How Latin America Became the Next Big Tech Frontier
Buying a used car, renting an apartment or opening a bank account are all nightmares in Latin America, due to red tape, lethargic bureaucracy and legal pitfalls.
Start-ups created to tackle such problems are propelling the region to the forefront of the technology boom in emerging markets. Last year $ 4.1 billion in venture capital investment poured into Latin America, surpassing Southeast Asia’s $ 3.3 billion and beating Africa, the Middle East and Central and Eastern Europe combined, according to the Global Private Capital Association.
In the first half of this year, Latin America attracted $ 6.5 billion in venture capital, close to India’s $ 8.3 billion.
âWe started in this industry in 1999, when there was hardly any internet, almost all connections were switched and the internet penetration rate was 3%,â said HernÃ¡n Kazah, co -Founder of Kazhek Ventures, the largest start-up fund in Latin America. with over $ 2 billion in capital raised to date. âToday, Latin America finally has critical mass in almost every market. “
Nubank embodies the new generation of Latin American start-ups. Co-founded in 2013 by Colombian entrepreneur David VÃ©lez after it took her six months to open a bank account when he moved to SÃ£o Paulo, it has grown exponentially and now has more clients than any other autonomous digital bank in the world.
An upcoming IPO could value Brazilian fintech at over $ 50 billion, according to recent reports. That compares to the $ 79 billion worth of Mercado Libre, the region’s response to Amazon and Latin America’s most valuable company, founded in 1999 during a first wave of tech activity.
The latest generation of Latin American start-ups have caught the attention of some of the richest investors in the tech world. Bolivia-born SoftBank COO Marcelo Claure announced a second dedicated Latin American tech fund last month, committing $ 3 billion in addition to the $ 5 billion allocated to the first fund in 2019.
âWe were incredibly surprised at the quality and quantity of large companies that lacked capital, so we started to invest,â Claure told the Financial Times. âThere is so much room to improve the lives of people in Latin America, because all the systems are inefficient and undermined by bureaucracy. . . huge opportunities for technology to disrupt.
One of those disruptors is Mexico’s first unicorn, Kavak. Valued at $ 8.7 billion in a fundraising round last month, the company aims to improve the often dangerous experience of buying a used car. It offers buyers mechanical control, a three-month warranty, fast online credit and door-to-door delivery.
Brazilian company Quinto Andar simplifies the challenge of renting an apartment by removing brokers and offering its own insurance to approved tenants, eliminating the need for huge deposits, guarantors or expensive insurance.
Chilean start-up NotCo deployed innovative AI to develop unusual combinations of plants to mimic the taste and texture of milk, mayonnaise, ice cream and meat. Valued at $ 1.5 billion in a July funding round, NotCo has now expanded to the United States and Canada.
Kavak, Quinto Andar and Nubank highlight how Latin America’s most successful start-ups are dedicated to solving the region’s problems.
âThis story of bringing in Silicon Valley and trying to tropicalize it didn’t work,â said Ivonne Cuello, former executive director of the LAVCA region private capital association. âThe models that started to be successful were the ones that said, ‘There are structural problems in the area that can be solved by new businesses. . . designed exclusively for the needs of the region â.
Kazah de Kazhek said that innovators in Latin America are now the envy of the crowd. âYou see companies outside the region saying ‘I want to be the Nubank of Germany’. This hadn’t happened before. “
Financial services have dominated the startup scene in Latin America, with around 40% of last year’s private funding going to fintechs, according to data from LAVCA.
Before the pandemic, more than half of the region’s citizens did not use a bank. In just a few months, from May to September of last year, 40 million people opened a bank account, according to a study by Mastercard.
Fintech start-ups like Nubank and UalÃ¡ in Argentina have played a key role in facilitating the expansion. In Brazil, the central bank launched Pix, a fast money transfer system for mobile phones with 110 million registered users.
âSome of the most profitable banks in the world are in Brazil and Mexico, so this is a clear first success,â said Claure of SoftBank. âThese banks are very inefficient, lots of branches, long lines and all that. . . so we started with fintech.
As in other regions, the pandemic has accelerated digital change. Latin America has some of the world’s highest per capita coronavirus death rates and some of its worst recessions, but Covid-19 has also forced much more economic activity online.
âFor many years Latin America, a region that accounts for a significant percentage of global GDP as they are middle-income countries, has been underinvested in technology,â said Pierpaolo Barbieri, who founded UalÃ¡ in 2017. âWhat we are seeing now is a general catch-up where everyone is rushing to see what the opportunities are.
In some areas, the region is still lagging behind. âSeventy percent of commerce in China is done online, almost 50 percent in the United States and. . . it’s still 20 percent in Latin America, so the process of economic digitization still has a long way to go, âadded Barbieri.
Julio Vasconcellos, co-founder of Atlantico, a Latin American venture capital fund, compared the total market capitalization of technology companies in the region as a proportion of GDP with the same ratio in Asia.
âWhen you look at the evolution of the US market, the evolution of the Chinese market and now Latin America, the curve tends to be very similar over time,â he said. âIt’s slow and gradual until it finally hits an inflection point and it really starts to accelerate.
“Latin America is going through this inflection point about 10 years after the United States and about seven to eight years after China.”
The total capitalization of Latin America’s tech market stands at 3.4% of GDP, he said, compared to 30% in China and 14% in India. If Latin America were to reach Chinese levels of technological participation in the economy “we are talking about the equivalent of over $ 1 trillion in market value being created.”
How long it could take is unclear. Francisco Alvarez-Demalde, co-founder of US-based Riverwood Capital, has been investing in Latin American technology since 2008. Although he acknowledges that the region is seeing “a lot of excitement” and revenue growth in the tech sector should be strong, he notes funding comes and goes.
âThere is a significant increase in the availability of capital in the region, which has accelerated in recent years at a very rapid rate,â he said. “Where we are in the cycle is hard to say [â.â.â.] we should be prepared for volatility on this front.
The region faces other challenges. As a major exporter of raw materials, it is subject to economic booms and recessions and its policies are volatile. An ongoing electoral cycle is sparking a wave of protest candidates and calling for greater state intervention in the economy.
There are also practical problems. Except in Brazil, software engineers are scarce and universities do not produce enough technology graduates. Fixed broadband connections are lacking in many areas.
SoftBank’s Claure, meanwhile, is comfortable increasing its technological bets. âToday, the Latin American fund has more than 100% IRR [internal rate of return] in local currency and it is probably the best performing fund we have today from an IRR perspective.
Three successes of Latin American start-ups
Nubank claims to be the most successful start-up scene in Brazil. Since the launch of a credit card with no annual fee in 2014, the fintech has accumulated more than 40 million customers across its home country, Mexico and Colombia.
A funding round this year gave the unicorn a valuation of $ 30 billion and it is now considering a first public offering in the United States. With a focus on technology and customer service, the SÃ£o Paulo-headquartered group challenged a Brazilian banking industry known for its high fees and bureaucracy.
Through its smartphone app, Nubank also offers personal and business accounts, loans, insurance and investment products.
The online used car platform Kavak was founded in Mexico in 2016 by Venezuelan entrepreneurs. The company recently raised $ 700 million in a funding round that valued it at $ 8.7 billion, one of the highest in Latin America. Investors include General Catalyst, SoftBank, and others.
Customers can buy or sell their used cars on the site, with the company acting as an intermediary and performing vehicle inspections as well as financing, warranties and door-to-door delivery. The company now operates in Brazil and Argentina and aims for further expansion.
Rappi is the exceptional success of the Colombian start-up. Local entrepreneurs started the business in 2015 to deliver groceries, but it has since expanded into areas such as financial services. After expanding to nine countries and more than 200 cities, it aims to become Latin America’s âsuperapplicationâ.
One of Rappi’s innovations is the Turbo Fresh service, which aims to deliver the most requested products to customers in 10 minutes, using sophisticated âlast mileâ logistics. The name of the company is a pun on “rÃ¡pido”, the Spanish word for “fast”.