For years now, the sheer number of Latin American tech startups and the volumes of VC funds flowing into them have been used as the go-to argument to position the region as the next big thing in tech.
That argument has been slowly fading, though. A concerning macro landscape and the region’s reputation for volatility has cooled the passion that investors had for the Latin American startup scene, bringing into question the short and mid-term viability of the ecosystem as a whole.
The strength of a startup ecosystem is an indicator of the health and potential of an economy, whether local, national or regional. The World Economic Forum (WEF) describes startups as “catalysts of economic growth”, and the Richmond Fed sees them as sources of jobs, drivers of economic development and, most relevant to regions like Latin America, as attractors and retainers of talent and entrepreneurs. As such, the subcategory of tech startups is used as part of the most relevant (and certainly popular) IT credentials of a country or city.
But market observers, experts on the development of Latin America’s tech landscape and (increasingly) US businesses know that there’s much more to the region when assessing its capabilities as a source of Nearshore IT.
Talent, not Funding
NSAM spoke to several sources who have been working closely with Latin American tech companies and individual talents for several years. All of them regarded startup numbers as a relevant indicator, but considered them only a part of the story.
Aron Ezra, Chairman of Vegas-based software development shop Plan A Technologies, underscored the importance of talent, beyond the number of startups and how much money is flowing in.
“The sheer number of new tech startups is certainly part of the story, but I think what’s even more revealing is the actual quality of the engineers there,” said Ezra. “There’s a strong culture of entrepreneurship in several of the countries across the region, and as Latin America’s infrastructure continues to modernize, I think we’ll continue to see more brick and mortar entrepreneurs decide to move into the digital space.”
Reports on the region’s tech ecosystem tend to focus heavily on its popularity among investors (measured in volume of VC flows) and its current entrepreneurial zest (measured in the number of emerging businesses).
Talent is seldom mentioned, even though US companies consider it perhaps the most important factor when seeking for investment and sourcing oportunities, whether offshore or nearshore.
According to Ezra (whose firm has worked with companies as big as Verizon, Chevrolet, Kellogg’s and AT&T), Latin America has proven a valuable source of talented engineers.
“We’ve been lucky enough to work with multiple terrific companies in the region, and we’ve been really impressed with the level of innovation and quality of the businesses,” he stated. “We hire new technical and creative talent in LATAM every week, and we’ve been blown away by the technical skill and dedication of the staff members we’ve been able to find.”
Jeff Mains, CEO at Dallas-based accelerator Champion Leadership Group, also pointed to talent availability as one of the most relevant indicators for Latin America’s IT ecosystem, adding that investors should be aware also of local support networks and the state of regulatory environments.
“The number of tech startups in Latin America is a good beginning point, but it should be part of a more thorough due diligence process that analyzes the ecosystem and elements that affect a startup’s success in this lively and developing market”, commented Mains.
“The sheer number of new tech startups is certainly part of the story, but I think what’s even more revealing is the actual quality of the engineers there”—Aron Ezra, Chairman of Plan A Technologies
Tech industry analyst Ray Fernandez underscored the importance of diving deeper into the region, getting to know the terrain.
“Entrepreneurs need to do thorough research on all aspects, not just measure how many tech startups are in play,” he commented. “I would suggest they travel and settle in the region, build contacts, get feedback and really submerge themselves into the political, economic, legislative, and social culture of a country.”
The Scene Lives
Several reports paint a grim outlook for Latin America’s tech scene since last year, using a decline in VC flows as their main argument.
The volume of VC funds flowing into Latin America fell from US$19 billion to US$8.3 billion between 2021 and 2022, according to Crunchbase data. As of the first half of 2023, the region has yet to break the US$1 billion mark.
The sharpest drops in VC investment were seen among late-stage financing deals, with early-stage funding and seed funding deals faring better. Most startups don’t make it to exit, failing at some point between their second and fifth year.
While Latin American startups don’t seem exceptional in their rate of failure, the fact that late-stage financing has fallen so sharply in the region adds the risk of failure and to the overall perception of volatility in the ecosystem.
Also, while the region is often portrayed as an emerging contender in the global tech scene thanks to what’s described as a buoyant startup ecosystem, it isn’t as impressive as what can be found in other onshore and offshore geos. São Paulo is the only scene in the region to generally rank among top global players, and it tends to find itself in the lower end of that scale.
Taking all of the mentioned above into account, the argument could be made that investors should opt for more stable, developed ecosystems in North America, Europe, Asia and even the Middle East. But they would be missing out on what more and more companies in the US, Canada and the Europe are seeing: a growing IT ecosystem which can feed their needs for talent, expertise and even innovation.
According to remote hiring platform Deel, hirings of Latin American software developers by US companies increased by 50% Y-o-Y during Q1 2023. More and more tech providers keep opening offices in the region, or expanding their current operations. Tech vendors consulted by NSAM have been reporting a consistent demand for engineers and tech consultants.
This does not mean, however, that vendors can go on cruising. A healthy startup scene feeds the whole tech ecosystem, allowing for an increase in opportunities for talent that might otherwise take their expertise someplace else. It also provides the chance to develop expertise locally, making importation less of a need.