Seizing Opportunity in LATAM: An Exciting Time for Early-Stage Investors

Photo by Leonardo Miranda on Unsplash

In my opinion, there’s never been a more exciting time to be an early-stage investor in Latin America (LATAM)

During a recent conversation with a colleague, he brought up the point that “Brazil is a superpower, it just doesn’t know it.” As a Brazilian, I couldn’t agree more. That being said, I also think the world is changing — the immense potential lying dormant in LATAM is on the verge of being unlocked, and early-stage investors are gearing up.

The Case for the LATAM Market

So what’s so interesting about LATAM? To be honest, there’s already a wealth of literature on this, so I won’t delve too deeply. That being said, it’s true that LATAM boasts a multitude of attractive traits. Sure, the region is not impervious to the economic ups and downs currently impacting the globe, but the fundamentals that drove a record $16bn in funding in LATAM last year still remain the same:

1. Growing Middle Class: The Latin American middle class has been expanding, with a rise in disposable income and purchasing power, creating new markets for businesses and growing existing ones.
2. High Level of Urbanization: LATAM is one of the most urbanized regions in the world, with about 80% of its population living in cities. This supports the spread of technology and services.
3. Improving Infrastructure: LATAM is seeing significant investments in digital infrastructure, improving internet connectivity, and thereby, supporting the digital economy.
4. Underpenetrated Markets: Many sectors in LATAM are underpenetrated compared to developed markets, particularly fintech, e-commerce, and software services, offering room for significant growth. What’s more, stories like that of Lei Jun (founder of Xiaomi) teach us that there is a benefit to approaching a sector with fresh eyes. In case you’re interested, I briefly touch on this idea of reverse leapfrog development in the case of Nubank here, and am a fervent believer in the idea that innovation often comes from the most “unexpected” of places.
5. Political Stability and Regulatory Improvements: Despite the belief of some, Latin American countries have made some strides in terms of political stability and regulatory improvements. Of course, this varies strongly by country (Lolita Taub wrote several amazing profiles on each country in case you’re interested, like this one on Brazil), but the overall environment is certainly more conducive to investment.

Most importantly, LATAM is a massive market, with a significant chunk of the population (around 40%-50% in most cases) being below the age of 25. These young individuals are digital natives, quick to adopt new technologies and in the context of venture capital, very willing to embrace innovative startups that respond to their needs and aspirations.

The demographic dividend of LATAM and the digital proclivity of its population make it a fertile ground for startup growth, and with the region delivering higher VC returns than other emerging markets due to the combination of growing consumer markets and a lack of competition, the investing world is quickly taking notice.

Ok, But Why Now?

The promise of LATAM’s early-stage investment landscape is accompanied by a shift in several key underlying dynamics that characterize the region. I know, you may be thinking to yourself, proponents of LATAM have been preaching this for years, but hear me out. I was born and raised in Brazil, moved to the US for college, and ended up sticking around — and I can’t help but think times are changing:

1. Reverse Brain Drain: For one, there is an increasing number of talented individuals choosing to return to LATAM after gaining experiences and skills abroad. They bring with them a wealth of new ideas, diverse perspectives, and a global network — all of which are critical for spurring innovation and building successful startups. A case in point is the founder of Pago — a fintech startup digitizing invoicing for traditional industries starting with agriculture — that I had the pleasure of connecting with earlier this week and that started his company after returning to Brazil. In fact, many of my closest friends are returning to LATAM because of the amazing opportunities they see in the region.
2. Shift from Local to Global Mindset: Similarly, I think that LATAM entrepreneurs are no longer just thinking about catering to their local markets. Rather, as a friend of mine at Y-Combinator pointed out, these founders are developing solutions with a global audience in mind. Nubank and Rappi are but two of the most salient examples, and the early-stage pipeline is packed with brilliant founders following similar playbooks.
3. We are at an Inflection Point: Additionally, I do think that we are at an inflection point in terms of how the financial community perceives LATAM. There are several instances of institutions beginning to offer more than just capital to founders in the region, but also operational support and other invaluable resources. Take Itau Cubo, a startup thinktank and co-working space in Sao Paulo, and this recent panel hosted by Latitud Ventures (with participation from a16z, Founders Fund, and Harlem Capital) as examples.

Vamos Latam Summit by Latitud Ventures

The Opportunity Amidst the Slowdown

While the overall investment volume flowing into LATAM experienced a contraction in 2022, the early-stage segment paints a slightly different picture. Seed-stage investment in LATAM reached an all-time high, with deals amounting to nearly $1.16 billion, an exciting increase of ~9% from 2021.

On the Series A front, despite witnessing a slowdown towards the end of the year (largely due to macroeconomic factors) several prominent large rounds drove a significant portion of capital into LATAM. For instance, the Argentina-based digital wallet startup Lemon Cash managed to secure $28 million in funding.

In my view, despite economic shifts contributing to a slowdown in capital deployment and a subsequent drop in valuations, for investors with a high-conviction, low-frequency approach, LATAM is a sea of opportunity.

High-Speed Latin American Startup Funding Slows in 2022 by Crunchbase

So what are LATAM founders working on? If we take the Brazilian market as a reference, research conducted by Abstartups and Deloitte (surveying 14,000 startups in Brazil) points that early-stage startups in Brazil can be broken down as follows:

• ~14.5% in Edtech
• ~9.1% in Fintech
• ~8.9% in Healthtech
• ~6.7% in Software
• ~5.1% in Retail Tech

What do you think? Is LATAM on the brink of a major breakthrough? And if so, what ideas, founders, themes and trends are you thinking about?