In 2002, foreign direct investment in Latin America had trended steadily downward to less than 2% of the world’s total. Times have changed. Today, the private equity and venture capital pouring into Latin America is now at an all-time high. And, there are clear signs that global investors remain bullish on the long-term opportunities; especially driven by the digital acceleration that has leapt the region forward.
Based on LAVCA’s 1H-2021 data & analysis release last week, private capital investment in LatAm has more than doubled compared to the same six-month period last year with 402 deals valued at $10.3 billion. Investors continue to support accelerating digitalization trends in underserved sectors including education, financial services, healthcare, real estate and retail.
Founded more than 12 years ago, LAVCA is a membership-based organization headquartered in New York City with a mission to build the venture capital and private equity industry in Latin America.
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Among the record-setting milestones so far this year, new fundraising for VC firms has already hit 26 closings valued at $1.7 billion. Most notably, Kaszek Ventures – known as a “unicorn rainmaker” – raised $1B to invest in Latin American tech startups in June with the goal of investing $475 million in early-stage startups and the remaining $525 million to further benefit its existing portfolio.
After departing Mercado Libre, Latin America’s largest e-commerce company, to found Kaszek Ventures a decade ago, VC partners Hernan Kazah and Nicholas Szekasy have racked up a reputation for picking winners with at least nine unicorns in its portfolio including Brazilian fintech Nubank, which is valued at $30 billion and on track for an IPO on Nasdaq at the end of the year.
Similar to Kaszek Ventures’ geographic focus, the most invested-in regions in Latin America are Brazil, Colombia and Mexico that collectively attracted 90% of all VC dollars during the first half of 2021. Investments in financial services led by fintechs remained the strongest with 42% of total investments
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However, there are new trends developing that are noteworthy, including: the rise of more investments in hardware-based technologies including those supporting the Internet of Things (IoT), VC rounds that are increasing in size with 29 VC rounds in 1H 2021 that surpassed $50 million – compared to 16 of those in all of 2020 – as more international fund managers target Latin America, and private equity fund managers that committed $1.6 billion through 1H 2021, an 82% increase over the same timeframe last year.
Also of note: the times are changing in terms of growing investor interest in ESG (Environmental, Social and Governance) and more money being invested in female-led startups today.
The interest in ESG is backed up by a recent study by Bank of America Global Research that found “as the pandemic intensifies global challenges such as food insecurity, access to healthcare, and racial and economic equality, a strong focus on ESG could bring benefits to society, businesses and investors alike.”
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Investments in female-led startups have nearly tripled to 31% of venture funding in the first half of 2021 compared to only 13% of total Latin American startup investments in all of 2019.
Going beyond the raw numbers, here are excerpts from our recent conversation with Carlos Ramos de la Vega, manager of venture capital at LAVCA. His insights spotlight some of the major players, trends and new developments in Latin America’s innovation ecosystems:
LABS: Marc Andreessen, the co-author of the first widely used web browser and a celebrated Silicon Valley venture capitalist, popularized the adage “software is eating the world” in an essay published by the Wall Street Journal back in 2011. I understand that, on the flip side, you are now seeing a new trend of investing in hardware innovation in Latin America today?
Carlos Ramos de la Vega (CRV): Yes, we have seen that as one trend developing with more innovation in hardware-based and deeptech-based technologies. For example, Indicator Capital, BNDES and Qualcomm Ventures launched a $45 million fund that’s exclusively dedicated to what we call IoT or Internet of Things technologies, which is an important development for the ecosystem (More here).
That hardware-based technology has actually found a great fit with how small and medium-sized businesses and manufacturing facilities are operating in Brazil and Mexico, for example. We’re seeing the need for sensor-based technologies to automate the processes for logistics routing and optimization, especially in Brazil. In a recent LAVCA interview with Cobli CEO and co-founder Parker Treacy, he compared the rise of IoT or telematics systems (in the U.S. and Latin America) as “undeniable” – especially “with Samsara raising big rounds and attaining huge market penetration.”
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Of course, they are focused on exactly their sweet spot: small and medium-sized enterprises that have a lot of complexity in their delivery operations. The goal is to bring this all into one single platform so users have more visibility and businesses can be more productive from a logistics standpoint.
Another example that’s at an earlier stage now is incorporating hardware-based technologies and sensors into creating analytics for manufacturing plants – so different machines, operators and manufacturers can all be viewable in one platform to increase overall productivity through business data intelligence.
LABS: The fact that financial services led by fintechs still leads the pack in terms of total investments is not that surprising given that it’s been doing so in Latin America for six years running. That said, 42% of total funds for the first half of 2021 is a significant share. Are you seeing any new trends of fintech innovation or the investors backing fintechs this year?
CRV: Yes, for sure. I’d say the main one is not only is fintech innovation and investment leading the way as a pure-play category; it is now playing a role in permeating other niches and categories with payments, credit origination and new embedded fintech platforms. For example, B2B fintech platforms such as Swap and Zoop in Brazil are delivering on the concept of white-label platform services that provide pre-packaged credit card issuances or pre-packaged platforms; to essentially create more fintechs.
By combining the concepts of Banking as a Service (or BaaS for short) and embedded finance, we’re seeing the integration of these features into other vertical technology categories such as real estate (proptech) and agriculture (agtech) that are not part of the broad financial-services sector. The leading category for this intersection is for real-estate financing innovation.
Carlos Ramos de la Vega, manager of VC at LAVCA
But, we’re also seeing the intersection of fintech and agricultural technology; for instance, to get that technology in the hands of small to medium-sized farmers so they have direct access to more capital so their crops have a better yield. We’re also seeing the integration of digital payment systems into healthcare with a sharp rise in telemedicine.
LABS: There have been some recent reports about rising investor interest in funding companies with strong positions on ESG (Environment, Sustainability and Governance), and certainly, with all the extreme weather events impacting us around the world, the need to address climate change is obvious. In Latin America, what are you seeing in terms of investor preference for ESG-focused startups?
CRV: Yes, that’s a very interesting question. The story of ESG in Latin America has been first and foremost focused on attaining broader financial inclusion, and that’s been the case with the gradual progression of the fintech-asset category and the ability for fintechs to provide more services to the underserved segments of the populations in many Latin American countries. Unfortunately, traditional financial-services institutions have not been able to underwrite terms of credit or provide banking services as a whole to everyone who needs them.
More recently, we are seeing the rise of cleantech and climate tech; not only because fund managers are interested in backing these opportunities, but because the limited partners (LPs) who invest in these funds are interested in backing them; and they’re seeking companies with a strong ESG component from the get-go. The fund managers are leading the trend, but also with LPs’ interest behind that.
For startup founders, especially in the early stages, it’s a challenge to be able to prove their ESG impact. We are definitely seeing a trend of pushing their portfolio companies to quantify how they are measuring impact across their operations. One of the interesting components here is how the cleantech startups being funded this year are going to reduce CO2 emissions and gas-fuel consumption, for example, and by how much. How can you actually have an impact in the long run when it comes to this technology?
LABS: This is turning out to be a record year for IPOs, and that’s true for late-stage Latin American tech companies, especially those in Brazil. How would you compare and contrast LAVCA-member fund manager’s preferences for listing locally on Brazil’s B3, for example, versus listing on Nasdaq, which seems to be a go-to for most of Brazil’s planned tech IPOs this year?
CRV: My take on this is that the choice of listing companies on which public-equity markets or stock exchanges will follow a strategic path of both the visibility the businesses want to have on a global basis and where they are concentrating their current operations.
We’ve heard from our founders themselves that if a company has a predominantly Brazilian operation, for example, then there is a stronger argument for them to consider a local public market to list their company in as opposed to a global public market. Unless they want to expand their operations outside of Brazil, the global visibility might not be the right fit for them at the moment. Whereas, if there are some companies that already have only regional operations elsewhere and they’re mature enough to go to a global stage, then that’s why they are, of course, considering Nasdaq.
Carlos Ramos de la Vega, manager of VC at LAVCA
Two different examples of going-public strategies this year are GetNinjas, a local services marketplace for Latin America, which raised about $60 million in funding and pursued a bootstrapping strategy before going public on the B3. Then, you have dLocal, the cross-borders payment processor from Uruguay, that raised about $403 million in VC funding before going public. These are two sides of the coin for extremely successful companies: one in the local public market and one in a global public market.
We are definitely seeing a mix of both. The B3 in Sao Paulo has definitely been the one to register the highest number of tech-enabled companies that have IPO’d in the last year.
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There has also been consideration of SPACs as a new way of raising significant capital. For example, Argentina-based Satellogic is now planning to go public through a SPAC vehicle after raising substantial funding from some very prominent investors. The company’s vision is to democratize access to space-based services by reducing barriers to obtain real-time satellite data. They are doing several partnerships with Elon Musk’s SpaceX to get satellites to orbit for monitoring the rate of deforestation or provide more accurate cultural trends in order to provide more intelligence to help improve the Amazon, for example.
LABS: Your latest 1H 2021 data release predicts that total investments pouring into Latin American tech startups could be on track to surpass $10 billion by the end of the year. That’s a big number. Are you surprised that investment in the region is growing that big so fast?
CRV: As an organization, we can’t make any forward-looking statements in terms of final numbers, but if we keep with the same pace of investment that we’re at right now, we will definitely see some records set during the second half of 2021. That is a certainty. I think what we’re seeing in 2021 has been the result of years of work for both the private capital ecosystem and the concentration of the talent pool in the major economies in Latin America. And, now that talent is being backed by the right amount of capital for these startups to execute at scale. I think the global interest we’re seeing has been long overdue.
Note: Beginning in Q1-2022, LAVCA will begin releasing quarterly data-analysis reports covering the Latin American private equity and venture capital industry. To access its new 2021 Latin American Startup Directory, visit here.
