FinTech

The 'SoftBank Effect' on VC in Latin America

The 'SoftBank Effect' on VC in Latin America | NASDAQ

By Nathan Lustig, entrepreneur and Managing Partner at Magma Partners, a seed stage investment fund with offices in Latin America, the U.S., and China. Follow him @nathanlustig

In early 2019, Latin America, and much of the rest of the world, woke up to the announcement of the $5 billion SoftBank Innovation Fund – the largest-ever technology fund focused exclusively on the fast-growing region.

Marcelo Claure, SoftBank’s COO, who oversees the new fund’s operations and investments, stated in the announcement:

“There is so much innovation and disruption taking place in the region, and I believe the business opportunities have never been stronger. The SoftBank Innovation Fund will become a major investor in transformative Latin American companies that are poised to redefine their industries and create new economic opportunities for millions of people.”

Latin America is new to funds of this size, and it’s bound to continue shaping the future of VC in the region in big ways. According to VentureSource, the Innovation Fund is equivalent to all of the region’s venture investments in 2017 and 2018 combined. SoftBank plans to invest throughout Latin America, with a focus on Brazil, Mexico, Colombia, Argentina and Chile, across multiple industries, including e-commerce, digital financial services, health care, mobility, insurance and more. 

It’s an ambitious plan, but it’s not the first time SoftBank announced investments in the region. The Japanese firm invested $100 million each into Brazilian startups Loggi, a delivery service, and 99, a ride-sharing service it then sold to China’s Didi.

An all-time high

The Innovation Fund still has its sights set on roughly 300 targets, primarily in Brazil, according to Andre Maciel, a managing partner at SoftBank Group International. 

“We already feel that the opportunity in the region is bigger than we originally thought,” Maciel said in a Bloomberg interview. 

SoftBank is now the leading technology investor in Latin America. In 2018, investments in technology startups in the region hit an all-time high of $2.4 billion, more than double the total in 2017, according to PitchBook. In 2019, investments topped $2.1 billion, with SoftBank-backed deals making up much of the total.

Colombia-based delivery startup Rappi was the first to receive an investment of up to $1 billion from the Innovation Fund, making it one of the largest technology financing to date in a Latin America-based company. Other investments led by the Innovation Fund so far include:

  • Clip - a Mexican payments service similar to Square. ($20M)
  • Volanty - A Brazilian digital platform for used vehicles.($17.6M)
  • Gympass - a Brazilian fitness startup. ($300M)
  • Banco Inter - a Brazilian digital banking service. ($318M)
  • Creditas - a Brazlian lending service. ($231M)
  • QuintoAndar - a Brazilian real estate platform. ($250M)
  • MadeiraMadeira - a Brazilian home goods platform. ($110M)
  • Buser - a Brazilian bussing company. ($73M)
  • Olist - A Brazilian marketplace integrator. ($190M)
  • VTEX - a Brazilian e-commerce platform used by Walmart. ($140M)
  • Ualá - an Argentine personal finance app. ($150M)
  • Konfio - a Mexican online lending platform. ($100M)
  • Loft - A Brazilian property marketplace ($175M)
  • AlphaCredit - A Mexican lending fintech. ($125M)

The effect on VC

Many of the earlier-stage local players are welcoming SoftBank’s arrival in Latin America, but many of the later-stage investors are having to adapt to increased competition for deals. Over the past five years, the pool of seed-stage investors has grown significantly in the region in the wake of new accelerator programs and growing interest from family offices and angel investors. However, it’s still not easy to raise growth-stage capital in Latin America, and the lack of funding at this stage has caused many startups to look elsewhere for support. 

One way SoftBank plans to solve this issue is by partnering with local funds to double their investment power.

“We don’t have the reach and structure to look at smaller transactions, but those funds do. They can irrigate the system for entrepreneurs,” Maciel said. SoftBank has already co-invested with local firms such as Kaszek Ventures and Monashees. More recently, the fund teamed up with Brazil’s Valor Capital to help it find new investments in the region and speed up the spending of available capital. SoftBank plans to invest approximately $500 million in five to 10 more local funds, according to one source.

With SoftBank’s arrival, many other local funds may come to the realization that they’re going to need more capital to compete. A number of seed stage and Series A and B funds have been announced recently, including Kaszek Ventures ($600M), EWA Capital ($30M), Accion Venture Lab ($33M), Base Partners ($135M) and Monashees ($250M) to name a few. 

But later-stage funds, previously able to cherry-pick the best deals at low valuations, will need to change their approach or risk missing out. The competition to deploy capital and participate in more deals may also inflate later-stage local startup valuations to levels closer to those seen in other regions of the world. What’s more, most Latin American startups don’t IPO, and with SoftBank writing large checks that allow startups to pursue growth without worrying about burning cash, this trend will likely continue for the foreseeable future.

Because of a previous lack of access to capital for Latin American startups, most had healthy margins and grew a bit slower than their U.S. or Asian counterparts. But SoftBank’s entry into the market has enabled Latin American startups to join the blitzscaling party, pushing companies like Rappi, Gympass and others to grow extremely fast. It will be interesting to see if the SoftBank effect will push more companies to aim for hypergrowth rather than maintain more sustainable models.

An opportunity to solve the most pressing issues

The VC landscape in Latin America will grow increasingly competitive as local funds mature and more capital pours into the region from international investors like SoftBank. With more and more foreign investors setting their sights on Latin America, local investors have the opportunity, and responsibility, to push forward ventures that are solving real problems in the region and not just “copycat” business models with the most unicorn potential. There are still significant opportunities to solve social and economic inequality in the region and bring underserved populations online. SoftBank may be able to grant Latin American entrepreneurs limitless cash, but it will be up to local VCs to help guide the mega funding in the right direction.