As The Tech Boom Continues, VCs Increasingly Look To Latin America For Returns

While venture funding in Latin America has grown steadily over the past few years, the amount of money raised by startups in the region in 2016 remains dramatically under U.S. funding totals.

But the gap may be narrowing – albeit slowly – thanks to increasing investor interest as Latin America grows more tech savvy.

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While funding in Latin America dipped some in 2016 (mirroring the global trend) to $500 million according to the Latin America Private Equity and Venture Capital Association (LAVCA), it was still up significantly from the $143 million raised there in 2011. The number of deals made in 2016 – 193 – was also a record for the region. But that’s still far lower than the $76 billion raised in the U.S. in 2016.

Julie Ruvolo, director of venture capital for LAVCA, believes there’s great potential in Latin America for investors. The fact that just $500 million of venture money went into the region last year is a prime example of its untapped potential, Ruvolo claims.

“Latin America is an undercapitalized market when you look at the amount of venture going into it relative to the size of the digital market in formation,” she told Crunchbase News.

A growing number of VC firms agree, including the recently formed LEAP Global Partners. Earlier this month, Goldman Sachs alumni Roman Leal and Pablo Perez III launched Palo Alto-based LEAP to invest in technology companies with Latin American founders based in the U.S. or Mexico. So far, the firm has raised $10 million of a targeted $15 million fund and invested in four companies —PayStand, Listo Financial, Insikt, and Wizeline—three of which are in the fintech sector.

LEAP describes itself as “stage agnostic” but does plan to focus more on seed and Series A rounds.

“We believe that we are at the beginning of an important secular growth trend of Latinx led companies,” said Leal, managing partner of LEAP, who is of Mexican and Salvadorian descent. Perez is of Puerto Rican and Filipino descent.

Latin American Startup Interest Grows

LEAP is following in the footsteps of other firms who have recognized what Latin American startups have to offer. New York-based Valor Capital focuses on Brazil and US-Brazil cross-border opportunities. It also has offices in Menlo Park and Rio de Janeiro. Portfolio companies include Descomplica, Gympass, Guiabolso, Sontra, Stone,

Coinbase, Nextdoor, and Udacity.

SV LatAM’s partners are located in San Francisco and Mexico City. The firm has invested in several startups including Ares Materials, PayClip, and Muchi Corp.

San Francisco-based Lumia Capital has invested in six Brazilian startups over the past two years, and plans to keep investing in the region. Portfolio companies include CargoX, Instacarro, Meliuz, Trocafone, Pitzi and Quiero Education.

Joel Ayala, a principal at Lumia Capital, told Crunchbase News his firm is looking to invest in startups that are addressing a local market pain point in a way that might be overlooked by an outside party such as a larger U.S. firm going into the market.

“We look at companies that have the potential to be regional powerhouses,” he said.

And in general, Latin America is attractive because of its “very large emerging middle class,” Ayala added.

What Talent Shortage?

The talent pool in Mexico is rising, and the country has become one of the world’s largest producer of engineers after China and India.

In 2016, the Royal Academy of Engineering found that “in terms of increases in ‘engineering and engineering trades’ graduates for the period 2008 to 2012, Mexico dramatically topped the poll, with numbers tripling to 71,300 (or 0.06 percent of the population, compared with 0.04 percent in the US).” Leal estimates that number has climbed to about 100,000 today.

He believes the entrepreneurship culture in Latin America, particularly in Mexico, is growing despite “not a lot of VC funding to back it and help it scale.”

LEAP is different, he thinks, because it is the only fund that he knows of that unites US and Mexico-based investors to invest in US-based and Mexico-based companies or entrepreneurs. The firm’s investors are largely family offices that have owned some of the largest corporations in Mexico.

“In Latin America’s emerging markets, most large offices are family-owned and trying to diversify investments,” Leal said. “But most of these offices haven’t yet gotten to the point where they’re allocating a specific percentage of their portfolio to early stage VC.”

These family offices also see the benefit of being able to integrate technologies into the family enterprises where it makes sense. All the investors in LEAPS’s funds range from 25 to 40 years old.

“They have a different mindset from the patriarchs and matriarchs of the family. They care about technology and want to see it incorporated into their everyday life,” Leal said. “Many of them will be running their family office in the next three to five years.”

Part of LEAP’s mission is to unleash a lot of capital into startups owned by Latin entrepreneurs that might not have otherwise been available over the next three to five years. It also wants to serve as a bridge between startups and mentors and investors.

“Bridging Silicon Valley to Latin America,” Leal said. “That’s the vision.”

The Mobile Landscape

To LAVAC’s Ruvolo, the rise of smartphone adoption and the fact that 4G connection adoption in Latin America is “through the roof” is evidence of the potential for growth.

“When I look at some of the big secular trends, it’s clear that Latin America is a really important market already,” she said. “And it’s only going to grow more.”

Indeed, the number of people across Latin America using their mobile devices to access the internet is set to grow by 50 percent by 2020, according to a recent GSMA study. Specifically, the overall number of unique mobile subscribers in Latin America is projected to surge to 524 million by 2020 compared with 414 million at the end of 2015, making Latin America the second-fastest growing global region during this period after Sub-Saharan Africa.

Latin America seems ripe for investment. But only time will tell if more venture capitalists are ready to take the plunge and make a commitment there.

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