Scandal and Trump shake Latin American startup stability
Business Management

Scandal and Trump shake Latin American startup stability

The investment landscape for tech startups in Latin America is at an important inflection point. The startup scene is far from the maturity of North America and Europe and continues to meet different hurdles. A mixture of political instability and uncertainty around US trade policy since President Donald Trump was elected has cast a pall over the ecosystem.

LAVCA, an organisation that tracks VC activity in Latin America, published a report into startup investments in 2016, which recorded a record number of deals for the year at 197, up from 182, reaching $500 million in transactions.

At the same time, KPMG’s Venture Pulse report for Q1 2017 noted that Mexico is in a state of flux. With Trump taking the presidency, many investors are opting for a ‘wait and see’ approach to see how things pan out. The report showed a significant drop in both capital invested and deals closed in Q4 2016 compared to Q3.

“The results of the US presidential election are now resonating across the Americas, particularly in Mexico and Latin America,” according to Gerardo Rojas, head of deal advisory, KPMG Mexico. “While investors continue to show an appetite for the region, many are waiting to see what will happen with the economy and trade agreements now that the new US administration is in place.”

 

Bullish

Despite the air of uncertainty, some investors have remained bullish and steadfast on the region.

In late May, Argentinian VC firm Kaszek Ventures closed its third fund at $200 million to invest in Brazilian tech startups. It marks one of the most significant startup venture funds for the region in the midst of economic and political uncertainty. US investors in the fund include Sequoia Heritage (an arm of famed Silicon Valley’s Sequoia Capital), Accel partner Kevin Efrusy, and the Dietrich Foundation.

Brazil has become the firm’s biggest target for investment and it expects to continue that path, which has largely focused on investments in fintech and SaaS.

Argentina has been another one of the main destinations for VC investment in Latin America, says Dr Evaristo Doria, a lecturer in international business at Georgia State University, which is a market to watch out for.

“[Argentina] increased the amount of VC activity from 17 transactions in 2015 to 26 in 2016 and the future of the start-up ecosystem there looks promising. Argentina just approved a new law aimed to foster and facilitate entrepreneurship,” he explains. “This initiative includes the creation of six to ten publicly funded early-stage VC funds by 2019 among other several measures to promote the creation of start-ups in the country.”

E-commerce and fintech have risen as the two biggest verticals in Latin America with the most potential.

E-commerce in Latin America is still experiencing growing pains but could be a massive game changer and as a result more international companies are taking a bet on the region and investing in the sector.

Much like e-commerce, fintech has significant potential in the region. In one recent example, Colombia’s Aflore, a fintech start-up which is developing money management tools for the unbanked, successfully raised a Series A round in March from Mexico’s Finlab.

A considerable amount of people in Latin America are underserved by traditional banking and financial services. Fintech is guilty of making a lot of lofty promises with its products but the vertical does offer some respite. According to a World Bank report in 2015, technology is gradually bridging the gap for the unbanked globally.

Major markets like Brazil, where around 40% of the population is unbanked and mobile use is constantly growing, is seen as fertile ground for fintech. However, in South America, the trend still veers towards cash as a preferred method of payment for bills. There’s much work to be done but investors are smelling an opportunity.

 

‘Smart money’

As we examined earlier this year, these Latin American fintech startups have been struggling to grow and scale beyond the idea and seed stages. They need money to grow but also “smart money”.

This smart money may need to come from outside influences. Latin America has a budding ecosystem of native entrepreneurs but the market has also seen an influx of European entrepreneurs trying to launch their businesses there.

Spanish taxi app Cabify has put the bulk of its time and money into the Latin American market rather than attempt to grow in Europe and North America.

Cornershop, a food and grocery delivery app, was founded by Swedish entrepreneur Oskar Hjertonsson but is only operating in Chile and Mexico. The founder identified a potentially lucrative market in Latin America for his business model and investors have followed suit with VC firm Accel leading a $21 million round earlier this year. It’s now plotting its expansion into more Latin American markets.

 

Instability

Regardless of the uncertainty in the US, the region is still hampered by instability at home. Brazil, its biggest economy, is wrapped up in another corruption scandal that accuses President Michel Temer of receiving bribes. The fresh round of scandals is the last thing many companies needed. Following the ousting of Dilma Rousseff and the volatility that came with it, it appeared that Brazil had finally found some stability and investments had begun to pick up again, according to the KPMG report. That risks coming undone. The potentially wide reaching economic implications of another government collapsing will certainly be felt by startups as well as established industry.  

According to Dr Doria, this shouldn’t spook investors and entrepreneurs, who should stick to their guns in the face of current hurdles.

“I think Brazil should be considered a strategic market. This means that companies should focus more on the medium and long-term impact of their investments in a market like this,” he says.

“Many companies see Brazil in this way and they will continue investing heavily in Brazil despite potential short-term challenges.”

PREVIOUS ARTICLE

«IDG Research: Younger workers have stronger belief in big data

NEXT ARTICLE

Online voting presents cybersecurity conundrum»
Jonathan Keane

Jonathan Keane is a freelance journalist, living in Ireland, covering business and technology

Our Case Studies

IDG Connect delivers full creative solutions to meet all your demand generatlon needs. These cover the full scope of options, from customized content and lead delivery through to fully integrated campaigns.

images

Our Marketing Research

Our in-house analyst and editorial team create a range of insights for the global marketing community. These look at IT buying preferences, the latest soclal media trends and other zeitgeist topics.

images

Poll

Should the government regulate Artificial Intelligence?