Latin America experienced a particularly turbulent 2021. The consequences of the Covid-19 pandemic were still causing serious damage, and sectors as diverse as education, social security and job creation were facing a major crisis as well. While this reality grabbed headlines across the region, one area was booming: venture capitalism.
Throughout 2021, Latin American startups received almost US$15 billion from venture capitalists. This was an incredible development, especially considering that venture capital deals in the region barely reached the US$6 billion mark in 2013. Just for reference, the whole African continent only raised around US$5.2 billion in venture capital deals in 2021, this in spite of a 104% increase in the number of deals from the previous year.
Most relevant companies in the US venture capital space have been active in Latin America during the last two years. Leading firms such as SoftBank (which in 2019 created a US$5 billion Latin America Fund), Sequoia, Valor Capital and Tiger Global, as well as local VCs like Canary and Kaszek, increased their involvement in the region.
“A big part of that inequality [in LatAm] is the exclusion of access to income-generating opportunities like education or know-how, capital, network and markets”—Wenyi Cai
In order to analyze the recent rise of venture capitalism and its implications for Latin America, Nearshore Americas spoke with Wenyi Cai, Founder and CEO at Polymath Ventures, a venture studio that describes its mission as “building digital platforms to empower the middle-class of Latin America”.
Cai’s observations are particularly relevant in 2022, when venture capital investment has experienced a downturn. This is a global trend instigated by various factors, such as negative macroeconomic indicators. In the case of Latin America, many firms that initially jumped to invest in the region have not recommitted to it.
In spite of this slowdown, Latin America remains a region of excitement and potential growth for the venture capital industry.
What’s Driving LatAm’s Venture Capital Gravy Train
If there is a flagship for Latin America’s startup scene and venture capital ascension, that would undoubtedly be fintech. Countries such as Brazil, Mexico and Colombia have seen a rapid growth in the number of fintech startups. Many unicorns in the region are neobanks or fintech companies offering a diverse range of products.
This clearly responds to the high percentage of unbanked population in the region and the growing appetite for financial services. This scenario in the fintech space is being reproduced in various sectors. Prevalent issues in Latin America, such as inequality, are propelling the growth of startups trying to solve them, and the venture money that comes with them.
“Sometimes, people think about inequality as a matter of policy and not as a matter of markets,” said Wenyi Cai. “Of course, there are a lot of historical reasons for inequality, some of which are rooted in certain practices like colonialism and slavery, but I think that a big part of that inequality is the exclusion of access to income-generating opportunities like education or know-how, capital, network and markets. This, for me, is the root cause of the middle-income trap in LatAm.”
For Cai, what’s interesting about VCs and innovative business models is that they can use digital to break apart the inequality issues of access to education, capital, markets and network. It provides a solution to some of the problems of inequality in the region.
“We see it with more precision now, but in the beginning, our hunch was that digital and innovative business models could tackle both what type of services can be built for this demographic that has a lower capacity to pay, but also to give people and micro-businesses better access to income-generating opportunities like capital, market, education or know-how and network,” she said.
LatAm venture capital investment experienced a boom in 2021, increasing to over USD15bn. This occurred despite the poor, negative performance seen in most LatAm stock markets last year.
There were sixteen new “unicorns” in Latin America in 2021 and alreadyhttps://t.co/zSiW036BGq pic.twitter.com/e71PsSfuzK
— EM-Funding (@EMFunding) February 11, 2022
Do Governments Get It?
Technology innovation in the region is an area of growing concern due to its impact on markets and innovation. For some analysts, governments in the region are behind the wave and unintentionally blocking meaningful progress. For Cai, the maturity of the Internet is still in its early to mid-phases.
“Internet access is there; people can own smartphones, and data plans are accessible to a large extent of the population. What is still not very mature in the region is digital payments,” she said. “Even though Covid-19 helped a lot in getting people used to interacting with complex services, we still are a few years away from completely adopting services like digital payments.”
“The maturity of tech regulations is tied to the capacity to successfully implement these regulations”—Wenyi Cai
“In terms of tech regulation, we need to separate the regulation by itself and the capacity and resources to implement it. Focusing on fintech regulation, we have had mixed results in the region,” added Cai. “Take Pix in Brazil and CoDi in Mexico for example. Both are similar payment systems powered by central banks, but with different results and success rates. The maturity of tech regulations is tied to the capacity to successfully implement these regulations.”
The Niche for Professional Services Outsourcing
Now that there is a very well established appetite for technology investment in Latin America, what could that mean for other areas such as business process outsourcing (BPO) and knowledge process outsourcing (KPO)?
For Cai, the overall interest in tech talent in Latin America has increased a lot from US geographies mainly, and that is going to create good tailwinds for the outsourcing industry in the region.
“This scenario will also create competition, because some talent can go between tech companies and outsourcing industries. In the near future, I believe that there will be price competition and high growth in the industry,” said Cai.
“I think that there is still maturity of entrepreneurs and digital talent that needs to evolve as a normal part of the evolutionary process, but I think we are in a place where the interest and the maturity of the ecosystem in LatAm are going to converge in a few years,” she concluded.