VCs say there are more startup opportunities to chase in Latin America

Regions once overlooked by the venture capital industry are racking up impressive investment totals in recent quarters. African startups, for example, were long ignored by the global VC scene, with totals for the continent’s upstart technology companies representing a fraction of a fraction of the funds made available to other regions’ next-generation companies.

But in recent years, investment into African tech companies has surged, and just today, investment company Juven announced plans to boost its investments in the continent, while Google set aside $50 million to do the same.

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Latin America’s startup scene is similar to Africa’s in terms of attracting outside interest, but a few years further down the road. Reporting that SoftBank will put another $3 billion in the area’s startups was news, sure, but not a shocking announcement last month. The Japanese conglomerate and investing powerhouse had already put $5 billion to work in Latin America.

Ahead of Q3 numbers that will update our thinking about the current state of the Latin American startup market, we wanted to dive into the structural forces in the region to better understand the impending numbers. So, The Exchange reached out to investors in Latin America for a little behind-the-numbers digging. We got a hold of Magma’s Nathan Lustig, Atlantico’s Julio Vasconcellos and ALLVP’s Antonia Rojas to flesh out our thinking.

We’ll talk a little bit about what is driving capital flows in Latin America, the pace of investing and whether it can stay high, why China is part of the conversation and where there may yet be overlooked companies that investors are missing thanks to institutional blind spots. Let’s go!

What is driving the money?

Latin America boasts 26 unicorns as of August, according to Atlantico’s 2021 digital transformation report, a must-read that serves as a backdrop for today’s piece. As Vasconcellos clarified for us via email, the number reflects the fact that eight new unicorns were minted in 2021. For comparison, there were only four unicorns in the region in 2018 — and it wasn’t necessarily obvious at the time that several Latin American companies would go on to list their shares publicly, both in the U.S. (VTEX, dLocal) and in Brazil.

Another interesting data point is that the cumulative market cap of Latin American unicorns has already more than doubled. According to Atlantico, their total post-money valuation went from $46 billion in 2020 to $105 billion as of August 2021.

This is also reflected in funding tallies: Per Crunchbase data, venture capital funding into the region’s unicorns reached $10 billion this year to date. Commenting on the data, SoftBank Group International CEO and Latin America champion Marcelo Claure wrote that “it ratifies the potential of Latin America and the incredible effect that the SoftBank Latin America fund has had in the region.” And there’s more to come: During TechCrunch Disrupt, Claure said that SoftBank can be expected to deploy between $8 billion to $10 billion of capital into Latin America in 2022.

Perhaps even more interestingly, unicorns are driving a self-reinforcing trend, ALLVP’s Rojas told TechCrunch. Highlighting Uber’s acquisition of ALLVP’s portfolio company Cornershop, she wrote that the deal “generated a virtuous circle, in which investors all over the world increased their confidence in our region and in the fact that it’s possible to realize amazing returns while changing the way traditional industries operate.” Vasconcellos concurred, noting that “the boom in unicorns and IPOs coming from the region … shows that success is possible and attracts more global capital.”

But taking a step back, what is driving these cycles is what the Atlantico report refers to as “the second wave” of digital transformation. In a guest post on TechCrunch, Vasconcellos explained it as the “second- and third-order effects of the [COVID-19] crisis,” which has accelerated the ongoing “continentwide tech expansion to a pace beyond any projections.”

While the pandemic played the role of an accelerant in digitalization, it also drove structural changes. For instance, the expansion of e-commerce “required a significant evolution in the quality and scale of the infrastructure provided by logistics, payments and e-commerce platform companies,” Vasconcellos noted. And on a broader level, the region’s structural issues have typically represented opportunities for startups leveraging technology to address them.