VC push into Latin America growing after covid

F-Prime Capital, QED Investors and SV LatAm Capital are betting on further growth in the region after the pandemic gave a boost to innovation there.

Venture firms doubled down on their commitment to Latin America as its burgeoning start-up scene ballooned last year during the pandemic.

David Jegen, managing partner of F-Prime Capital’s Tech Fund, said Latin America’s robust fintech space represents an excellent opportunity for many venture funds.

“Latin American fintech is as exciting as any part of the world, yet vibrant,” Jegen said. “And it’s an opportunity to watch an entire region kind of move from cash to digital in a way that China did in the last 20 years. So we’re doing a lot there.”

F-Prime Tech Fund is the early-stage investment arm of F-Prime Capital, whose recent technology investments include data research company Kensho, which was acquired by S&P Global in 2018, and foreign exchange payments platform Flywheel, which debuted on Nasdaq in May.

Latin America, despite being home to large economies, lags when it comes to some innovations. For example, much of its population does not have a bank account, does not use credit cards and rarely transacts online. A report by Santander said Latin America is home to about 200 million unbanked people despite the big economies within the region.

Jegen said credit card penetration in Latin America is about 30 to 35 percent. Even in its largest markets of Brazil and Mexico, credit card ownership and those with a bank account are still not as high.

However, Jegen and his team are seeing signs of change and predict the region will have an easier transition to digital finance.

“Just like in China, there’ll be some leapfrogging where there won’t necessarily be a credit card-heavy country,” he said. “There will be more mobile wallets or QR codes, but at the same time, we’re seeing the playbooks of the US and Europe ripple through in terms of digitizing the point of sale for payments or moving real estate transactions and creating Red Fins or Zillows.”

VCs investing in Latin America noted that the pandemic pushed many consumers to use more apps, and not just those around fintech. Research from Lazard Asset Management showed e-commerce penetration in Latin America is growing, with customers increasing from 172 million to 435 million by 2031.

Covid-19 was not the only accelerator for innovation. Ana Cristina Gadala-Maria, principal at QED Investors, said several factors contributed to the boom in sectors like fintech and e-commerce.

“You’re starting to see more on the regulatory front in different countries,” Gadala-Maria said. “Brazil, for example, launched a kind of open banking regulation that sort of mimics cash dynamics and enables customers to start transacting online.”

These new regulations have encouraged more start-ups to begin coming with new ideas, not just in Brazil and Mexico, but in smaller countries within the region. QED set up a $12 million fund called Fontes focused on very early-stage companies in Latin America. Some of the capital for Fontes comes from QED portfolio companies.

Growth in other sectors

Other sectors are also seeing the benefits of growing VC interest, though there is still less focus on investments outside of fintech and e-commerce.

VC Venture LatAm
Consuelo Valverde, SV LatAm Capital

SV LatAm Capital founder and managing partner Consuelo Valverde said VC activity still needs to catch up and expand to other sectors.

Valverde typically invests in food and agriculture, biotechnology and biomedical engineering.

“There is less [VC activity] because there’s less access to venture,” Valverde said. “Even the local VC firms are less focused on [some spaces]. When I started the firm, we always had that foodtech lens, but no other local funder focused on foodtech or biotech. They were more focused on traditional agriculture.”