Nearshore Americas

A VC’s View on Finding “Disruptive” Stars Among LATAM’s Burgeoning Startups

Venture capitalists are hot on the tech landscape in Latin America, in large part because populations from Mexico to Brazil are embracing social media and mobility. When combined with innovative business models and low startup costs, these trends spell plenty of opportunity for a new generation of entrepreneurs.

“The companies we invest in can disrupt major players in Latin America,” says David Blumberg, Managing Partner of Blumberg Capital in San Francisco. “And a big reason for this is that in the past 15 years the cost of an IT startup has dropped by 80%.”

Blumberg Capital focuses on early-stage opportunities, with specific attention to those startups that can disrupt markets over the long haul. In Latin America a legacy of corruption, excessive paperwork, and a lack of transparency has resulted in a regional market ripe for transformation. For Blumberg Capital, this spells opportunity in everything from mobility and B2B/B2C to social media and enterprise software. But perhaps the biggest window is in consumer-friendly financial services – an area where the region has been under-served.

“A company like Lenddo, which we have invested in, is a good example,” says Blumberg. “It is headquartered in New York City, but has offices in Colombia and Mexico. They offer consumer lending by creating proxy credit scores that greatly expand their market reach.”

Lenddo leverages social media data and microfinance strategies to serve the under-banked, a population that numbers in the hundreds of millions in Latin America.

“Latin America is not very good at building credit bureaus,” says Blumberg. “Lenddo can leapfrog traditional methods and use data from social media to serve a huge Latin American consumer class that needs access to credit.”

Assessing the Opportunity

In order to know if a startup has value and staying power, Blumberg Capital leverages its own internal expertise, people on the ground in Latin America, and, most recently, a partnership with California-headquartered IT services firm UST Global, which includes among its technology partners Oracle, IBM, Microsoft, SAP, and Cisco.

“We provide solutions to Fortune 1000 companies, and can help assess the innovations that Blumberg Capital’s startups bring to the table,” says Saurabh Suri, Senior Director of UST Global. “After that, we have a client base that can operationalize and industrialize these solutions.”

For a company of UST Global’s size, part of the appeal of Blumberg Capital is that it has resources in Latin America that can provide early assessments of management teams, technology, and business models, with a particular view to how innovation might disrupt the market. As it stands, Blumberg Capital assesses thousands of companies a year, and though it will invest in only about ten, it is developing a track record in the region.

“We now have over a decade of experience in Latin America,” says Blumberg. “We know the people in our portfolio of companies, and are always on the look-out for good ideas.”

The company also sees Latin America as a place where tech startups from other regions can expand. For example, German startup Kreditech, a consumer lending company that leverages Big Data to expand credit scores to the under-banked, recently received financing to expand into Mexico, and is expected to add Peru and Brazil later in 2014.

“By leveraging Big Data, Kreditech can find new sources of information and expand credit offerings to a vast number of people and families,” says Blumberg. “In Latin America, the large banks simply aren’t set up to innovate like this.”

But with a global company like UTS as a partner, Blumberg says that there is opportunity for the large firms in Latin America to get in the game.

“UST has major banks in Mexico and the rest of Latin America as customers,” says Blumberg. “They have access to C-suite officers. We can take the technologies from the startups and suggest a white label offering. Big players like Bancomer and others can then have the relationships with the customers that they want, and we can keep the underlying technology.”

Big Data is Mobile & Social

What is clear when looking at the tech startup opportunity in Latin America is that, because the region’s young population has embraced mobile technologies and social media, any innovation that can leverage these data sources to offer a service has a great chance of success.

“Bogota, Colombia, has more Facebook user accounts than New York City,” says Blumberg. “In Latin America, there is a huge young population that is heavily engaged with social media and mobility.”

Blumberg sees a younger generation of consumers and entrepreneurs in Latin America that has given up landlines (a frustrating and costly experience in many countries), and that knows how to use the latest in ICT to develop new business models.

“Big Data represents a huge opportunity in Latin America, and young entrepreneurs know it,” says Blumberg. “This kind of information has never been available before. Latin America, due to historical inefficiencies, is a ‘high friction’ market. Now with all this information available the friction in the market can be greatly reduced for both the consumer class and for the enterprise.”

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Which means that there is opportunity with other tech startups active in media aggregation, but also in areas such as storage, virtualization, and security. In Latin America – as elsewhere – there is a chance for these offerings to help smaller businesses disrupt the dominant players.

“The twin pillars of disruption and innovation are getting closer and closer in Latin America,” says Blumberg. “But if you look at the growth rates in the economies, they have far outpaced the existing infrastructure. It can be more costly to get a product from the coast in Colombia to the capital city Bogota than from a port in China.”

And though poor infrastructure is a problem, it is also an opportunity in areas such as virtualized supply chain management, as provided by a company like CaseStack, and for other innovators who know how to work around some of the ever-present challenges in Latin America. Clearly, the region is embracing technology that changes the way things are done in what has always been a conservative, ‘business-as-usual’ culture.  Startup investors, eager to cash in, have arrived on the scene – and will be active in Latin America for many years to come.

Tim Wilson

Tim has been a contributing analyst to Nearshore Americas since 2012. He is a former Research Analyst with IDC in Toronto and has over 20 years’ experience as a technology and business journalist, including extensive reporting from Latin America. A graduate of McGill University in Montreal, he has received numerous accolades for his writing, including a CBC Literary and a National Magazine award. He divides his time between Canada and Mexico. When not chasing down stories, he is busy writing the Detective Sánchez series of crime novels.

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