Magma Partners scores $50M to build the a16z of Latin America

Magma Partners has more than doubled the size of its investable capital with the close of its latest $50 million fund. The Santiago, Chile-based venture firm founded in 2013 had secured $21 million that made up the outfit’s second fund, which it raised after closing its debut fund with just $2.5 million. The firm’s largest fund to date comes as investment in Latin America has reached a record high

Magma has made 70 deals and its portfolio has seen three exits. General Partner Nathan Lustig tells me that Magma will continue to write $50,000 to $100,000 seed checks, and that its larger investments will range from up to $5 million to $7 million. The firm is targeting a few niches:

  • Fintech and insurtech companies in Latin America and the solutions that provide the cybersecurity, anti-fraud and identity management API layers needed to support them. 
  • SaaS companies with tech and sales teams in Latin America that target a global user base.

The fund won’t touch hardware or biotech and isn’t really looking at anything outside its fintech and insurtech thesis. 

With fund three, Magma has attracted its first institutional investor. IDB Lab, the innovation laboratory of the IDB Group, has approved an investment of $4 million in the fund. This now puts Magma on a more global radar, and, depending on success of fund three, could enable an even larger future fund four. 

Chilean, Colombian and Mexican family offices were the biggest cohort of contributors to the fund, along with angel investors in both Latin America and the U.S.

Magma itself is made up of 15 people across both operations and investing, and the team is spread remotely across Santiago, Bogota, Mexico City and Guadalajara. 

Magma Media and the agency model

While a relatively young firm, Magma has been focused from the start on developing an agency model to support its founders — one that serves as both educator and, in many cases, connector. Latin America suffers from a lack of educational content around company building. That’s why Magma is launching Magma Media, an in-house, media operations unit determined to help its portfolio companies succeed. 

“If you’ve only raised a small round, hiring the wrong person could kill your startup.”

Lustig says that the Magma team is made up of former entrepreneurs, and that the goal of Magma Media is to build from the ground up the services they wish they’d had as founders. Inspired by the Andreessen Horowitz agency model, Magma also offers to its startup founders content marketing, sales, recruiting and PR services. Regarding the importance of content marketing, he notes that “if you have a great product and a great idea but you can’t communicate what you’re doing, no one will buy it.” As for the in-house recruiter who is helping to educate founders on making the right hires, Lustig says, “If you’ve only raised a small round, hiring the wrong person could kill your startup.” These are the kind of company building tips that aren’t as widely circulated in Latin America’s comparatively nascent startup scene as they are in Silicon Valley. 

Magma has been hustling to expand a network of twenty corporations across Latin America — similar to the Andreessen agency model — that will take meetings with their portfolio, given that the lockdown of an early corporate partnership is a big win for a startup. 

The firm encourages successful Latin American startups to feed back into the ecosystem by adapting agency-like networks similar to a16z and Y Combinator, through which startups leverage a network of pre-vetted services and sign on as each other’s first customers. One Magma company, OmniBank, is already factoring out its financial loan services to a few other companies in its portfolio in efforts to emulate this network model that has seen success in the U.S. 

As for diversity and inclusion, Lustig says that 35% of the Magma portfolio has at least one female founder and that they hope to grow that percentage.

Asian capital is smarter capital in Latin America

Despite Lustig’s admiration for some American models of investment, he observes that “China is eating the U.S.’s lunch in Latin America,” referring to the capital flowing into the region from Asian sources. Didi entered Latin America in 2018 via its $1 billion acquisition of Brazilian ridesharing company 99. Tencent’s $180 million strategic investments into Nubank propelled the Brazilian neobank’s valuation to reach $10 billion. And of course, Tokyo-based SoftBank committed $6 billion to invest in Latin American companies via its Latin American Innovation Fund, fueling Colombia’s Rappi and Brazil’s Creditas with growth-stage investments that have allowed the companies to scale aggressively. 

In fact, while U.S. funds are beginning to wake up to the Latin America opportunity, Lustig believes that Asian capital in Latin America is smarter capital. Some of it has to do with pattern matching. Globally, Southeast Asia and Latin America count similar population sizes of around 640 million, and 18 out of the 25 biggest cities in the world are in either Southeast Asia or Latin America.

Congruent geographic patterns and likeness in population volume means that tech solutions achieved by startups in Southeast Asia could also function in Latin America — warranting heavier investment, especially when considering how much has been invested into Southeast Asia. Lustig estimates that Southeast Asia saw somewhere between $16 billion and $20 billion invested in 2019, and it has a lower GDP than Latin America. 

Lustig highlights online education as just one example of technology that’s more developed in Asia and that could be used to reach rural areas in Latin America that don’t have as much access. Asian e-commerce and mobile payments models are other sectors that Latin American companies can borrow from, he says, stressing that Latin America features a very social culture. It explains why Brazil is one of Facebook’s largest markets, but also, linking social to commerce is a huge opportunity that could show up and generate big returns in Latin America.  

Latin American startups should borrow success from the pioneering agency models invented by Andreessen Horowitz and Y Combinator on their home ground, while pattern matching the tech solutions that worked for startups in geographically analogous Southeast Asia and China.

Asian investors may not share the same racist and xenophobic rhetoric around Latins that exists in the United States, too, says Lustig. Though an American himself, he believes a bias against Latins exists in the U.S. “There are still many very educated people in the U.S. who think that Colombia is Narcos on Netflix.” In his experience, he observes that Asian investors aren’t wired to think like that and are instead focused on the growth fundamentals. 

Put all the pieces together, suggests Lustig, and the opportunity becomes clear. “One of the most exciting parts about investing in Latin America is that if you can actually solve some of these problems, yes you can generate a big return. [Y]ou might also help tens to hundreds of millions of people solve basic problems that people in the U.S. take for granted. So I think the advice for founders is to go out and try to solve the problems that they’re seeing in their day to day,” he says. 

Latin American startups should borrow success from the pioneering agency models invented by Andreessen Horowitz and Y Combinator on their home ground, while pattern matching the tech solutions that worked for startups in geographically analogous Southeast Asia and China. Magma hopes its strategy will prepare Latin American startups for the incoming mega-rounds from Asia that will enable the best companies to enter hypergrowth mode.

Meanwhile, in a note to American investors, Lustig says that the U.S. really needs to up its game in Latin America if it wants to continue to have influence.