A new era for startup investing in Latin America - 4 years ago
Startups in Latin America are using creative solutions to address not just local but also global problems. For investors outside the region, the prospect of working with these startups can appear attractive, yet complicated. Investing in early-stage startups in Latin America can present challenges; however, despite the challenges, time and time again I’ve found it can be well worth the effort. When I first came to Santiago, Chile in 2010 as part of the pilot round of Start-Up Chile, there was hardly any talk of startups. Most people didn’t even know what startups were. Within nine months of returning to the U.S., the company I co-founded was acquired. So I decided to go back to Chile to look for more opportunities in this emerging market. Over the next couple of years, I taught entrepreneurship in Chile, mentored local entrepreneurs and eventually started investing in Latin American companies myself. I’ve now invested in more than 30 early-stage companies in Latin America, and I firmly believe the time to help early-stage startups in Latin America has never been better. Here’s why. Pioneer VC firms have paved the way for others to invest confidently in the region Some of the earliest VC firms established in the region, such as NXTP Labs in Argentina and Vox Capital in Brazil, have paved the way for others to find success. In a region that is traditionally very averse to risk and tends to condemn failure, these firms took a chance on budding ventures long before others dreamed of doing so. These pioneer VC firms in the region faced plenty of challenges. First, they had to educate and develop the expectations of local entrepreneurs so that they realized that Latin America is not Silicon Valley, with easy access to venture capital and U.S.-style valuations. But their successes and failures have served as exemplary models for many of the new early-stage funding initiatives we’re seeing. As the startup ecosystem in Latin America evolved, the flow and ease of doing early-stage deals improved significantly and encouraged more investment in the region. A look into five-year investment trends in Latin America revealed that investors had closed deals worth $2.3 billion, according to the Latin American Venture Capital Association (LAVCA). In the past few years, we’ve also started to see VC-backed startups begin to give back to the community and participate as investors themselves, either as angels or limited partners in funds. One example is Colombian-American entrepreneur-turned-investor, Andrés Barreto. He launched several startups, including Grooveshark and PulsoSocial, and, in 2012, he started the investment firm Socialatom Ventures. The Colombian firm, which recently raised a second fund called Firstrock Capital, invests in early-stage companies and provides them with resources to grow their companies. The firm is still active and now focuses on early-stage startups that have their technology team in Latin America but whose target market is the U.S. (Disclosure: My firm, Magma Partners, has participated in two co-investments with Socialatom Ventures.) Local accelerators attract resources There’s no debating that the proliferation of accelerators and local entrepreneurs gaining experience in each of the key startup hubs across Latin America — such as in Buenos Aires, Santiago and Medellín — has impacted the region’s funding ecosystem as a whole. There’s never been a better time than now to be involved with the Latin American startup scene. A 2014 study of accelerators found that just the presence of an accelerator can have an impact on the number of seed and early-stage VC deals in a local startup ecosystem. This “spillover effect” is certainly something I’ve witnessed in Latin America. The growing number of early-stage accelerator programs, such as Start-Up Chile and Wayra, have had a lot to do with putting the region on the map as a hotspot for startup activity. These programs are showing outside investors that Latin America possesses abundant opportunities worth exploring. Fintech startups are driving investment activity Startups are disrupting all sectors of the economy, but the main sector of Latin America witnessing the most change is the traditional banking industry. Because there is still such a large unbanked population in the region, fintech startups are discovering plenty of opportunities to succeed. According to Finnovista, the number of fintech startups in the region recently surpassed 1,000. Strategic partners in traditional businesses and regulatory approval from government, along with funding for the initial stages, are needed to scale these companies both locally and globally, and investors are on board. LAVCA showed startups in the fintech sector received more investment in 2015 than any other startup sector in the region. Fintech accounted for almost 30 percent of the entire IT sector’s investment in 2015, and 40 percent in the first half of 2016. The global startup network Startupbootcamp recently announced its expansion to Latin America by launching a dedicated fintech program in Mexico in a joint effort with Finnovista. Over the past four years, Finnovista claims they’ve witnessed how fintech startups have shaped financial services in the region and recognized that these companies cannot scale by themselves. The program aims to provide fintech startups in Mexico, and beyond, access to the funding and mentorship needed to grow their companies. Seedstars, too, traveled around Latin America over the past few years to find top entrepreneurs and connect them with global investors and partners. This year, focus has been on fintech innovations coming out of the region. Colombian crowd factoring startup Mesfix and Brazilian financial planning services startup QueroQuitar were selected as finalists to present at the Seedstars Summit. 500 Startups is increasing its seed-stage funding efforts in Latin America. With a new $10 million fund in partnership with the International Finance Corporation (IFC), 500 Startups aims to provide early-stage funding to 120 Latin American companies this year to help top founders succeed. Google recently selected more than a dozen Latin American startups for its Launchpad Accelerator program aimed at helping local startups reach their full potential by leveraging Google’s global reach and resources. Microsoft has set up the BR Startups fund in Brazil to help fill the gap between early capital and larger rounds, investing in 70 startups to date. Payments giant Visa also launched an acceleration program to assist new ventures in the fintech space in Brazil with their business models and fundraising. It wasn’t long ago that venture capitalists focused their efforts elsewhere, and Latin American startups had little to no access to early-stage financing for their companies. But as attitudes have changed, and both organizations and governments have begun fostering entrepreneurial ecosystems across the region, investment opportunities and activity in Latin American startups have been steadily on the rise. Momentum is building, with success stories like Brazil’s Nubank and Argentina’s IguanaFix becoming a regular occurrence, and there’s never been a better time than now to be involved with the Latin American startup scene.