Latin America remains a hot market for venture capital deals despite economic conditions
Despite the slowdown in investment dollar volume, the number of deals remains relatively stable, ensuring that this sector will continue to be a priority for investors.
2021 was the breakout year for venture capital deals in Latin America with $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. Recent economic conditions may put pressure on the dollar volume of venture capital deals, but the near-constant number of deals suggests the sector will continue to be an area of focus for investors.
Indeed, 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 is still a hot category for investors. The number of transactions — 280 in the first quarter and 261 in the second quarter — shows a 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. (For reference, there were 257 deals in the third quarter of 2021 and 243 deals 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 post-pandemic-era reforms. Globally, investors are questioning high valuations and pushing numbers downward, and Latin America is not immune to this development.
The region is likely to witness continued capital inflows based on the record amount raised in the last five years. For context, fintech investments in Latin America have 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 by Q3 2021.
Investors are likely to be more selective when deploying capital, as public markets affect private-market valuations. As a result, the nature of dealmaking is shifting toward small-dollar, early-stage investments and fewer late-stage, hundred-million-dollar bets. This is because early stage startups have a strict valuation range. Recent data shows that early-stage investments in Latin American startups continue to gain momentum: 158 seed-stage investments in the second quarter of 2022 (up 68% year-over-year) and 84 early-stage investments (up 20% year-over-year).
Why Latin America?
Investors are keen on Latin American startups as a growing middle class looks for products that help them navigate the digital infrastructure and significant red tape in the region, said Charles McGrath, one of the authors of a recent market report from alternative-asset industry provider Prekin. Data, told the Wall Street Journal. “It’s fueled a lot of consumer-tech and financial-tech innovation in the area,” he said. Additionally, Covid has forced innovation in the non-traditional banking segment as branches have lost much of their relevance.
The increase in product demand is driven by a high population of economically underserved consumers, 30% to 50% of consumers in the region’s major countries. Banks in the region 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 are the funds going?
According to Ventara, a research firm focused on startup and venture capital trends in Latin America, Brazil accounted for 55% of venture capital investment in 2021, followed by Mexico at 22%. Brazilian companies made the 6 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 megaround in 2021 ahead of its IPO in December.
Brazil-based payments firm Ebanx closed a $430 million investment last year.
In June 2022, Mexico-based digital bank Klar raised $70 million in equity funding at a $500 million valuation.
In July 2022, Chilean fintech Zeppelin, which offers an accounting and finance platform for small-to-medium-sized businesses, secured $230 million in debt and equity.
A view of the future
While the Latin American region will experience lower dollar volumes of venture capital investment due to difficult economic conditions and pressure on valuations, ongoing interest in early-stage companies presents opportunities for investors. Startups that manage to raise funds this year may be more expensive, but we expect the number of deals to remain stable, opening up new avenues for investors.
Of course, the fallout from economic pressures means that some companies are scaling back their growth intentions and others may be taking a more cautious approach to fundraising. Indeed, major companies in the region have continued to cut staff and at least two major companies – Ebanx and business platform Hotmart – have decided to postpone their 2022 IPOs. Given the growing interest in other sectors, including agribusiness, the carbon-capture space and healthcare, fintech may also see some relative decline.
Despite these challenges, some investors are betting that inflation will stabilize and that rising interest rates will not hamper economic growth. As such, they tend to thrive on the increased purchasing power of the Latin American population over time. We expect investment amounts to increase again as companies mature and live up to revenue projections. Indeed, the fintech sector is still the largest sector for venture capital investment in Latin America and includes 2,482 fintech platforms, which is 22.6% of the total number of fintech companies worldwide. Continued strong market demand and a high underserved population will ensure that venture capital investment – including fintech and financial services deals – will support companies that offer innovative solutions to consumer pain points.