Venture capital investments in Latin America exploded in 2021

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Shu Nyatta’s friends thought he was crazy when he said he was going to move to Miami and start investing in businesses in Latin America.

“Now that’s an uninteresting thing to say,” he said. “It’s so funny, but it’s just a testament to how few people know the future.”

Nyatta was at the start of the “LatAm thesis” in 2019 when he helped launch SoftBank’s $5 billion investment fund focused on the economic region known as “LatAm,” consisting of Mexico, Central America and South America. You can forgive his friends for thinking that was a far-fetched proposition — in the previous two years combined, LatAm startups had raised just $3.9 billion, and Nyatta was entering the market with a fund. more important than that.

It’s not so unorthodox now. Over the past year, venture capitalists have realized the opportunity offered by Latin America and made it the fastest growing investment region in the world. (Investors have also discovered Miami, and moved there in droves.)

In 2021, venture capitalists invested $14.8 billion in startups in Latin America. The nearly $15 billion was more than the previous six years of venture capital investment combined, according to PitchBook. Companies like Sequoia have started posting blog posts saying the time has finally come for the region.

“Before, we had to explain: why LatAm?” said Mike Packer of QED, an investor whose fintech-focused business had already made four investments in Latin America before joining in 2016, and now has more than 40. last year. … We saw a bunch of new funds come into the market because all of a sudden the LatAm thesis was known. The cat was out of the bag, if you will.

The question now is who will stay. Already, investors who haven’t built large portfolios, especially the hardest-hit growth-stage investors, have begun to pull back. Some funds that have made a lot of investments and are invested in the region are sticking around to protect their interests, Nyatta said.

“All other capital is gone,” he said. “He disappeared.”

After a wild year globally for the venture capital ecosystem, a downturn in 2022 is already a challenge for anyone who truly believed in investing in the LatAm thesis opportunities and was content with opportunistic marketing from the founders with a blog post.

The “LatAm thesis”

SoftBank was one of the biggest whales to enter the LatAm ecosystem when it caused a stir with a $5 billion fund in 2019.

According to Nyatta, former Sprint CEO and SoftBank head Marcelo Claure was frustrated sitting in his office in Tokyo as he watched a parade of entrepreneurs enter to introduce Masa Son and saw none. not many who, like him, were Latin. America. After meeting more than 30 founders in Miami and doing a quick tour of Brazil, Colombia, Mexico and Argentina in a week, Nyatta found himself “blown away” by the founders and the opportunities he saw.

Latin America has always been underfunded compared to other regions of the world. For a while, it was hot for venture capital firms to set up a Chinese fund or an Indian fund (Sequoia has both). Even Southeast Asia has seen a surge in venture capital investment following the rise of companies like Grab, Gojek and Tokopedia.

Latin America has a population similar in size to Southeast Asia, also young and digitally native, and has twice the region’s GDP: However, it was still only receiving half the funding in 2019.

“The arbitrage opportunity hit me as soon as I joined VC,” said Lightspeed’s Mercedes Bent, who began investing for the firm in Latin America when she became a firm partner at San Francisco in 2019. “My investment thesis is to go to underrepresented regions and founders and give them capital, because I think you can get really good returns that way.

The tech ecosystem in Latin America has also matured in recent years. Local venture capital funds like Kaszek, Monashees and Canary had invested in a strong seed and start-up ecosystem. Many local entrepreneurs worked as scouts or referred business to larger US and global funds.

A wave of startup founders and employees were now on their second and third ventures. Groupon and Uber created “mafias” of entrepreneurs who created local operations for these US-based companies before starting their own business. Rocket Internet had many Latin American companies in its heyday that created their own ecosystem.

The most talked about, however, is the “Mafia Rappi”. The founders of Rappi joined Y Combinator’s 2016 winter group, then returned to Colombia to create their food delivery startup. Although it has no exit yet, the startup has already become something of a legendary entrepreneurial school, with some venture capitalists estimating that 100 startups have emerged from its alumni pool.

For Nyatta, Bent and others, the region had moved past an old stigma of only “cutting and pasting” ideas from existing high-profile startups. Particularly strong markets had emerged in Brazil and Mexico.

Turning

While the SoftBank megafund was one of the first major signals for other investors to start taking a look at the region, an even bigger signal came in 2021 when Warren Buffett’s Berkshire Hathaway invested $500 million. dollars in Brazilian fintech Nubank.

Ironically, Nubank founder David Vélez was hired by Sequoia more than a decade ago to help it “map its way” in Latin America, the company said in an article. Real economies were “beset with problems”, but the digital economy had potential, he found. Vélez thought the ecosystem was disappointing at the time, with more startups focused on “X for LatAm” ideas than original solutions.

In 2013, he launched Nubank, attracting seed investment from Sequoia and local investor Kaszek. When it went public last year, Buffett was an investor and had a valuation of $45 billion. Even after a crash in the fintech market, it’s still a $20 billion market cap company.

“Looking back, the thesis David Vélez developed for Sequoia ten years ago was right – it was just too soon. Now that opportunity is here,” Sequoia wrote.

Later-stage growth capitals like Tiger Global, General Atlantic and Riverwood have all started making deals. A combination of strong founders, later-stage capital and a few IPOs has been a big moment for the region.

Half of the region’s unicorn startups, those valued at more than $1 billion, were created in 2021, according to data from PitchBook. Companies like CargoX, Clip and Konfio have passed the billion dollar valuation threshold. Other already significant successes, such as Kavak and QuintoAndar, have raised additional funds.

“Every fund that I know of, basically, was investing in Latin America in the last year. All the big funds to the specialist funds in the sector, it seemed like everyone was looking at the region,” Bent said, even though they were using Zoom and didn’t actually send people there.

Beyond the influx of money, backers and founders are scrambling to build a community to support it, lest the next Vélez find the scene disappointing. Mexico founder and founder Kate Kiewel would argue that Mexico is five or seven years behind Brazil in terms of market maturity, but it is catching up. She launched a network of entrepreneurs called Khôra to bring investors and founders together, including creating a database of all funds investing in the region.

“There’s a ton of additional capital coming into the region,” Kiewel said. “However, we still need to provide this very early support to founders so that they really have the confidence to work full-time and grow their business.”

Is the timing always right?

If the time was right in 2021, now the question is what will happen in 2022. Already, the volume of venture capital dollars has fallen by 30% between the fourth quarter of 2021 and the first quarter of 2022.

Latin America was not spared from the larger slowdown and macroeconomic instability. The market faces a similar challenge for global startups where many start-ups have dry powder to invest in, but growing businesses are hit harder. SoftBank announced that it was largely halting new investments. Nyatta and other fund managers left the company, and SoftBank spun its venture capital experiment into its own group. Tiger Global is down 50% for the year and largely down after a blistering pace of trading.

In some ways, a tough economic environment is an on-the-ground advantage for contractors accustomed to building in countries facing instability. “High inflation, high interest rates, fear of recession, macroeconomic and general political uncertainty, limited access to capital. It’s a home game!” a founder says Nyatta.

But there are still plenty of investors who are convinced the time is right and, like a good investor, they see an even better opportunity to invest in the region. Lightspeed had found prices too high in the second half of 2021 and did not conduct any new investments, Bent said. She has already made several now in the first half of 2022 as prices have cooled.

LPs continue to show interest in supporting investment vehicles in the region. This week, Headline VC announced a roughly $170 million fund focused on Brazil-based LatAm. Nyatta is creating a new fund, Bicycle, which will specifically focus on late-stage investments in LatAm. Former SoftBank investors like Paulo Passoni will join the team once their non-compete expires. Local venture capitalists also continue to raise funds: last week, Maya Capital unveiled its second $100 million fund to invest in early-stage startups.

QED is also putting down roots, hiring Sao Paulo-based Camila Vieira to join the team and help with on-the-ground thinking. “As we think about deal flow and get the right startups to want us on their board, we need to be able to continue to be connected to the ecosystem and the right talent,” Vieira said.

There was certainly a lot of tourism venture capital money coming in and out. But Packer looks forward to a return to working more closely with local funds and Brazil-based partners like Vieira to do just that.

“We went from trying to get deals together to deals and then talking to each other about it. It was a lot harder to collaborate,” QED’s Packer said. “Things definitely slowed down, and so I think we are now in a period where we are going to see more collaborations.”

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