Understanding the VC landscape in the LatAm Ecosystem

Latin America (LatAm) is home to more than 600 million people across 20 countries and with a combined GDP of $ 5.7 trillion, and these days it is gaining notoriety in the global VC landscape. This notoriety is driven mainly by the success stories of its 14 unicorns. Companies that provide trust in the region and nurture the necessary talent for ventures to scale. Here is a snapshot of who the unicorns in LatAm are and where they come from:

This graph does not contain the companies for which there has already been an exit ( i.e. Auth0, Mercado Libre)

With that in mind I would like to explore the other side of the equation, the venture capital side, in this insight, and put forward some arguments for why you should invest in LatAm. So let’s start with a basic question:

Who are the main players in the LatAm VC ecosystem?

I classify the LatAm current investors into two types: The Locals and The Explorers.

This graph does not include all investors in the region but only the most active players.

1. The Locals:

The proliferation of venture capital firms made in and for LatAm, goes back to 2005 from the opening of Monashees. However, I would also like to make special mention of KaszeK, a fund started by two former Mercado Libre founders, Hernan Kazah and Nicolas Szekasy, that has had remarkable success and influence in the region. Just recently, Nicolas Szekasy became one of the first Latin American investors to be included in Forbes Midas List 2021. KaszeK is currently on their fifth fund and has a pretty stellar record with 7 of the region’s 14 unicorns in its portfolio. Most recently there was an announcement of them fundraising $ 1 Billion, which is distributed in the fifth fund and an opportunity fund.

Local funds made the first bets in the Latin American startup proposition: they have helped shape the ecosystem and also have deep know-how of what works in the market. These reasons define their competitive edge and still make them key players in the future of the LatAm ecosystem.

The distribution of the main local funds is as follows:

Information extracted from Pitchbook

An interesting fact is that although many funds claim to invest at Seed and Series A level, it is still challenging for startups to raise. According to many local founders, it seems that the requirements in LatAm to raise Seed are especially high compared to other geographies (i.e. having a built MVP, revenues and good hints of profitability). Thus, there are still very few startups that make it into the Series A league. This could be an opportunity for funds willing to provide financing at the pre-seed and seed stages (e.g. QED Investors has recently launched a $ 12 m seed fund focused exclusively in LatAm, First Check Ventures allows individuals to invest in Latam opportunities through angel list, and MrPink VC is currently raising more funds to fund overlooked opportunities).

Another feature of the Latin American ecosystem is that we are starting to see entrepreneurs giving back to the ecosystem’s growth through angel or syndicate investing. Examples include founders like David Vélez from Nubank, Florian Hagenbuch from Loft, and Andres and Daniel Bilbao from Rappi and Truora respectively. These entrepreneurs have obtained backing from global VCs, and been able to scale their ventures significantly. Now they are looking to support the startup ecosystem by reinvesting some of their own money, and making the rounds more competitive.

Furthermore, it is also important to mention that several funds have strong ties with US-based investors, which provides additional firepower through co-investments. This leads us to the next type of investor.

2. The Explorers

The explorers are international funds that started making some early bets in LatAm. As the ecosystem gains momentum, many of them have doubled down on LatAm and/or are leading larger rounds in the region. Special mentions within the explorer category go to Softbank, Endeavor, Y Combinator, 500 startups, and QED Investors. These funds have specialized teams for the region and/or have 5+ deals in the region. 500 startups in Latin America actually has all Mexican LPs and Softbank particularly has made bold bets on LatAm. In 2019, Softbank set up the $5 billion fund, which was a game changer for the ecosystem.

However, many more funds have some presence in Latin America. The following image showcases the presence of international funds according to ALLVP by 2019:

Extracted from ALLVP Research

As it can be seen from the list, most international funds that have invested in LatAm are based in the US, for two reasons:

• 🌎 Geographical proximity: LatAm and the US are both located in the Americas; the biggest VC hub on earth, San Francisco, is only 5 hours away from Mexico City, one of Latin America’s tech hubs. Geographical proximity greatly contributed to VC firms feeling comfortable in the pre-COVID days, which meant that Silicon Valley investors could meet and see entrepreneurs in their market (e.g. Mexico) in just a few hours. Now, with remote having become a much more common way of working, it is likely that geographical proximity will not be such a big contributing factor to making deals, but it has certainly paved the way.
• 💲Size of the fund: The average AuM of a Latin American fund is around $ 50 m, allowing them to complete between 5 to 10 deals per year. However, the US funds mentioned in the previous list have at least three times higher AuM. Thus, investing in Latin America, regardless of the stage, does not constitute a sizable percentage of their AuM and could encourage them to take calculated risks on many startups to test the market.

According to Crunchbase News, co-investments between global and Latin American investors are on the rise. 37% of the total US$4.6 bn VC dollars were deployed via a co-investment involving at least one Latin American investor and one global investor.

I expect this increase in investments in LatAm to continue, since explorer funds can benefit greatly from the local’s network and expertise.

This increasing collaboration will help support the momentum in the region. Furthermore, as interest in LatAm increases, I predict that in the near future we will see more interest from funds based in Asia and Europe. This will continue to have a positive net effect for the startup ecosystem, entrepreneurs and local funds, due to the following reasons:

• Follow-on capital: As Latin American startups mature, need follow-on capital to grow. Most local funds cannot support startups beyond Series B, and we expect this to become a limiting factor soon. It is critical that we continue to attract international investors that can support entrepreneurs with capital until their exit.
• Relevant scale-up knowledge: One of the main value-adds of a fund is their expertise and network to support founders on their journey. Latin America has very few scale-up stories yet, and can therefore benefit a lot from investors that supported founders throughout their path to an IPO or an acquisition. These investors can facilitate introductions to specialists and founders that have faced similar challenges previously, thus improving the startups’ chances of success.

Why I invite you to take a closer look at LatAm

As explained throughout this insight, the opportunity to invest in exceptional businesses in Latin America is large. LatAm is home to more than 600 million people across 20 countries and with a combined GDP of $ 5.7 trillion. In terms of VC opportunity, the capital allocated to the region has had an increase of over 6x the total amount invested, and 14 unicorns over the last five years.

What is more, we are starting to see exits in Latin America, something that not too long ago was unthinkable. The most recent developments in that space have been the acquisition of Auth0 for $6.5 billion by Okta in 2021, the acquisition of VivaReal/ZAP by OLX for $642 million, and some recent consolidation in the market from players such as Delivery Hero’s acquisition of Glovo’s LatAm’s operations in 2020.

Another reason why I would highly recommend looking into LatAm as an investor is the digitalization stage in which the region is. Latin America is a region that to this day had had limited digitalization, a proof of that is the very well articulated article by Angela Strange on why Fintech is booming so much in LatAm, which also mentions examples such as in Mexico, more than 90 percent of payments are in paper money and in Brazil, it’s around 70 percent. Technology penetration (as a % of the GDP) has been growing rapidly (65% yoy) in the region, as has now been catapulted by the pandemic. Furthermore, in contrast to other “developed” regions, there are few legacy structures in place to implement many of the technological changes. This reduces the risk of refactoring the architecture, lowers the switching costs for users to adopt new technology, and gives the region a unique opportunity to leapfrog in digital change. This phenomenon is not only present in fintech but in many other industries.

Additionally, by investing in LatAm investors and LPs get the opportunity to combine impact with fantastic returns, as many of the Latin American entrepreneurs are currently building services that will help improve simple needs in the lives of consumers such as access to credit, healthcare, education and nutrition. Startups such as Creditas are providing access to credit to Brazilians in a more efficient way, whilst Sofia is improving access to healthcare and insurance for Mexicans and Platzi focuses on providing access to high-quality education and opportunities to everyone in the region from their own homes. On that note, I would also like to add that despite all the fintech buzz over the last years, as a region Latin American consumers still have a long way to reach financial services adoption (in places like Peru, 49% of the population is still unbanked), which only means that the opportunities continue to be there for the ones who choose to take them.

Let’s close this insight by sharing a recent tweet from Harry Stebbings, podcast host of the 20 Minute VC and recently found fan of investing in LatAm:

If you are curious about the LatAm ecosystem, feel free to reach out, I am more than happy to share our insights and/or engage in a discussion.

💁🏽‍♀️ You can follow my journey and more musings on Twitter and connect with me on LinkedIn.

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