After a promising January that raised high expectations, the rest of the first semester revealed that the growth of venture capital (“VC”) in Latin America had not taken off and the number of deals remained the lowest in seven years. The region is still far behind North America, Europe and Asia. Only 323 deals were reached in the first two quarters of 2024, compared to North America (excluding Mexico) with 6.971, Asia with 4.596 and Europe with 4.073 deals. Despite its 5.5% share of GDP in the global economy, it attracted just above 1% of the USD 172 billion international venture capital.

These facts are not striking if we consider that Latin America has struggled to appeal to investments broadly speaking, both to global and local investors. However, innovative ideas successfully implemented by local startups show that there are good reasons for venture capital flows to continue growing in the region. 

The Golden 2021, which saw the largest inflow of venture capital to Latin America, seems far behind. The crowding out effect of later increasingly high rates to fight inflation, caused by disruptions to the supply chains, due in the first place to the COVID pandemic followed later by world conflicts, hit hard on investors’ appetite for projects in the area. Even if high interest rates were not a specificity of the region, they went higher and for longer than in other geographies. In this context, the level of capital inflows and deals attained by VC in Latin America in 2021, USD 16 billion, set a standard very difficult to sustain.

Some players, like Softbank, overvalued Latin American companies, provoking a profound distortion in the market. The last two years have witnessed adjustments in valuations and expectations and, to a certain extent, proof that the market is coming to terms with reality. According to the Latin American Venture Capital Association (“LAVCA”) report, 2024 LAVCA Trends in Tech, “investors are prioritising the ability of startup founders to engineer a clear path towards profitability and preserve cash on the face of limited follow-on financing.”  

Brazil and Mexico take it (almost) all

In 2023, Brazil accounted for 47% and Mexico for 28% of the USD 4.1 billion of venture capital invested in Latin America; Colombia and Chile followed with 9% and 5.7%, respectively. “Venture Capital is quite new in the region; it only started developing very shyly in 2018,” informed a partner of a large Brazilian VC company. 2021 was an abnormal year, according to this source. “Most of the countries do not have a developed equity market, making it more difficult to have good reference valuations for companies. Brazil is not absorbing almost half of the VC money invested just because of the size of its economy but also because it is the economy in the region with the most developed equity and credit market.” 

Although in some areas, particularly in Fintech, startups are born with a regional approach, this is not so common or easy in Latin America due to poor integration, scaling up in the region is challenging. It does not come as a surprise, therefore, that the largest markets, Brazil and Mexico, are attracting most of the investment. United States, Europe and Asia provide much better options for scaling up the dimensions of their startups. Unfortunately, the lack of common regulations and overall weak integration strangled the growth perspectives of many companies in Latin America. 

Fintech is still king

According to the LAVCA report, Fintech still attracted 46% of the VC investments in the region in 2023 (compared to 4% in the United States), and there is no evidence that the sector has yet reached its ceiling. The combination of a highly unbanked population, new artificial intelligence tools to analyse data, high connectivity, high informality in the economy and fewer old banking habits to change, in comparison to more mature markets, ensured the Goldilocks conditions for Fintech to reign in Latin America venture capital sphere. 

The report “The Rise and Impact of Fintech in Latin America” by the International Monetary Fund (“IMF”) highlighted that out of 60 Digital banks in the region in 2022, 55 were in Mexico and Brazil. These banks provided services to customers, of which 75% were previously unbanked or underbanked, something very common in the region (7 people out of 10). This report shows how the funding for new digital finance solutions has increasingly come from VC. 

Fintech solutions, aided by Artificial Intelligence (“AI”), can provide real-time solutions with lower costs than traditional banking systems, “People could not believe that they were suddenly able to take a loan by just uploading some data on their smartphones,” reported Karina Ojeda (Capital Indigo in Mexico) remembering the irruption of digital banking in Mexico. “Of course, as is usually the case, the regulation in place was insufficient, but the sector has developed some self-regulation.”  

The development of a more sophisticated and comprehensive financial system through Fintech has had a huge impact on the region. It helps reduce the number of cash-only informal businesses and wages and, in the end, improves the government’s fiscal balance and provides it with more tools and funds to have a larger impact in much-needed areas.

The large adoption rate of smartphones in Latin America has been a key element, with 600 million smartphone connections expected by next year. Solutions for payments, remittances and lending account for approximately 50% of the companies and turnover in the sector. However, there is much more to explore beyond these areas: scoring, identity and fraud detection, insurance or new services like cross-border payments for remote workers in a global workspace, similarly providing plenty of room for new companies to emerge.   

Opportunities beyond Fintech

Venture capital in Latin America is less diversified than in other geographies. In the United States, enterprise software and health tech accounted for 33% and 28% of the VC investments in the first semester of 2024, respectively, while fintech, security and energy each received around 7%. In Europe, energy, fintech, health and enterprise software all attracted around 16% of the total VC in the same period. 

As previously discussed, fintech venture capital leaves all the other industries far behind in Latin America. Aside from Proptech, which in 2023 accounted for 7% of VC investments in the region, all the other sectors fell around 5% or below. However, some sectors could experience surprising growth. “Brazil has a very interesting edge to be a strong player and innovator in the Cleantech ecosystem. Many Brazilian startups are developing solutions for clean energies, climate monitoring, carbon removal and biodiverse reforestation. In other areas, such as AI, we would be more emulative than innovative,” emphasised an investor at Igah Venture in Brazil. 

Nearshoring has opened very interesting opportunities in Logistics Tech. Mexico-based logistics startups have captured a cumulative USD 499 million since 2019. Seemingly, in the early stages, the number of Brazil, Colombia and Argentina startups rose from USD 5 million to USD 35 million last year. 

Global investors welcome

Latin American startups benefit from a good combination of local and global investors. Some local players highlight that although U.S. investors are generally more pragmatic and specialised, European investors are surprisingly usually acquainted with Latin America and more eager to understand the region’s specificities. 

The combination of local investors and startups, who understand the region’s often complex legal and tax systems, with global investors who bring both funds and knowledge from more mature markets has helped many Latin American entrepreneurial dreams come true, significantly impacting various industries. 

Venture Capital in Latin America is now a young adult that has left behind the crazy valuations of 2021. There are good foundations to expect good returns for innovative and transformative ideas that can bring smart solutions to the region’s challenges. Fintech for the underbanked or unbanked, logistic tech to help manage the fast-growing nearshoring activities or climate tech solutions for a key region in global food, energy and clean air supply are just a few examples of successful venture capital stories. The region holds promising potential for innovative solutions that address the local challenges and drive sustainable growth across diverse industries.