Despite economic conditions, Latin America is a hot market for venture capital deals
Despite the slowdown in the volume of investment dollars, the number of transactions has remained relatively stable, and the region will continue to be a priority for investors.
The 2021 breakout year of venture capital deals in Latin America ended with a whopping $16.3 billion invested in startups, more than in the previous five years. The region was hailed as the world’s fastest-growing region for venture-capital funding, with FinTech and financial services accounting for 39% of the total invested in the region in 2021. Recent economic conditions may put pressure on the dollar volume of venture capital deals, but a near-constant number of deals indicates that the region will continue to be an area of focus for investors.
Indeed, the market remains strong: 2.9 billion dollars were invested in the first quarter of 2022 and 2.5 billion dollars in the second quarter. FinTech is still a hot category for investors. The number of transactions – 280 in the first quarter and 261 in the second quarter – shows modest growth compared to the last two quarters of 2021. In the second quarter, FinTech startups were the largest recipients of venture capital funding with 33% of the dollars. brought up (For reference, there were 257 deals in the third quarter of 2021 and 243 deals in the fourth quarter).
Effects of global economic trends
This year, inflation and strained economic growth are putting pressure on valuations in the form of post-pandemic corrections. Globally, investors are questioning high valuations and pushing numbers down, and Latin America is not immune to these developments.
The region is likely to see continued deployment of capital based on a record amount raised over the past five years. For reference, FinTech investments in Latin America have grown steadily since 2017, with investments of $0.6 billion in 2017, $1 billion in 2018, $2.7 billion in 2019, $2.9 billion in 2020, and $9.7 billion through Q3 2021. has been.
Investors are likely to be more selective in deploying capital because public markets are influenced by private market valuations. As a result, the nature of deals is shifting toward small-dollar, early-stage investments and low-late-hundred-million-dollar bets. This is because early-stage startups have a more stringent valuation range. Recent data shows that early-stage investments in Latin American startups continue to accelerate: 158 seed-stage investments in the second quarter of 2022 (up 68% year-on-year) and 84 early-stage investments (up 20% year-on-year ).
Why Latin America?
Investors have taken keen interest in startups in Latin America as a growing middle class looks for products that help them navigate the region’s lacking digital infrastructure and significant bureaucracy, said Charles McGrath, an author of a recent market report from alternative asset industry provider Preqin. Data, told The Wall Street Journal. “It’s sparked a lot of consumer-tech and fin-tech innovation in the area,” he said. Moreover, COVID has pushed for innovation in the non-traditional banking sector as branches lose even more of their relevance.
The rise in product demand stems from a high population of financially disadvantaged consumers, who account for 30% to 50% of consumers across major countries in the region. Banks in the region typically cater to affluent customers and maintain strict credit requirements, creating a window of opportunity for FinTechs developing products that promote financial inclusion.
Where will the funds go?
According to Ventara, a research firm focused on startup and venture capital trends in Latin America, Brazil accounted for 55% of venture capital investments in 2021, followed by Mexico at 22%. Brazilian firms C6 raised six of the largest FinTech deals in Latin America in the first 9 months of 2021, led by challenger banks such as Nubank and Banco Inter.
Notable FinTech categories for investors are banking, credit, accounting and finance and payments. Some recent examples include:
Brazil-based Nubank, founded in 2013, raised a $750 million megaround in 2021 ahead of its IPO in December.
Brazil-based payments company Ebanx closed a $430 million investment last year.
In June 2022, Mexico-based digital bank Klar raised $70 million in equity funding at a $500 million valuation.
In July 2022, Chilean FinTech Xepelin, which provides an accounting and finance platform for small and medium-sized businesses, secured $230 million in debt and equity.
A vision of the future
While the Latin American region may experience lower dollar volume of venture capital investment due to difficult economic conditions and pressure on valuations, continued interest in early-stage companies presents opportunities for investors. It may be more expensive for startups that manage to raise funds this year, but we expect the number of deals to remain constant, opening up new avenues for investors.
Indeed, the fall of economic pressures means that some companies may reduce their growth intentions, while others may adopt a more cautious approach to raising funds. Indeed, major companies in the region continue to cut staff and at least two major companies – Ebanx and business platform Hotmart – have decided to postpone their 2022 IPOs. Given the growing interest in other sectors including agribusiness, the carbon capture space and healthcare, there may also be some relative decline in FinTech.
Despite these challenges, some investors are betting that inflation will stabilize and that rising interest rates will not dampen economic growth. Therefore, they are highly dependent on the increasing purchasing power of the Latin American population over time. We expect the amount of investment to pick up again as companies mature and meet revenue projections. Indeed, the FinTech sector is still the largest sector for venture capital investments in Latin America, with 2,482 FinTech platforms, equivalent to 22.6% of the total number of fintech companies worldwide. Continued strong market demand and a high low population will support venture capital investment – including FinTech and financial services deals – in companies that offer innovative solutions to consumer pain points.