VC investment in Latin America ballooned in 2021. Can it survive the downturn?

Demographics, opportunity and a new generation of founders brought venture dollars south, but now the “LatAm thesis” could be tested by a downturn.

Plane dropping money

Venture capitalists have woken up to the opportunity in Latin America.

Illustration: sorbetto/DigitalVision Vectors; Protocol

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

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

Nyatta was early to 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 it was an outlandish proposition — in the previous two years combined, LatAm startups had only raised $3.9 billion, and Nyatta was entering the market with a fund bigger than that.

It’s not so unorthodox now. In the last year, venture capitalists have woken up to the opportunity in Latin America and made it the fastest-growing region for investment in the world. (Investors have also discovered Miami, and moved there en masse.)

In 2021, venture capitalists invested $14.8 billion into startups in Latin America. The nearly $15 billion was more than the previous six years of venture investment combined, according to PitchBook. Firms like Sequoia started publishing blog posts saying the timing was finally right for the region.

“We used to have to explain: Why LatAm?” said QED’s Mike Packer, an investor whose fintech-focused firm had already done four investments in Latin America before he joined in 2016, and now has over 40. “At some point that flipped last year. … We saw a bunch of new funds entering 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 stick around. Already, investors who haven’t built large portfolios, particularly hardest-hit growth stage investors, have started 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 the other capital has disappeared,” he said. “It’s vanished.”

After a crazy year globally for the venture ecosystem, a downturn in 2022 is already challenging who was a true believer in investing the opportunities of the LatAm thesis and who was just opportunistically marketing to founders with a blog post.

The ‘LatAm thesis’

SoftBank was one of the largest whales to enter the LatAm ecosystem when it made a splash with a $5 billion fund in 2019.

The way Nyatta tells it, former Sprint CEO and SoftBank exec Marcelo Claure had been frustrated sitting in his office in Tokyo as he watched a parade of entrepreneurs come in to pitch Masa Son and didn’t see many who, like him, were from Latin America. After meeting with over 30 founders in Miami and doing a speedy 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 had historically been underfunded compared to other world regions. For a while, it was hot for venture firms to set up a China fund or an India fund (Sequoia has both). Even Southeast Asia had seen a large spike in venture investment following the rise of companies like Grab, Gojek and Tokopedia.

Latin America has a population similar in size to Southeast Asia, equally 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 struck me the minute I joined VC,” said Lightspeed’s Mercedes Bent, who began investing for the firm in LatAm when she became a San Francisco-based partner at the firm in 2019. “My thesis of investing is all about going into underrepresented regions and founders and giving them capital, since I think you can get some really great returns that way.”

The tech ecosystem in Latin America has also matured in recent years. Local VC funds like Kaszek, Monashees and Canary had been investing in a strong seed and early-stage ecosystem. Many local entrepreneurs were working as scouts or referring deals to larger U.S. and global funds.

A wave of founders and startup employees were now onto their second and third companies. Both Groupon and Uber seeded “mafias” of entrepreneurs who built up local operations for those U.S.-based companies before starting something of their own. Rocket Internet had a lot of LatAm companies in its heyday that have created their own ecosystem.

Most talked about, though, is the “Rappi mafia.” Rappi’s founders joined Y Combinator’s winter 2016 batch, then went back to Colombia to build their food delivery startup. Despite not having an exit yet, the startup has already become something of a legendary entrepreneurial school, with some VC firms estimating that 100 startups have come from its alumni group.

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

The turning point

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

Ironically, Nubank founder David Vélez had been hired by Sequoia over a decade ago to help “chart its course” in Latin America, the firm said in a post. The real economies were “rife with problems,” but the digital economy had potential, he found. Vélez thought that the ecosystem was underwhelming at the time, with more startups focused on the “X for LatAm” ideas than original solutions.

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

“Looking back, the thesis that David Vélez developed for Sequoia a decade ago was spot on — it was just too early. Now, that opportunity is here,” Sequoia wrote.

Later-stage growth capital like Tiger Global, General Atlantic and Riverwood all started doing deals. A combination of strong founders, later-stage capital and some IPOs all added up to a big moment for the region.

Half of the region's unicorn startups, those valued at over $1 billion, were created in 2021, according to PitchBook data. Companies like CargoX, Clip and Konfio crossed the billion-dollar valuation threshold. Other already-large successes, like Kavak and QuintoAndar, raised extra cash.

“Every fund I know, basically, was investing in Latin America last year. All of the big funds to the sector specialist funds, it seemed like everybody was taking a look at the region,” Bent said, even if they were using Zoom and not actually sending people there.

Beyond just the cash influx, funders and founders are working to build a community to support it, lest the next Vélez similarly find the scene underwhelming. Mexico City-based founder and funder Kate Kiewel would argue that Mexico lags behind Brazil in terms of market maturity by five or seven years, but it’s catching up. She started an entrepreneur network called Khôra to bring investors and founders together, including building a database of all the funds investing in the region.

“There's a ton of more capital coming into the region,” Kiewel said. “However, we still need to give this really early support for founders to really get the confidence to go full-time and to build their business.”

Is the timing still right?

If the timing was right in 2021, there’s questions now about what will happen in 2022. Already venture dollar volume fell 30% from the fourth quarter of 2021 to the first quarter of 2022.

Latin America hasn’t been immune from the greater downturn and macro instability. The market faces a similar challenge of global startups where a lot of the early-stage firms have dry powder to invest but the growth firms are being hit harder. SoftBank has announced it’s largely stopping new investments. Nyatta and other fund managers have left the firm, and SoftBank spun out its early-stage venture experiment into its own group. Tiger Global is down 50% for the year and has largely retreated after a blistering deal pace.

In some ways, a challenging economic environment is a home-field advantage for entrepreneurs used to building in countries facing instability. “High inflation, high interest rates, fear of recession, general macro and political uncertainty, limited access to capital. This is a home game!” one founder told Nyatta.

But there are still plenty of investors with conviction that the timing is right, and like a good investor, they see an even better opportunity to invest in the region. Lightspeed had found the prices too high in the second half of 2021 and didn’t lead any new investments, Bent said. She’s already done several now in the first half of 2022 as prices have cooled.

LPs are still showing interest in backing investment vehicles in the region. This week, Headline VC announced a roughly $170 million fund focused on LatAm based in Brazil. Nyatta is building a new fund, Bicycle, which will specifically be focused on late-stage investing in LatAm. Ex-SoftBank investors like Paulo Passoni will be joining the team once their non-competes expire. Local venture capitalists are also still raising: Last week, Maya Capital unveiled its second fund of $100 million to invest in early-stage startups.

QED is also putting down roots, hiring São Paulo-based Camila Vieira to join the team and help with on-the-ground brainstorming. “As we think through deal flow and getting the right startups that want us on their board, we need to be able to continue to be plugged into the ecosystem and the right talent,” Vieira said.

There was certainly a lot of tourist VC money coming in and out. But Packer is looking forward to a return of working more hand-in-hand with local funds, and having partners like Vieira based in Brazil to do it.

“We went from trying to do deals together to doing deals and telling each other about them after. It was much harder to collaborate,” QED’s Packer said. “Things have certainly slowed, and so I think we’re in a period now where we’re going to see more collaborations.”


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