Declining VC investment into LatAm startups could throttle digital growth

There are reasons to be optimistic about the region, so why are investors slowing down?

This column is fascinated by Latin America, a region of the world rich in history, culture and, recently, a massive boom in technology company formation and financing. The period of rapidly accreting venture capital activity, however, is slowing. Fast.

The declines in capital availability, as far as TechCrunch can see, will not prove lethal. However, they may slow the pace at which Latin American economies digitize and mature. Data from Atlantico — a regionally focused venture capital fund and the sister firm of Canary, which invests in earlier-stage Latin American rounds — indicates that there may be enough local capital in the region to ensure that its domestic startups have a shot at persistence.

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That said, it’s perhaps slightly disappointing to watch capital from other regions pull back from Latin America, given some encouraging signs from the region that venture investment was having a material impact.

If we are to have a global economy, and if we are to hope that accelerating capital formation is something any region can enjoy, then we must also expect that technological prowess will not — and should not — be constrained to just part of the world’s geography. This means that Latin America may need startups to help the region compete with other markets. And that means more venture capital over time, not less.

Today, we’re unpacking the latest report on Latin America from Atlantico from our perspective as a pair of journalists who chronicled the rise of the region’s startup and venture capital markets during the last boom. Let’s check in on what’s going on today — and just how much opportunity may be being left on the vine in a region that could use every ounce of economic stimulus that it can muster.

Up, and then down

From 2015 through 2018, the Latin American venture capital market was muted. Per CB Insights data, startups in the region raised $1.8 billion in 2015, a figure that fell to $1.1 billion in 2016 and only rose to $2.4 billion by 2018. Round count rose over that time frame, however, indicating that more was brewing than we can see from just the headline dollar figures.

From there, capital investment took off, with the region’s startups raising $5.3 billion in 2019 and $5.4 billion in 2020, and then around $20.2 billion in 2021; that massive crest of venture capital deal-making was why you read so very much about Latin American startups last year and into the start of 2022.

Since then, however, Atlantico’s report — citing data from Crunchbase News , Alex’s former employer — notes the following deceleration:

  • Q2 2021: $5.0 billion in late-stage capital, $1.7 billion early-stage, and $0.2 billion angel and seed.
  • Q3 2021: $3.5 billion in late stage capital, $1.6 billion early-stage, and $0.3 billion angel and seed.
  • Q4 2021: $2.9 billion in late-stage capital, $1.7 billion early-stage, and $0.6 billion angel and seed.
  • Q1 2022: $1.5 billion in late-stage capital, $1.3 billion early-stage, and $0.4 billion angel and seed.
  • Q2 2022: $1.0 billion in late-stage capital, $1.1 billion early-stage, and $0.2 billion angel and seed.

Charted out, this is what we might call a “down and to the right” set of numbers, the opposite of what you want to see if you are hoping for more investment for Latin American startups.

There are three things to note in the above. First, that late-stage investment in the region has gone from a very high peak — Q2 2021 late-stage venture activity in Latin America was worth nearly the entire Latin American venture market in 2020 — to the secondary category of venture capital activity in the region in just a handful of quarters.

Second, early-stage capital proved more durable than late-stage investment amid the region’s venture slowdown. This could imply that the Series A and B companies in the region are not facing as dire a cash crunch as some of their late-stage peers may be experiencing.

And, finally, despite all the declines, by Q2 2022 Latin America would still be on pace — annualizing the above-noted $2.3 billion worth of investment in the region during the quarter — to have its second-best year ever, and by some margin. So things are slowing down in LatAm, but from such a very high peak that we’re still seeing results that, before 2021 at least, would have been more than welcome.

Still, we tend to measure down from recent records than up from prior lows, which means that despite our ability to put a bit of a spin on the most recent Latin American venture capital data that we have, we’re far from glowing in our grading of the figures. Why is LatAm slowing down now?

Reservoirs for growth

What makes the current slowdown disappointing is that the previous acceleration phase had a clear impact on Latin America. One of the most telling metrics is that the region went from four unicorns in 2018 to 28 in 2021. And, as usual, these figures only include private companies, not the ones that already exited, such as Nubank and VTEX.

You could argue that unicorns are measured by their valuation rather than by their social impact. But Latin American scaleups aren’t just about making quick deliveries quicker. With the lion’s share of venture capital typically going into fintech, many of these startups are improving financial inclusion. More generally, Latin American founders often discovered that there was money to be made by addressing a larger share of the population than incumbents did.

Small and medium-sized businesses are a good example of a customer segment that needs better solutions. According to Atlantico, “SMBs constitute over 95% of businesses in LatAm, but growth and productivity are stymied by low digital maturity.” As a result, they collectively account for a much lower percentage of GDP (25%) than in the U.S., Europe and China.

Latin America is even further behind other regions in regard to an interesting metric that Atlantico came up with.

“The Atlantico Digital Transformation Index, which measures tech penetration by tracking the value of public technology companies in a region as a percentage of its GDP, is at around 1.5% for Latin America and 3% for Brazil, its largest player,” Atlantico managing partner Julio Vasconcellos noted in a guest column for TechCrunch+. “To put this level of digital penetration in context, the index is at 52% for the U.S., 20% for China and 15% for India.” The VC firm did the math and found out that if LatAm were to catch up with India, it would represent a $791 billion opportunity. With China, $974 billion. And with the U.S., $3.15 trillion.

The ability to unlock so many GDP points is obviously something that startups can and will leverage. Which is why it seems odd-timed for venture capital investment to slow down.

So what?

Looking at the glass half-full, the fact that venture capital activity has only slowed is good news. In a live presentation of the report, Vasconcellos recalled that in previous downturns, foreign investors had been known to desert Latin America entirely. Not this time.

Analyzing Crunchbase data, Atlantico observed investments made by the 20 most active investors in Latin America and found out that despite a decline, foreign investors still account for almost half of the deal-making. Meanwhile, local investment hasn’t declined as sharply.

“Zooming out further, we note that funding levels in the region remain higher than before the pandemic, suggesting that capital shouldn’t be a relevant constraint going forward. It’s not visible in the financing data, but local funds are sitting on record volumes of dry powder waiting to be deployed. Many of the larger funds raised supersized funds last year, and a majority of that capital has still not been deployed,” Vasconcellos wrote in his post for TechCrunch+.

It seems odd that in the face of massive opportunity and lower prices than in recent years, venture investors are less willing to put capital to work than they were when the same chances for outsize value creation were present, just at far higher valuation marks.