First of all, Private Equity (PE) needs to be briefly distinguished from Venture Capital (VC). Both represent types of private financing companies. Since the latter don’t have access to capital markets to finance their businesses, certain funds or firms specialized in private markets invest in them. These are not liquid investments, it can take from 2 to 15 years, or even more, depending on the industry and type of exit, to materialize the return on the investment made. Usually, VC investments are made in earlier development stages of these companies, most commonly called startups. PE firms tend to enter in a later stage, when the company already has a strong customer base, revenue streams or wants to enter new markets, scaling its business.
Focusing on the region discussed in this topic, in March, SoftBank Group announced plans to launch a $5 billion innovation fund in Latin America, or what it described as “the largest-ever technology fund focused exclusively on the fast-growing Latin American market.” In the first half of 2019, VC investment in the region startups totaled $2.6 billion across 160 transactions, in agreement with the Association for Private Capital Investment in Latin America (LAVCA). That compares to just under $2 billion raised in 463 transactions in all of 2018. It means the market is progressively maturing, since more money per transaction is being raised. To analyze the discrepancy in a short period of time, if we go back to 2016, LATAM startups raised a total amount of $500 million, five times less than what has only been achieved in the first half of this year, as presented below.
According to Julie Ruvolo, director of venture capital at LAVCA, it was at the end of 2017 that $100 million-plus investments started to appear, giving life to ‘unicorns’ ($1 billion-plus companies in valuation) in the region.
This year, as we have seen, VC activity has been breaking records in LATAM, examples of such investments are the Colombian on-demand delivery unicorn Rappi raising $1 billion in April, Gympass netting $300 million in June, and real estate startup QuintoAndar raising $250 million in a Series D that gave it unicorn status.
Even if historically Brazil has been the biggest recipient of venture dollars in LATAM, it has been surpassed by its Colombian neighbors in the first half of 2019. It is worth mentioning that this statistic is inflated by Rappi’s $1 billion Series E round.
According to LAVCA, the main three markets in terms of VC activity this year are Colombia ($1.06 billion in venture funding combined over 13transactions), Brazil ($989 million, 88 transactions) and Mexico ($310 million, 34 transactions). To have an idea of the concentration of investments in these countries, according to the same source, they’ve made up 91.9% of total dollars invested in the region and accounted for 84.9% of total deals executed.
As stated by Federico Antoni, co-founder of Mexico City-based VC firm ALLVP, Latin America is the world’s “largest untapped VC opportunity.”
“Mexico is Amazon’s fastest market to reach $1 billion in sales, São Paulo is Uber’s largest city in rides in the world, Mexico City holds Spotify’s biggest user base, and Brazil and Mexico are Facebook, Instagram and WhatsApp’s largest markets.”
Personally, despite the socio-political problems that arise in the region, I see this point in time as a great opportunity for LATAM startup companies. This inflow of VC is a great incentive for local entrepreneurship, job creation, potentially fostering a wave of innovation throughout the region, impacting sectors that really need it. The problems I foresee are the deficient wealth distribution and systemic corruption that occurs in these countries. Nonetheless, this investment in bright ideas translated into businesses can also develop the midsize companies of the region, that could create better-paying jobs and ignite a stronger competitive business environment. According to McKinsey’s “Latin America’s Missing Middle” report of 2019, LATAM has a lot more unproductive small companies than the benchmark of other emerging markets economies. An increase in wages due to bigger and more efficient ones would boost an already increasing middle class, strengthening the demand side and driving up the region’s economy.
Article published in our December 2019 Newsletter
Guilherme Corga, MSc in Finance