There has been a lot of hype surrounding Latin America’s startup success. For good reason: Startups raised $9.3 billion in the first half of 2021, almost double the amount in all of 2020, and mega-rounds are a growing trend.
But while the industry hails the rise of the region’s ecosystem and growing fleet of unicorns, Latin America’s startup story has a much longer past. And it’s something we need to keep in mind as entrepreneurs and investors around the world forge the future of the region.
People often ask me: How are consumers different in Brazil? How is the Peruvian market behaving compared to the United States? These questions don’t really consider each country for its inherent value, but instead, prompt people to expect the unexpected from a historically economically disadvantaged region.
In fact, the evolution of business shows much more similarities between countries than we would expect. Latin America’s market has evolved over time – as long as Silicon Valley and any other hub. This region has a global perspective, spectacular universities, a diverse population, and an army of entrepreneurs.
It is important for investors outside of Latin America to get involved in fundraising at earlier stages when founders need extra support from everyone.
That’s why the unicorns and mega deals should come as no surprise: they are the natural evolution of the ecosystem, of more capital generating more success after years of hard work.
With the growth of Latin America, competition in the United States has become even fiercer. VCs have more money than ever and it is getting more expensive to invest in North America. Therefore, they want to diversify their investments with great opportunities abroad. Major funds are now dedicating funds exclusively to Latin America, from SoftBank establishing a region-specific fund to Sequoia saying it will pay more attention to the region.
These inbound investors need to bring more than cash to ensure that entrepreneurship continues to grow in a healthy way, rather than throwing it off balance. Investors need to bring in a local strategy that will make them an asset to Latin America’s startup ecosystem.
Investors need to look for younger markets
Most of the Latin American companies that achieved unicorn status and are now going public started around 2012. This is not much different from the timeline of companies in other markets, such as the United States. For example, e-commerce giant MercadoLibre launched in Argentina around the time eBay emerged.
This tells us that foreign investors would do well to keep a close eye on emerging opportunities outside of heavily hedged markets like Brazil and Mexico. There is a huge opportunity to do what local investors did years ago in Brazil and Mexico, and play an important role in the next chapter of countries with booming markets like Colombia, Peru or Uruguay.
US investors remain shy
The amount of venture capital funneled into Latin American startups has skyrocketed since 2017, with angel investments closely following. However, many of these investments come from local and regional investors. Every top university in Brazil has a pool of angels. Investors in the Andean region span Peru, Chile, and Colombia. If the current ecosystem is thriving, it’s largely because indigenous investors are lighting the spark.
Meanwhile, the presence of US investors in the early stages is still low and risk-averse. It is much more difficult for a pre-seed or seed startup to generate interest from foreign investors than if they have already reached series A or B. Investors also often come in on an ad hoc basis or as outliers caused by mutual contact. Foreign investors are the exception, not the rule.
It is important for investors outside of Latin America to get involved in fundraising at earlier stages when founders need extra support from everyone. Investors should pursue a long-term strategy that will bring greater consistency to the local ecosystem as a whole.
Money is not enough, investors need to bring dedicated resources
Your contribution as an investor is largely about the resources you can provide. This is especially a challenge for a foreigner who has less knowledge of the local industry and has no network and people on site.
While investors may say your normal value offering is sufficient – network and US clients – in reality, it won’t necessarily be of much use. Your recruiting network may not be ideal for a Latin American company and your deep understanding of the US market may not reflect developments in Latin America.
Remember, the region has a plethora of VC organizations that have worked with local startups over the course of a decade. Latin America is a very welcoming and open market, and local investors and accelerators like to work with foreign investors, including in deal-sharing.
Creating incentives within the ecosystem is critical, which – as in the United States – largely means that founders get unique opportunities. In North America, this often happens organically, as people are on the ground and actively involved in what’s happening in the region, from networking events to awards and grants and collaboration opportunities.
To create this in Latin America, foreign investors must dedicate a team and money to their regional commitments. They will need to understand the local industry and be available to guide founders with different perspectives.
In my experience helping EA, Pinterest, and Facebook land in Latin America, we always had someone on the ground or working remotely, but fully committed to the region. We had people focused on locating the product and we had research teams studying similarities and differences in user behavior. That’s how companies land their products; it’s how VCs should land their money.
Only disturb if it adds value
The idea is that foreign investors strike a balance locally while creating distortions when it helps startups look outward rather than trying to overhaul steady, positive internal growth. That could mean encouraging companies to set up in the United States to make it easier for investors from anywhere to invest or to prepare the company to go global. Local investors can help investors new to the region understand the balance of things that should and should not be disrupted.
Don’t be surprised when the apparent “boom” in Latin America starts happening in other emerging markets like Africa and Asia. This is not about a secret hack coming in from the outside. It’s about creating the right environment for local talent to thrive and ensure it continues to grow healthily.