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Latam: Have startups come to solve for historically elusive tech enabled growth?

In Harvard Business Review’s latest report; Venture Capital has been signaled as the key sources of capital for high growth innovative companies. Tu put this in perspective, back in 2015 public companies that had received VC backing in the US equated to 20% of the market capitalization and 44% of the research and development spending of U.S. public companies.

If you press forward, the statistics for the last year should probably be even more relevant with VC backed companies driving the ascent of high growth technology enabled business plans as the leading sectors driving returns in public markets despite the challenges posed by the pandemic.

While venture capital has existed for centuries, it’s insertion into the financing ecosystem was spearheaded in 1958’s by SBIC Act in the US. SBIC was enacted as a way of incentivizing innovation to support the development of the US economy and particularly its SME sector. 

We have come a long way from those years where 75% of Venture Capital funds where SBIC backed (1968). Still the seed was planted for what we see today as the impact of Silicon Valley and the incremental growth created by off-spring hubs such as New York, London, Singapore, Beijing, Berlin and more recently Miami and Sao Paulo.

Today the world seems torn by two opposing forces: The complex challenges the pandemic has brought and the positive dynamics it has created for the tech enabled ecosystem. Lockdowns have stopped completely some economies with dire consequences for the less affluent populations, while at the same time, it has allowed these same populations to adopt technology, once foreign, and now making accessible some daily needs (education, health, remote work, etc) during lockdowns. Its hard to measure the real impact of these changes in a region, such as Latam, where the average per capita GDP has been contracting for the past decade and where the pandemic has been hard felt. Without ignoring the long-term issues created by the loss of employment and household incomes; technological adoption is actually part of the solution. 

In this respect we have seen a fast unravelling of a tech enabled bonanza where innovation has increasingly found capital to fund it. Apple, Amazon, Tesla, Alibaba, Prosus, PayPal, MELI are just some examples of the tectonic change in the market configuration towards tech enabled companies that have become front and center to investor minds. These companies growth has been knowledge based and have created opportunities for many, nurtured by the innovative spirit of its founders, creating a new breed of employees looking to spin-off and conquer other verticals applying the lessons learned.

Zooming in towards a region more often than not associated with anything but technology, we see Latin America emerging as a hot bed for innovation spearheaded by 66% internet access, a percentage that is above the 53% for the world, according to the World Bank. It might seem paradoxical this is happening when GDP per capita in the region has been falling for the past decade: No doubt it is. Interestingly, this might just be the reason for an emerging class of entrepreneurs willing to innovate despite the challenges by leveraging mobile penetration and a large portion of internet access being made through cellphones with 70% of the population already owning one. 

With informality a challenge (according to, as of 2016 informal employment was 53.1% on average in Latin America and the Caribbean), concentrated economies around few large business groups and low banking penetration and access to capital; innovators are discovering those limitations and complexities of Latin American economies might just be one of the greatest enablers of adoption of new business models. And while the region has seen a disparate process across countries, we are slowly seeing how it spreads from north to south with increasing number of startups springing up. 

There is no doubt Brazil is showing the fastest pace of change and impact. With a more mature capital markets ecosystem than the rest in the region (according to Reuters there where 45 expected IPO’s in 2021), nurtured not only by its size (it’s the 8th economy in the world) but by a regulatory regime that’s allowing a fast pace of digital adoption and a low interest rate environment that has led investors to diversify into less liquid alternative investment vehicles such as private equity and venture capital in the hunt for yield and opportunities. 

Connecting capital and innovation creates a virtuous cycle of entrepreneurship in which Founders are given the mandate to take risks to go and conquer, giving life to amazing companies such as Mercado Libre, a Buenos Aires based ecommerce and financial services platform with a market cap of $75 billion that is closely following in size Brazilian mining giant Vale S.A. the largest company in the region. This is no small feat and shows the direction of trade. When the ten largest fintechs in Brazil are larger than the 4 large banks we can say something is happening.  Particularly, when these 10 Brazilian fintechs are all venture backed evidencing the capital-innovation equation can produces stelar results. 

The region’s growth has been mostly commodity led, and while still a long way from transitioning away from this important source of revenues, the tectonic change technology is bringing has the potential to break the historic dependance on input accumulation led growth. The contrary, and mostly associated with developed economies able to adopt technological changes at a fast pace, is productivity led growth elusive for these economies accentuated by Depressions causing long periods of economic decline.  

Its therefore important capital keeps flowing and its therefore important a vibrant capital markets ecosystem is nurtured. We are seeing how private markets are slowly starting to feed public markets with successful IPOs and venture led follow-ons such as Pag Seguro, StoneCo, XP, Banco Inter, Neogrid and Boa Vista among others in a second wave following precursors such as MELI, Globant, Linx and Despegar firms paving the wave between 2007 and 2017. The success has been mostly Brazil and Argentina led, expecting other countries in the region to break the chasm: Colombia’s Rappi most recently closed a pre-IPO investor led round and d-Local the Uruguayan unicorn has secured $150m at a $5.5 billion valuation in its latest round. 

The challenges are still large for the region. Founders seem ready to demonstrate innovation can bring elusive productivity led growth.

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