“Latin America is on the cusp of becoming one of the most important economic regions in the world, and we anticipate significant growth in the decades ahead,” Masayoshi Son, chairman and chief executive officer of SoftBank Group
Latin America has been giving strong signals to the international community of it’s large potential as an entrepreneurship hub…
- Consumption Ready Middle Class: LatAm already has more internet users than the US,GDP 2x larger than India’s, and mobile penetration of ~70%
- More Liquidity: Startup funding in LatAm has been heating up for the past nine years, doubling every year for the past three
- Successful Exits: Recent exits have provided the stamp of approval that the startup ecosystem can deliver (99, Cornershop, Linio)
- Government Support: Governments have been showing a willingness to cooperate with innovation (Ley Fintech, Innovate Peru, Start-Up Chile)
… these signals have been attracting some cautious (usually late stage) international participation and investment (Rappi, Nubank), but SoftBank’s $5B LatAm-only fund is a signal that could accelerate the shifting dynamics of entrepreneurship in the region — Hiring is already happening!. What could this announcement mean for the different stakeholders and players in the ecosystem?
To Founders: Think Bigger
“This massive amount of money (with SoftBank being the most visible nowadays) will not be distributed evenly, but heavily skewed towards a handful of outliers — those that really solve a problem on a scalable way. No secret sauce. Meritocracy, differentiated technology, impact” Fernando Lelo Larrea
- Differentiate: As with the early Chinese start-up ecosystem, some of LatAm’s startups (and arguably some of the most successful — MercadoLibre, Rappi) are considered copycats, but as the ecosystem matures we will see a rise of a new generation of start-ups from the founders of these successes bringing new and regionally unique business models to local problems (TechCrunch). It is now a good time for the LatAm “PayPal” mafia to launch a new generation of differentiated companies.
- Come to LatAm: Mature innovation ecosystems have been seeing increased competition, difficulty differentiating but have remained where they are due to the easier access to capital. With potential for large rounds in a less competitive market with a large consumer base starting a new venture in LatAm is a no brainer, lower costs, ample opportunity to solve consumer pain points, and now access to capital, could we see outside talent led start-ups, reverse brain drain? Postmates and Ofo (Chinese ridesharing unicorn) both chose Mexico as their first international expansion market.
- Act Regionally: “[LatAm] has less unification on both a geographical and legislative context. Overcoming this requires the cash to match the ambition” (Alex Graham). Outside of the Brazilian ecosystem, start-ups that have succeeded have been those with international teams and / or international plans. Latin America remains a difficult region to navigate but with big payoffs if done right — bigger rounds will facilitate navigating these transaction costs and founders should make sure to dedicate funds to navigating these.
To VCs: Think Local
“Angel investors will be rewarded for their risk as they exit in mega rounds. Early stage VCs will realize returns & wire real money to their LP. SV & international firms will start looking for the next SoftBank bet backing tech that can change the world.” Federico Antoni
Local VCs — Be Leaders
Local VCs, not unlike entrepreneurs, have been key in setting unique innovation culture. They have been learning alongside entrepreneurs what works best for the local context and often have unique perspectives on start-up due diligence, term sheet structures, and often work closely with their founders (looking at your ALLVP, Greg Mitchell, Nathan Lustig). If local VCs are to continue to remain the voice of local culture they will have a crucial role in leading the rounds that could define the future “poster” start-ups in the region.
International VCs — Follow the Lead
The most active non-LatAm investors in LatAm start-ups are still not the “big” US funds, with US based investments by deal count being led by Endeavor, 500 Startups, Valor Capital and the IFC (LAVCA). But, “Latin America is emerging as the new battleground for the global tech giants, and some of Silicon Valley and Asia’s biggest investors.” As US, Asian and European investors begin to keep a watchful but distant eye they could be the ones financing later stage megarounds for the SoftBank Series A graduates and helping to create sustainable growth in the LatAm ecosystem. Great VCs like Sequoia have regional funds in Asia, why not LatAm?
To Enablers: Think Ecosystem
“There is a big opportunity to own large chunks of high value startups that will be a part of the fabric of the region for likely decades” Nathan Lustig
Corporates — Be the Center of the Ecosystem
Many LatAm corporates have already responded to the momentum; 150 corporates are working with 2,000+ start-ups on 180+ initiatives, but collaboration has remained cautious. International corporates have opted to be involved in the form of CVC rounds or acquisitions (LAVCA), and have often chosen LatAm as a first step to international expansion (LAVCA), but international VCs have remained largely absent. As local corporates look to benefit from the momentum they should consider putting start-ups at the center of their innovation journey. They can do this by being more active aware investors (Federico Antoni has some tips), being active open innovation partners, and reliable sources of exits.
Accelerators / Incubators — Build Ecosystems
Successful acceleration and incubation models (Entrepreneur First, Y Combinator, Techstars) should consider the opportunity to support LatAm start-up growth. Many LatAm start-ups have passed through prestigious US based acceleration programs, showing a growing need for local accelerators of the same quality — this could be a white space for corporates to provide access to assets and talent while also playing a role at the center of local innovation (Wayra).
Alongside the wave of optimism and activity that will continue to inspire LatAm, there are some points to consider.
- Entrepreneurship starts hyper-local: LatAm is not unfamiliar with foreign business interests investing locally; it is often welcomed if done with local-buy in. If SoftBank wants to create a transformation in the region that will spark the kind of win-win growth they speak of, it will require involving local investors, entrepreneurs, and ecosystem players who are familiar with the “jobs to be done” of the region.
- Then what? As SoftBank deploys large rounds in transformative Series A rounds questions will begin to arise for when those start-ups need Series B or C rounds, if the capital for continued growth is not deployed this initial wave of liquidity could lead to the kind of capital flight the continent has seen before in prior waves of Foreign Direct Investment. Hopefully, international VCs will be paying attention and wanting to be involved in bigger numbers.
For more juicy numbers, region overview, and a look at some of the regions’ best local sources of information see below:
- “Assessing SoftBank’s Arrival in Latin America” — Alex Graham
- “2018: The Year VC In Latin America Began To Close The Gap” — Nathan Lustig
- 2018: The Year Latin American Startups Hit the Gas — And Didn’t Let Up — Sophia Wood
- Latin America Startup Heatmap — LAVCA
- Why LatAm is Becoming the Next Tech MegaHub — Polymath Ventures
- Adventure Capital: Why Investors Have Growing Interest in New and Emerging Markets — LAVCA