What Latin America’s tech boom means for international investors, by Riley Kaminer.
Ask investors about Latin America and they will answer with mining, agribusiness and petroleum. But as data becomes “the oil of the 21st century,” Latin America’s tech sector has more to offer. Tech investors are taking note in a big way as the region now boasts more than 20 ‘unicorns’ – that is tech companies valued at over $1billion.
Analysts at the Latin American Venture Capital Association (LAVCA) estimate that venture investment into the region has more than doubled every year from 2016 to 2019. The coronavirus pandemic will slow this trend, yet ample opportunities remain for those that take a long-term perspective, says Greg Mitchell, Managing Director at Peru-based startup investor, Angel Ventures. “There are much more opportunities than capital in Latin America.”
Demographics play a crucial role in Latin America’s tech boom. The region’s middle class expanded to 46 million households from 33 million between 2008 and 2018 and is increasingly moving to cities. Latin America is the world’s most urbanized region: 260 million people – approximately 40% of the total population – currently live in Latin America’s 200 largest cities and generate 60% of the region’s GDP.
Internet usage in Latin America has exploded, reaching 450 million people in 2019 from just 200 million in 2010, making it the world’s fastest-growing internet population. Not only do Latin Americans have access to the internet – they’re taking full advantage of it. The region’s social media use is higher than any other region in the world, and almost double the North American average. The rising purchasing power of Latin Americans, coupled with increasingly widespread internet access, makes them more willing to purchase products and services through new tech platforms.
Latin America’s social media use is higher than any other region in the world…
Mitchell describes another key phenomenon enabling Latin America’s growth as a tech destination: increasingly high-quality founders. According to Mitchell, “regional investors have evolved from the traditional mentality of looking for founders with MBAs and are now valuing experience at major international startups like Uber and WeWork,” which in the last decade have opened satellite offices across Latin America.
The increase in capital in Latin America is key to the tech ecosystem’s growth, says Mitchell. Abundant funding for startups lowers the opportunity cost for would-be founders to leave lucrative jobs at established tech firms and start their own business. He cites the example of regional ecommerce giant Mercado Libre, whose stock price has tripled since the beginning of the coronavirus pandemic, to argue that the more local success startups have, the more the regional ecosystem benefits.
Brazil and Mexico take the lead
Latin America’s two largest economies together accounted for 73% of all tech investment transactions in 2019, according to LAVCA. Brazil was an early leader in tech and VC investment, having formed its government-run Private Equity & Venture Capital Association in 1983. More recent initiatives, such as the government’s Start-Up Brazil and Google Brazil’s campus for startups, have provided entrepreneurs with a wide range of resources, from funding to mentorship and office space.
Mexico, meanwhile, has two primary advantages over Brazil. It shares the Spanish language, with most of the region; and it has close cultural and geographic ties to the US. It also benefits from three distinct cities with unique tech communities. This includes the country’s sprawling capital city, which is home to more than 21 million people and the National Autonomous University of Mexico, a top source for tech talent.
The Andean countries of Peru and Colombia are also top of investors’ minds. Peru’s stable economy, government-backed tech programs like Innóvate Perú, and its development bank-driven funds make it a strong option for early-stage investors. Meanwhile, Colombia is still enjoying the spoils from its $3.5billion delivery app behemoth, Rappi. Similar to Mexico, Colombia is home to four major cities, each with its own unique startup ecosystem.
In the Southern Cone, Chile and Argentina are perennial favourites: the former, for its business-friendly political environment and prosperous economy; the latter, for its larger population and for being home to both MercadoLibre and a host of the region’s most innovative blockchain fintechs. But perhaps the most interesting opportunities can be found in Uruguay, whose population of 3.4 million is one of the most tech savvy in the region. Uruguay’s government has heavily invested into its ICT infrastructure and has a world-class eGovernment agency that cuts bureaucratic impediments to doing business.
Ecommerce, fintech, and healthtech
Mercado Libre is just one of a host of Latin American ecommerce companies that have attracted major attention from international investors. Brazilian online domestic goods company MadeiraMadeira received $110million of venture funding in 2019, bringing it to more than $300m overall. Mexican online grocery store Jüsto landed a $65m Series A round in February 2021 amidst the pandemic, led by US-based private equity firm General Atlantic. With coronavirus pushing customers to shop online, experts argue that eCommerce businesses will continue to experience a strong growth trajectory in a post-pandemic context.
Fintech startups across Latin America are changing the way millions of consumers spend and save money. While 78% of Latin Americans are expected to have a smartphone by 2025, 70% are currently under-banked. Opening a bank account in many Latin American countries is notoriously tricky. Once you become a customer, the situation does not improve: banking systems across the region are plagued with long lines, minimum deposit requirements, and predatory products.
it is unsurprising that millennials are turning to tech for their banking needs…
Against this backdrop, it is unsurprising that millennials are turning to tech for their banking needs – and investors are responding. Brazil-based Nubank, for example, has received $1.5billion in funding. Offering digital banking services has made Nubank a success for consumers, achieving a Net Promoter Score of +87. This level of customer satisfaction stands in stark contrast to that of Itaú, Brazil’s largest private bank, which has a score of +14. Fintech innovation is not limited to the consumer banking sector. Mexico-based Konfío, which provides financial services for small and medium enterprises, received $100million in a 2019 Softbank-led Series D funding round.
Finally, Mitchell urges investors to watch Latin America’s burgeoning healthtech space. Covid-19 pushed countries to allow for more progressive policies on telemedicine, opening up opportunities for startups like Colombia’s 1doc3 and Peru’s Smart Doctor. Meanwhile, in a region with spotty public health services and robust private healthcare systems, startups are taking advantage of consumers’ quest for insurance. Brazil-based Alice and Chilean Betterfly have received multi-million dollar investments each from investors who are bullish on the prospect of increased consumer healthcare spending as the region heals from the pandemic.
From Guadalajara to Buenos Aires and everywhere in between, tech innovation abounds. Once seen as a place for commodities, shrewd international investors are taking note of the demographic conditions that make Latin American tech a strong bet for future growth. The rapidly rising middle class consumer base has led to a developing startup sector that is producing world-class entrepreneurs. The Covid-19 pandemic has devastated the region from both a public health and an economic perspective. But for investors who are willing to ride out any turbulence from the pandemic recovery, significant opportunities in the tech sector remain.