Tough times in LatAm: but that's business as usual

How has Covid-19 impacted venture capital investment in LatAm tech?

Venture capital has poured into Latin America in recent times. VC investment in the region has doubled every year since 2016, climbing to an all-time record figure of US$4.6bn in 2019. But the Covid-19 crisis looks set to have a grave impact on this situation.

In May, the Inter-American Development Bank (IDB) published a survey covering 429 different organisations involved in entrepreneurial ecosystems across 18 Latin nations. Two out of three respondents said they had significantly reduced or stopped their work altogether. Between 2019 Q4 and 2020 Q1, the deal count across LatAm countries dropped by nearly 60 per cent.

The Covid-19 crisis is causing both local investors and those from outside LatAm to reconsider their plans. Deals are still being inked, but a lot of VCs now prefer to continue support for their pre-existing portfolio ventures: many have ceased to seek out new investments, at least for the present.

It's clear that tough times are here again, but Latin startups may not be as badly hit as some in other parts of the world. Those still standing in the LatAm venture space have, in many cases, already battled their way through severe economic and political shocks. Latin entrepreneurs know how to survive and even thrive during hard times. Indeed, vibrant tech hubs have burgeoned in countries such as Argentina, Brazil and Colombia despite recent periods of turmoil.

 

Interface, not face-to-face

Furthermore, new technologies would seem, at least in some cases, to offer opportunities to do business almost regardless of Covid-19. One such example could be the range of automation and data-processing technologies often bundled together under the somewhat overhyped label "Artificial Intelligence" (AI).

According to a new report published in June by MIT Technology Review, the potential for an AI boom across Latin America in the near future is significant. Four in five large Latin businesses are using AI, and over half of these cite automated customer service as their main AI application so far. Evidence across the region shows innovations like chat bots and AI-driven customer analytics in sectors including banking, air travel, transport, and e-commerce.

These use cases, of course, tend to help social distancing rather than conflicting with it. According to the MIT report:

Companies in all industry verticals are taking advantage of AI technologies. Banking is one, helped by strong public support for automation; one survey found that 83 per cent of Brazilian consumers said they would trust banking advice entirely generated by a computer, compared to a global average of 71 per cent. Chatbots and virtual assistants, which can improve response times and lighten administrative loads, are being used by banks across the region including BBVA, Banco Galicia, and Banco de Crédito del Perú, with bots being introduced in Facebook Messenger and WhatsApp.

Banking and fintech has, of course, been one of the success stories of LatAm tech with the sector producing well-known unicorns such as Nubank, Pagseguro, Stone and EBANX. Companies like this may still be affected by a general economic slowdown as less money moves around, but their actual business operations are barely affected by the Covid-19 crisis.

 

Where are the happy places?

But not everyone has the good fortune to be a well-capitalised unicorn operating in a relatively unaffected sector. According to the IDB analysis the current slowdown is affecting startup investments everywhere in LatAm. However, in the bank's view, the Covid paralysis could prove particularly damaging to smaller national startup ecosystems: particularly those emerging in Peru, Ecuador, and Bolivia.

Startups in these less-well-developed tech hubs now have fewer resources and may face longer recovery periods than their counterparts in the region's more established tech ecosystems. The IDB surveyors contacted more than 2,200 entrepreneurs in 19 Latin American countries to get their perceptions of Covid-19's impact. Respondents in Uruguay, Costa Rica and Chile reported positive support from the entrepreneurial community: those in Bolivia, Ecuador, El Salvador, Honduras, and Venezuela described a less positive situation with fewer resources to draw upon.

The IDB survey also draws a picture in which comparatively well-developed startup communities in Uruguay and Chile showed positive signs of flexibility and continued activity. However others in Bolivia, Ecuador, Peru, Panama, Guatemala, El Salvador, and Venezuela all indicated that they are facing severe difficulties. When asked how well hubs and other community organisations have responded to the crisis, 44 per cent of entrepreneurs said the responses have been slow and insufficient: 29 per cent went further and said that responses have been entirely absent.

It's clear from the bank's survey that startup ventures in the smaller and more nascent LatAm tech ecosystems are at a higher risk of losing ground as resources and funding dwindle.

One part of the solution, as it has been a major part of the positive funding situation of recent years, could be more foreign investment to these smaller tech hubs. In all the Latin countries international investment from both regional and global investors is rising, albeit this primarily applies to later-stage startups. In 2019, all but one transaction over US$50m involved a cross-border element: cross-border funding totalled US$1.7bn across 74 such deals. This is a fairly new situation in which Latin startups have finally been able to attract growth-stage capital that was formerly extremely difficult to access. However international investment into seed and early-stage startups remains rare across LatAm. Most international funding still moves through the region's more mature hubs: in 2019, more than 50 per cent of all venture investment deals were struck in Brazil and another 20+ per cent in Mexico.

 

Big data can mean big compliance

There are other clouds on the horizon apart from the Covid-19 crisis and its impact on the availability of venture capital. Julio Pertuzé, assistant professor at Pontificia Universidad Católica de Chile, flagged up another emerging problem to the MIT Tech Review researchers: specifically the impact of new rules such as Europe's General Data Protection Regulation (GDPR). Companies which do not comply with GDPR cannot do business in those nations that have adopted it: these include not only the EU nations but other significant markets such as the UK. GDPR applies not just to databases in the relevant countries, but to any records held regarding data subjects - people or organisations - in those jurisdictions.

"What worries us is that Europe is one or two steps forward and its strict regulations could hamper tech development in Latin America, as we have a different social reality," commented Pertuzé. GDPR is a heavy burden on less-developed countries that lack institutional capacity. "We could have holes that make us unable to interact with Europe." Some countries, such as Japan, have negotiated bridge agreements with GDPR to encourage business ties between the regions without having entirely consistent regulatory regimes, but "I don't see Latin America having the negotiating strength for that, at least currently," says the professor.

Challenges lie ahead for Latin tech businesses, then. But there are reasons to be hopeful. Interest rates around the world remain historically low, meaning that global capital will continue to seek investments with strong growth potential. Latin America is a huge market with 650m people, the majority of whom speak the same language and have similar cultures, and who are more urbanised even than Europeans.

LatAm is particularly fertile ground for tech business; Latins are the top social media consumers in the world and use twice as much mobile data per head compared to Americans. The tough business conditions across the region in recent times, not only due to Covid-19 but political and economic instability also, have winnowed out the ranks of Latin startups: there are fewer "zombie" companies in LatAm than most places, and many lean, efficient enterprises likely to deliver a strong return on investment.

Once the situation stabilises, whatever the new Covid-19 reality turns out to be, it seems likely that the pace of tech investment south of the US border will pick up again quickly.