Being born with a local or global mindset could determine the interest that LatAm fintech startups attract from investors this year.
Venture capitalists have their sights set on the region, looking for solutions to customize financial services, reduce costs and minimize payment frictions. As they evaluate fintechs, they look for ones with ambitious plans to internationalize, as well as taking a close look at their the income and expense projections.
“Even starting out of one city, [a fintech] can start with a regional organizational structure or a remote culture that makes it possible to see how it can grow along the way […] and be successful,” Greg Mitchell, managing partner at Angel Ventures Peru, said as part of a Master Class on fintech investments in Latin America for 2021, a period that will be key to raising capital after a year of uncertainty.
Many fintechs are starting with ‘regional DNA’, explains Mitchell, a point in favor for investors.
QED Investors, an equity fund specializing in early-stage, disruptive models, considers whether the business has expansion opportunities from the start – and especially if it has a “clear strategy, with the potential to continue expanding long term,” Lauren Connolley Morton, a partner at the firm, said at the iupana event.
Similarly, many of the companies in which IGNIA Partners invests are born with global mindsets and “an intrinsic value in other markets,” said Fabrice Serfati, managing director.
The explosion of fintechs – as seen in the growth of last-mile services, challenger banks, consumer and business lending startups as well as B2B models – far from crowding the market, is attracting new capital, giving the ecosystem a fresh boost, said Serfati.
“All of this makes it easier for global investors to enter the region because they are seeing that these business models are indeed getting traction and are working.”
Capturing fintech investment: Numbers matter
Along with the potential for internationalization, investors look closely at unit economics to determine the level of success a venture might have.
“Having a fairly clear handle on this is a confidence booster – knowing what you’re doing and that you’re building something that you’ve spent a lot of time crafting, researching and immersing yourself in, and that you believe in it,” said Connolley, of QED Investors, a venture capital firm that has market giants such as Nubank, Creditas and Konfio in its portfolio.
How the numbers stack up depends, to a large extent, on the target audience of the venture, added Serfati. For example, for B2C initiatives, it is relevant to measure each user’s lifetime value, versus the cost of acquiring that customer. But if it is a B2B business, customer acquisition can be more complex and lengthier.
“We remain very focused on the verticals in which we invest, the entrepreneurs and the teams we are supporting must present us with a certain level of traction and unit economics that we can consider healthy. This does not mean that, at the moment we invest, they are totally healthy, but it does mean that we can have an idea that they are on their way,” he added.
Customer acquisition is a key component of a company’s overall likelihood of success, said Connolley. “I’ve seen excellent teams with great ideas fall down in their ability to acquire clients at scale, in a way that’s economically viable.”
QED Investors spends a lot of its time trying to obtain “early signals” that indicate that there is an audience willing to purchase the product or service offered by a fintech.
“Sometimes it’s just a test or a waiting list, anything that we can see that gives us confidence that there’s a real opportunity to scale.”
Additionally, investors look closely at the team working at the startup.
“We are talking about customer acquisition, expertise in data, risk and all local regulatory knowledge; plus, if it’s insurtech, expertise in the sector. We prioritize teams that already have those complementary skills at an early stage,” Mitchell said.
Fintech verticals of interest for VC investors
Among the most attractive fintechs for investors are those that allow for lower customer acquisition costs and those that “use data to reach and filter the right customer,” Mitchell said.
These technological tools allow fintechs to be increasingly fast and agile in finding their first market niche, as well as establishing their first user base, an advantage over traditional banking, he said.
“(Banks) have a lot of market size and create products for the average person, and we know there is no such thing as the average person.”
Fintechs that help small businesses continue to adapt to e-commerce will be a valuable sector in the year ahead, Connolley predicted. Especially when it comes to technologies that enable the digitization of the SMB back office and use digitization to better understand customers and offer them services such as loans.
Payments will be another vertical of interest for QED Investors, specifically anti-fraud solutions, those that assist in identifying people digitally, and those that allow companies to collect payments with less friction. Also, those that provide platforms to offer point-of-sale lending under the “buy now, pay later” model.
After achieving significant expansion in 2020, B2C models will continue to grow, IGNIA forecasts.
“We are in the right place. If there was ever a good time to be getting into fintech and digital platforms, it’s right now,” said Serfati.
Learn more of Lauren Connolley Morton, Fabrice Serfati and Greg Mitchell’s investment insights in the Master Class: Fintech Investing 2021, available here.