As Billions Flow Into Latin America, Its Startup Scene Scales

So far, it’s been a good year for Latin America when it comes to venture funding.

In March, SoftBank Group announced plans to launch a $5 billion innovation fund in Latin America, or what it described as “the largest-ever technology fund focused exclusively on the fast-growing Latin American market.” At that time, SBG had committed $2 billion to the fund, and said it would serve as its general partner.

Over the course of the year, it has become increasingly clear to those of us paying attention that Latin America has effectively become the new China when it comes to venture investing. SoftBank’s interest aside, overall there’s been a significant uptick in startup and venture funding activity.

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In an attempt to quantify that uptick, we reached out to LAVCA, the Association for Private Capital Investment in Latin America.

In the first half of 2019, VC investment in Latin American startups totaled $2.6 billion across 160 transactions, according to LAVCA. That compares to just under $2 billion raised in 463 transactions in all of 2018. This tells us a few things. One, venture funding is ramping up and we have the numbers to prove it. Secondly, rounds are getting bigger, indicating the market is continuing to mature. More money raised over fewer transactions means larger dollops of cash are being doled out.

When you compare these numbers to 2016, though, they are even more impressive. In that year, Latin American startups raised a combined $500 million. To put that in perspective, venture funding in the region in the first half of 2019 totaled more than five times the amount raised just in all of 2016.

Since 2017, the region has seen a noticeable uptick in rounds over $50 million and $100 million, noted Julie Ruvolo, director of venture capital at LAVCA.

“Around the end of that year is when the pace of $100 million-plus rounds started picking up, and we started seeing unicorns in the region,” she told Crunchbase News. “But in general, we’re seeing strong activity in the early stage, from seed all the way to growth capital.”

Indeed, there’s been no shortage of big deals as of late, many of which we reported on, including Colombian on-demand delivery unicorn Rappi raising $1 billion in April, Gympass netting $300 million in June, and real estate startup QuintoAndar raising $250 million in a Series D that gave it unicorn status.

We’re also seeing more deals involving U.S.-based investors. For example, Fifth Wall Ventures, a Los Angeles-based firm focused on real estate technology investing, put money in both Loft’s $70 million Series B and Loggi’s $150 million Series E. Other active U.S.-based investors in the region in H1 include Andreessen Horowitz, Riverwood Capital and GGV Capital.

To LAVCA’s Ruvolo, the increased interest from global investors is welcomed and not entirely surprising to the local investors.

“They are investing in startups the local players have been backing for the last five or six years,” she said. “The general mentality is that Latin American startups are more cash efficient and cash conscious. They had no choice. Only recently have they even had the ability to think about a Series B.”

Let’s Break It Down

Historically, Brazil has been the largest recipient of venture dollars in Latin America. But in the first half of 2019, Colombia actually edged past Brazil in terms of venture dollars raised, largely in part due to Rappi’s $1 billion Series E.

Specifically, according to LAVCA, Colombian startups netted about $1.06 billion in venture funding combined over 13 transactions. Meanwhile, 88 Brazilian startups raised $989 million across 88 deals. Mexico was the next largest recipient of venture funding dollars, with 34 startups raising $310 million.

Collectively, the three markets made up 91.9 percent of the dollars invested and 84.9 percent of the deal count during the first half of 2019, according to LAVCA.

While Brazil was still home to the majority of deals (55.3 percent), this time Colombia (mostly Rappi) led the region, capturing 41.3 percent of VC investment dollars in H1 2019. Brazil was close behind, with 38.5 percent, as you can see in the chart below:

Investors Weigh In

Buenos Aires, Argentina-based Kaszek Ventures was founded in 2011 and has been actively investing in Latin America since its inception. (The firm recently closed on two funds totalling $600 million, as we reported here.) It’s backed dozens of companies in the region, including QuintoAndar, Loggi and Nubank, among many others.

“We’ve seen how the startup scene is evolving over the years,” said Nicolas Szekasy, co-founder and managing partner of Kaszek Ventures. “Every year it’s one step ahead. In the last few years, in particular, we have seen the pace accelerating and an increase in quality of the founding teams. There’s more depth now.”

I told him that it looked to us that Latin America is the new China when it comes to investor interest. He agreed there were similarities.

“When you look at the macro numbers in terms of the population and internet penetration, 4G and broadband, everything is ready for an acceleration,” Skekasy told me. “Latin America relative to China on a consolidated basis is similar in size on most metrics. China first developed a capital flow and we think a similar process is happening now in Latin America.”

Juan Luis Palma Dominguez, a regional director for Latin America for Capria Ventures (a Seattle-based accelerator for fund managers), believes the region has both “a lot of social need and wealth.” He is also impressed by the increased number of global investors including Berkshire Hathaway, Goldman Sachs, Sequoia, China’s Ant Financial, and Andreessen Horowitz that are putting money into the region.

His firm’s network works with nine local network funds in Latin America to co-invest in companies in Brazil, Central America, Colombia, Chile, Mexico and Peru.

“We realized people raising money in emerging markets were having trouble fundraising and were mainly on their own,” he said. “So we invest in fund managers and co-invest in companies with them. We believe those on the ground in those countries know better how to source good deals that will yield good financial returns.”

Illustration Credit: Li-Anne Dias