It would be foolish to dismiss Latin America as a has-been after the past couple years of economic turmoil. Granted, the region is no longer minting unicorns at the pace it used to, but fewer SoftBank-backed high spenders in the region is not necessarily a bad thing, especially when there are so many cash-efficient startups willing to challenge incumbents.
More often than not, Latin America’s most interesting disruptors tackle problems related to fintech. It makes sense for them to: In a region where financial inclusion has a long way to go, fintech is more innovative and impactful than one may think. However, people in the region need a lot more than fintech, and startups are taking on these problems head-on.
“We anticipate that other colossal sectors like healthcare, logistics, communications and agriculture will experience substantial disruption in the near future,” said Julio Vasconcellos, a managing partner at VC firm Atlantico.
And according to Denis Pedreira of Prosus Ventures, education is also a space where technology will play a key role in closing the skills gap in the region. “There is a clear need for access to affordable and quality training, and traditional school models are being challenged. Technologies like AI will change the way we learn in K-12, higher education and the workplace,” he told TechCrunch+.
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Solving problems for Latin Americans doesn’t necessarily mean going B2C (business-to-consumer), though. There are a lot of pure B2B (business-to-business) plays that can address issues behind the scenes, from open banking APIs and supply chain management to vertical SaaS.
“In our case,” said Marta Cruz, a managing partner at NXTP Ventures, “we could not be more confident in our investment thesis, which aims only to invest in B2B startups, with the conviction that software companies are building long-term competitive advantages in underpenetrated markets.”
Because underpenetrated markets are always a business opportunity and talent can come from everywhere, Latin America is rife with startups these days. “As regional investors, we see lots of movement from countries like Colombia, Mexico, Chile and Argentina,” said Geraldo Melzer, founding partner of ABSeed Ventures.
Anecdotally, this is also confirmed by Magma Partners’ portfolio. “Some of our best investments, including Kushki, Global66, Houm, FZ Sports and Prometeo, come from smaller Latin American markets,” the firm’s managing partner Nathan Lustig told TechCrunch+.
Read on to learn more about where these investors are placing their bets, when they think Brazil’s IPO window might reopen, how to best pitch them, and more.
We spoke with:
- Denis Pedreira, Latin America Investments, Prosus Ventures
- Lolita Taub, general partner, Ganas Ventures
- Geraldo Melzer, founding partner, ABSeed Ventures
- Julio Vasconcellos, managing partner, Atlantico
- Rodrigo Vieira, partner, Caravela Capital
- Nathan Lustig, managing partner, Magma Partners
- Marta Cruz, co-founder and managing partner, NXTP Ventures
- Hernán Haro, founder and general partner, MrPink VC
The responses have been edited for length and clarity.
Denis Pedreira, Latin America Investments, Prosus Ventures
Image Credits: Reinaldo Coser
Except for Argentina, inflationary pressures seem to be receding in Latin America. How does the potential slowing of inflation change your outlook for venture capital investment and fundraising for the rest of the year?
Latin America has structurally higher inflation than developed markets and some other emerging markets. For example, the CPI [Consumer Price Index] in Brazil, Colombia and Mexico has averaged 5% to 6% over the past couple of decades versus 2% to 3% in the U.S. Inflation has always been a consideration in our investment decisions.
We look to mitigate inflationary impact by investing in high-growth markets and in platforms that provide outstanding value to customers. We also strive to unpick underlying fundamental growth from “empty calorie” inflation growth in our diligence.
As we invest off our balance sheet, we’re not constrained by short-term exit requirements and take a very long-term approach to investments. The recent spike in inflation has not changed our strategy as we expect these ups and downs in the market.
When do you expect to see tech IPOs again on São Paulo’s B3 stock exchange?
We have not seen any IPOs at the B3 — regardless of industry — since 2021. The local IPO window can be quite uncertain. For example, there were 65 IPOs in 2007 and 45 IPOs in 2021, the two most active years in the past two decades. And there was almost no IPO activity from 2014 to 2016.
While we have seen some follow-on activity in the past quarter, it’s still too early to call it a reopening of the equity capital markets. That said, we will likely see IPOs in more traditional sectors — like industrials and infrastructure — before tech IPOs.
Mega-rounds seem scarcer. Brazil, for example, hasn’t seen any new unicorns at all in 2023. Are you worried about this trend, and do you think it will last? How has it affected your capital allocation plans?
It is true that tech investments significantly declined from the unprecedented levels of 2021. That said, the current level of investment is similar to that of prior years, and probably 5x higher than when I started with Prosus (or Naspers back then) seven years ago.
Activity has been stronger in Series A/B than in later-stage/growth equity, but this can still be an interesting opportunity to back strong entrepreneurs who have built scale and proven businesses across our key sectors, including food, edtech, payments and fintech and classifieds, in the region.
Many Latin American unicorns let staff go in 2022. What are you seeing startups do to cut costs and reduce burn?
Most tech companies have taken a more prudent approach to cash and return on capital. The levers one can pull will largely depend on the situation. For instance, in addition to staff, we have seen initiatives around pricing optimization, marketing spend rationalization, sourcing, prioritization of new business initiatives, etc.
What would it take to reignite foreign investors’ interest in Latin America before the end of the year?
Foreign investors have not pulled out from Latin America altogether. There’s still appetite from VC, private equity and strategic investors because Latin America’s fundamentals remain attractive: a large and young population embracing online services at a fast pace; a vibrant business community in need of digital solutions; gaps in human and physical infrastructure that can be closed by technology; and a talented entrepreneurial pool with bright ideas and enthusiasm to get things done.
Macroeconomic (inflation, FX, etc.) and political stability, combined with a strong institutional framework also contribute to consolidating LatAm’s position as a strong destination to foreign investment.
Do you think most M&A targets will be struggling companies looking for a buyer? Or would they be companies like Pismo, which was reportedly not seeking to be acquired or even raising money before Visa bought it for $1 billion?
Both ends of the spectrum will remain active. Obviously, we hope to see more “Pismos” soon! M&A activity will continue to be driven by the economic motivation of matching an asset with its best owner in each point of its life cycle.
Many investors argue that fintech is the most exciting sector in the region. Do you agree, or do you see something that’s even better?
We have seen amazing platforms like XP, Nubank and Creditas build innovative products to address structural challenges in the financial services industry. Today, the market is much more competitive than when they started, but no doubt fintech will continue to be an exciting space.
We also remain excited about the food ecosystem. In addition to growing the core, we see large opportunities in adjacent categories like grocery, pharma, local commerce, merchant solutions and fintech.
Education is also a space where technology will play a key role in closing the skills gap in the region. There is a clear need for access to affordable and quality training, and traditional school models are being challenged. Technologies like AI will change the way we learn in K-12, higher education and the workplace.
Do you think innovation around product and business model is enough for Latin American startups, or do you prefer companies that also take technology risk (i.e., deep tech companies)?
Innovation can take different shapes and forms. We don’t make a strict choice between the two models and believe the most successful companies will combine elements of both approaches.
Are you open to cold pitches? What is the best way a founder can reach you?
Though most of our investments come from referrals within the portfolio, co-investors and our advisor network, we are always open to learn about new businesses being built, so founders should not hesitate to reach out.
Lolita Taub, general partner, Ganas Ventures
Image Credits: Ganas Ventures
Except for Argentina, inflationary pressures seem to be receding in Latin America. How does the potential slowing of inflation change your outlook for venture capital investment and fundraising for the rest of the year?
The potential slowing of inflation is a positive development for venture capital investment and fundraising. Inflation can make it more expensive for startups to raise money as investors become more risk-averse. A slowdown in inflation could lead to more money flowing into the venture capital market, which would help to fuel the growth of startups in the region.
When do you expect to see tech IPOs again on São Paulo’s B3 stock exchange?
In the next 12 to 18 months. The Brazilian tech market has matured significantly in recent years, and there are now a number of well-established companies that are ready to go public. Nubank’s IPO is a good example of this.
Mega-rounds seem scarcer. Brazil, for example, hasn’t seen any new unicorns at all in 2023. Are you worried about this trend, and do you think it will last? How has it affected your capital allocation plans?
I am not worried about the trend of fewer mega-rounds. The global venture capital market is still growing, and there is still a lot of money available for early-stage startups in Latin America. However, I do think that investors will be more selective with deals, and they will be looking for companies with strong fundamentals and a clear path to profitability.
The market has not changed our capital allocation strategy, and we continue to look back to the best founders in the U.S. and Latin America.
Many Latin American unicorns let staff go in 2022. What are you seeing startups do to cut costs and reduce burn?
I am seeing startups do a number of things to cut costs and reduce burn, including:
- Reducing headcount.
- Negotiating lower prices with vendors.
- Deferring nonessential expenses.
- Increasing efficiency.
- Pivoting to a more sustainable business model.
