Predictions for Latin America's Startup Landscape in 2021
The COVID-19 crisis is already widening socioeconomic disparities in Latin America, according to a report from the Inter-American Development Bank. The region is set to be among the hardest hit economically and is expected to have one of the world's slowest recoveries. We've already seen venture capital activity slow down in Latin America. Despite these strong headwinds, startups in the region are well positioned to maintain their promising long-term growth trajectory. As the pandemic accelerates digital transformation in some sectors, it also reveals the gaps that still exist in others, such as education and financial services. These gaps are opportunities for technology startups, and attracting VCs who are looking to emerging markets for more growth and higher impact during these challenging times.
Latin America’s growth leading up to the crisis
Venture capital investment in Latin America has doubled every year since 2016, reaching an all-time high of US$4.6 billion in 2019. A large contributor to this surge in capital was SoftBank, which unveiled a US$5 billion fund in 2019 to invest exclusively in the Latin American market.
The COVID-19 crisis caused both local and global investors to rethink their strategies, starting in the first half of 2020. While deals are still happening, many VCs have doubled down on support for their existing portfolio companies. As a result, the startup fundraising landscape has become more challenging. However, there are hopeful signs emerging for early-stage startups.
First, investors are indicating they are maintaining their investment pace. A recent 500 Startups survey of early-stage investors in Q3 2020 revealed that a majority of investors are actually maintaining their investment activities at pre-COVID-19 levels or even increasing them. In Latin America, venture capital deals skew toward the early stage, with 95% of 2019 deals going to early-stage companies.
Secondly, over the past few years, co-investments between Latin American and global investors have been on the rise. According to Crunchbase data, 37% of the total venture capital investments made in 2019 were deployed via a co-investment involving at least one local and one global investor. In 2010, only 137 US VC funds invested in Latin America. As of November 2020, that number reached more than 560.
New opportunities emerging from the crisis
COVID-19 is changing consumer and social behaviors worldwide. These changes have accelerated the adoption of digital channels for purchasing goods and services, learning, making payments, and more.
1. Boosting small business productivity.
More than 90% of companies in Latin America fall into the small and medium-sized category. These businesses are responsible for a significant portion of jobs and GDP in almost every Latin American country. Yet, as many as 75% of them fail within the first two years because of mismanagement.
Many small businesses in Latin America still operate outside of the official tax and legal frameworks. As a result, they often lack strategic business plans and face narrow margins, cash flow challenges, and limited growth opportunities. For local governments, the result is an underreporting of business activities, fewer taxes collected, and lower productivity.
B2B software solutions are still sparse for Latin American businesses. Startups that can help businesses meet new consumer demands in a COVID-19 world, digitize their operations, and free up time to focus on tasks more central to their businesses, will find plenty of demand in the region. Not only is there less competition for these solutions in Latin America, but high-quality, affordable technical talent means startups are often able to operate and scale their products more efficiently than in other regions of the world.
Consumers are feeling increasingly safe about purchasing and paying for goods online, and COVID-19 has expedited this trend. There is a significant opportunity for small and medium-sized businesses to provide better services than their competitors, many of which may still be using pen-and-paper methods, or are stuck using legacy software.
2. Improving the accessibility of education technology.
Combine income inequality with the COVID-19 crisis in Latin America, and low-income families are also facing unprecedented challenges. Access to quality education is a necessary tool to address these inequalities; however, ongoing school closures have created new challenges to implementing education technology (Edtech) that is accessible to all.
While some governments have been quick to take action and help ensure students have a way to receive educational materials, there are still significant gaps. Innovative approaches are needed to overcome connectivity challenges and guarantee access to education for the region's most vulnerable populations.
Delivering affordable educational resources is just one part of the challenge. There are also opportunities to improve digital literacy and ensure the learning experience is engaging and meaningful for all.
3. Building a cross-border e-commerce and payments infrastructure.
In Latin America, increased internet access, specifically through mobile devices, is setting the stage for e-commerce to continue to grow. More than 75% of Latin American consumers now go online to make a purchase decision, and the e-commerce sector is projected to reach US$74.8 billion by the end of 2020.
As more consumers embrace e-commerce in these developing markets, the opportunity to bring more businesses online is accelerating. According to Google estimates, only 10% of small-and-medium-sized businesses in Latin America have a web presence, and only 2% currently sell online.
There are also many difficulties when it comes to accepting payments in a region dominated by cash. Around 70% of Latin Americans do not have a bank account, and 60% of transactions made by small businesses are still in cash. Even though, according to E-Marketer, online transactions are growing 2.8 times more than in-store payments, non-cash payments still only account for only 20% of total transactions in Latin America.
Providing ways to accept payments from foreign buyers, and in multiple currencies, adds another level of complexity for e-commerce merchants in the region. Existing cross-border payment solutions are often too expensive or complex for a small business to handle.
There are many opportunities for startups to reduce these costs and improve cross-border payment options. While Latin America is by no means a unified market, similar challenges can be found across the region. These challenges have generated a wave of demand for software solutions that can help businesses overcome physical payment and logistics challenges, as well as government inefficiencies.
Latin American startups deliver value and impact
Over the past few years, Latin America’s startup ecosystem has experienced profound growth, and certain regional trends that were already looking promising before the crisis are now accelerating. Startups are making a real impact on the region’s digitization, productivity, and economic development, attracting more diverse and global funds. Vibrant tech hubs have blossomed across Latin America despite ongoing periods of political and economic uncertainty. Thanks to startups, the region is more connected than ever.
Though COVID-19 has introduced some incomparable challenges, it has also brought new opportunities. Consumers and businesses are already adopting new solutions to continue operating their lives as normally as possible, but there remain unmet needs. There is a lot of uncertainty about how these consumer and social behaviors will evolve and what new trends may emerge in this new year. However, Latin American startups still hold a unique advantage when it comes to delivering impact alongside financial returns. In Latin America, the issue is not whether or not entrepreneurs are up to the challenge, as they have proven their resilience time and time again, but whether investors are willing to make the most of the moment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.