FinTech’s Hottest Market: Latin America

Latin America is a hot market for venture capital markets, despite economic conditions

The number of deals remains fairly steady despite a slowdown in investment dollar volume, ensuring that the region will continue to be a priority for investors.

The exit year 2021 in venture capital markets in Latin America was affected by a whopping $16.3 billion invested in start-ups, more than the previous five years combined. The region was hailed as the world’s fastest growing area for venture capital funding, with FinTech and financial services accounting for 39% of the total amount invested in the region in 2021.[1] Recent economic conditions may have pressured the dollar volume of venture capital deals, but the near-constant number of deals suggests the region will continue to be an area of ​​focus for investors.

Indeed, the market remains strong: $2.9 billion was invested in venture capital in the first quarter of 2022 and $2.5 billion in the second quarter. FinTech remains a hot category for investors. The number of transactions – 280 in the first quarter and 261 in the second quarter – shows moderate growth compared to the last two quarters of 2021. In the second quarter, FinTech startups were the largest recipients of venture capital funding, with 33% of the dollars. elevated. (For reference, there were 257 deals in the third quarter of 2021 and 243 deals in the fourth quarter).

Effects of global economic trends

This year, inflation and depressed economic growth are putting pressure on valuations in the form of a post-pandemic correction. Around the world, investors are questioning high valuations and pushing numbers down and Latin America is not immune to these developments.

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The region is likely to see continued capital deployment based on the record amount raised over the past five years. For reference, FinTech investments in Latin America have grown steadily since 2017, with $0.6 billion invested in 2017, $1 billion in 2018, $2.7 billion in 2019, $2.9 billion in 2020, and $9.7 billion through Q3 2021.[2]

Investors are likely to be more selective in deploying capital, as public markets influence private market valuations. As a result, the nature of the trade is shifting towards smaller dollar, early stage, and less late stage, hundred million dollar investments. This is because early stage startups tend to have a tougher range of valuations. Recent data shows that early-stage investments in Latin American startups continue to gain momentum: In the second quarter of 2022, 158 seed-stage investments (a 68% year-on-year increase) and 84 early-stage investments (a 20% year-on-year increase) were seen. .

Why Latin America?

Investors in Latin American startups and a growing middle class have been looking for products that help them overcome the region’s lack of digital infrastructure and significant bureaucracy, according to Charles McGrath, one of the authors of a recent market report from Preqin, a provider of alternative asset industries. details, told The Wall Street Journal.[3] “That’s what’s driven a lot of the consumer-tech and financial-tech innovation in the field,” he said. In addition, COVID has pushed for innovation in the non-traditional banking segment as branches have lost more of their relevance.

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The increase in product demand stems from a high population of financially underserved consumers, as many as 30% to 50% of consumers across major countries in the region.[4] The region’s banks typically cater to affluent customers and maintain strict credit requirements, creating an opportunity for FinTechs to develop products that promote financial inclusion.

Where is the funding going?

According to Ventara, a research firm focused on startup and venture capital trends in Latin America, Brazil accounted for 55% of venture capital investments in 2021, followed by Mexico at 22%.[5] Brazilian companies raised the six largest FinTech deals in Latin America in the first 9 months of 2021, led by challenger banks such as C6, Nubank and Banco Inter.

Notable FinTech categories for investors include banking, credit, accounting and finance, and payments. Some recent examples include:

Brazil-based Nubank, founded in 2013, raised megawatt $750 million in 2021 ahead of its December IPO[6]

Brazil-based payments firm Ebanx closed a $430 million investment round last year.[7]

In June 2022, Mexican digital bank Klar raised $70 million in equity funding at a $500 million valuation.[8]

In July 2022, Chilean FinTech Xepelin, which offers an accounting and finance platform for small and medium-sized businesses, raised $230 million in debt and equity.

A view of the future

Although the dollar volume of venture capital investment in the Latin American region is likely to be lower due to difficult economic conditions and pressure on valuations, continued interest in early-stage companies presents opportunities for investors. It may be more expensive for startups that succeed in raising funding this year, but we expect the number of deals to remain steady, opening up new avenues for investors.

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Of course, the fallout from economic pressure means that some companies may be scaling back their growth intentions while others may take a more cautious approach to fundraising. Indeed, major companies in the region continue to face staff reductions and at least two major firms – Ebanx and business platform Hotmart – have decided to postpone their 2022 IPO. There could also be a relative decline in FinTech, given the increased interest in other sectors, including agribusiness, the carbon capture space and healthcare.

Despite these challenges, some investors are betting on stabilization of inflation and that rising interest rates will not hinder economic growth. As such, they continue to support the increasing purchasing power of Latin American populations over time. We expect investment amounts to increase again as companies mature and in line with revenue projections. In fact, the FinTech sector remains the largest sector of venture capital investment in Latin America, and includes 2,482 FinTech platforms, equivalent to 22.6% of the total number of fintech firms worldwide.[9] Continued strong market demand and an underserved population will ensure that venture capital investment — including FinTech and financial services markets — will support companies that offer innovative solutions to consumer pain points.

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