Why are foreign VCs building up their LatAm portfolio?

In 2021, Latin America became one of the fastest growing regions in terms of venture capital funding in the world. According to Crunchbase, in 2021, venture investors invested about $19.5 billion in the LatAm region, more than three times the record level of 2020. This year there is a significant decrease in the number of transactions and investment volumes, which is part of the global trend.

Despite the global decline, foreign investors continue to gain a foothold in the Latin American market: a group of US investors top the list of the most active investors in Latin American startups from various categories, from accelerators Y Combinator and 500 Startups to Private Equity funds such as Riverwood Capital, hedge fund Tiger Global and influential investor in Omidyar Network. 

In turn, global corporate investors are also making some of the largest investments in Latin American startups, including Naspers, American Express Ventures, and Qualcomm Ventures. Asian investors’ appetite for Latin America is also growing. Highlights here include SoftBank and Didi Chuxing’s investment into Brazilian trading company 99, as well as deals with Tencent (Satellogic), Singaporean sovereign wealth fund GIC and Temasek (Netshoes).

However, not only giants among international venture funds, but also small venture capital firms and business angels from all over the world, who are ready to support early-stage startups, are engaged in the development of the Latin American region. Why are more and more foreign investors making LatAm part of their investment focus?

The growth of the technology sector in the region 

First, venture capital investors have turned their attention to the markets of Latin America because, in many sectors, the rapid development and introduction of technological solutions is just getting started. Now in LatAm, most technological solutions come down to FinTech, so one of the challenges for entrepreneurs is to overcome the fintech trend, find needs unrelated to financial services and offer their product accordingly. 

Latin American markets have great potential for B2C services, where there is no red ocean yet, and there is an opportunity to take a leading position. A good example of such opportunities is the EdTech industry, which is already showing the potential to be the next FinTech in LatAm.According to Holon IQ, at the end of 2021, there were 1,578 EdTech companies in the region that created more than 4,500 jobs. 

Nearly $500 million was invested in edtech in the region last year, more than 6 times the average for the previous five years. For example, one of our portfolio companies, EBAC Online, entered the Brazilian market in 2020 at the start of the pandemic, and now has 60,000 customers in four countries and continues to grow rapidly. 

On the one hand, this industry is particularly driven by high unemployment and low wages. On the other hand, due to the growth of the innovation economy, tech companies need more IT specialists, and employers are ready to offer a good level of wages.

Other growing sectors that can quickly spread to local markets are eCommerce, ultra-fast grocery delivery, and startups focused on products to improve mental health. LatAm is also a good springboard for new unicorns among local B2B IT solutions, particularly SaaS products.

Technology in media, sports, and entertainment (including video games and streaming) is expected to grow exponentially in Latin America shortly. In many Latin American countries, people are fanatical about sports. And this is a competitive business, where digitalization, VR technologies and gamification create opportunities to be one step ahead of the competition. The media and content creation industries are rapidly evolving along with the growth of the middle class. FoodTech and AgroTech are also promising fields, as Latin America has 38% of the world’s arable land.  

Potential for rapid scaling to neighboring markets

An important success factor for the growth of companies is the ability to scale in several countries simultaneously. Projects with high potential appear on the market, and they need to cover new regions quickly. It is important not to stay too long within the local home market.

International investors can help Latin American startups  go beyond and have a broader vision of the world. They’ve already worked with other portfolio companies that conquered new regions, and their experience and vision  can help startups to strengthen their teams, and attract larger investors for the next round. International investors with experience in growing portfolio companies and significant connections can help startups in emerging markets reach their milestones quickly. 

LatAm attracts talent from all over the world

Latin America is attracting talented and experienced entrepreneurs because there are still many niches where, in comparison to other countries, the supply of products and services does not match its demand.

An interesting number is that 90% of engineering graduates in Brazil aspire to become entrepreneurs or join a startup, and very few want to become bankers or corporate managers.

In addition, for several years now, we have noticed the phenomenon of immigrants running startups in Latin America. Domestic VC players are likely to underestimate the potential of this phenomenon.

There are many opportunities in the market for early-stage investors

The largest venture funds, international companies and banks, such as Sequoia Capital, Goldman Sachs, 500 Startups, are launching local funds and support programs for Latin American startups. Funds like QED, which have been investing in Latin America for years, are generating great returns. More than 1,100 unique foreign investors closed deals in Latin America in 2021, roughly doubling the number from 2020, according to PitchBook.

However, the larger international venture investors more often provide capital to late-stage companies (95% of late-stage capital comes from global investors). As the number of startups grows in the region, so does the need to support them at early stages. And there is room for angel investments at the pre-seed and seed stages
Information from LAVCA confirms that late-stage startup investment is slowing down in Latin America, but for seed rounds and early stage startups, the total investment is still higher than in the first half of 2021.

LatAm is ripe for innovation and success stories

The Latin American market is boosted due to three factors: an increase in funding from both local and international funds, an acceleration of many market indicators amid the COVID-19 pandemic, and an increase in digital literacy of the population.

Investors are extremely optimistic about the region, as the potential market opportunities for providing services to the growing middle class in the region are huge, and there are an increasing number of experienced entrepreneurs: founders from the Valley, with experience in technology entrepreneurship, are returning to their home countries to launch startups, as well as the mafia from local unicorns launching their own projects. There are still not so many local B2C services and B2B IT services in the region, which have already flooded the traditional Western markets, making them a red ocean (in particular, in foodtech, ultra-fast grocery delivery, edtech, mobility, SaaS). If a serial experienced entrepreneur launches an already proven working business model in Latam as a new market for such a product, it can quickly lead a startup to take off.

We see the current VC downturn in Latin America as an opportunity for investors to partner with some of the best founders in the region. Since 2013-2014 we have seen some applications for delivery food and groceries in 15 minutes, or EdTech companies in the sphere of online education for adults. Also with the upskilling niche, which grew rapidly, or marketplaces that in 2017-2018 reached their peak. Founders who have already built such a business in their domestic market are launching the same business in new countries, where there are still few analogues, but big economic growth is expected due to the growth of Internet penetration and the growth of the middle class. It depends on the socio-economic structure of countries and the rapid development of the innovative economy and technology sector. We call this phenomenon cross-emerging location transfer. 

Latin America continues to confirm its ability to create massive success stories. Different categories of investors are beginning to work closely and actively in this region, including early-stage investors – small venture capital firms and business angels.