Descubre el futuro de las finanzas en América Latina y el Caribe

The future of finance in LatAm & the Caribbean

O futuro das finanças na América Latina e no Caribe



Fintech investment in Latam soars to new heights

Jul 12, 2021

By Fabiola Seminario
Fintech investment in Latam: Global investors have fallen in love with Latin America's financial technology industry, driving up deal sizes and valuations...



Fintech investment in Latin America is soaring as an industry that began in earnest less than a decade ago attracts increasing international attention.

That is spurring a virtuous circle, driving even more attention and investment – as well as bringing new competition between local and international investors.

This year’s surge in investment is a result of the success of individual startups that have executed well their roadmaps – but also broader factors, including the maturity of certain verticals and a growing pool of talent in all sectors.

In an investment sweet spot, Latin American fintech will be a key market to follow over the coming years, investors say.

“The technology sector will lead the economic growth of the region and fintech will be at the forefront,” Miguel Armaza, co-founder of Gilgamesh Ventures, a seed and Series A fintech investment fund in Latin America and the United States, tells iupana.

Fifteen years ago, the only technology firm that was among the 10 most valuable companies in Latin America was Mercado Libre, Armaza notes. But he forecasts that the growth rate is likely to accelerate, and the region will take just a third of the time it took the US to consolidate its technology sector.

“Back then, traditional service companies made up 90% of the most valuable US companies, and only 10% were tech companies. Today, six out of 10 are from the tech sector,” he said.

A series of so-called ‘mega-rounds’ in recent months have ploughed capital into startups that were launched less than 10 years ago, such as Clip’s US$ 250 million investment or Ebanx’s US$ 430 million private equity injection. Meanwhile, even newer players are notching up rounds in the tens of millions – and could also reach their own mega-rounds in the coming years.

In addition, the growth potential in LatAm is enormous, not only because of its huge population of more than 650 million, but also because of the financial disconnection, a result of a lack of banking infrastructure.

“Latin Americans have been very poorly served by banks. There is a problem of inclusion and quality. Most financial institutions have focused on window dressing and have not bothered to innovate and have a heavy reliance on their legacy systems,” said Martín Aspíllaga, partner and co-founder of Salkantay Ventures, a Peruvian regional venture capital firm.

For Aspíllaga, the combination of a mass of dissatisfied consumers and low-cost connectivity solutions is clearing the way for a series of competitors specializing in digital native models, an area that traditional businesses had not exploited until now.

See also: LatAm fintech investors retreat to pockets of safety amid pandemic

Latin American fintech in the global eye

A series of Latin American fintech success stories have given investors confidence to set their sights ever-higher. These precedents are important for a region that, previously, had few tangible examples of runaway growth to entice in newer investors.

The most obvious example would be a “finance startup” by the name of Nubank, which raised a US$14 million round in 2014. The company’s most recent investment left them with a market value of US$30 billion. Today there are already other examples of fintechs backed by VC investment that have grown into multi-million dollar businesses.

Initially, seed, Series A and B stage investments were focused on helping startups build robust business models, but it was uncertain whether there would be follow-on capital to help these companies grow further.

Now, with the influx of international funds that have the capacity to make large investments, doubts about a region that had little visibility for years are evaporating.

A major milestone came in 2019, when Softbank opened its investment portfolio to Latin America, throwing down a US$ 1 billion cheque for the Colombian delivery app Rappi. At the time, the investment was one of the largest venture capital investments in a technology company in the region, when just a year earlier Latin American startups together had raised a total of US$ 2 billion in investment.

“Foreign investors have realized that there is huge potential in the region and have also lost a bit of fear,” says Rafa de la Guía, director at Quona Capital, a global VC fund specializing in fintech in emerging markets.

Latin American fintech investments were viewed with some distrust by investors in years past, says de la Guía. But another factor that drove growth was the work of major regional funds such as Kazsek and Monashees, as well as smaller players. De la Guía adds that it is no coincidence that many of the startups that have been raising very large rounds in recent months have follow-on funds from firms such as QED or Quona among their participants.

Another response to the new flow of capital is the development of funds dedicated to fintech in Latin America, a practice that is emerging as a new strategy for investors in view of the pressure to compete with their peers.

“A year or two from now, we’re going to see an increase in US-based funds with specific strategies for Latin America,” says Armaza of Gilgamesh Ventures.

“The US is pretty hot and competitive and every week there’s a new fund. So, that pushes investors to look further afield, and they go where they see a lot of value and where excellent companies are being created,” Armaza said.

See also: Latam fintech investment turns virtual – mostly


Investors look for earlier opportunities in LatAm fintech

To continue investing, LatAm funds are looking for opportunities at earlier stages. That is, a fund that might have previously invested in series B is now seeking out opportunities in series A stage, while a series A stage fund is more interested in seed rounds.

Some investment partners attribute this trend not only to the incursion of larger funds into the territory, but also to a kind of fear of missing out on opportunities at the next stage. By getting in at an earlier stage, investors can in a way reserve a spot for subsequent rounds.

“There is tremendous competition for funds battling with brand visibility. Increasingly, they have to look closer at their principles and investment fundamentals versus staying out of rounds,” says Rafael Esteban, partner at Mouro Capital – previously Santander Innoventures – a venture capital firm focused on early-stage financial services startups in Europe, North America and Latin America.

Increasingly, investors are looking at ways to adjust their strategies when looking at rounds in LatAm, Esteban says, betting on rounds or paying prices they would not otherwise pursue.  And that in part explains the growth in series size compared to a year ago: seed rounds for LatAm fintechs today are the size of Series A rounds a year ago.

Mouro Capital studies opportunities on a case by case basis, without depending on market trends; however sometimes they have had to adapt to the sector’s exuberance, says Esteban.

“We’ve taken a measured approach to investments. We’ve seen things we would have liked to invest in that simply don’t fit our investment fundamentals either due to price or the general state of the company. It’s complicated to manage but is increasingly important to adhere to,” Esteban says. “Maybe that’s what has affected us: that we had to miss an opportunity we would have liked to participate in.”

See also: Fintech investment: Nubank, Neon top the table of 2020 financing rounds

Virtuous circle of LatAm fintech founders

The rise of unicorns in Latin America has also given opportunities for local entrepreneurs to become role model for new founders.

Industry investors say the region’s professional networks help bring together startup founders with expertise from their previous experience in other fintechs.

“One of the factors that has influenced this trend is that there is more ‘recycling’ in the ecosystem. That is, we are investing in the same founders, that now have new startups. Something like a recycling of capital,” says Pedro Pablo del Campo, partner at Magma Partners, an early-stage venture capital firm focused on US and Latin American technology startups.

That virtuous circle is creating new business opportunities in the region, says del Campo, and it is the frequent capital raises that are supporting this growth of the ecosystem. More investment exits will be important to drive the market further, he adds.

“In the end, this practice will be the most important thing because that money will be recycled and put back into the ecosystem, and that oils the machine much more to make it stronger,” he said.

While the ability of Latin American teams to construct entirely new business models from scratch has grabbed attention, the region is still fertile ground for new players in tried and tested areas.

See also: Growing force: Rise of women in fintech brings big benefits

“When a fintech in the United States launches a solution, 10 other fintechs immediately appear. Latin America is still at a point where you can develop a solution for the financial sector, and you will find few competitors. The competitive landscape is still very favorable,” says Luis Narro, executive director of the Peruvian Association of Seed Capital and Entrepreneurship (PECAP).

According to Narro, the fintech subsectors in Latin America are still very broad and diverse, as are the countries in the region.

In other words, before this year’s surge in LatAm fintech investment, Brazil and Mexico were the markets attracting the greatest attention. Now, the flow of capital has been broadened to other jurisdictions, but there is still ample room for growth.

“What is missing now is for some of those stand-out cases to have a cross-over effect, and that investments can be made in Peru, Bolivia, Paraguay, etc. That all those solutions that have financial backing and operate in Mexico and Brazil, begin to operate in other markets in the region as well,” he says.

For funds that operate in markets outside Brazil or Mexico, finding great local solution is a key factor for evaluating fintech investments, says del Campo, of Magma Partners.

In these areas, a local startup can grow due to the large number of underbanked people. However, for a company located in Chile or Peru, the DNA of the business should be based on internationalization.

“I think that’s where the big winners are going to be. Today everyone is thinking about Brazil and Mexico, but I see a lot of activity outside of those markets that are perhaps smaller, but they are thinking on a local level, and that is a must.”

See also: LatAm fintech investment: Startups with “regional DNA” attract attention

Fintechs 2.0: new opportunity areas for the sector

Investors that iupana spoke to listed a series of fintech verticals that they are most bullish about for the next five years. Open banking,  financial infrastructure and the use of cryptocurrencies topped the list.

At the forefront, open banking solutions have the greatest potential, as regulations develop across the region, led by Mexico and Brazil.

Brazil’s central bank, for example, has been the “most aggressive and innovative” in open banking issues, says de la Guía, for the same reason that it has been on a 10-year mission to liberalize competition in financial services, while it has been “clawing at the monopoly.”

However, although Brazil is emerging as a model country for open banking, the perception and application of open banking differs from country to country.

“In Mexico, open banking is like saying where a bank’s ATM is, but in reality, it is just pie in the sky. In terms of the importance it can have on the consumer, there is a lot to be done,” says de la Guía.

Capitalizing on a business model within the open banking framework will be a challenge for LatAm’s fintechs in the years ahead. At the same time, that will open the door to the next generation of technological infrastructure for new industry players.

“Some institutions have started to realize that, instead of fighting the new wave of innovation, they have to take advantage of it, and – if they can collaborate more with some of these innovators – they’re going to be able to be part of the movement,” says de la Guía.

See also: Open banking in Brazil: Banks look to security, personalization to succed

In Peru, Luis Narro points to crypto as a big growth sector. The first wave of cryptoassets arrived in LatAm in the form of wallets and exchanges, but, he says, there are many other use cases to be explored and exploited.

Meanwhile, Salkantay’s Aspíllaga says insurtech is another growth area for the coming years.

“There is a huge opportunity in insurance 2.0. Some of the problems we have seen in online [insurance] sales companies is that the cost of acquisition is high. So, they would have to find a way to work with brokers or insurance companies to have higher retention and offer a better UX,” says Aspíllaga. He adds that a revolution will take place in all Latin American fintech areas, despite the “fractured” economic, political, and social situation.

Meanwhile, Armaza from Gilgamesh Ventures says startups need to support each other to help the ecosystem grow – something that’s a recurring practice in Sillicon Valley.

“[In Silicon Valley] it’s almost like a tribe. It’s acceptable to have a culture of failing.”

“On the one hand, you might be competing with another fintech, but at the same time it’s almost a David and Goliath story. Among fintechs there is that comradery that maybe doesn’t necessarily exist as strongly in other sectors, and I hope it continues, and that local markets become more accepting of startup culture,” concluded Armaza.

Stay ahead of LatAm’s digital banking, fintech and payments industry

Únete a los líderes mundiales en tecnología financiera que leen los informes de iupana