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STUDIES & Macro Notes

Insights: Venture Capital and Growth Equity Ecosystem in Latin AMerica

Managing Partner

For those part of Latin America’s Venture Capital and Growth Equity ecosystem, and particularly for those of us that have experienced several macroeconomic cycles in the region, it is clear that all sectors have gone through radical and transformative changes through the last few years. Today, technological advances and the growing digitalization in Latin America have relevantly reduced the geographic and political limitations when doing business, allowing a true regionalization of digital companies. This solid digitalization wave has created a generalized improvement in companies’ unit economics. Although everything signals to a challenging economic cycle, the profitability of technology-based companies will continue to improve in the medium and long terms.

This work describes the current state of VC and Growth Equity in Latin America, result of widespread structural changes the different industries have recently faced, generating a true paradigm shift in the region. This shift will very likely continue to attract considerable investment and, even more importantly, will create economic value for the region, its companies, its entrepreneurs and its consumers in general. This analysis revolves around four dimensions we consider crucial and highly interconnected: (i) investment, (ii) technology, product & consumer, (iii) the emerging technology-based companies and (iv) the entrepreneurs that created these companies.

Latin America is becoming one of the most fertile regions to take advantage of the next digital disruption wave: it is a market with huge opportunities represented by its more than 600 million consumers and its US$5.0 trillion GDP.1 Evidence of the growing opportunity, VC and Growth Equity in the region have grown exponentially in the last decade, from being almost non-existent in 2010 when only US$11 million were raised for 5 investments, to represent US$15.3 billion through 582 investments made in 2021.2 Even though Latin America is still a developing region due to its relevant lag in physical and digital infrastructure, the new digital adoption wave regarding internet connectivity (39.0% in 2011 vs. 70.0% in 2021), the use of smartphones (7.6% in 2011 vs. 73.0% in 2021), and access to E-Commerce, has promoted and attracted local and international investment to the region.3 Accordingly, the VC and Growth Equity ecosystem in Latin America today represents ~0.38% of the region’s GDP,4 which when compared to the U.S.’ 1.38% of GDP in 2021,5 makes us realize that there is still a considerable opportunity.

During the last few years globalization, digitalization and free trade agreements have created solid value chains in Latin America. These value chains are based on clear comparative advantages: abundant raw materials and low-cost labor became strong development catalyzers for the region. More recently though, we are experiencing a renewed interest in promoting regional ecosystems for the development of new technologies and products to better serve Latin America’s fast-evolving consumers in various sectors. The technology-based companies and the entrepreneurs that have been creating them in this renewed push are disrupting their traditional competitors’ businesses with a product offering that substantially improves the user experience of consumers that used to be their captives only a few years ago. These competitors and their products are being relegated to the economy of the past.6 Moreover, digitalization together with growth in internet penetration and the use of smartphones, are allowing entrepreneurs and their companies to reach a larger portion of the population and to do so at a lower cost in many sectors. This is generating a relevant increase in current and potential consumers’ lifetime value in the region. Furthermore, current growth expectations due to the existing digital gap relative to the U.S. represent an even greater opportunity for entrepreneurs and for new investment in the region.

It has been a joy to work alongside Endeavor in the assembly of this analysis; we aim to highlight the impact that digitalization is having in the disruption and growth of the different sectors in the region, but more importantly the type of entrepreneurs, the very core of the ecosystem, that are generating this growth. We find that current successful entrepreneurs have considerably more relevant experience, better mindset and vision, are in general more sophisticated and better aligned with institutional investors. Furthermore, they are often part of a larger group of founders with complementary skills and personalities working together. We are convinced that, even though the current state of the financial markets looks fairly grim, we have ahead of us a panorama of growth and development in the medium and long terms for the ecosystem in the region. We observe that the current foreign investment wave is generating increased liquidity in the market and facilitating exit transactions for current investors. The only subject that we consider as pending is that, except for Brazil, foreign investors are keeping a great majority of the benefits of investing in Latin America; we consider that there is a great opportunity for local investors to keep a relevant portion of these benefits.

  1. Source: International Monetary Fund, World Economic Outlook, April 2022. GDP figure corresponds to 2021.
  2. Source: Endeavor Intelligence, 2022.
  3. Source: Endeavor Intelligence, 2022.
  4. Source: Endeavor Intelligence, 2022.
  5. Source: Endeavor Intelligence, 2022.
  6. For example, Fintech companies and entrepreneurs have managed to disrupt a traditional industry in which only ~35.0% of the population participated (had a bank account). These entrepreneurs have improved access and user experience for consumers in the financial sector in general and, today, the percentage of the population that participates in the financial sector is ~64.5%. Sources: The World Bank, Americas Market Intelligence

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