Why more VCs are looking into LatAm

#043: How LatAm dances through the innovation playbook and positions itself against developed economies

Feb 28, 2023

Hola technopolists,

The Global Head of Portfolio for Endeavor—startup kingmakers in emerging markets—recently said in an interview that ‘technology arrives in waves’. Innovation is a series of phases that an economy passes through like chapters in a novel, or so the thinking goes. The chapters are roughly chronological, beginning with the simple and moving towards the complex:

Consumer retail: E-commerce and its many adjacencies
Infrastructure: The ‘rails’ of the economy, especially fintech and logistics
SME digitisation: B2B software that catalogues and automates business process
Deeptech & Biotech: The ‘hardest’, most technical, and most R&D-intensive (e.g., NotCo)

Through this framing, we can see why Mercado Libre (consumer retail) and dLocal (payments) were among the first startups to reach public markets. It also provides a hypothesis explaining why ChatGPT didn’t come from São Paulo or Santiago.

But here’s the twist: because Latin America has bigger global siblings to learn from, the boundaries between waves 1-3 get blurry. Take Argentina-born software conglomerate Globant, a true LatAm OG that went public in 2014, long before Rappi was even incorporated. Or look at NotCo, the AI-powered foodtech that last year signed a global deal with Kraft Heinz to effectively become an R&D partner for the global juggernaut.

Under normal (or American) circumstances, an economy would need to experience each wave in order—writing each chapter before it could be read. But in LatAm, where the book is already in print in several languages, founders are skipping to the last pages.

What’s Hot

🤑 Mercado Libre posts record Q4 results. In its latest earnings release, the e-commerce and fintech darling reported its best quarter yet, with net revenues increasing 57% year-on-year to $3bn while EPS smashed consensus estimates by 30%. The fintech business, made up of Mercado Pago and burgeoning lender Mercado Crédito, is a powerhouse: the unit grew 73% annually, with Pago processing $36bn of payments in Q4 (+80% y-o-y) to crack the $100bn threshold for 2022. Mexico maintained its position as the highest-growth geography, with revenues surging 55% (v. 50% in Argentina and 36% in Brazil). Analysts predict favourable tailwinds for the commerce business with Americanas’ recent demise, though the consensus outlook for Q1 2023 is gloomy. (Mercado Libre)

🏪 Oxxo is (once again) heading to the US. FEMSA, awash in $3.7bn in cash from selling its stake in Heineken, announced a new investment offensive around the Americas as it aims to reach 30mn customers. Its biggest bet is the US, where its stores and suite of fintech products (Spin and BxB Fintech) will head north of the border nearly a decade after its first American stores opened (and stagnated). As part of the investment, FEMSA also announced it will test out self-service ‘smart stores’ comparable to Amazon Go while deepening its footprint in Chile, Brazil, Colombia, and Ecuador. (El Economista)

💰 Rappi and Justo partner in Brazil. Justo announced that its online supermarket will soon be available for purchase via Rappi’s app in São Paulo. At launch, customers will be able to purchase most of Justo’s stock (excluding bakery items) with a target delivery time of 45 minutes. The move is the latest in an industry-wide series of consolidations to stay alive in the cutthroat food delivery sector (see: Jokr’s retreats from everywhere but Brazil). Rappi will hope to increase its penetration in Brazil with iFood being forced to unwind some of its exclusivity contracts in the coming months. (Startups Brazil)

What’s Not

👩🏽‍💻 LatAm faces a talent crunch. Founders and managers are reporting a worsening dearth of technical talent around the region. A 2022 Harvard Business Review study found that 73% of Latin American managers cite talent as the biggest barrier to innovation and growth; in Mexico, 57% of companies report growing their tech workforce, while 68% voiced difficulties finding tech talent. Brain drain is a clear issue: a study from tech bootcamp Practicum shows that the majority of Mexican tech talent is attracted to companies abroad, with 53% looking for US employers, 39% seeking an Asian employer, and only 8% satisfied in seeking Mexican employers. The gap is only slated to widen, with foreign multinationals (like those in Spain) planning to increase their LatAm expansion in 2023 and beyond. (Bloomberg Linea)

📉 VC funds struggle to raise. New data from Preqin shows that VCs around the world raised ~$20bn in Q4 2022, the lowest quarterly investment raised in the last 9 years. A record high number of funds were hunting for cash in the market as the average amount of time to close a fund drags on; roughly half of funds are spending at least 19 months fundraising, +20ppt increase over pre-pandemic levels. While funds plan to scale back their investments into North America and Europe, there’s a silver lining: LatAm is proving to be an attractive investment destination, with funds increasing their intended exposure to the region. More below. (Neofeed)

Stat of the Week

Yes, the tough funding environment for risk assets is taking its toll on VCs, but not all regions will feel the pain equally. Here’s a deeper look at that dataset from Preqin:

So what? Tech everywhere is hurting, but they’re hurting more in developed markets where there’s a longer way to fall. Interest rate rises have come as a harder shock in contrast to places like Brazil, where rates started at a higher base and rises have been less steep. The stakes of just about everything are higher because of larger scale: more layoffs, bigger downrounds, seedier scandals. By contrast, strong fundamentals in emerging markets, such as growing internet penetration and financial inclusion, are starting to seem more durable for long-term investments. The big question is how quickly foreign ‘tourist capital’ might actually flow in.

Smart Links

Colombia court moves to metaverse to host hearing (Reuters)

76% of Spanish companies will increase their investments in Latin America in 2023 (Tekios)

Soonicorns: the LatAm startups on the cusp of a $1bn valuation (Bloomberg Linea)

Nearshoring attracts VC and FDI to Mexico (Bloomberg Linea)

“There are a dozen startups in LatAm waiting to go public”: Endeavor Catalyst (Bloomberg Linea)

LatAm startups will attract fewer mega-rounds and more debt in 2023 (Bloomberg Linea)

Mexican Airbnb regulation speaks to the multifaceted impact of gentrification (Contxto)

Local investors are starting to “fall in love” with Nubank, says BTG (Neofeed)

Stark Bank announces $60mn in new lending (Startups Brasil)

The rugby gringos who bet on crowdfunding in Brazil (Pipeline Valor)

Gustavo Petro wants to smother Colombia’s gig economy (The Economist)

Deals (February 21-28, 2023)

Fundraises

🇨🇱 Buk, a Chilean HRtech that automates administrative HR tasks, raised a $35mn Series B led by Base10 with participation from Greenoaks Capital partners. The company will use the funding to enter Brazil and accelerate growth in Mexico, Colombia, Chile, and Peru.

🇨🇱 Datamart, a consumer credit diligence platform, raised a $6.3mn seed from Moonvalley Capital, Banco Santander, Grupo Falabella, and BICE.

🇧🇷 Dattos, a financial analytics automation platform, raised a $3.8mn Series A led by Igah Ventures with participation from ABSeed, Investtech, and GR8 Ventures.

🇪🇸 Vitaance, an occupational health insurtech, raised a $2.3mn seed from Kfund, Kindred, Extension Fund, Shilling, Astorya, SoftBank, and Antai Venture Builder. The company plans to use the funds to expand to Latin America.

🇧🇷 4intelligence, a data analytics platform that helps companies predict demand and optimise inventory, raised a $1.9mn round from Inovabra (Bradesco). The company serves clients such as Coca-Cola and Volvo.

🇦🇷 Uali, an aerial drone manufacturer that enables companies to monitor large assets and create accident prevention models, raised a $1.9mn round from the Cornwall & Isle of Scilly Investment Fund. The company will open an office in Cornwall with the funds.

🇺🇸 VivaWell, an aggregator platform for health and wellness services, raised a $1.6mn round from family offices and angels. It predominantly operates in Argentina and Mexico, and will use the funds to expand in Mexico.

🇨🇱 Wbuild, a proptech that uses blockchain tokenisation to enable fractional home ownership, raised a $1.2mn round co-led by Amarena and Condor Ventures.

Did I miss any deals? Let me know!