STORY INLINE POST
Last month, I visited Spain for the startup and VC congress 4YFN, and was pleasantly surprised to find there is an increasing interest among founders in Europe to create startups and invest in Latin America. This trend can be attributed to several factors, including the region's growing market potential, its relatively untapped market, and its, in many ways, favorable business environment, contrary to what was believed a few years ago.
Even if Latin America was deemed by many as just a “developing economy,” with highly volatile politics and other social stressors, world order changes and balances throughout 2022, such as the war in Ukraine and the bigger rift between China and the US,, has made many entrepreneurs and investors look across the oceans and asses Latin America with a whole new vision of hope and, yes, even stability. Who would have thought.
Just one year ago, I wrote an article on why it was time to start seeing Latin America as the world power it is, and in November, again, I wrote on why investors remain hesitant in Latin America and why they should not be. A few months later, I got a huge vibe at this conference of people wanting in. It seemed like a “Latam gold rush.” I don’t blame them, we have true potential.
Of course, one of the primary reasons European startup founders are drawn to Latin America is its growing market potential. According to a report by the World Bank, the Latin American and Caribbean region is home to around 650 million people, and its GDP is projected to reach US$5.3 trillion this year. The region's growing middle class is also expected to fuel consumer demand for goods and services, providing an excellent opportunity for startups to tap into these markets.
Even when the latest KPMG Private Enterprise Venture Pulse report shows that global venture capital investment dropped for the fourth consecutive quarter in 4Q22 — falling from US$102.2 billion on 9,767 deals to US$75.6 billion on 7,641 deals, meaning global investment has fallen to its lowest levels since 2Q19 — the confidence level in both continents differs greatly. In 2021, VC investment in Latin America surpassed the previous five years combined. And even when in 2023 numbers are deemed to decline together with the global trend, in Latin America, we are still surpassing the total investment made in 2019 while Europe has receded to its 2019 VC funding numbers. For us, even bad can be good. That seems to be an asset these days.
It may be hope and the need among entrepreneurs to believe that is making Latin America such an attractive destination for European startup founders that feel they are in a stagnant environment. This tendency is not new, there are some examples of European founders who have come to “the new continent” to try and make it. One of them is GAIA, an online furniture store that was started by European founders in Mexico, challenging in a market that IKEA has made almost impossible to tap in Europe.
Another example is Spain’s Cabify, which plans to keep expanding in the region. They announced a US$300 million input in 2023-24, even when they are already competing with Uber and DiDi, but they have 42 million riders in the region, demonstrating that the market is capable of hosting and holding startups even in the most competitive industries.
There are also some highlights of the region's strengths, including its increasingly educated workforce, low labor costs, and in some cases, such as Brazil, Chile, and Mexico, a favorable regulatory environment. And then there is the nearshoring trend, with hundreds of European, Chinese and Asian companies running to set up shop in Mexico, wanting to get into the biggest market, the US, with way fewer restrictions than Asia because of the recently re-negotiated NAFTA agreement (now USMCA) that Mexico has long fought for. There is just a huge opportunity for so many startups to provide services, from fintech, to AI to SaaS to HR services, and for bigger companies; Tesla in Monterrey is just the tip of the iceberg, and Europeans are finally waking up to the hype.
Another area where there is still ongoing growth, even with a shaky economy elsewhere, is online buying and selling, which, for example, have gained considerable ground in Mexico, so much so that the country has positioned itself as the second-largest e-commerce market in Latin America after Brazil. With a rapidly increasing online-buying population, it was forecast that nearly 64 million Mexicans were shopping on the internet in 2022, a figure that will grow by almost 22% by 2025.
While Latin America presents many opportunities for European startup founders and investors, there are also significant challenges that must be considered. One of the most significant is the region's economic and political instability, which has not diminished, even if with the European turmoil it may seem less of a hurdle. Many Latin American countries have experienced economic crises, and political and social unrest in recent years, which can create significant risks for startups operating in these environments.
Another challenge-slash-opportunity for startups in Latin America is the lack of infrastructure and technology. While some cities in the region, such as Sao Paulo and Mexico City, have highly developed technology ecosystems, many rural areas lack access to basic infrastructure and tech.
Finally, cultural differences and language barriers can also pose challenges for European startup founders looking to launch their startups in the region. While there is a growing interest in entrepreneurship and innovation, Latin American countries have unique cultural norms and business practices that may be unfamiliar; therefore, building local networks and partnerships is essential for founders and investors to succeed in the region.
It's good to know that the region is finally being taken seriously as an investment destination, and it is great to see that there is an interest in our growing entrepreneurial ecosystem; as one of its long-lasting advocates, I do feel proud to be in the target of a much-awaited gold rush. I know Latin America will not disappoint: we have the knowledge, the people and the heart to keep growing. Europeans now see this and I hope they will be able to work with what we have created to keep nurturing a healthy, developing startup system that takes into account our regional values and talent. We are more than happy to host this gold rush, with more than hope but with numbers and data to prove our worth.