Investors keen but cautious on LatAm AI funding

Latin American funds and global venture capital investors targeting the region are enthusiastic but at the same time cautious about backing AI startups.

That was one of the main takeaways from the panels held by Lavca, the Latin American Private Equity and Venture Capital Association, with funds and investors in São Paulo. 

“We invest in Latin American founders, in an early-stage base. And we’ve been obsessed with AI and the nuances in the region around this technology,” Jimena Pardo, managing partner and co-founder of HI Ventures, told the event.

HI is a Mexican venture capital fund that invests in Latin American startups driving “human innovation,” hence the acronym HI, focusing on e-commerce, payments and others. Among its investments, including those in which it already exited, are companies such as Cornershop, Nuvocargo and Robinfood.

The fund’s latest public investment was Perhaps, a Chilean startup deemed the first workspace “designed for collaboration between humans and AI.” HI Ventures led a US$1.7mn round in the company in July.

In 2024, HI Ventures made three new investments, all of which were follow-on rounds, and a fourth is expected to be closed in the coming days, according to Pardo.

'AI CRAZE' AND VALUATION

Carlos Krokon, VP and managing director of San Diego-based Qualcomm Ventures, said that in general and at a global level 2024 has been a slower year for the fund than 2023. 

This, he said, has much to do with the ‘AI craze’ as the obsession of the markets with the phenomenon would be pushing startup valuations higher. Krokon said many in the market are convinced that AI is the biggest tech wave since the internet – even bigger than the smartphone.

“The valuations are difficult to fathom. We have close to eight AI companies in our global portfolio, but we’ve been more cautious when to get in and not to get in,” said the leader of chipset maker Qualcomm’s VC arm. The fund has teams in Brazil, the US, India and Israel.

Many startups have proliferated and gone on the market with the most diverse proposals involving AI, but few of them with solid theses and convincing business models.

Despite that, Krokon says the market “is still correcting and will continue to correct” for pricing in general.

One of Qualcomm Ventures’ latest public investments in Brazil was foodtech Aravita in 2023. The startup works with grocers by employing AI to optimize how much people buy and sell depending on the location, climate and season, among other factors.

The fund also just concluded a non-public follow-on round, said the executive.

SCARCITY

Rodrigo de Baer, managing partner at São Paulo-based Upload Ventures, believes that capital scarcity in general will continue throughout the rest of 2024. 

The fund, focused on backing Latin American companies that “want to compete globally,” has prioritized investments in software-as-a-service (SaaS) startups and targets the B2B segment in Brazil, Mexico and Colombia, among others. 

Upload’s latest investment was Pupila, an AI-powered branding platform that streamlines marketing management, creative work and brand communications.

The fund carried out one new investment this year, in addition to five follow-ons, and like Pardo’s HI Ventures, has another funding ready to be signed, said De Baer.

The fund continues to prospect opportunities in AI, as well as in other segments, but with caution.

Rafa de Haro, co-founder and managing partner at Mexico-based Cometa, said his company has two-thirds of its third investment fund already deployed. However, like other VC groups, Cometa suffered a capital downturn after the pandemic.

The company was created by Chileans and is “85% based in Mexico” said Haro. Its main focuses are nearshoring and AI.

Cometa launched its first fund in 2021, in the middle of the startup and IPO boom. Despite that, he said his firm looks to avoid hypercycles. 

“Our plan was nine investments per year. We did four in 2021. 2022 was more interesting, 10 investments,” said Haro. In 2023, Cometa made none. 

Some investments in the fund’s portfolio include companies such as Bitso and Cabify; local payment and lending platforms like Conekta and Kueski; regional fintech players like Simetrik and Prometeo; and global Hispanic players such as Territorium and WelcomeTech.

Pulsar was the company’s latest investment, the only one so far this year and targeting AI and nearshoring. Pulsar works with Latin American manufacturers, helping them digitize their industrial operations with an AI-based platform.

The US$8mn funding round was led by Cometa with participation from Seaya Cathay Latam, Kayyak Ventures and ACV_VC.

PERSPECTIVES

All the venture capital investors on the panels agreed that the downturn in capital availability after the pandemic boom is leading to what would be a healthy correction in valuations. Besides, it is conducting a “natural selection” of startups.

“We always have to take a long-term view in this industry. We see these cycles and it’s important to have discipline. It’s not because you have capital that you can deploy at any cost,” said Kokron, who added that all the main prospects on the horizon for VC funding are “trending up.”

"We did go through a period of very low interest rates and got used to that, thought it would be forever. But it’s not the case. 2019, 2020 and 2021 were absolutely crazy on a global basis, and more so in Latin America because we were not used to that,” he added.

Along the same lines, De Baer said the “party is not coming back anytime soon,” adding there are few series A rounds happening in Latin America and even less so series B or C ones.

According to De Baer, there are at least nine series A funds in the market in Brazil currently trying to raise capital to invest, but without success because of the overall conditions, with the IPO window closed. 

“I see capital scarcity persisting,” he said.

On the AI boom, HI’s Pardo believes the market still has not seen in Latin America the hype surrounding AI as in Silicon Valley. 

She said an AI company in Latin America is not as valued as in advanced markets. "This could be good for investors."

MARKET

A recent study by Endeavor shows that Mexico was the Latin American country with the highest growth in the number of companies focused on AI in the past six years. 

Endeavor is a co-investment fund based in New York and focused on emerging markets, with offices in nine LatAm countries and territories.

In 2018, according to a study it carried out with Santander Mexico, there were 34 companies dedicated to AI in the country, a number close to that of Chile (28) at the time, although far from leader Brazil (124).

Halfway through this year, Mexico had 362 AI companies (up 965%), Brazil 728 (+487%) and Chile 170 (+471%), according to the report ‘La era de la AI en México. Panorama, tendencias y datos 2024’.

The study says the 362 AI companies in Mexico generated 11,000 jobs and raised more than US$500mn in investment. Despite this, only 1% of technology companies in the country are investing in generative AI models, it said.

FINTECHS

In Brazil, 53% of credit-focused fintechs plan to invest in AI in the next two years, according to a study by the Brazilian Digital Credit Association and PwC Brasil.

In second and third place, respectively, are machine learning/deep learning (23%) – which are also based on algorithms – and blockchain/distributed technologies (18%).

The study shows that the digital credit sector already uses AI for credit modeling and assessment, with the aim of properly determining the consumer's eligibility for credit and the most appropriate rates to be charged.