Latin American startups draw on cultural knowledge from regional venture capital (VC) firms and localized talent to inform growth and scaling strategies, an invaluable asset in unfamiliar markets where infrastructure and compliance standards are uneven.
“The startup ecosystem knowledge that you can gain from Latin American VCs is invaluable. Foreign VCs have begun to recognize this and are starting to open offices in Latin American business hubs,” said Aron Schwarzkopf, Founder & CEO, Kushki.
The rise of these companies preceded the current flood of foreign venture capital into Latin America when access to capital was difficult and limited. In Mexico, this figure was capped at about US$27 million, which in turn shut out the participation of businesses with the potential to disrupt stagnant industries. Since then, however, this figured has ballooned upward of US$10 billion coming mainly from the US, Alejandro Diez Barroso, Managing Partner, DILA Capital, told MBN. With this barrier satisfied, the ongoing development and expansion of digital infrastructure throughout Latin America have created a fertile environment for the startup boom that has been observed in recent years.
Although previously overlooked, multi-billion-dollar successes such as Nubank, a Brazilian Fintech company valued above US$50 billion, and Mercado Libre, Latin America’s Amazon presently valued at US$79 Billion, have drawn in the interest of bullish investors. In the short run, foreign capital will be necessary to fund the rise of startups necessary to disrupt stagnant industries often monopolized by a few actors and reform inefficient processes often fraught with legal pitfalls, lengthy bureaucracy and reams of paperwork. Already, this capital influx has given rise to an increasingly competitive tech market, which has come to be dominated mainly by fintech companies that have found success in providing market needs ignored by the traditional banking system.
With an established digital foundation and greater digital penetration, the startup tech market is increasingly diversifying into supporting services such as AI authentication, cybersecurity and cloud services, which have received an additional boost from the COVID-19 pandemic that forced resistant companies online. Although this a positive indicator, this nascent industry is still far off from maturity as reflected in its uneven infrastructure, rudimentary policy and compliance standards. “This is something that US investors do not understand, which can make raising series A funds difficult,” said Ricardo Amper, Founder and CEO, Incode.
To overcome these foundational challenges, companies have relied on localized talent and regional VC firms to inform growth and expansion strategies. “In contrast to the US were there is a saturation of plausible growth strategies, in emerging markets you have to go with the option that will maximize long-term value,” said Amper. Therefore, when confronting infrastructure limitations and engrained cultural barriers, deferring to local expertise is saliently important. From this experience, companies have substantively learned the value of diversity, recognizing additional merits including unconventional innovation and problem-solving strategies.
Overall, since there are so many unaddressed market demands to fulfill in Latin American economies, the region’s startup ecosystem remains full of opportunities, which is sure to continue drawing in investment. Companies that prioritize localized talent and expertise, however, stand to construct a more competitive business model.