Venture

2018: The Year VC In Latin America Began To Close The Gap

Nathan Lustig is a serial entrepreneur and managing partner at Magma Partners, a seed-stage investment fund with offices in the US, Latin America, and China. Follow him on Twitter @nathanlustig.

In November 2018, Brazilian delivery startup iFood raised more capital than Latin American startups raised in all of 2016. The round, which Forbes called Latin America’s largest funding round ever, was a high point of the accelerating pace of innovation in the region and confirmation of international investor interest in Latin American startups.

For the Latin American startup ecosystem, 2018 was also a year of new unicorns and new records. The first of these unicorns emerged after Didi Chuxing’s acquisition of Brazilian rideshare app 99 in January.

Hardly a day goes by now without a breaking story about a new Latin American tech deal. As international VC money pours into the region, Latin America’s tech revolution is starting to feel unstoppable. In 2010, the year I arrived in Chile, venture capitalists invested less than  US$200M in Latin American startups. In the past two months, Latin American startups have raised more than US$1B, nearly matching what Latin American startups raised in 2017 (US$1.1B).

We are witnessing an unprecedented pace of acceleration. And as funding rounds increase in size and exits become more common, Latin American startup valuations are also starting to rise. Startups that were founded in the early-2010s are now reaching maturity and starting to generate returns. As the region begins to attract more capital and produce more success stories, a few key trends in Latin American venture capital are emerging.

Big Exits Fuel Local Markets

Many influential VCs in the United States—think Andreessen Horowitz, Founders Fund, or Greylock Partners—are led by former entrepreneurs who cashed out during their huge exits. With few exits, the Latin American ecosystem has lacked a diverse range of local angel investors and VCs with startup experience who can give back to the next generation of entrepreneurs. However, as the number of exits rises, we are starting to see this change.

The US$225M Walmart acquisition of Cornershop in September, 2018, generated headlines across the U.S. and Latin America. For now, Cornershop’s founders Daniel Undurraga and Oskar Hjertonsson are still operating the startup independently with help from Walmart to grow their brand. It’s likely that these entrepreneurs will use the exit to give back to the local Latin American e-commerce ecosystem, having worked with many employees-turned-founders during their time at Clan Descuento and Groupon LatAm. The Cornershop founders already invested in one of their previous team members’ startups, Babytuto, just a few months after the news broke of the Walmart acquisition.

Similarly, the founders of 99, Ariel Lambrecht, Paulo Veras, and Renato Freitas, joined forces with other Brazilian entrepreneurs to start Canary, a US$160M fund that invests in Brazilian startups at the Seed and Series A stage. This year 99’s founders also launched Yellow, a dockless bike share company that raised the region’s largest Series A round ever.

Finally, the US$138M acquisition of Mexican e-commerce startup, Linio, by one of Latin America’s biggest retail brands, Falabella, was a sign that e-commerce startups are doing well in Latin America. Linio’s founders, Antonio Nunes, Bernardo Cordero, Fernando D’Alessio, Pedro Freire, Ulrick Noel, and Wilson Cimino, have gone on to build other startups such as Mercadoni and Tricae, or to found their own VC firms such as STARTegy Venture Builder, D Capital Partners, and Everdeen Capital.

Until recently, large retailers ignored nascent e-commerce startups that were competing for market share. This acquisition, along with the Cornershop exit, showed that e-commerce startups are a genuine threat to the way traditional retailers do business and that retail giants must innovate by partnering with startups to improve their services or risk falling behind.

Strategic Support From China

In both the private and the public sectors, China is swiftly increasing its support for Latin America. Chinese expertise in financial technology, as well as its influence in developing markets around the world, is turning China into a strategic partner for startups and entrepreneurs in Latin America. Most of the Chinese investment in Latin America so far is going to Brazil, although this is likely to spread across the region as Chinese investors become better-acquainted with the local tech ecosystems, most likely to Mexico.

Beyond the Didi Chuxing acquisition of Brazil’s 99 in January, Chinese companies began investing heavily in Brazilian fintech startups, specifically Nubank and StoneCo, this year.

Nubank is one of the world’s largest digital banks, with over five million customers in Brazil using their mobile credit cards and wallets. In February 2018, Nubank became Brazil’s second unicorn of the year with a US$150M investment led by DST Global.

In October 2018, Chinese giant Tencent strategically invested a further US$180M, bringing Nubank’s valuation to US$4B. The Tencent investment goes beyond the money; Nubank will now receive mentorship from the mobile giant that owns and manages WeChat and its internal payments processor WeChat Pay.

Brazilian payments processor, StoneCo also received Chinese support during its October IPO. StoneCo creates small payments processing systems for small businesses in Brazil and raised over US$1.5B in its IPO, boosting its market cap to US$9B. Ant Financial, the financial services company backed by Alibaba’s Jack Ma, committed to purchasing millions of shares when the company went public alongside Warren Buffet’s Berkshire Hathaway.

Deals Grow As Market Matures

In September, Latin American startups broke records across the board. Rappi became Colombia’s first unicorn with a US$200M investment from US VCs. Mexico’s electric scooter company Grin raised US$28M in the region’s largest ever Seed investment soon after graduating from Y Combinator. Grin then went on to raise a further US$45M in October at a rumored US$160M+ valuation as it expanded into the Brazilian market. Also in September, 2018, Brazil’s bike-share startup, Yellow, raised US$63M.

In addition to these deals, the Association for Private Capital Investment in Latin America (LAVCA) counts seven new public, private, and acquired Latin American unicorns in 2018, most of which came from Brazil. While these massive deals made international headlines, even smaller venture capital investments are creeping up in value.

The last three months revealed over 16 funding rounds in Latin American startups that ranged from US$1M to US$111M, many led by international investors. CargoX, Uala, Skydrop, UBits, U-Planner, Jooycar, Brex, and Loggi were among the companies that have benefitted from the recent boost in VC interest in Latin America.

Global Accelerators Look To Latin America

As VCs begin to invest more heavily in Latin American startups, international accelerator programs are also taking more interest in the region. At least six Latin American startups passed through Y Combinator this year, including Fintual and BrainHi, firsts for Chile and Puerto Rico, respectively. MassChallenge, Techstars, and Startupbootcamp also expanded their investments in Latin American startups this year.

Latin America’s Promising Future

Since the start of 2018, support for Latin American startups increased at every level, from early-stage to late-stage investments. The boom in VC investment in Latin America is creating a positive cycle of success for the region. While investment is rising, valuations in the region are still low compared to their counterparts. There is a lot of opportunity for investors to participate in good deals that help entrepreneurs solve real problems; the region still suffers from significant underinvestment. VC investment in Latin America may be growing, but the ecosystem is still just getting started.

iStockPhoto / fotopoly

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