Latin America a hot market for venture capital deals, economic conditions notwithstanding
The number of deals remains relatively constant despite a decline in investment dollar volume, ensuring that the region will continue to be a priority for investors.
The breakout year 2021 in venture capital deals in Latin America was marked by a whopping $16.3 billion invested in startups, more than the previous five years combined. The region was hailed as the world’s fastest growing area for venture capital funding, with FinTech and financial services accounting for 39% of the total amount invested in the region in 2021.[1] Recent economic conditions may put pressure on the dollar volume of venture capital deals, but an almost constant number of deals suggests the region will continue to be a focus area for investors.
In fact, the market remains strong: $2.9 billion in venture capital was invested in the first quarter of 2022 and $2.5 billion in the second quarter. FinTech remains a popular category for investors. The number of transactions – 280 in the first quarter and 261 in the second quarter – shows modest growth compared to the last two quarters of 2021. In the second quarter, FinTech startups were the largest recipients of venture capital funding, with 33% of dollars raised. (For reference, there were 257 agreements in the third quarter of 2021 and 243 agreements in the fourth quarter).
Effects of global economic trends
This year, inflation and strained economic growth are putting pressure on valuations in the form of corrections after the pandemic. Globally, investors are questioning high valuations and pushing numbers down, and Latin America is not immune to this development.
The region is likely to see continued deployment of capital based on a record amount raised over the past five years. For reference, FinTech investment in Latin America has grown steadily since 2017, with $0.6 billion invested in 2017, $1 billion in 2018, $2.7 billion in 2019, $2.9 billion in 2020 and 9, 7 billion dollars through the 3rd quarter of 2021.[2]
Investors are likely to be more selective when allocating capital, as public markets influence the valuation of private markets. As a result, the nature of dealmaking is shifting toward smaller dollar, early stage investments, and fewer late stage, hundred million dollar efforts. This is because early-stage startups tend to have a tighter range of valuations. Recent data shows that early-stage investments in Latin American startups continue to gain momentum: Q2 2022 saw 158 early-stage investments (up 68% year-over-year) and 84 early-stage investments (up 20% year-over-year) .
Why Latin America?
Investors have been eager for Latin America’s startups as a growing middle class seeks products to help them navigate the region’s lack of digital infrastructure and significant red tape, Charles McGrath, one of the authors of a recent market report from Preqin, an alternative assets industry provider . data, The Wall Street Journal reported.[3] “It’s sparked a lot of the consumer technology and fintech innovation in the area,” he said. Also, COVID has pushed for innovation in the non-traditional banking segment as branches lost even more of their relevance.
The rise in product demand stems from a high population of economically underserved consumers, as many as 30% to 50% of consumers in the region’s major countries.[4] The region’s banks typically cater to affluent customers and maintain strict credit requirements, creating a window of opportunity for FinTechs to develop products that promote financial inclusion.
Where does the funding go?
According to Ventara, a research firm focused on startups and venture capital trends in Latin America, Brazil accounted for 55% of venture capital investments in 2021, followed by Mexico with 22%.[5] Brazilian companies raised the six largest FinTech deals in Latin America in the first 9 months of 2021, led by challenger banks such as C6, Nubank and Banco Inter.
Some notable FinTech categories for investors are banking, credit, accounting and finance, and payments. Some recent examples include:
Brazil-based Nubank, founded in 2013, raised a $750 million mega round in 2021 ahead of its December IPO[6]
The Brazil-based payments company Ebanx closed an investment round of 430 million dollars last year.[7]
In June 2022, Mexico-based digital bank Klar raised $70 million in equity at a valuation of $500 million.[8]
In July 2022, Chilean FinTech Xepelin, which provides an accounting and finance platform for small and medium-sized businesses, secured $230 million in debt and equity.
A look at the future
While the Latin American region is likely to experience a lower volume of venture capital investments in dollars due to difficult economic conditions and pressure on valuations, ongoing interest in early-stage companies presents opportunities for investors. Startups that manage to raise funding this year may find it more expensive, but we expect the number of deals to remain constant, opening new avenues for investors.
Naturally, the fallout from economic pressures means some companies may scale back their growth intentions and others may take a more cautious approach to fundraising. In fact, major companies in the region continue to make layoffs, and at least two major firms – Ebanx and business platform Hotmart – have decided to delay their IPOs in 2022. There could also be a relative reduction in FinTech, given growing interest in other sectors, including agriculture, carbon sequestration and healthcare.
Despite these challenges, some investors are betting that inflation will stabilize and that rising interest rates will not stifle economic growth. As such, they remain positive on the increased purchasing power of Latin American populations over time. We expect that the investment amounts will increase again as the companies mature and live up to the revenue forecasts. In fact, the FinTech sector remains the largest sector for venture capital investments in Latin America, comprising 2,482 FinTech platforms, representing 22.6% of the total number of fintech firms worldwide.[9] Continued strong market demand and a high underserved population will ensure that venture capital investments – including FinTech and financial services deals – will support companies that offer innovative solutions to consumer pain points.
