Why US Venture Capital Funding is Heading to South America?
By Posted by contact265 and Community Contributor
Mar 15, 2019 | 10:11 AM
Four months ago, the Brazilian delivery firm iFood raised US$500 million in venture capital - that's more than all Latin American startups raised in the whole of 2016. Considered to be the largest funding round in Latin American history, the deal represented a shift in the way international investors looked at South America, a landmark investment serving as a catalyst for cash injections from some of the world's most established funds. Combine that with Didi Chuxing's acquisition of Brazilian rideshare app 99 in January 2018 for US$1 billion, and it is clear that VCs are pouring money into the region and capitalizing in the LATAM revolution.
Although 2018 venture capital figures are yet to be finalized, the Latin American Venture Capital Association has projected a record year with investments topping US$1.5 billion, and 2019 is set to be even more lucrative. Today, we speak to Craig Dempsey, the CEO of Biz Latin Hub, one of the key back-office players supporting investors looking to grow in the region, about the rise in venture capital in the territory, and the opportunities it represents.
Craig! There has been a huge increase in venture capital in South America…
There certainly has! In the past year or so, there has been a huge increase in venture capital injections across the South American region, and some of its sectors seem unstoppable. In Brazil, for example, China's Tencent has invested more than $180 million in the credit startup Nubank, a digital bank designed to reach under and unbanked customers across the region without the unnecessary costs associated with physical bank branches. As mobile adoption rates continue to climb across South America, investors and entrepreneurs are realizing that they can reach hundreds of millions of customers through smartphones and computers, and that is unlocking major potential in markets from fintech to food delivery to travel and tourism.
In fact, according to the Global Impact Investing Network, growth impact investing assets has reached a 15% annual compound growth rate compared to the industry average of 13%, and with more than US$36 billion in impact assets under management in the region, there is some serious money to be made for investors and venture capitalists with an eye for detail.
South American startups fueled by market growth and entrepreneurial spirit are expanding across Southern and Central America to penetrate larger markets and compete against local and international players. Latin America is currently Uber's fastest growing region, but the company faces immense competition from the likes of 99 and Easy Taxi, for example, who have had longer to build brand awareness, deliver on their proposition and are native to the region, demonstrating the need to enter into a market sooner rather than later and secure investment from day one. As I say to all of my clients - there's no time like the present!
Colombia, for example, is enjoying significant levels of inward and international investment because the country has adopted a strong entrepreneurial spirit, with talented graduates and experienced entrepreneurs setting up their own corporations instead of working for foreign firms. Of course, this growth isn't sustainable in the long-term - eventually, markets will be oversaturated and new startups will struggle to compete, but for the time being, it's creating one of the most diverse and exciting markets in the world, with the country reporting growth in its FDI inflows, despite investment in Latin America actually falling by 3.6% region-wide.
What industries are seeing the biggest investments?
Fintech is naturally one of the most exciting and lucrative industries in the sector with huge untapped potential in reinventing personal banking and offering consumers control over their money. Indeed, fintech is the top sector of venture capital investment by the number of deals and dollars invested, according to the latest insights. That growth naturally had a knock-on effect in sectors such as e-commerce and logistics, with new technology companies such as Liftit and Nowports generating hundreds of millions in foreign investment to support the increased trade coming from China and other markets. Logistics firm CargoX, for example, has received funding from Goldman Sachs, The Blackstone Group and Samsung Ventures, and raised US$60 million in its most recent funding round, highlighting demand in the sector.
Where is venture capital coming from?
The wider technology industry is also a key area of interest. Japanese multinational holding conglomerate recently SoftBank announced ambitions to launch a $5 billion innovation fund in Latin America, and whilst it's unclear how the firm will distribute funds just yet, it's obvious that investments will have a major impact on South American tech, bringing thousands of new jobs to the territory, fueling growth in the technology sector, and delivering to SoftBank.
Japan's neighboring China is another key investor in Latin America, spending US$90 billion in the region between 2005 and 2016. Back in 2015, the Chinese government announced it was launching a ten-year plan to increase trade between China and Latin America to $500 billion. By 2017, trade between the two stood at $266 billion, and that figure is only set to grow in the coming decades. In Brazil, for example, a company called Chinnovation takes Chinese investors on a tour of the country to connect with firms looking for investment.
Any other industries we should keep an eye on?
There are a number of growing industries where investments are thick and fast, including in distribution, with Colombian delivery service Rappi raising more than US$220 million from VCs such as Delivery Hero, DST Global, Sequoia Capital, and Andreessen Horowitz, and in groceries, with Walmart acquiring Mexican delivery startup Cornershop for US$225 million at the end of 2018, the US giant's first known investment in Latin America. If there's money to be made and growth projected, the chances are that venture capitalists are getting involved.
Tourism is another market for investors in South America. Despegar, the largest online travel agency in Latin America, reporting strong performance in bookings in Mexico and Colombia. The company went public on the New York Stock Exchange in 2017, raising US$332 million.
How can my business benefit?
Businesses with a presence in Latin America are naturally optimistic about the future with a slew of new venture capitalists watching their every move and waiting to pounce, but firms outside of the territory can also benefit. Company formation in Latin America is simple and quick, whilst investors looking to grab a slice of the market can take advantage of Latin American countries' investor-friendly legislature and visa policies. As I say to investors time and time again, the sooner you enter into the market and assess the level of demand, the sooner you'll be able to secure investment or invest in a firm that will deliver ongoing returns. I wish you the very best of luck - get out there, see what's on offer, and make some money!
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