Investor interest in funding Latin America’s financial technology firms (fintechs) is growing in tandem with the rise of startup

According to Sherwood Neiss, cofounder and principal at Crowdfund Capital Advisors, venture capital for fintechs has started to grow in Latin America. He expects thwe money to start flowing in larger quantities as a new financial ecosystem emerges but he also thinks the sector first needs to overcome some challenges for change to come quickly. “There is no lack of interest in Latin America, but there are barriers that have kept investors from moving more aggressively,” Neiss says. companies in the region. Fintechs are just part of the dynamic community of startups and they compete for the same cash from private and public sources to add scale. Going public allows fintechs to raise capital, but so far only a few firms have listed shares on the stock exchange. Some companies have secured funding from multilateral institutions and venture capital funds, but, according to industry experts, Latin America’s fintechs must overcome a series of obstacles before they can match the kinds of numbers seen in Africa and Asia.

A major barrier is the complexity of regulations in many Latin American markets, he says. Investors are not only looking at ways of getting in but also at ways of getting out. The complex regulations have discouraged investors, especially when the volatility of markets and local currencies is taken into account. 

Neiss also points to cultural and social barriers that have limited the number of fintechs and startups in general in the region. Investors in Latin America are highly averse to risk, which has curbed both the number of startups and the venture capital needed to fund them. Angel investors, a critical component in more developed economies, are still fairly small in number in the region, he says.

Still, Neiss says, the conditions are changing. “As experience builds, there is a greater window to take off. Now that we have fintechs starting to grow in Latin America, you will see more people getting in and others will follow. It is going to scale much faster,” he says.

Growing in scale

Such growth is just what the Inter-American Development Bank (IDB) expects. Susana García-Robles, principal investment officer at the IDB’s Multilateral Investment Fund (MIF), says the business environment for fintechs is promising and that the startups working today will likely have a multiplying effect in the coming years.

“I think the future is quite ripe in applying technology to solve problems that are common to many of these countries. The solutions that we are going to see will be scalable and the ecosystem will expand,” she says. 

The MIF does not directly support fintechs but it does provide resources to venture capital funds and seed funds. The MIF has allocated approximately $250 million to 54 funds so far. “We support local fund managers and first-time fund managers or fund managers who are not 100% invested by the private sector because our mission is to catalyze the investment of the private sector. Our participation helps private investors feel more comfortable about investing,” García-Robles says.

The MIF and other institutions are trying to get angel investors to focus on SMEs and, more importantly, add fintechs to their portfolios. Venture capital firms are focusing on building the ecosystem and bringing in angel investors. Universities are also working on building investor networks, and a number of governments in the region are creating SME incubators that include fintechs.

One pioneering firm, Angel Ventures México, started as a venture capital fund in 2008 to serve as a matchmaker for startups and investors. It has since created a $20 million co-investment fund that provides 50% of capital up to $2 million per company. Angel Ventures now funds some of the major fintech startups in Mexico, including the mobile payment app Clip. Angel Ventures has also set up a company in Peru and is part of a joint venture in Colombia.

With support from the IDB’s MIF, the business school at the University of Montevideo in Uruguay has created the platform Xcala to develop startups in the region through angel investor networks. Prior to launching Xcala in 2014, research conducted by the business school concluded that angel investors had not been active in Latin America and the Caribbean. The university found that angel investors had invested a total of $26 million between 2005 and 2011 for an average amount of $250,000. The 31 networks identified by the university had slightly less than 700 investors. “We have a lot of potential angel investors who require information so that they can see things differently with fintechs. We tell them that they cannot be worried about returns in the first year but to see it as ‘the more I invest the more I am going to get back’,” García-Robles says.

Public support

The public sector in many countries has also partnered with private enterprises to support startups. The Brazilian government, through the national development bank BNDES, was a forerunner of public support and created the Criatec Fund in 2007 to provide seed capital for technology companies.

The Chilean government’s Start-Up Chile program is the largest incubator in the region and is cited as one of the most innovative in the world. The government has recently launched a follow-up program called Scale to provide approximately $100,000 to startups — participating companies have to be less than two years old — that are generating cash flow but need capital to gain traction. The program accepted applications through the end of September and will make disbursements in early January. It targets SMEs that have “traction” and could be working toward market exits. The Chilean development agency CORFO also provides seed capital, as do private and university-led incubators. 

Colombia’s National Service of Learning, or SENA, has spearheaded a startup and incubation system, while Peru’s Ministry of Production has lead an effort to create Technological Innovation Centers, or CITES. In all of these cases, the governments are providing the seed capital that can be leveraged by the private sector.

Neiss says governments throughout the region have caught on that a technological revolution is underway and they need to get on board. “Look at Colombia, where they have gotten the internet to 90% of the population. It is the perfect example of how they get what is going on,” he says. “At the end of the day, people are recognizing that they can’t just watch the game but need to go all in.” LF

Download your copy of the Innovation in SME Finance in Latin America and the Caribbean report here.