Latin American Venture Capital: Record-Breaking Investment in 2023

Latin American Venture Capital: A Deep Dive into Q2 Performance

We are concluding our comprehensive analysis of the global venture capital landscape’s second-quarter results. Our investigation has spanned numerous regions, seeking to understand the substantial investment flowing into contemporary startups. Latin America represents the final, and perhaps most compelling, piece of this puzzle.

Initially, the Latin American venture capital and startup scene mirrors the growth observed in other emerging ecosystems. Similar to hubs in the U.S., Canada, Europe, India, and Africa, Latin America is witnessing record-breaking venture capital activity.

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However, a closer examination of the headline figures reveals a startup market undergoing significant maturation, attracting substantial external investment in pursuit of promising opportunities.

To facilitate our exploration of Latin America’s remarkable second quarter, we’ve gathered insights from Gonzalo Costa of NXTP, Nathan Lustig from Magma Partners, and Federico Antoni of ALLVP. We also utilized data from Dealroom, CB Insights, the Global Private Capital Association (GPCA), and ALLVP.

Talent as the Driving Force

Our analysis extends beyond the data to consider the human element fueling this startup surge. Antoni posits that the current Latin American startup market is fundamentally driven by talent, rather than simply capital availability. This sentiment is echoed by Sequoia, a U.S. venture capital firm, which recently expressed its astonishment at the caliber of founders emerging in the region.

The convergence of talent and capital is essential for thriving startup ecosystems. However, additional factors contribute to the prominence of Latin American startups, including favorable structural conditions like widespread digital adoption and rapid e-commerce expansion.

These trends are projected to endure. Costa argues that technology companies currently represent only 2.5% of the total market capitalization in Latin America, compared to over 40% in the U.S. His firm anticipates these figures will converge over time, suggesting a wave of future Latin American tech companies are currently being established and funded.

Key Areas of Focus

We will now delve into the Latin American venture capital data, identifying the rising star countries within the region. Furthermore, we will examine the speed at which Latin American startups expand internationally and assess the rate of capital reinvestment within the ecosystem – a crucial indicator of long-term sustainability.

Understanding these dynamics is vital to grasping the full potential of the Latin American startup market.

A Surge in Venture Capital Investment

Latin America is experiencing unprecedented growth in venture capital funding, poised to achieve record-breaking figures in both total dollars raised and the number of venture capital rounds completed during 2021. Data from CB Insights reveals that startups within the region secured $9.3 billion in the first half of 2021, spanning 414 separate deals.

For comparison, the entirety of 2020 witnessed $5.3 billion invested across 526 deals. Interestingly, the 2019 total mirrored that of 2020, also reaching $5.3 billion, but from a larger pool of 614 individual transactions.

Exceptional Growth in Q2 2021

This year demonstrates a significant departure from previous trends, with the second quarter of 2021 marking an exceptional period for investment. Approximately $7.2 billion was channeled into Latin American startups during Q2 2021.

This figure dramatically surpasses previous quarterly results; the closest comparison is the second quarter of 2017, which saw $2.6 billion in investment.

Further corroborating this trend, data from GPCA, as shared with The Exchange, indicates that venture capital activity in the first half of 2021 increased by more than fourfold compared to the first half of 2020.

Dealroom data similarly points to a 5.5x increase in venture capital activity in Latin America during the first six months of 2021, when contrasted with the same period in 2020.

Increasing Exit Activity

The positive momentum isn’t limited to incoming investment; exit activity is also on the rise. According to CB Insights, the last four quarters represent the strongest period for exits in the region to date.

Specifically, the second quarter of 2021 was the second most successful exit period recorded, only slightly trailing the performance of the fourth quarter of 2020.

Shifting Investment Stages

Analyzing the stage of investment reveals a notable shift in the second quarter. Data indicates that mid-stage venture capital activity accounted for 14% of total deal volume, a substantial increase from the 5% observed in the first quarter.

Concurrently, the proportion of early-stage deals decreased, while late-stage deals experienced growth. This suggests a healthy ecosystem where startups can successfully secure funding across all stages – seed, mid-stage, and late-stage.

Regional Variations

While the overall trend is positive, certain countries within Latin America are experiencing even more rapid growth. Dealroom data shows that Colombia’s venture capital totals, measured in dollar terms, increased by 9.2x in the first half of 2021 compared to the same period in 2020.

Mexico also saw significant growth, with an 8.6x increase over the same timeframe. Brazil, while still demonstrating impressive gains, experienced a more moderate 4.3x increase.

A closer examination of country-specific data further highlights the dynamism of the Latin American venture capital boom.

Regional Venture Funding Dynamics

Analysis of venture funding by country reveals that Brazil currently dominates the landscape, securing over half of the total investment. According to Costa, Brazil’s performance demonstrates significant strength. This aligns with CB Insights data, which indicates that of the $7.2 billion invested regionally in Q2, $4.6 billion was directed towards Brazilian companies.

Notably, this investment volume represents almost a threefold increase compared to the $1.6 billion raised by Brazilian startups in Q1 2021 – a period already considered exceptionally strong.

Mexico also experienced substantial growth, achieving a “billion-dollar quarter” with $1.307 billion in funding. A significant portion, $485 million, was attributed to a single, large deal involving the car marketplace, Kavak.

Even excluding this substantial transaction, Mexico’s quarterly performance would still have established a new record.

Consequently, Brazil and Mexico are solidifying their positions as the primary hubs for venture capital within the region. However, identifying emerging opportunities requires a broader perspective.

Industry experts suggest focusing on Colombia and Chile as promising markets. Antoni specifically highlighted these two nations, while Lustig pointed to Colombia and Argentina, emphasizing Argentina’s capacity for fostering globally successful unicorn companies.

This underscores the importance of considering qualitative factors alongside quantitative data. As Costa explained, the distribution of tech talent is relatively uniform across the region.

Therefore, the strategic focus of startups is more critical than their geographical origin or current location.

Frequently, this focus leads companies back to the region’s largest economies. Antoni observed that while innovation can emerge from countries like Uruguay and Ecuador, many teams ultimately target Mexico or Brazil.

This is due to the substantial market opportunities presented by these two nations, representing the most significant potential rewards within the region.

Regional Expansion for Latin American Startups

The question of whether regional expansion is essential for Latin American startups, or simply advantageous, doesn't have a straightforward answer. The necessity often hinges on specific factors. Antoni suggests that both the startup's country of origin and its underlying business model are key determinants.

This perspective contrasts with the common belief that startups based in Brazil or Mexico don't require multi-country operations, as previously indicated by Lustig. The core of the debate appears to center on whether expansion is a fundamental "need" or an optional strategy.

Costa offers a nuanced viewpoint, stating that while not mandatory, especially for companies initially targeting larger markets like Brazil or Mexico, the wealth of opportunities throughout the region often leads even those companies to consider expansion plans.

The Role of Business Models

Antoni further clarifies that companies poised to compete with global entities are likely to face pressure from investors to pursue regional expansion sooner rather than later. This aligns with the advice offered by Mariano Gomide, co-founder and co-CEO of VTEX.

Gomide, during an appearance on the Brazilian podcast “Like a Boss,” urged Brazilian founders to broaden their horizons beyond Brazil, asserting that the Brazilian market alone is insufficient for substantial growth. This strategy appears to have been successful for VTEX.

The e-commerce platform, backed by Tiger Global and SoftBank, recently launched an IPO on the NYSE, demonstrating the potential benefits of a regional outlook.

Key Considerations for Expansion

• Country of Origin: The startup’s initial location influences the urgency of expansion.
• Business Model: Companies facing international competition may need to expand more rapidly.
• Market Opportunities: The broader Latin American region presents significant growth potential.

Ultimately, the decision to expand regionally is a strategic one, influenced by a complex interplay of factors. While not always a strict requirement, a forward-looking approach to regional markets can be crucial for long-term success.

Global Investment Trends in Latin American Startups

A significant proportion of the capital being secured by Latin American venture capitalists originates from sources outside the region, a common practice for emerging startup ecosystems. All developing startup markets rely, to some extent, on funding sourced from various geographical locations.

Before delving into the funding mechanisms utilized by Latin American startups, it’s important to consider the role of external investment. Costa notes that founders from Latin America who have a proven track record with previously successful, venture-backed companies are often able to attract capital quickly, even with limited initial development.

Entrepreneurs with prior experience in rapidly growing companies, such as Nubank, are particularly well-placed to capitalize on the current availability of funds. This translates into the capacity to consolidate pre-seed and seed funding rounds simultaneously and to obtain substantial investments based solely on a pitch deck.

Essentially, the current surplus of global capital is actively seeking to support Latin American ventures led by individuals who have demonstrated the ability to scale a startup successfully. This aligns with the investment strategies of venture capitalists, who frequently rely on identifying and replicating successful patterns.

However, global capital allocation in Latin America exhibits certain limitations. Lustig points out that startups not located in key markets like Mexico or Brazil, or lacking founders from prestigious institutions such as Harvard or Stanford, or without participation in programs like Y Combinator, often remain unnoticed by U.S. investors.

Without these credentials, these startups are effectively overlooked by many investors. This bias disproportionately affects ventures operating in smaller regional markets, such as Chile.

Lustig explains that most venture capitalists are hesitant to invest in companies before they demonstrate success in a larger market. This preference may contribute to the common strategy among Latin American startups of expanding rapidly to broader markets early in their development.

The Growing Role of Local Funding in Latin American Startups

An increasingly significant role is being played by local capital in the financing of startups across Latin America. The occurrence of successful exits is notably influencing the expansion of domestic funding, particularly during the initial phases of startup development.

Lustig highlighted that founders who have achieved successful exits, or participated in secondary sales, are evolving into active angel investors. He emphasized that these investors offer more than just financial resources to entrepreneurs.

The Rise of Founder-Led Investment

The phenomenon of entrepreneurs becoming investors isn't novel to Latin America. Kaszek Ventures, the most prolific Latin American fund in Q2 as reported by CB Insights, exemplifies this, with co-founders Hernan Kazah and Nicolas Szekasy previously holding executive positions at MercadoLibre.

However, the current rate of this trend is accelerating, and its positive influence is becoming more pronounced.

Exits Fueling Further Investment

Costa explained that the “remarkable expansion in venture financing, alongside increased exits and liquidity events through secondary offerings,” is enabling some funds to return capital to their Limited Partners (LPs). These returns, often substantial, are bolstering their willingness to continue investing within Latin America.

The scale of these exits has grown considerably over time, representing unprecedented figures for the Latin American market.

Beyond Founders: The Emergence of Angel Investors from Early Employee Ranks

It’s not solely founders who are transitioning into angel investors. Early employees are also following a similar trajectory, forming groups reminiscent of the PayPal alumni network.

ALLVP has identified five such clusters originating from companies like Rocket Internet/Linio, Domicilios, Groupon, Rappi, and Grin/Grow. Roger Laughlin, CEO of Kavak, serves as a prime example, having progressed from roles at Groupon and Linio to establishing a unicorn company and subsequently becoming an investor in various Latin American startups.

A Trend Still in its Early Stages

According to Lustig, this trend is only just beginning to unfold.

Positive Fundamentals Supporting Continued Growth

Similar to global trends, the underlying factors driving the venture capital boom in Latin America appear sustainable. Capital costs are not expected to increase, ensuring a continued flow of funds.

Furthermore, the technological advancements – including expanding internet access and smartphone adoption – that have fostered tech markets in numerous countries and regions are projected to persist.

The growing experience and wealth of the regional talent pool provide further reasons for optimism regarding Latin America’s startup ecosystem.

While the business cycle will inevitably reach a peak, current conditions indicate continued momentum for startups in the region.