The weak link in Brazilian fintech

#047: Not even GPT-4 can solve Argentina’s inflation crisis.

Mar 28, 2023

Hola technopolists,

Just as we were getting used to ChatGPT’s ability to write doggerel, OpenAI dropped a new bomb on us: GPT-4.

The new model proved it could pass any standardised test you wished: SAT, ACT, and even the prestigious Bar exam. Not only did it pass, but it outperformed human averages.

Yuval Noah Harari, the acclaimed author of Sapiens and Homo Deus, used the moment to draw attention to the AI goldrush that’s become a race to open Pandora’s Box:

In the beginning was the word. Language is the operating system of human culture. From language emerges myth and law, gods and money, art and science, friendships and nations — even computer code. A.I.’s new mastery of language means it can now hack and manipulate the operating system of civilization. By gaining mastery of language, A.I. is seizing the master key to civilization.

So if AI is seizing the master key to civilization, can it solve thornier economic problems? Latin America is not without its (attempted) optimists. Astounded by GPT-4’s quantum leap of intelligence, Eduardo Porter took a different tack in a Bloomberg OpEd: he asked GPT-4 how it would solve Argentinian hyperinflation.

Alas, the AI could eloquently summarise the history of the country’s economic woes and point out the root causes of hyperinflation, but fell woefully short in any prescriptive solution of strengthening key economic institutions.

It could, however, write a lovely limerick about an inflationary tango.

What’s Hot

💰 Corporate VC had a record year in 2022 both around the world and in LatAm, and Mexico serves as a case-in-point. FEMSA, Coppel, and Cemex were the most active CVCs in the country, while FEMSA’s venture arm ranked 6th among all investors in the country for its deal flow, deploying $87mn across 9 deals. In Brazil, 80% of executives polled at large enterprises stated an intent to invest in startups in 2023, according to a survey conducted by ACE Cortex. PitchBook speculates that CVC will become a more attractive financing source for startups as interest rates rise and traditional VC sources cool off. (Bloomberg Linea)

📈 Stone, the Brazilian payments fintech beset by a history of rampant defaults, reported its third consecutive quarter of strong performance. Q4 2022 revenue increased 45% YoY, and EBT (earnings before taxes) exceeded consensus analyst expectations by 20%. Focusing on SME clients has proven to be a boon: payment volume via SMEs surged 23% YoY — twice as fast as the industry average. The turnaround tale at Stone is impressive and is only gaining momentum, as the company recovers from its -80% share price plunge in 2021 following a massive wave of consumer defaults. More below. (Brazil Journal)

🚪 Exits are back in focus with SPAC deadlines and SoftBank chatter. The wave of SPACs that launched in 2021 are rapidly coming to the end of their 2-year expiration window in the coming months, many with empty hands. Only two companies have gone public via SPAC in LatAm: Semantix (2021) and Nuvini (2022). SPACs that do not acquire a company at the end of their 2-year window are required to return cash to investors (typically at a loss after management and filing fees); the likelihood of requesting an extension beyond the 2-year window is slim for most SPACs. Elsewhere, SoftBank is (once again) creating early hype for its portfolio companies, with LatAm Fund head Juan Franck stating companies with a clear path to profitability (e.g., Rappi, Creditas, Clip, and Kavak) could IPO as soon as markets stabilise — though spokespeople from the companies did not back up the claims. (Bloomberg Linea)

What’s Not

📉 LatAm startups face a $2.4bn funding shortfall in 2023. According to new analysis from Kamaroopin, LatAm post-Series A startups will need to raise $6.1bn this year against an estimated $3.7bn in available capital. The shortfall estimate is actually relatively optimistic: the report estimates that the dry powder will shrink if local funds deploy early-stage funding at accelerated rates. Kamaroopin’s managing partner, Pedro de Andrade Faria, estimates that part of the gap needs to be closed by growth investors that bear more likeness to private equity, such as SoftBank, General Atlantic, and Riverwood Capital. (Neofeed)

🏦 Half of customers applying for secured loans from Creditas during Q4 of 2022 were doing so in order to pay off debt and avoid bankruptcy, according to a recent survey conducted by the fintech. Among applications for loans with a vehicle guarantee, 49% sought to avoid bankruptcy; among those with a property guarantee, the figure dropped to 44%. Secured credit has become the second most popular form of fintech lending in Brazil: fintechs in the last decade have commanded 80% of venture funding and have increasingly turned to lending as a profit driver in a sector notorious for low margins. However, the new data suggests Brazilians are clearly struggling under the yoke of Brazil’s macroeconomic woes and may be a bellwether for an incoming credit crunch. (Fintechs Brasil)

Stat of the Week

Stone seems to have made a massive recovery, and now that the dust has settled for 2022 financial results, it’s time to look at fintech performance in Brazil. We know the big names and their quarterly earnings headlines, but how is the bottomline trending for Brazil’s fintech darlings?

So what? The story among fintechs is far from uniform.

PagSeguro: PagSeguro is perhaps the most boring case of success amongst the bunch — a compliment given banking’s volatility in the past year. The fintech’s lending portfolio – already strong – has stayed healthy, and most of the profit increase has been derived from growth in secured lending (a trend amongst most fintech lenders).
Stone: This is a complete turnaround from a public company mired in pain. The company’s share price tanked -80% in 2021 after a wave of unforeseen defaults decimated profitability and investor confidence. Since then, Stone has focused on its core payments solution (and rode a huge Pix-fuelled wave) while doubling down on its banking operations for MSMEs. Over the course of 2022, it increased its customer base by 40% and its MSME deposits by 84%.
Nubank: Roxinho was a victim of its timing. Its market cap topped $48mn at IPO in January 2021 before falling precipitously in the back half of the year as the market cratered. But that hasn’t stymied progress in its business fundamentals: the bank posted its first profitable quarter in Q3 2022, and last quarter reached 75mn customers around Latin America — with revenues up 128% YoY.
PicPay: PicPay wins the ‘most improved player’ award, turning its first profit in Q4 2022 and reducing annual losses by 64%. Its formula has been an all-out attack: gaining a banking license, reducing operational overheads, and expanding its product portfolio (especially in secured lending). The banking license helped it drastically reduce its capital costs — some -40% reduction in its own cost of funds.
Creditas: 2022 was a major transition year, as the company made two big moves that hit profitability: (1) selling off its automotive refurbishment business to focus on pure-play lending, and (2) a major accounting crunch as it updated provisions for future defaults on its lending porttfolio. The company projects profitability by the end of 2023.

The Rundown

A study of BlackRock’s emerging markets ETF shows that LatAm countries are losing ground compared to Asian ones; as global GDP expanded in the last decade, LatAm GDP contracted. Mexico and Brazil comprised 15% of the ETF in 2014, but today only comprise 7%, while countries such as China, India, and South Korea nearly doubled their weightings. (Bloomberg Linea)
LatinX VC’s 2022 annual report noted a bleak outlook for Latino inclusion in American VC: only 2% of VCs in the US are Latino — a slight increase from the year prior — while only 1% of capital from Top 25 funds went to Latino entrepreneurs. (Bloomberg Linea)
A new study from think tank Signos Vitales estimates that $4bn of remittances flowing into Mexico (~8% of total) could be linked to crime — just as remittances topped a record high $56bn in 2022. (Bloomberg Linea)
Former SoftBank LatAm execs (Marcelo Claure, Paulo Passoni, and Shu Nyatta) have confirmed plans to reconvene and run venture fund Bicycle Capital in the coming months once their non-compete clauses with SoftBank expire. (Bloomberg Linea)
While most banks around the world face a crisis of confidence, Nubank’s share price was LatAm’s only public bank to post a share price increase in the week following SVB’s bankruptcy. (Bloomberg Linea)
Coinbase is making a deep push into Brazil, announcing plans to support Portuguese-language customer support and real-based payments via Pix in partnership with Ebanx. (Bloomberg Linea)
New analysis estimates that 50% of customers who left SVB opened accounts at JPMorgan, while 20% went to Mercury and 9% went to Brex. (Kruze Consulting)

Deals (March 13 - 27, 2023)

Fundraises

🇺🇸 Andes, a carbon capture biotech founded by Chileans, raised a $15mn Series A extension from Acceler8, Voyager Ventures, and existing investors.

🇧🇷 Mecanizou, a marketplace for automotive parts, raised a $14.5mn Series A led by Monashees with participation from FJ Labs, Alexia Ventures, and Dalus Capital.

🇨🇴 Bacu, a foodtech that develops ‘comfort food’ recipes for dark kitchens and restaurants, raised a $6mn investment from Benchstrength Capital, Hof Capital, Reshape Ventures, H20 Capital Innovation, Kamay Ventures, and angels (incl. Rappi).

🇲🇽 Cometa, a private school tuition management software, raised a $5mn investment from Kaszek, Reach Capital, Homebrew, Latitut, Investo VC, 500 Startups, and Salkantay Ventures.

🇸🇻 Propi, a real estate marketplace for renting and buying, raised a $2.5mn pre-seed from Panorama Capital.

🇺🇸 ROOK, a LatAm-founded startup that provides access to data collected from wearables, raised a $1.7mn pre-seed led by Nu-Fund Venture Group with participation from Techstars, Harvard Business Fund, and other angels.

🇧🇷 Proesc, a school administration software and fintech, raised a $1.5mn seed from SQUARE Knowledge Ventures.

🇧🇷 Makasi, a construction financier and broker, raised a $1mn seed led by Terracotta Ventures and Honey Island.

Debt

🇨🇴 Creditcorp Capital received a $50mn commitment from the IFC for its first private debt fund, a vehicle focused on structured long-term debt for Colombian medium- to large enterprises.

VC Funds

🇧🇷 XP closed its second Brazil-focused private equity fund at $327mn.

🇸🇬 Latin Leap, a VC with origins in Singapore, landed in LatAm with a $25mn fund and the opening of its first local office in Colombia.

Did I miss any deals? Let me know!

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