Regions once overlooked by the venture capital industry are racking up impressive investment totals in recent quarters. African startups, for example, were long ignored by the global VC scene, with totals for the continent’s upstart technology companies representing a fraction of a fraction of the funds made available to other regions’ next-generation companies.
But in recent years, investment into African tech companies has surged, and just today, investment company Juven announced plans to boost its investments in the continent, while Google set aside $50 million to do the same.
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Latin America’s startup scene is similar to Africa’s in terms of attracting outside interest, but a few years further down the road. Reporting that SoftBank will put another $3 billion in the area’s startups was news, sure, but not a shocking announcement last month. The Japanese conglomerate and investing powerhouse had already put $5 billion to work in Latin America.
Ahead of Q3 numbers that will update our thinking about the current state of the Latin American startup market, we wanted to dive into the structural forces in the region to better understand the impending numbers. So, The Exchange reached out to investors in Latin America for a little behind-the-numbers digging. We got a hold of Magma’s Nathan Lustig, Atlantico’s Julio Vasconcellos and ALLVP’s Antonia Rojas to flesh out our thinking.
We’ll talk a little bit about what is driving capital flows in Latin America, the pace of investing and whether it can stay high, why China is part of the conversation and where there may yet be overlooked companies that investors are missing thanks to institutional blind spots. Let’s go!
What is driving the money?
Latin America boasts 26 unicorns as of August, according to Atlantico’s 2021 digital transformation report, a must-read that serves as a backdrop for today’s piece. As Vasconcellos clarified for us via email, the number reflects the fact that eight new unicorns were minted in 2021. For comparison, there were only four unicorns in the region in 2018 — and it wasn’t necessarily obvious at the time that several Latin American companies would go on to list their shares publicly, both in the U.S. (VTEX, dLocal) and in Brazil.
Another interesting data point is that the cumulative market cap of Latin American unicorns has already more than doubled. According to Atlantico, their total post-money valuation went from $46 billion in 2020 to $105 billion as of August 2021.
This is also reflected in funding tallies: Per Crunchbase data, venture capital funding into the region’s unicorns reached $10 billion this year to date. Commenting on the data, SoftBank Group International CEO and Latin America champion Marcelo Claure wrote that “it ratifies the potential of Latin America and the incredible effect that the SoftBank Latin America fund has had in the region.” And there’s more to come: During TechCrunch Disrupt, Claure said that SoftBank can be expected to deploy between $8 billion to $10 billion of capital into Latin America in 2022.
Perhaps even more interestingly, unicorns are driving a self-reinforcing trend, ALLVP’s Rojas told TechCrunch. Highlighting Uber’s acquisition of ALLVP’s portfolio company Cornershop, she wrote that the deal “generated a virtuous circle, in which investors all over the world increased their confidence in our region and in the fact that it’s possible to realize amazing returns while changing the way traditional industries operate.” Vasconcellos concurred, noting that “the boom in unicorns and IPOs coming from the region … shows that success is possible and attracts more global capital.”
But taking a step back, what is driving these cycles is what the Atlantico report refers to as “the second wave” of digital transformation. In a guest post on TechCrunch, Vasconcellos explained it as the “second- and third-order effects of the [COVID-19] crisis,” which has accelerated the ongoing “continentwide tech expansion to a pace beyond any projections.”
While the pandemic played the role of an accelerant in digitalization, it also drove structural changes. For instance, the expansion of e-commerce “required a significant evolution in the quality and scale of the infrastructure provided by logistics, payments and e-commerce platform companies,” Vasconcellos noted. And on a broader level, the region’s structural issues have typically represented opportunities for startups leveraging technology to address them.
Can the pace keep up?
Structural tailwinds are useful, but not an entire answer to the question of whether the Latin American tech scene will maintain its current levels of investment. To understand that question, we need to consider the region’s startups in two large buckets: early and late.
It’s clear that late-stage startups in Latin America are doing well, given the unicorn data we just covered. But what matters for future investment into late-stage upstart tech companies — the sorts of startups that can absorb mega-rounds in time — is the pace at which early-stage activity is occurring; the more early-stage activity that the region can engender today, the more chances the area has at fostering tomorrow’s unicorns and IPOs.
Atlantico’s Vasconcellos has good news regarding the future generations of tech startups that could raise huge rounds in time. He said that in his more than 10 years of investing in early-stage startups in Latin America, he has “never seen early-stage be more active in terms of number of new companies getting started but also the quality of the teams.”
The investor added that his firm has “seen qualified deal flow increase by over 70% year-to-date, which is unprecedented.” (Atlantico has a sister fund that invests earlier, providing regular deal flow for the fund.)
That final data point doesn’t merely hint at the possibility of maintaining today’s level of startup investment in Latin America, but indicates that there could be an acceleration in time; if there are even more early-stage startups today with a chance at becoming big, even more late-stage funds may be needed — or perhaps absorbed — by Latin American startups in time.
So, yes, the pace of Latin American investing can be maintained. It may even accelerate.
Geopolitical headwinds?
One of the key trends highlighted by the Atlantico report is that due to geopolitical factors, “China increased its influence and footprint in Latin America through trade, investment and the growth of its tech companies.” The former is visible in the role that China played in the COVID-19 vaccine rollout in many Latin American countries, and the latter in the fact that “TikTok, Shopee and Xiaomi all became household names in the region.”
According to Vasconcellos, there are reasons to think that Chinese tech companies and investors’ leanings toward emerging markets such as Latin America will persist, “not only because growing in the U.S. is harder than historically (due to political reasons) but now because growing domestically in China has also become more complicated.” In addition, thriving Latin American copycats of popular Chinese startups also show the similarities in consumer behavior. This can also explain why companies from elsewhere in Asia have reportedly shown a growing interest in the Latin American market.
Still, Vasconcellos expects the U.S. to continue “to be the dominant foreign player in the region.” A changing regulatory structure in China could help keep the United States ascendant if the Asian country’s government cracks down on investments by its leading technology companies, historically strong generators of deal flow.
Is there room left for deals?
Given the fierce competition for hot deals in mature startup markets, The Exchange has expected that savvy investors would look further afield for breakout startups in areas where there is less of a brawl for allocation. In theory, markets where internecine fighting among investors is lower could yield more attractive investment pricing and, therefore — perhaps — stronger returns over time.
Returning to our first words today, African startups are seeing rising investment totals not thanks to benevolence, in our view. They are picking up more capital because they can generate large returns at lower prices than startups in other, more developed technology markets can offer.
Good news for anyone looking to put capital to work in the global startup market: There is still alpha to be found in Latin America. According to Magma’s Lustig, there is really a two-part startup investment market in the region. Here’s the investor, describing a market where credentials can drive valuations:
The other big trend [in Latin America] is that the funding gap between elite status founders and non-elite status founders is getting bigger. U.S. investors seemingly would rather invest in “elite” startups at $100 million [to] $200 [million or greater] valuations in extremely early-stage companies with great teams and little traction instead of backing operators with significant traction who didn’t go to top schools or come from [investment] banking or consulting.
Investors willing to bet on founders that lack the sort of credentials that folks can lean on to provide implicit diligence may be able to drive outsized returns.
There are other blind spots. Lustig noted that for “the vast majority of startups,” if they are not “in Brazil or Mexico,” they will effectively not “exist to U.S. investors.” He noted some exceptions, including certain founders in Colombia, but cautioned that “not much has changed outside of the big two countries, especially if you’re an underestimated, ‘non-elite status’ founder.”
That means that there is still a bundle of founders in the Latin American market that are not benefiting from the funding boom, which implies that there is more capacity to absorb capital in the region than is currently being taken advantage of.
Perhaps investors will look more broadly for investment opportunities in Latin America. If they do, it would be good news for early-stage founders located there. Which, in turn, could lead to more unicorns and mega-rounds. Provided, of course, that capital remains plentiful.
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