The innovation game

Could underinvestment in digital education stem the flow of capital to Latin America?

Let’s be honest, Latin America is no Singapore or Hong Kong. Eyewatering bureaucracy, endless red tape and chronic underinvestment in digital education do not usually create the kind of fertile soil that tends to catch the eye of venture capitalists hunting for their next big investment. How is it then that the continent has attracted more venture capital (“vc”) in the last year than almost any other region in the world? 

An investment portfolio manager based in Colombia commented, “Latin America is currently experiencing an astonishing tech boom – whilst the pandemic hurt economies across the region it also spurred start-up innovation. In 2021, vc-backed companies raised USD 14.8 billion across 772 deals in the region which was more than the total capital invested in Latin America in the previous six years combined.”

“Latin America is currently experiencing an astonishing tech boom – whilst the pandemic hurt economies across the region it also spurred start-up innovation.”

Portfolio manager, Colombia

This represents an increase of 174% on the previous year; inflows were led by Brazil’s online lender Nubank and Colombian delivery firm Rappi. Fintechs are not only dominating capital inflows but changing behaviour – the ways in which people across the region are managing their finances is undergoing a transformation. Driven by the ease of opening accounts online via smartphones, some 40 million people opened bank accounts across the region last year. This kind of digital migratory flow should be welcomed by governments – it is one of the more effective tools in limiting the spread of informal economies, an intransigent problem in Latin America.   

What is particularly notable about Latin America’s start-up scene is the depth of innovation that regional tech minds have applied to dealing with day-to-day challenges from paying rent to booking a taxi to transferring money to friends and family. Unsurprising then that several of the leading firms in vc and private equity are looking to capitalise on this innovation including SoftBank, General Atlantic and Sequoia Capital. 

Many of the region’s leading tech start-ups are becoming so successful in fact, IPOs loom on the horizon. Among them are Brazil’s apartment rental service QuintoAndar, Mexico’s used-car dealer Kavak and Mexican payments provider, Clip. 

A partner at a US-based venture capital company commented, “What is fascinating about many of these start-ups is that they are challenging Latin America’s traditional economic model – large often family-owned conglomerates and failing businesses that survive because of subsidies and cosy political relationships where favours can be asked if times are tough. In this new world, tech firms do not require subsidies and are more fully exposed to market conditions – if they fail, there is no coming back.”

“What is fascinating about many of these start-ups is that they are challenging Latin America’s traditional economic model.”

Partner, venture capital company, US

A tradition of protectionist politics and subsidies has meant that many of Latin America’s largest companies are too comfortable and have rarely felt the need to innovate to survive. Whilst Latin America still lags Europe and North America in terms of the volume of tech start-ups, the widespread and increasing use of smartphones, better wireless networks and much more sophisticated payments technology has meant that across the region there is a demand for digital services that is among the fastest growing in the world. For vc, Latin America has never been more exciting.  

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