Latin America has a flourishing venture capital (VC) and start-up ecosystem with hundreds of exciting new companies being set up every year, which should bode well for entrepreneurship in the region in the future.
The continent has yet to produce a so-called ‘unicorn’ – a start-up company valued at more than $1bn. However, two Latin American start-ups, both from Argentina, have listed on the Nasdaq: Mercado Libre, the regional equivalent of eBay that was founded by Marcos Galperin Marco; and Globant, a software development company, set up by Martín Migoya.
The region now has hundreds of home-grown VC funds that back thousands of new companies every year. Many of the new firms are web or mobile related, and take advantage of high smartphone penetration rates in the continent, especially Android devices. Some 38% of WhatsApp’s global user base comes from the region and e-commerce expanded by 23% in Latin America last year, according to the Latin American Private Equity and Venture Capital Association (Lavca).
Of the past few years, 2013 saw the peak for VC fund raising in the region, with $714m secured according to Lavca (against £303m for 2015). However, 2015 was the peak year for investments, with $594m injected into 182 start-ups monitored by Lavca.
Brazil's ups and downs
Starting in 2011, Brazil has been the main regional magnet for Silicon Valley VC funds but many came unstuck there, as the country’s economy turned sour in 2014.
Brazil is still a major market as it has the biggest population in Latin America: 206 million inhabitants compared with 119 million in second placed Mexico. However, most of the main VC funds operating there are now local. Some of the biggest Brazil-specific fund managers include Redpointe.Ventures, Monashees Capital and e.Bricks.
“Most international investors now have a very negative view about Brazil,” says Alex Mendez, an Argentine who is managing director of Storm Ventures, a San Francisco-based early-stage venture fund, and founder of Puente Labs, a Silicon Valley-based organisation that helps Latin American start-ups to secure funding and to scale up. “Many of the first international VC firms to enter there got their fingers burnt."
Of other markets, Mr Mendez says: “Argentina is now becoming very popular with investors, especially after Mauricio Macri became president in December. But other countries are also starting to see their start-up scenes develop quickly. Colombia has a lot of entrepreneurial talent and Peru has great potential.”
Argentina: back in favour
Buenos Aires, the Argentine capital, is home to one of Latin America’s most vibrant venture capital ecosystems. The city and its surrounding area, which topped fDi’s South American States of the Future 2016/17, has a wealth of IT talent. Business confidence has improved dramatically since Mr Macri – who represents the centre-right political coalition Cambiemos – assumed office.
NXTP Labs, for example, is a local accelerator seed fund headed by Ariel Arrieta, which has invested $38.5m in 174 start-ups based throughout Latin America during the past four years. It backs companies in a range of sectors from ad tech, mobile, gaming, media and security.
Its portfolio companies include Satellogic – an ambitious Uruguay-based start-up that is building a constellation of nano-satellites to image any spot on earth every few minutes – and Afluenta, a Buenos Aires-based firm that has become the largest consumer peer-to-peer lending company in Latin America.
“Argentina will go back to being an investment hub now, since it is by far the country with the best entrepreneurs in Latin America,” says Susana Garcia-Robles, principal investment officer at the Multi-Lateral Investment Fund, part of the Inter-American Development Bank, which has invested about $250m in 66 seed and VC funds in the region since 1996.
Of other countries, she adds: “Mexico has been doing very well lately, and Chile and Colombia have very good government support, although their entrepreneurs still need to be more innovative.”
According to Lavca, Mexico accounted for almost half of Latin America’s total VC fund raising in 2015, securing $142m against $44m in 2014. Mexico’s National Institute of the Entrepreneur (Inadem), a government agency, has been one of the main drivers behind the industry’s growth. It has invested in 36 local funds, including LIV Capital, Ignia, ALLVP, Dila Capital, Ideas y Capital and ON Ventures. Amexcap, the Mexican venture capital association, now counts 55 local VC funds among its members.
One interesting contrast between the Mexican and Brazilian start-up scenes is the type of industrial sectors being targeted: 99% of Brazilian investments have been in tech, whereas Mexican funds are also backing the healthcare, energy, retail and real estate industries.
“Brazil has tended to have quite a closed economy,” says Hernán Fernández, managing partner at Angel Investors, one of Mexico’s biggest VC managers. “Perhaps for language and cultural reasons, it has been hard for Brazilian start-ups to scale up outside their country. Meanwhile, Mexico has a much more open economy, is a member of the North American Free Trade Agreement, and is one of the leading member states of the Pacific Alliance [trade bloc]. There is a feeling that if you set up in Mexico, you can go on to conquer the rest of the region.”
A mature industry?
Since 2010, a number of start-up incubators (funded by national or regional governments) have been set up in Latin America, including Start Up Brasil, based in São Paulo; Celta in Florianópolis in southern Brazil; Ruta N in Medellín in Colombia; and Start Up Chile in Santiago.
Some follow the Y combinator model, a highly successful US seed accelerator programme, while all of them focus on providing mentorship, networks and business strategy advice, as well as providing initial funding.
“Something that we are noticing at our incubator is that the average age of the entrepreneurs that we are backing is getting older,” says Tadashi Takaoka, director of early investment at Corfo, the Chilean economic development agency that runs Start Up Chile. “They tend to be more insightful people, with greater experience in the business world. This could be their third or fourth attempt at establishing a start-up. I think that indicates that the start-up ecosystem is becoming more mature.”