With Brazil Leading The Way, VC Investment In Latin America Has More Than Doubled

2017 was a record year for venture capital investment in Latin America, and the first quarter of 2018 saw three new Latin American unicorns born. So what’s driving a record year, and a big start to 2018, for the region? Let’s dig through the numbers and find out.

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VC investments in the region surpassed $1 billion last year for the first time, spiking by 128 percent over the $500 million seen in 2016, according to recent data from the Latin American Private Equity & Venture Capital Association (LAVCA). Deal volume surged by 26 percent from 197 in 2016 to 249 in 2017.

Co-investing was also way up in 2017. Sixty-seven percent of VC dollars, or $633 million, were co-invested in Latin America in 2017 compared with $203 million in 2016.

Brazil was the largest recipient of funding in 2017, with Mexico coming in second. Brazilian startups accounted for 45.4 percent of reported deals closed in 2017 with $859 million invested across 113 transactions, up 208 percent compared with $279 million raised across 64 deals the year before.

Mexican startups accounted for 23.7 percent of the venture dollars raised in the region last year. Specifically, companies in Mexico raised $80 million across 59 venture deals in 2017, down from $130 million raised across 73 deals in 2016 (but we should point out that 2016 has been a particularly strong year for Mexico VC.)

Latin America is known for financial challenges, so it’s not shocking that fintech startups make up the biggest chunk (29 percent) of deals financed in 2017. But regarding fastest-growing sectors, marketplace and transportation startups were among those that saw the biggest surges in venture dollars raised. Marketplace startups raised $342.2 million in 2017 compared to $18.2 million in 2016. Transportation tech companies raised $203.5 million in 2017 compared with just $3.4 million in 2016.

“When you look at Latin American tech startups, it’s hard to find an example of one that’s not solving a real problem or pain point,” said Julie Ruvolo, director of venture capital strategy of LAVCA. “Half of the population doesn’t have access to traditional bank cards or capital, so there’s a lot of opportunity in fintech. So if you look at the underlying problems these companies are solving—they’re huge.”

The Big Deal(s) In Latin America

Unsurprisingly, in a record year, one can expect to see record rounds. Sao Paulo-based rideshare startup 99 closed the largest publicly disclosed venture capital round to date in Latin America, raising more than $200 million in a Series C round from SoftBank, Didi Chuxing, and Riverwood Capital.

Brazil’s Movile, which specializes in mobile marketplaces and online-to-offline applications, brought in a total of $135 million in 2017 with South Africa’s Naspers and Poland’s Innova Capital making follow-on investments. The company has raised $271 million since its inception in 1998.

Grupo Netshoes is a Sao Paulo-based ecommerce platform for shoes that raised a total of $215 million in expansion capital prior to its IPO on the NYSE in April 2017.

“$100 million-plus rounds were relatively rare occurrences, but you’re starting to see more deals of this size happening,” Ruvolo said.

And so far, 2018 is turning out to be another banner year as well. In the first quarter of 2018, three tech startups gained unicorn status: the aforementioned 99 when Didi Chuxing announced it would acquire a majority stake in the startup for about $600 million; digital finance startup Nubank out of Sao Paulo when it raised $150 million in a Series E round led by Hong Kong’s DST Global; and PagSeguro via an IPO that was actually the NYSE’s biggest IPO since Snap.  Colombian last-mile delivery startup Rappi raised $185 million from Germany’s Delivery Hero, Sequoia Capital, Andreessen Horowitz, and others, in January.

For those who have invested in Latin America for some time, these events are not a surprise. They’ve been in the making “for a while,” according to Ruvolo.

“Historically, people have asked where are the unicorns in Latin America,” Ruvalo said. “To reach that size as a startup, you need access to growth capital. Historically, Latin America has not had access to growth rounds of financing and had to look abroad after a Series A round. But a lot of that is changing as we’re seeing a maturation of the local ecosystem. And these unicorns are a sign to international investors that there are companies reaching those kinds of valuations.”

Going Across The Border

One likely factor behind the record earnings and surge in activity is that 25 global investors made debut investments in the region last year, according to LAVCA. Investors such as SoftBank, TPG’s The Rise Fund, Telstra Ventures, and Rethink Education participated in a number of notable deals.

The region has also increasingly been on the radar of global tech companies seeking to expand. Giants such as Facebook, Amazon, Spotify, Netflix, Google, Uber, and Airbnb have made it part of their strategy to grow their presence in Latin America. For example, Latin America is the fastest-growing market globally for Airbnb, and Amazon launched its first-ever debit card in Mexico in March 2018. It’s also investing in data centers, logistics, and the launch of Echo in Latin America.

Brazil has also benefited in an increase in cross-border funds such as Valor Capital Group, which has its headquarters in New York but offices in Menlo Park and Sao Paulo. The firm was formed by Scott Sobel in late 2013 specifically to focus on investing in Brazil and on  US-Brazil cross-border opportunities. It raised $40 million in its first fund, which closed in 2014. Out of that first fund, Valor has invested in 14 companies in Brazil and 10 in the United States with companies that have potential in the Brazilian market.

Among Valor’s U.S.-based portfolio companies are San Francisco-based digital currency startup Coinbase, social networking site Nextdoor, and Illumio, a cybersecurity company.

Valor is about 90 percent deployed on its first fund with 75 percent of its capital going into operating companies in Brazil, according to Michael Nicklas, partner of Valor Capital. It was primarily focused on fintech, edtech, logistics, digital platforms, and “health and wealth,” he said.

From left to right: Scott Sobel, Michael Nicklas and Antoine Colaço of Valor Capital

The firm mainly invests in Series A rounds and had raised $56.8 million toward a $100 million second venture capital fund as of April, according to a filing with the SEC. Since Fund 2 launched early last year, Valor has made seven investments.

Nicklas believes Brazil is seeing a rise in its middle class, and that is in part driving some of the investment in the region. He also agrees with Rovolo that fintech is a significant sector in the region due to the nation having “some of the highest credit card interest rates in the world.” (Rates were more than 400 percent in late 2016 and early 2017.)

“Also, banks are very concentrated with the top five to seven banks controlling a significant portion of the market,” he said. “So the country is absolutely ripe for innovation in this sector, which is one of the reasons why you’ve seen companies like Nubank scaling up rapidly.”

Previously, business model innovation—where existing technology was applied to sectors—in Brazil was more prevalent.

But now startups are also focused on areas where they can address inefficiencies or can drive productivity often via a combination of cloud and mobile, according to Nicklas. The innovation that is currently being born in Brazil has the potential to go global, he added.

“The problems that are being addressed in this middle market emerging economy is more similar to the types of problems you see around the globe in countries such as China, Russia, South Africa and Turkey,” he said. “So, in some ways, the solutions being created here have more applicability around the globe than those created out of Silicon Valley.”

Nicklas believes the Brazilian market has a lot of potential even as the country struggles to bounce back from a prolonged recession.

“We think the ecosystem has matured incredibly and on many levels,” he said. “This is evident in the quality of the entrepreneurs as well as the investors that are now active in the country. The startup culture is taking root in a powerful way.”

Looking ahead, it’s clear the Latin American region is seeing more activity than ever. What remains to be seen is if it can continue this momentum in the years ahead.