When Kaszek Ventures set out to raise its first fund in 2011, potential investors had confidence the venture capital firm could identify promising startups in Latin America. Less certain was whether they would make money, says Hernan Kazah, co-founder of the Buenos Aires firm. He recalls being peppered with questions. What about subsequent fund-raising? Who would invest? What kind of returns could they expect?
Kazah understood their caution. Venture capital firms investing in Latin America have had their ups and downs. It’s been especially tough to attract early-stage investors who take on big risks. Even with talented entrepreneurs, exits that generate attractive returns have been scarce. During Brazil’s most recent boom, many startups tried unsuccessfully to mimic popular business models in the US and Europe. Many Silicon Valley investors, then new to the region, got burned.
But a crop of new startups is transforming the tech landscape in Latin America. Rather than cloning business plans that thrived in more mature economies but failed locally, a new wave of Latin American startups is developing technologies to advance the region’s key industries. This isn’t just about fintech. Startups are also focusing on mining, agribusiness, food, health, education and transport.
Consider Agrosmart. This Brazilian startup founded in 2014 is developing software to monitor crops and help farmers expand production. Then there’s QuintoAndar, a 2016 Kaszek investment. It’s eliminating the red tape that makes renting an apartment in Brazilian cities like São Paulo and Rio de Janeiro a nightmare by connecting prospective tenants directly online with landlords.
“I dare say Latam is at an inflection point where we have finally found our own secret sauce, our ‘Made in LAC’ innovation model,” says Susana Garcia-Robles, chief investment officer at the Inter-American Development Bank Lab, referring to Latin America and the Caribbean. “It has to do with solving real challenges that surround the rural and urban communities of the region,”
Cate Ambrose, head of the Association for Private Capital Investment in Latin America (LAVCA), concurs. She sees more effort in and attention to understanding local needs in determining which business models to pursue instead of the old copycat mindset. “Today you see much more sophisticated approaches,” she says.
The region’s reputation as a second-tier option for investors is also changing. Even the region’s traditionally risk-averse family offices are warming to VC funds. While wealthy families in Brazil used to wait on the sidelines and wait for VC firms to build a track record before investing, many are no longer hesitating. “You can lose an opportunity if you wait too long,” says Ricardo Simon, who runs the family office Eclipseon.
That kind of investor reception has helped VC firms launch multiple, sequential funds. LatinFinance
has learned that Kaszek Ventures expects to start raising its fourth fund as early as the final quarter. Monashees, a VC investor located in São Paulo, wants to raise $250 million for its ninth fund, starting in the coming months. And Redpoint e.Ventures has almost finished raising its second fund for Brazil. Itaú Unibanco and XP Investimentos are marketing it to their wealthy clients.
All this comes as Japan’s SoftBank commits $5 billion to Latin America technology startups. While its recent investment in Bogota, Colombia-based delivery startup Rappi garnered much attention, the Japanese firm also wants to partner with venture capital funds in the region, a source tells LatinFinance, and is considering investments in Monashees, Kaszek, Canary and Valor Capital Group. “The core of the new SoftBank fund is investing in companies,” the source says. “Their investing in VCs is more strategic to gain access to their portfolios.”
Venture capital invested in the region is already on track to exceed last year’s amount. In the period started Jan. 1 through May 9, $1.74 billion had been invested in 95 deals, compared to $2.82 billion spread among 356 deals in all of 2018, according to the research firm CB Insights.
It’s not just Brazil that’s attracting interest. Firms like Monashees and Kaszek are increasingly bullish on Mexico and Colombia. The rest of the region outside Brazil has already seen more deals and received more VC investment through May 9 than it did all of last year, according to CB Insight.
To be sure, numerous challenges remain. Brazil, for example, still produces a relatively low number of computer engineers to populate future tech startups.
Another concern is that the new SoftBank fund could rapidly drive up valuations. While that may be good for local early stage investors looking to cash out, it could crowd out other growth stage investors. Just as worrisome, access to the Japanese firm’s capital could kill the incentive for startups to pursue an initial public offering, lessening the importance of investor relations and undermining corporate accountability.
For now, however, the flow of fresh venture capital continues and promising companies are able to raise multiple rounds of capital, a significant development. Of the 24 companies in Kaszek Ventures’ first fund, 20 obtained subsequent funding from new investors, according to Kazah. In the second fund, 17 of 19 did, he says.
Lucrative exit deals have also strengthened investor confidence. Last September, Walmart agreed to acquire Cornershop, a grocery on demand online marketplace in Chile and Mexico, for $225 million. It was the largest venture-backed exit ever in Mexico, according to venture capital firm ALLVP, which initially invested in the starup in 2015. And it wasn’t just local firms that benefitted. Silicon Valley’s Accel participated in later investment rounds.
The following month, Brazil payments company Stone Pagamentos raised more than $1 billion through an IPO on the Nasdaq. In January 2018, Didi Chuxing acquired Brazilian ride-sharing company 99 for $600 million, earning VC firm Monashees a return that’s 10 times its initial investment, says one person familiar with the transaction.
Those kinds of results are a big selling point for VC funds. While Monashees had difficulty in finding investors to reach its previous fund target size, it closed its latest offering in less than six months.
“It was the fastest and easiest we’ve ever fundraised,” says Eric Acher, the firm’s co-founding partner. What’s more, he says local players participated, not just foreign investors who dominated previous fund offerings. “For the first time, we had Brazilian LPs interested,” says Acher, who declined to comment on Monashees’s future fund-raising plans or discuss any deals.
Rich returns also strengthen the tech ecosystem by allowing entrepreneurs to pursue other startups. After Didi acquired 99, about half of the 24 employees who had stock options in the ride-sharing company became reais millionaires, and most started new companies, says Paulo Veras, one of three 99 founders. Veras, meanwhile has become an angel investor and recently invested in trucking company CargoX and Digibee, an enterprise software startup.
Fellow 99 founders Ariel Lambrecht and Renato Freitas started a new urban mobility company, Yellow. Originally, a bike-sharing company, it merged with Mexico City’s Grin, a scooter service. The holding company is called Grow Mobility. Though Lambrecht declined to discuss future financing or potential new investors, a source tells LatinFinance that the company is close to raising capital from SoftBank.
And why not? A latecomer to 99, SoftBank invested in the company just six months before it was acquired. Still, as one source points out, it made a healthy profit.