‘We've seen much more stable levels of investment in Latin America’

Lavca, the association for private capital investment in Latin America, has more than 200 members, which include fund managers, venture capital groups, corporate investors and family offices focused on private funding in the region.

In its latest report, Lavca tracked over US$1.7bn in VC and equity funding in Latin America during 1H24, invested in 217 deals.

In 2Q24 alone, Lavca said it mapped US$956mn invested through 98 deals, compared with US$900mn in 202 transactions in the same quarter of 2023.

In this interview, its research director Emanuel Hernandez shared Lavca’s insights into the trends shaping flows of private capital in the region, mostly towards startups.

BNamericas: What do the latest figures and capital inflow patterns tell us about investment trends in Latin America?

Hernandez: I would say some of the key highlights that we noticed is, one, that we've seen more stable levels of investment in Latin America. 

Anyone in the industry knows that in 2021 there was a big peak of capital that was flowing into Latin America, specifically for tech and VC. This is a phenomenon that was global, so it wasn’t just specific to Latin America.

A lot of capital was going towards startups because of digitization trends, very low cost of capital and lots of global investors with very big pockets that were putting a lot of money in them. But that wasn’t sustainable. 

Even in 2021, I think there were two quarters where we saw roughly US$5bn of investment in each quarter. In 2021, more capital was invested than in the whole prior decade. It was around US$16bn across the entire region. And like I said, that wasn’t a sustainable level of investing, so since then there have been some corrections.

BNamericas: Corrections that are still underway.

Hernandez: Those corrections first started at the later stages of investment, series C, series D rounds. And then that started to trickle down towards other stages. But now, for the last two years or so, 2023-24, we've seen much more stable levels of investment.

We’re recording about US$1bn that's flowing into the region, which is very consistent with the levels that we saw before the pandemic, before the boom that we had in 2021. 

What’s also remarkable is that a lot of the money is coming from local fund managers, from seed and early-stage funds, which are predominantly funds that are dedicated to Latin America.

The other thing is that we mapped how many startups have been backed by VCs over time, over the last decade. And there you can see that we're close to 3,000 startups that have been backed over the last decade.

That number obviously increased a lot in 2020, 2021 and now 2024. But I think what's remarkable is – beyond Brazil, because we always hear about how Brazil is the largest market, and it is – in Spanish-speaking Latin America, we’ve recorded startups now accounting for roughly half of the total in the region.

And within those markets, we took an additional step to see which ones have experienced more growth. And we found out that Uruguay is actually one of the ones that has seen most investment recently, more growth relative to where they were in 2021. 

BNamericas: That’s partly because Uruguay has a lower starting point compared with others, right?

Hernandez: Right. If you put that in specific terms, we’ve recorded only seven [Uruguayan] startups that received funding in 2020, and that number is now up to 32. So, obviously, it's a lower base. That's part of the reason.

But we're also seeing a greater influx of entrepreneurs, startups, investors that are moving towards Uruguay. One example of that is Cubo Itaú. Their network is primarily based in Brazil, but they have operations regionally.

And just this month or last month they announced that they're opening an innovation hub also in Uruguay, specifically following that trend.

We also looked at the timing of the last time the startups raised funding, which is an analysis that we hadn't done before. Most of the startups in the region last raised funding in 2021 and 2022. 

That's interesting because usually when you talk to investors, the conventional wisdom is that when a startup raises money, they need to have money to survive for at least a year or two if they're being a bit conservative. 

We have roughly about 1,200 startups that are way past that. That signals a couple of things. One is that that there’s going to be a wave of startups that are going to be coming back to market and asking for more capital from the investors.

BNamericas: And the other?

Hernandez: The fundamentals. Back when they raised money in 2021-22, the mentality was a bit different. Because there was so much capital, the mentality was more growing very, very rapidly without paying too much attention to profitability and some of the financial metrics. 

But then as the market adjusted and less capital became available, a lot of those startups really started to focus very strongly on profitability.

BNamericas: Basically, the capital scarcity led to professionalization of the business projects?

Hernandez: Yes, which overall, I think is positive for the environment. 

Besides that, we also did an analysis of what we call the success rates. That was basically looking at how many out of all the startups that raised money make it to the next round? How many make it from the seed to series A and series B? 

We found that only one in 10 startups makes it to series A after raising their seed. And only one in 30 makes it to series B. 

That just highlights how difficult it is to fundraise and have a startup. Obviously, not all startups have to do all rounds. And sometimes they get acquired before even raising the next round. But it’s different than in the US, for example.

BNamericas: Going back to financial instruments, we've been seeing a diversification in these capital inflows. There are other types of instruments being used by startups to raise money here, right?

Hernandez: Yes, and I would say one that has stood out, especially over the last two years, has been debt. There's been much more money flowing towards venture debt. 

There have also been a lot of cases of credit lines. Lots of investment banks and international banks have come to the startups and given them credit lines for their operations.

We see that a lot within the fintech ecosystem, because it changes the way that the fintechs are structured, in the sense that they then become the originators of credit. They get the funding to provide the loans from another bank or from an international institution.

BNamericas: What can you say in terms of the countries of origin for the capital investments? Is money flowing now more within Latin America rather than from global markets?

Hernandez: If we're talking about the earlier stages of investments, for example, seed, it's much more common to have local funds that are doing that type of investment. They know the market better, they're there, they have a presence on the ground.

As you get to the later stages, funds get much more global and much more international. In terms of where they come from when they're global, it's still predominantly the US. I mean, most of the main firms that are active in Latin America are either from the US or LatAm.

BNamericas: Why is that?

Hernandez: Part of that is just basically because the US is the largest VC market in the world. 

But, also, when you look at where their startups expand to, they usually start locally in their country. A lot of times they'll grow regionally, but usually beyond the region the main market tends to be the US.

BNamericas: Some investors are saying that we shouldn’t expect series C or D rounds in Latin America in the foreseeable future. And I think that may be related to what you were saying in terms of capital scarcity and the thesis and business projects. What's your view on that?

Hernandez: I wouldn't say that there's never going to be a series C or D again. You're still going to have those and you're still going to have startups that raise that money. But the ticket sizes are much different. We're just not seeing the same types of megadeals that we used to in 2021.

There are still growth investors that are active in Latin America. You have Bicycle, Riverwood, General Atlantic, and a lot of those firms specialize specifically in late-stage funding.

BNamericas: How about IPOs? We haven’t been seeing them for the past two years and everyone keeps saying the window will reopen, but it hasn’t. What's the issue there? Is this related to interest rates, to capital liquidity?

Hernandez: I would say that they’re actually coming back, and I have a specific example of that. It's not for a VC-backed company, but you're right that over the last two years we haven’t really had any listings of Latin American companies. 

But this year we’ve already recorded two different IPOs. One is for a company called Grupo AUNA, which is a healthcare company from Peru. And then there's another one called Tiendas 3B, which is a discount retailer from Mexico. Both of them listed on the New York Stock Exchange this year.

To me, that's a reason to remain optimistic. Private markets are coming back and eventually that will also mean a comeback for some of those tech companies that are also ready for a listing.

BNamericas: Right. But then again, both were on the NYSE, not in their own countries.

Hernandez: We’ve seen some private equity funds that have been leading offers in the region and getting some of their money back, getting liquidity from that, which is something that we didn't really see much in 2022-23.

So, even if we haven't seen any other IPOs in the Brazilian or Mexican markets, I feel optimistic based on the activity that we've seen recently.

BNamericas: Any final remarks or highlights?

Hernandez: In terms of sectors, I mean, you've been covering the market for a while… fintech is still the leading magnet for investment in the region.

When we look at the top 10 sectors over the last five years, fintech is always number one. It receives more capital than the next nine categories combined. 

But, interestingly, we're seeing more activity in cleantech. So that's startups that are coming up with solutions for renewable energy, carbon credits, water management, all of those solutions related to climate. 

We're also seeing much more activity in AI and machine learning. Obviously there's a lot of hype around that, but we do see lots of startups that are coming up with really interesting solutions and applications for specific industries within Latin America.

And then we've also seen a lot of startups in logistics that are being funded. And I’d say that's mainly a story with Mexico, because of all the cross-border trade that’s happening with the US and insurance trends.