Startups across Latin America (LatAm) enjoyed a record-breaking year in 2021 as investors poured an estimated $19.5 billion into the region. And, though regional investment in 2022 has been quieter, this is down to larger macro trends across the global economy.
LatAm offers a large and increasingly connected population with markets that still have ample space for disruption, as indicated by the five unicorns that emerged this year alone. This coupled with early-stage investment deals that come at a rate that’s often lower than average.
With VC funds in the US alone holding an estimated $290 billion in collective reserve, seed funding opportunities in LatAm may be the place to bet in 2023.
Why Focus on Seed Funding in LatAm?
Before the entrance of international funds like Softbank and Tiger and breakout success stories of unicorns like Rappi and Nubank, LatAm was suffering from a chronic case of limited investment. This means founders in the region are used to lower levels of funding than their US counterparts and are well-versed in the need to build low-cost, scalable business models from the ground up.
Startups that are ready to move into higher funding rounds in healthier economic climes or established tech ecosystems are more likely to accept smaller funding rounds in LatAm, even more so after 2023’s lull in investment activity. For investors, this equals more deal opportunities at lower valuation rates.
As the exit for seed stages is still far in the future it’s therefore more likely to happen during the economic upswing (since 2018 only 19% of startups reached Series A within 36 months of their seed round), meaning investors can place less concern on immediate market conditions.
But this doesn’t mean startups in the region are less likely to move into Series A in the long run, as indicated by YCombinator’s recent interest in names like Kashin, Pulppo and Alephee.
International investors new to the region can bet smaller checks and monitor how these evolve, beyond before investing further. Let’s look at risk mitigation in LatAm further.
Mitigating Risk with LatAm Seed Investments
Seed investments in LatAm require the same basic due diligence as any normal investment deal. This means clear potential for long-term, free cash flow, strong potential market growth within an industry and the percentage of market share in comparison to competitors. Monitoring a startup’s Minimum Viable Product (MVP) can help to assess all of these metrics.
Beyond this, lower deal rates in the region can help US investors build a more resilient portfolio by placing multiple seed-stage bets across various industries and countries. For example, fintech is a hot market in most of LatAm, yet markets like enterprise software in Brazil, proptech in Colombia or e-commerce in Brazil offer growing promise.
To spread investment deals, incoming VCs can look to build partnerships with local LatAm funds that have deep knowledge of early-stage startup portfolios and regional market opportunities. Here, investors should aim to build relations with funds that demonstrate comprehensive portfolio support programs, hands-on involvement with their startups and regular performance reports.
This symbiotic business relationship will help budding ideas flourish, and ensure startups are primed to emerge into higher funding rounds when the time comes.
LatAm is abound with new ideas and innovative startups. Investors can focus on regional seed fund deals that feature a number of countries and sectors to build a robust portfolio at good rates. Local VC funds can help to boost success even further.
By Diego Noriega, Managing Partner at Newtopia VC