Why 2021 was a breakout year for Latin America’s VC ecosystem

In 2018, Marcelo Claure, COO of SoftBank Group and a native of Bolivia, realized something peculiar. The Vision Fund, SoftBank’s nearly $100 billion vehicle, was making investments in China, Southeast Asia and India, but there were no Latin America-based companies in the Japanese conglomerate’s portfolio.

“We were puzzled,” said Shu Nyatta, a managing partner at SoftBank who now co-leads the Latin America Fund. “Latin America has a population of 650 million people. It’s the same size, but twice the GDP of Southeast Asia, but the Southeast Asia venture ecosystem was light-years ahead then.”

At that time, Latin America had some local early-stage VC firms and a few international players active in the region. But there were hardly any firms doing classic growth investing, Nyatta said.

SoftBank investors visited Brazil and Mexico and were impressed with the quality of entrepreneurs. The region seemed to have all the ingredients of a flourishing tech ecosystem.

“Our hypothesis was that all that was missing was real growth capital that would unlock founders’ ambitions,” Nyatta said.

In spring 2019, SoftBank launched its $5 billion Latin America Fund, an enormous bet on a region that had collected only $3.9 billion in venture capital in the two years prior, according to PitchBook data.

The timing could not have been better for the firm, which, as a late-stage investor, is not known for identifying opportunities ahead of other venture capitalists.

What SoftBank and others couldn’t foresee was that VC investment in Latin America was about to take off like a rocket. In 2021, venture-backed companies have raised $14.8 billion across 772 deals in Latin America, according to PitchBook data. That’s more than the total capital invested in the region in the previous six years combined.

Going digital

When the pandemic erupted in 2020, many people in the region were forced to start to do things, from shopping to banking, online. Large swaths of Latin America’s population began transacting digitally for the first time in their lives. Over 40 million people in the region were added to the banking ecosystem in just five months during 2020, according to a study by Americas Market Intelligence in partnership with Mastercard.

While the whole world was going through an acceleration of digital adoption, the pace in Latin America exceeded other regions, said Patricia Kemp, a co-founder and managing partner at Oak HC/FT.

By the latter half of 2020, other investors realized how rapidly many Latin American startups were expanding.

“When investors saw the decks of the companies, their reaction was, ‘Why are you growing so fast?'” said Nyatta. “This attracted a lot of other capital.”

Suddenly, growth firms like Tiger Global, D1, DST and Coatue all increased their focus on the region. And then earlier-stage investors, such as Andreessen Horowitz, Accel and Benchmark, also started pouring money into Latin American startups.

Out of the 17 total Latin America-based unicorns, nine were minted this year. These companies include Mexico-based Clip, which accepts payments, similar to Square; NotCo, a Chilean producer of plant-based milk and meat alternatives; and CargoX, a Brazilian startup connecting truck drivers with corporations.

“I think there are more folks that have identified LatAm [for opportunities]. However, I think it’s still early innings,” said Kemp, whose firm made its first investment in the region just last month when it backed Aplazo, a Mexico-based buy-now, pay-later startup. “There is more competition for deals, but I don’t think there is as much as in the US, for instance.”

As investors have gotten a taste for the region’s potential, valuations have skyrocketed, pushing VCs to invest at earlier stages.

“At the seed and Series A stage, valuations are still a little bit reasonable,” said Mathias Schilling, a Redpoint e.ventures co-founder. “But as soon as a company reaches critical mass, prices rise to perfection because it is then transparent to the global VC market,” he said. That’s why his firm tries to identify opportunities as early as possible, taking advantage of its presence on the ground in Brazil.

SoftBank has also begun to make early-stage investments. The fund hired two local early-stage partners and revealed that it is doubling down on its investments in the region with a second Latin America-focused vehicle that has an initial commitment of $3 billion.

“We’ve moved to early-stage because it’s getting competitive on all fronts, and it’s the only way to avoid competing only on the deals that get visibility in the US,” Nyatta explained. In fact, the Latin America Fund sought to develop deep local expertise from the start and currently has 30 to 40 people between its Sao Paulo and Mexico City offices, he said.

But having a local office is not necessarily a requirement for international early-stage investors, according to Fabrice Serfati, a partner with Ignia, a Mexico-based venture firm. “I’m not sure you can build local intelligence very quickly if you’re coming from abroad,” he said, adding that co-investing with a regional firm that knows the regulatory nuances of the local market could be helpful.

As for valuations, Redpoint e.ventures’ Schilling said that they are unlikely to continue to climb at the same rate. He pointed to a recent contraction of the Brazilian economy and steep interest rate hikes in the country as potential headwinds.

These conditions, however, did not stop Brazil-based Nubank from going public on the New York Stock Exchange and Brazil’s main exchange at a valuation of nearly $45 billion earlier this month. Until a few years ago, even the most ardent believers in the Latin American VC ecosystem could not have imagined an exit of this magnitude for a Brazilian startup.

“Nubank’s IPO is an extraordinarily successful outcome for a company that didn’t exist 10 years ago,” said Nyatta. “People thought that was impossible” until recently.

And many more Latin American IPOs are likely to follow if market conditions remain favorable, Nyatta said.

“Clip, KavakConfioGympassQuintoAndarLoftCreditasWildlife, and I can probably list five more,” he said. “Those companies are all ready to go public and could go next year or in 2023.”

If this happens, the IPOs have the potential to unlock a great deal of additional value in the ecosystem. As people leave these companies to start new ones, they stand to create a flywheel of startup activity in the region.

“There’s still a lot of room for people to build local solutions in these markets,” Nyatta said. “And that’s what I think is the most exciting about what’s happening in Latin America now.”

Source: pitchbook.com

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