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Contxto – Last year, 11 startups from Latin America hit the US$1 billion valuation mark. And steadily, international venture capital (VC) firms are turning to this region. Examples include Tencent, Andreessen Horowitz, Sequoia, and of course, Softbank.
Many Latam startups are scaling up at a local level and even at an international scale, reaching Silicon Valley and Europe.
But how did the region (fortunately) get to this point? What makes for a robust and growing startup ecosystem within Latin America as opposed to its individual countries?
Or is it all just media hoopla?
To address these questions, I sought out a third party opinion from Polymath Ventures, a company-building-type of VC located in Colombia.
An Ibero-american weighs in
We reached out to Carlos F. de la Pradilla. This executive/entrepreneur/investor left his native Spain to join Polymath in 2014 as its Chief Financial Officer (CFO). No doubt he’s got an ample background that covers the entire spectrum of all-things startups.
De la Pradilla co-founded his own businesses and worked within a Spanish equity firm prior to joining Polymath. He’s even contributed as an angel investor to startups in Mexico and Colombia.
When asked what drew him to those markets in Latin America, he stated it came down to the projects’ quality, as well as their quantitative impact.
“It was a matter of the content these startups were developing,” he told me over the phone. “Especially in terms of the demographic group they were aiming for and the impact they were generating.”
No doubt there were many needs to be found within Latin America’s vast population of well over half a billion people. Whether it’s the region’s unbanked population, the uninsured, or those limited in urban mobility options. To name a few.
Problems mean opportunities for startups to solve, and VCs to help fund and scale.
Considering the vast potential market, funds have flown to the region and Latin America has been abuzz with activity.
“Despite recent complex macropolitical events,” explained de la Pradilla, “Latin America is reaching a phase of considerable entrepreneurship. And we’re reaching the best point of this phase for the entire region, not just Brazil.”
But despite what looks to be a prosperous moment, it’s only happened as of late at a regional level. Previously, the ecosystem had been extremely fragmented.
Latin America’s shattered past
Despite Latam having a reputation for hosting a population of festive and welcoming people (which is true mind you), regional cooperation for Latam’s startup ecosystem has been no walk in the park.
Regional cooperation slowly started around 10 years ago. Before then, everyone was on their own.
Brazil, bold and alone
“On one hand there was Brazil,” said de la Pradilla, “it was an island. [Their VC/startup ecosystem was] more developed but with few connections to the rest of the region.”
The country’s ecosystem had gone through various cycles but the trend has always been an upward one. The CFO explained that this was due to two reasons:
- It was the destination drawing in the most investments, especially foreign ones from the United States and Asia.
- The country had a longer trajectory in setting the bases to attract international talent.
Mexico moving forward?
Consistently at Brazil’s heels is Mexico. Polymath’s CFO noted that the self-sustaining ecosystem of this country caught on when government initiatives such as a fund of funds and the INADEM, a public program for entrepreneurs were launched.
Specifically, the lapse between 2014 and 2018 proved crucial for the country’s startups and sprouting venture capitalists (VCs), until they gained enough self-sufficiency.
And it’s a good thing they’ve gained more independence. That’s so considering one of these aforementioned public programs, the INADEM, has already been shut down.
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Chile, biting off more than it can chew?
Meanwhile, the ecosystem in Chile had always flourished at a faster pace than some of its neighbors. But it’s been limited by two factors:
- The country’s market size.
- Its decision to build an ecosystem using fairly advanced tech bases that may have been a little overambitious and stunted its growth speed.
Colombia catches on
This Andean-Caribbean country has always hosted a budding startup ecosystem. And prior to 2018, efforts were made to stimulate their growth. However, de la Pradilla clarified that there was no overall strategy or approach to frame these endeavors.
This situation started to change as of the arrival of its current president less than two years ago. Now Colombia is getting its ducks in order so as to pull in more organizations so they may procure investments, create hubs, and deploy innovation-related initiatives that benefit the ecosystem. One example was Bogotá’s launch of a “fund of funds” last year.
When factoring in that these countries’ ecosystems have been growing at different rates and moments in time, it makes sense that the region was so fragmented.
Everyone was simply doing their own thing, at their own pace, and there was no real common denominator between them.
But everything changed “when Softbank and other foreign investors showed up.”
Ah, Softbank again. We’ve said it, Polymath‘s CFO is saying it, and we’ll continue to say it: even though in the long run some companies may come to regret having given big foreign investors so much clout on their boards, it is undeniable that their massive investments have given the regional VC market a big boost.
The arrival of this Japanese VC marked a crossroads to achieve greater regional integration among its startups and develop project networks that crossed borders for a sustainable, regional ecosystem for the long term.
These outside players are also falling in love with the region’s rising tech-related business models. And as they participate further, these VCs understand the region’s unique needs better and how these startups are tendering to them.
But there are more signs of integration.
“It’s increasingly common that Brazilian funds have 10 to 25 percent of their investment power in projects outside the country. Just the same, the existence of Mexican funds in Colombia has become common practice as of a year and a half ago,” added Polymath’s CFO, later on in written correspondence.
Looking to the future
All this VC and government cross-collaboration for startup and tech will inevitably lead to further regional integration in the longer term and as the region further integrates, you can expect its startups to grow.
While Silicon Valley may be the only place to become a startup and tech hub organically, in Latam, government participation, in the form of startups incentives, will continue to be crucial for the future. That is, until they achieve further self-sufficiency. But we must still watch closely and see what happens.
Lastly, despite recent hiccups in the region, such as Lime’s withdrawal, as well as Rappi’s pending lawsuit and job cuts, investments will continue to flow to Latam. For de la Pradilla what’s set to change is a higher degree of analysis and vigorous revision on behalf of VCs to assure long term rentability.
With all that’s been said and done, for Polymath‘s CFO the entrepreneurial ecosystem of Latin America “will be unstoppable.”
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