both in terms of investment volume and the number of transactions. LAVCA data reveals that Mexico received $1.56 billion in investment across 52 deals during the first half of 2021, compared to $831 million across 94 deals for the entirety of 2020, reflecting both larger funding rounds and a more developed startup ecosystem.

It is important to recognize that this trend of increasing venture capital rounds isn't limited to Latin America. Julie Ruvolo, LAVCA’s director of venture capital, highlights that alongside the $6 billion+ raised by Latin American startups in the first half of 2021, regions like India, Africa, the Middle East, and Central and Eastern Europe are also witnessing comparable growth.

“Latin America is experiencing an exceptional year for investment, and we are observing expanding investment activity throughout the technology sector,” Ruvolo stated. “Growth isn’t solely driven by large investments; 2021 is projected to be a record year for seed and early-stage funding as well.”

While fintech and proptech sectors have traditionally attracted the majority of funding in Latin America, the region is now seeing considerable investment in areas such as food technology, brand aggregation, and resale marketplaces. For instance, NotCo, a Chilean food tech company specializing in plant-based alternatives, announced a $235 million Series D round in July, achieving a valuation of $1.5 billion. Furthermore, Valoreo, based in Mexico City, secured $80 million in debt and equity financing this year to acquire and develop Latin American e-commerce brands.

Investment is diversifying geographically. While Brazil remains the primary destination for funds, Mexico is rapidly producing unicorns – Clip, Bitso, and Kavak – alongside companies in Chile (NotCo) and Argentina (Mural, Auth0, and Uala).

Gonzalo Costa of NXTP conveyed to Alex and Anna that his firm prioritizes a startup’s focus over its location. Federico Antoni of ALLVP concurred, noting that while talent is widely distributed, many teams ultimately target Mexico or Brazil to capitalize on the region’s largest market opportunities.

The substantial size of these two nations is a key factor, according to Ruvolo. She explained that Mexico and Brazil’s position as leading recipients of funding isn’t merely a simplification. “Venture capital has been accessible in these markets for a longer period. Moreover, Mexico and Brazil possess sufficiently large populations, allowing a startup to establish a base and concentrate its efforts before expanding.”

Ruvolo also emphasized – echoing Antoni’s point – that Argentina, Chile, and Colombia are also on track for record venture investment this year, alongside Mexico and Brazil.

She further added that Brazil’s use of Portuguese, differing from the predominantly Spanish-speaking region, hasn’t presented an obstacle to investment. “While we cannot comment on the perspective of startups, it doesn’t appear to be a concern for investors – we are witnessing increasing cross-border investment from both local and international sources,” she concluded.

The Appeal of Strong Financial Foundations

According to Nyatta, the Japanese investment firm SoftBank has demonstrably accelerated its investment activity within Latin America this year. He notes that the global market for growth equity has become considerably more dynamic and competitive.

Nyatta explained to TechCrunch that investment rounds are now occurring at a faster rate and at elevated valuations. The firm has striven to maintain its standard due diligence while also increasing its responsiveness to avoid overlooking promising opportunities, leading to substantial capital allocation in LatAm.

What specifically draws investors to Latin America? Nyatta attributes it to fundamental economic factors.

“The region boasts a population of nearly 700 million, and its GDP per capita is four times greater than India’s and twice that of Southeast Asia,” he stated. “Despite this, the area has historically been underfunded, fostering resourceful entrepreneurs who prioritize building sustainable businesses rather than relying solely on continuous investor support.” This results in a prevalence of early-stage companies exhibiting healthy unit economics and led by disciplined teams.

SoftBank distinguishes itself from many growth funds in the region by making investments in both private companies and, as Nyatta describes, strategically selected public entities. A prime example is Banco Inter, a Brazilian neobank traded publicly, which Nyatta compares to Tinkoff in Russia, and currently holds a market capitalization exceeding $10 billion.

Further investments made by SoftBank in the region encompass:

• Kavak, a pre-owned vehicle marketplace originating in Mexico, now expanded to Brazil and Argentina. It can be likened to Carvana, tailored for emerging markets.
• Rappi, a service combining the functionalities of DoorDash and Instacart, operating throughout Latin America.
• QuintoAndar, a real estate marketplace based in Brazil.
• Creditas, which facilitates access to capital by unlocking equity in assets like homes and vehicles for Brazilian citizens.
• Gympass, a platform offering fitness and wellness solutions to employees through corporate partnerships.

SoftBank maintains a long-term perspective regarding returns on its investments. “Regarding exits, we are confident in the enduring potential of these businesses and are not pressured to sell prematurely,” Nyatta clarified. “Our access to permanent capital allows us to avoid making unfavorable short-term decisions concerning the sale of shares in these exceptional companies.”

Shifting Dynamics in Latin American Investment

Accel, a venture capital firm headquartered in Palo Alto, California, has significantly increased its investment activity within Latin America. Approximately $100 million has been allocated to LatAm ventures this year, representing a sixfold increase compared to the previous year, as reported by partner Ethan Choi.

Factors Driving Increased Investment

Several key factors are contributing to this surge in investment. A rapidly expanding consumer base and greater adoption of new technologies are playing a crucial role. Furthermore, the widespread use of video conferencing, accelerated by the COVID-19 pandemic, has effectively removed traditional barriers to investor engagement in the region.

Choi stated that the firm is now more readily able to support entrepreneurs following virtual meetings conducted via platforms like Zoom.

Growth of the Entrepreneurial Ecosystem

The quality of entrepreneurs in Latin America is also on the rise. This is fueled by experienced professionals launching new companies after gaining experience at established tech firms. Additionally, a growing number of founders are returning to their home countries after working in the U.S. and other international markets.

Successful Investments

Accel has a proven track record of successful investments in the region. Notably, the firm was an early investor in Cornershop, an on-demand grocery delivery service operating across multiple countries, which was subsequently acquired by Uber for $1.4 billion.

Another successful investment was Elo7, often referred to as the “Etsy of Brazil,” which was acquired by Etsy for $217 million.

Recent Investment Activity

In February, Accel spearheaded a $12 million investment in Flink, a Mexican brokerage platform designed to simplify equity trading for a broad consumer base. This was followed in March by a $90 million investment in Nuvemshop, a leading e-commerce platform serving over 80,000 SMBs and mid-market businesses in Argentina, Brazil, and Mexico. Nuvemshop recently secured an additional $500 million in funding, achieving a valuation of $3.1 billion.

Furthermore, in April, Accel led a $2.7 million investment in Atrato, a rapidly expanding buy now, pay later fintech company.

From Headwinds to Tailwinds

“The year of the pandemic proved to be a turning point, driving substantial growth in e-commerce, banking, and payment systems,” Choi explained. “Historically challenging conditions, such as limited e-commerce penetration, a large unbanked population, and economies heavily reliant on cash, are undergoing transformation through software and innovative consumer services.”

He emphasized that these former obstacles are now becoming catalysts for growth, creating a favorable environment for startups focused on digitizing various aspects of consumer life.

Digital Payments and Regulatory Support

Digital payments are experiencing accelerated growth throughout the region, supported by government initiatives like open banking and the introduction of new payment methods, such as PIX in Brazil. Choi believes these favorable regulatory developments and the surge in fintech activity will further increase digital payment adoption across Latin America.

Penetration rates vary, with countries like Colombia currently at around 40% and Argentina exhibiting a higher rate of approximately 87%.

E-commerce Growth and Bank Account Penetration

While Latin America represents the fastest-growing e-commerce market globally, it remains relatively under-penetrated, accounting for approximately 6% of total retail sales. Choi noted that 2020 witnessed a doubling of growth compared to previous years.

Bank account penetration is also rapidly increasing, moving from 40%-70% towards 99%, mirroring levels seen in developed markets like the U.S. This growth is largely attributable to the emergence of new, app-based neobanks, as Choi added.

A Long-Term Investment in Latin American Fintech

QED Investors demonstrated a strong dedication to the Latin American market in May by launching a $12 million fund. This fund is specifically designed to provide capital to pre-seed and seed-stage fintech companies operating within the region.

Named Fontes, a Latin term meaning "fountains," the fund represents an expansion of QED’s investment activities throughout Latin America. Average investment amounts will range from $300,000 to $500,000 per startup.

Early Investments and Portfolio Growth

QED’s initial foray into Latin American investing began in late 2014. Their first investment was in Nubank, which has since evolved into a globally recognized and substantial neobank.

Since then, the firm has completed over twenty-four investments in the region, with a primary focus on Brazil and Mexico. Notable companies within their portfolio include Creditas, QuintoAndar, Loft, Kavak, Konfio, and Bitso.

The Appeal of the Latin American Market

According to Bill Cilluffo, a partner and head of international investments at QED, Latin America presents a compelling investment landscape. He notes that a small number of established financial institutions control a significant majority – over 80% – of the banking sector.

This concentrated market often results in elevated pricing and high costs for consumers, particularly in Brazil, where annual interest rates can exceed 100%. Furthermore, historical underinvestment in technology by these traditional banks creates opportunities for disruption.

Cilluffo explains, “This situation leads to expensive products and subpar customer experiences. We perceive this as an ideal environment for fintech companies to challenge the existing norms.”

Emerging Fintech Ecosystems

Ana Cristina Gadala-Maria, a principal at QED, highlights that the fintech sector in Latin America is still in its nascent stages, especially in countries like Chile, Peru, and Argentina.

“While some nations have a more established fintech history, we are witnessing the development of robust ecosystems in others,” Gadala-Maria stated in an interview with TechCrunch. “This includes the necessary infrastructure to support business growth and the creation of new fintech ventures.”

She added, “We anticipate significant growth in Latin American fintech over the next decade and are eager to play a leading role in this expansion.”

Expanding Investment Horizons: Beyond Fintech and Proptech

Owl Ventures, a firm specializing in edtech investments, has recently initiated its first ventures into Latin America. These initial investments include backing UBITS in Colombia and Galena in Brazil.

The firm anticipates significant growth opportunities within the digital education sector across the region, driven by an expanding and increasingly online population.

According to Ross Darwin of Owl Ventures, a surge in edtech funding is anticipated in the coming years, mirroring the earlier acceleration observed in fintech investments. This expectation is fueled by Latin America’s substantial, expanding, and digitally connected demographic.

Increased engagement from local venture capital firms, the scaling of early-stage edtech companies, and the expansion of U.S. companies into Latin America are all contributing factors.

Darwin explained to TechCrunch that the rise of remote work is attracting talent to the region. Companies are now seeking employees outside the U.S. who can maintain U.S. working hours, a benefit particularly advantageous for Latin America.

He further stated that this progress is beneficial not only for Owl Ventures’ portfolio companies but, crucially, for the learners who can now access educational opportunities previously unavailable.

In March, Clocktower Technology Ventures announced the establishment of its inaugural fund, targeting $25 million for investments specifically in Latin American fintech companies during seed and Series A funding rounds.

As a long-time observer of the Latin American venture capital landscape, the current level of activity is not unexpected.

However, the sheer volume of investment rounds, the prominence of the firms involved, and the high valuations are particularly noteworthy.

The region is demonstrably gaining recognition as a serious investment destination, and this momentum is likely to continue.

Key Trends in Latin American Investment

• Growing interest in edtech alongside established fintech.
• Increased participation from both local and U.S.-based investors.
• The impact of remote work on talent acquisition in the region.
• Rising valuations reflecting increased confidence in the Latin American market.

Digital education is poised for substantial growth, offering new opportunities for learners throughout Latin America.