After decades of exponential growth for internet startups in the United States, John Luttig’s article, When Tailwinds Vanish, predicts imminent change. He wrote that internet penetration is nearing its peak, and the US market is reaching saturation in many categories, which could lead to a substantial culture shift in startup operations and investment and slower growth for new companies fighting it out in concentrated industries.
Latin America, however, has not yet reached that point and remains an attractive and fast-growing market for technology companies. Regional internet penetration is high, with 73% of South America’s population accessing the Internet last year, the highest regional penetration rate in 2019. The region has the fourth-largest online market, and two countries in Latin America rank in the top 20 world economies by GDP: Brazil is #9 and Mexico #15.
Local tech talent is also on the rise, attracting global tech giants like Uber, Facebook, and Airbnb to pursue large user bases and establish headquarters in the region. The increase in Latin American talent and the high rate of connectivity is bringing the region into the tech spotlight. Many of these tech giants now use Latin America as a testing ground for new products before launching them in other markets. Their presence further incentivizes tech education and decreases brain drain from the region.
The local tech scene has also grown significantly in recent years. Since 2016, investment in Latin American startups increased from $500M in 2016 to $4.6B in 2019. Over that same period, Latin America produced 17 startup unicorns, establishing its presence in the global startup scene.
Historically, Latin American business is built upon in-person interactions and interpersonal relationships. With the onset of COVID-19 and strict quarantine measures throughout the region, the traditional approach is no longer an option. Because of lockdowns and businesses that have not completed their digital transformations, COVID-19 is throwing a wrench in regional growth projections. The Economic Commission for Latin America and the Caribbean predicts one of the worst regional economic contractions in history, putting micro, small and medium enterprises relying on traditional infrastructure in an especially vulnerable position.
For tech companies, however, this could mark a cultural shift that will create an increasingly large market for new ventures, especially in the following industries.
Fintech
Latin American financial institutions have a reputation for being risk-averse, restricting access to capital for individuals and small companies. Fintech provides alternatives to the financing options offered by traditional banks, making it easier and faster to access funds. With many people and companies struggling due to COVID-19, the demand for alternative financial services is increasing, and fintechs are responding to that need.
Last year, fintech was the highest-funded startup industry, receiving 31% of the region’s venture capital. Now that the pandemic is restricting in-person transactions, the need for digital financial access is even greater.
Investors are responding accordingly; fintech was the most active sector for VC investment in May 2020. Fintechs are also attracting the attention of regional governments. Public health guidelines reinforce the need for digital finance, and governments throughout Latin America are creating federal aid programs in partnership with fintechs to provide accessible and flexible digital financing options to the broader public.
Whereas in the US, Europe and China, most people have access to financial services, 70% of Latin America doesn’t have a bank account, the growth potential for fintech is enormous, and the industry will continue to expand its reach for years to come.
Software-as-a-Service (SaaS)
Whereas much of the US market has deep SaaS penetration, Latin America still has significant room for growth, which may be solved by local solutions. Its popularity was already growing in the increasingly digital business world in Latin America, and is now accelerating.
SaaS solutions are helping SMEs work around physical payment, logistics, and other operational challenges despite social distancing requirements. Companies that want to stay in business are forced to transition their customer relationship and supply chain management into the digital sphere. Managing a remote workforce became a necessity almost overnight, and software-based options for human resource management, web conferencing, and messaging have become essential for business success. As a result, experts predict an industry compound annual growth rate of 28% between 2019 and 2026.
E-commerce
The Latin American e-commerce scene is one of the fastest-growing in the world and the leader in mobile commerce with 36.3% growth, beating the global average by nearly 10%. Even so, the local e-commerce market is still developing, with e-commerce making up only 4.2% of retail spending in Latin America in 2019.
Since the onset of the pandemic, regional e-commerce skyrocketed, propelled by quarantine measures and digital payment options. In Q1 2020, 13 million consumers made purchases online for the first time. In May, the downloads for many shopping apps increased 43% compared to last year, and local e-commerce giant, MercadoLibre, reported year-over-year revenue growth of 71% for Q1.
Retail e-commerce is now expected to grow nearly 20% this year, an increase of 7% from predictions made at the end of 2019.
Edtech
Underlying the preceding startup sectors is a growing edtech industry. The need for local tech talent created an opportunity for edtech services, making Latin America the fourth largest consumer of edtech in the world. With many people restricted to their homes, online education platforms are seeing a surge in users, with some user bases growing as much as 40% in recent months.
Like businesses and banks, schools have been forced to close their doors and are seeking partnerships with tech companies to offer remote education for their students. Companies shifting their business models are also looking to edtech providers to help train employees. With the increasing demand for digital education options on all levels, regional edtech revenue is predicted to reach $3B by 2023.
In recent years, the startup scene in Latin America reached new levels. However, the transition to a more fully digital business environment was still slowed by in-person business traditions, lack of trust, and risk aversion. COVID-19 is forcing companies in most industries to adapt their approach to business, implementing digital tools as a requirement for survival. This will be the tipping point, leading to a new wave of Latin American startup growth in the coming years.