Notably, venture capital funding in the region quadrupled from 2016 to 2018, reaching a record $2B, which was matched in the first seven months of 2019 alone. Of capital deployed in 2018, Brazil and Mexico represented 55% and 20% of investment volumes respectively, with 25% of total investment dollars going to the financial technology sector.
Against this backdrop, it was a much simpler time to be a venture capitalist in Latin America when I joined Quona Capital’s fintech investment team in 2016. Pipeline was scarcer at the time, and there were still plenty of blue ocean verticals. Likewise, there were major funding gaps at the seed and growth stages, and “starting up” had yet to go mainstream, with many graduates from top tier universities (e.g., ITAM, FGV, USP) instead opting for more traditional careers in law, medicine, or finance.
Startup ecosystems in Brazil, Mexico, and Colombia have flourished since then thanks to the proliferation of equity and debt capital in the region. New local seed funds (e.g., Canary, Maya Capital, ONEVC) have helped fill the early-stage funding gap, prepping fledgling startups for scale, while international venture and growth funds have increased presence in the region (e.g., SoftBank, DST, Thrive, GA, Dragoneer, GGV, a16z, Point72, Ribbit, Tencent), hopefully carrying a select group of winners to successful exits.
Likewise, specialist credit funds providing venture debt (e.g., WTI, A55, SP Ventures), lending facilities (e.g., Victory Park Capital, Arc Labs, Accial Capital, Soros, Goldman Special Situations), and securitization vehicles (e.g., Captalys, Empirica) have set their sights on fintech in particular, proving instrumental in supporting alternative lenders in the region.
After years with few significant exits, recent liquidity events including IPOs (e.g., Stone Pagamentos, PagSeguro, Banco Inter), acquisitions (e.g., Didi / 99, Uber / Cornershop), and secondary sales at unicorn valuations have enabled regional funds (e.g., Monashees, Kaszek Ventures, Valor Capital, ALLVP) as well as international specialists (e.g., QED Investors, Quona Capital) to raise significant subsequent funds and invest additional capital back into the region. With these early exits, we have also seen the rise of serial entrepreneurs (e.g., 99 mafia) and a new class of hyper-networked angels (e.g., Florian Hagenbuch, David Vélez, Sergio Furio) as well.
Last but not least, with additional capital, later-stage startups are finally able to offer competitive salaries and benefits, and with startups increasingly in the public eye, management consultants and investment bankers are finally leaving in droves to join (or launch) high-flying startups offering the chance to build something new.
Against this backdrop, fintech has undergone several waves since I started investing in the region. The first wave consisted of first movers such as challenger bank Nubank and alt lender Creditas un-bundling financial services with mono-product offerings (e.g., credit cards, loans) targeting specific verticals. Similar to the evolution of the US / UK fintech markets, this un-bundling effect rippled across a variety of financial services verticals, including lending, banking, insurance, wealth management, and payments.
More recently, I have noted a second wave of players re-bundling financial services. In order to fend off competition and avoid commoditization of their core offerings, mature fintechs are expanding their product suite to become one-stop-shops for financial services via in-house product builds (e.g., Nubank’s short-term loan product), partnerships (e.g., Banco Inter’s third-party marketplace), or through acquisitions (e.g., Creditas / Creditoo, Neon / MEI Fácil). Perhaps more notable is that non-financial companies are increasingly incorporating financial products as a secondary feature to complement their core offering in order to develop new revenue streams and enhance the stickiness of their client bases.
This has proven particularly common in the enterprise SaaS (e.g., human resources, accounting / tax, e-commerce, recruiting) and real economy (e.g., proptech, logistics, mobility) spaces, both of which have large captive user bases and rich corresponding data sets ideal for developing new financial services products. Whereas fintech was historically viewed as a distinct vertical, today financial services is poised to become more of a horizontal in Latin America, in turn complicating the competitive landscape.
At the same time, geographic lines are also fading away, with well-capitalized Latin American players expanding regionally (e.g., Brazilian Nubank and Argentine Ualá launching in Mexico) and international players also starting to dabble in the region (e.g., N26 and Revolut launching in Brazil, Branch International and PayJoy operating in Mexico).
The third wave that has yet to crash ashore is the development of new underlying financial infrastructure in Latin America. It stands to reason that if picking fintech winners becomes too tricky to predict, one could instead place bets on the plumbing that powers many of them. Notably, the development of plug-and-play APIs for digital financial services will augment both the first and second waves mentioned above by enabling new fintechs to get to market faster at lower costs, as well as helping non-fintech startups to easily offer financial products like cards, loans, and more. While this category has matured in developed markets, similar players in Latin America have tended to be too early-stage or niche in focus thus far, and key enabling regulations (e.g., open banking, instant payments) are still under development.
While the playing field may appear increasingly crowded, looking at the evolution of more mature fintech ecosystems in the US / UK, it would seem we are still in the early days of the innovation cycle in Latin America.
While winners are emerging in key verticals, there is still plenty of room for new players building tailored offerings for specific demographics, as well as greenfield opportunities in smaller (and historically under-capitalized) markets such as Argentina, Chile, Colombia, and Peru. Likewise, while the B2C space is quite saturated, many B2B opportunities remain untapped.
Lastly, taking from Rocket Internet’s original playbook, many early movers in Latin America attempted to tropicalize business models from the US / UK (e.g., Gusto of Mexico, Monzo of Brazil). While this copycat strategy has proven fairly successful, we can expect more entrepreneurs to develop home-grown solutions that target country-specific pain points (e.g., Flash’s solution for vale refeição, or Docket’s alternative for cartórios in Brazil). These unique approaches are fondly referred to as “jabuticaba” by some entrepreneurs, which is a fruit that can only be found in Brazil.
In closing, the fintech revolution is still just getting started in Latin America, and I’m quite excited for what comes next!
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