Latin America's Booming Tech Scene

Until recently, Latin America was an ‘innovation desert’. But now the region is blessed with unicorns and VC investment, writes Adam Patterson from Curitiba…

Until recently, Latin America was an ‘innovation desert’. Its tech ecosystem was light years behind other emerging markets in everything from startup numbers to venture capital investment. The malaise was blamed on the region’s boom and bust economies, traditional business mindsets, few local VC investment funds and historically high interest rates, which favoured fixed income investments.  

This famously puzzled executives from Softbank, the giant Japanese industrial conglomerate and major tech investor. On 2018 visit, the Japanese noted that Latin America’s population of more than 650 million people was the same size as Southeast Asia but with twice the GDP yet a much smaller startup ecosystem. It was a mystery because the region seemed to have all the ingredients of a flourishing tech milieu, including ambitious founders, seeking to “grow fast and break things”, plugged-in early tech adopters, low competition, and a badly served consumer in multiple sectors.  Indeed Brazil, Mexico and Argentina are among the world’s highest-ranked markets for internet and mobile usage.

They surmised that the missing ingredient was growth capital. The next year SoftBank launched its $5billion Latin American Fund – an audacious bet, as the region had only raised a total of $3.9billion in startup investment the year before. The flood gates opened. Paraphrasing renowned tech investor Marc Andreessen, VC dollars started to “eat” Latin America. After all, innovation is the unrelenting drive to break the status quo and “develop anew where few have dared to go”. For João Caetano, MD of Brazilian M&A advisor Redirection International: “regional economic challenges, and accumulated inefficiencies, helped drive opportunities in a sweet spot convergence of supply (capital) and demand (innovation)”.

Blockbuster deals

In 2021, venture-backed companies raised $14.8billion across 772 deals in Latin America, according to PitchBook data. That's more than the total tech capital invested in the region over the previous six years. Some analysts say it was due to the pandemic, others say it was a matter of time, but the dealmaking landscape is breaking records. Iconic successes helped put Latin America on the global tech map, such as Mexico-based payments company Clip and Nubank, a Brazilian challenger bank. The food delivery platforms, Rappi, and iFood, each raised $500million. In a virtuous circle, increased investment led to increased liquidity events. Start-up exits brought in $11billion just in 2020.

Moreover, 2021 closed out with around 34 unicorns - private tech firms worth at least $1billion - in Latin America. The number is even higher if we count companies that went public or were acquired. It’s even more impressive when you consider the region only gained its first unicorn in 2017. Another 18 joined the club over the course of the year – including ten from Brazil – making Latin America a standout region for startup investment.

Brazil is the cherry on the region´s venture cake, with the lion’s share of funding and unicorns. São Paulo remains the unicorn capital, but other cities are also adding to the blessing, including two from Curitiba, where your author is based. It is estimated that there are now 15,000 startups in the country, up from 4,000 in 2015. VC funding hit $8.9billion by November last year, more than double the $3.7billion allocated in 2020.

More startups, VC investment and unicorns led to more tech IPOs, part of a broader Brazilian IPO boom over the last few years. For example, 2021 saw 45 IPOs with around 30 in the queue. The number of tech IPOs went from four in 2020 to seven by the first half of 2021. The accumulated value of the main technology companies tripled in Brazil over the last decade. The tech boom has been fuelled by historically-low interest rates, breakout startups and last year’s federal legal framework for startups which aims to reduce bureaucracy and further stimulate sector investment. And yet there is potential for more as tech companies represent less than 10% of all companies in the Bovespa, compared to around 30% seen in the S&P500. 

But it´s not just Brazil. Global investors are increasingly seeing Latam as a hotbed for disruption opportunities and investment wins. Valuations have ticked upwards, pushing VCs to invest at earlier stages and therefore bringing in new global players. Larger funds like SoftBank Group Corp, Advent General Atlantic, Sequoia Capital, Tiger Global and QED Investors were followed by earlier-stage investors, such as Andreessen Horowitz, Accel and Benchmark. Around 70% of Latam VC transactions involved a US firm last year.

Pandemic Proof

The pandemic certainly helped accelerate digital transformation around the world as home working, internet banking and e-commerce became the norm. The impact was perhaps greater in Latin America with large sections of the population began transacting digitally for the first time. More than 40 million people in the region were added to the banking ecosystem in just five months during 2020, according to a study by Mastercard. In May 2020, Visa announced that 13 million cardholders in the region made their first ever online purchases. Existing and new startups which took advantage of this disruption began to grow exponentially. 

It is no surprise that fintech companies were the big winners. The large banks enjoyed a lack of competition for decades limiting financial and inclusion - until now. Fintech received more than 40% of VC dollars in 2021, with $9.7billion and 268 transactions in the first three quarters of last year according to market data provider CB Insights. Startup founders and investors saw the potential to close a financial gap that remains for large segments of the underbanked population, a huge leap from $236million VC investment in 2015 and a 211% jump from 2020.

Nubank was a key poster child of the fintech boom with a $1.2billion fund raise and later a $2.6billion Nasdaq IPO in 2021. But others also closed megarounds, including Kavak, a Mexican used car financing fintech. Kavak raised $700million last June and the international payments platform EBANX, which is based in Curitiba and has offices in London, closed a $430million round. A $10billion or $20billion Latin American tech company would have been seen as science fiction a few years ago. Now ‘decacorns’ are a reality. Greater availability of capital is also driving Latin American companies to take a regional approach earlier in their lifecycle, as investors push for geographical expansion that broadens the addressable market. Listing in more mature markets like the US also helps local companies expand globally. 

According to Carlos de la Vega from regional venture capital association, LAVCA: "The number and quality of exit strategies in the region, specifically in B3, Nasdaq and NYSE, are proving the resiliency of the tech ecosystem across Latin America that can be supported by larger cheques and greater capital availability.” Momentum is likely to continue for the foreseeable future, in a region where banking spreads remain high and e-commerce penetration remains below 10%.

The market value of technology companies in the region, as a share of GDP, grew from 0.9% in 2015 to 3,4% in August 2021 but still way behind the US with close to 70%.  The expectation, therefore, is that the huge flow of venture capital injected into Latin America should continue over the next few years as we see a massive value transfer from the traditional to the digital economy, advancing from fintech, retail and real estate to new verticals including health, crypto, agriculture and deep tech. There are of course still challenges for Latin American tech companies to overcome, including a lack of engineering talent, the election of less pro-growth governments in the region and rising interest rates. The Brazilian presidential election could also increase volatility, though venture capital usually has a longer cycle than other industries. Nonetheless, with increasing global VC investment, unicorn growth, global recognition and IPOs driving a self-reinforcing trend. Latin America’s innovation desert is looking more fertile every year.