Venture capital fuels Latam 'unicorns' expansion beyond borders

[SAO PAULO] Surging venture capital investment in Latin American startups has financed international expansion across the region and beyond, as business models that do not require large amounts of capital have helped many firms avoid silos common in the region.

New venture capital funding in the region quadrupled over two years to a record US$2 billion in 2018, according to the Association for Private Capital Investment in Latin America. And that total has already been matched in the first seven months of 2019.

Analysts say fundraising rounds this year could double 2018's total, thanks to Japan's SoftBank Group Corp, which launched its US$5 billion Latin America fund in March, the region's biggest-ever venture capital deployment.

SoftBank's investments this year have helped to mint a new wave of Latin "unicorns", or tech startups valued at more than US$1 billion, with high expectations hinging on their potential beyond their headquarter countries.

André Maciel, managing partner at the SoftBank Latin America Fund, sees huge potential for such companies to tackle regional barriers to productivity. China had an 8.8 per cent annual productivity growth since 1990 and India has had 5 per cent, whereas Brazil has had a 1.3 per cent rate in the same period, according to McKinsey data.

"There is a great opportunity for regional startups that are bridging this productivity gap with tech," Mr Maciel said in an interview at SoftBank Group's Sao Paulo headquarters.

A pair of US initial public offerings last year valuing Brazilian fintechs StoneCo Ltd and PagSeguro Digital Ltd at close to US$20 billion combined dramatised how far the Latin American startup scene has come.

The added attention has brought a burst of funding from investors seeking synergies in their global portfolios, with China's Tencent Holdings Ltd, for example, taking a stake in Brazilian financial startup Nubank.

"Our companies in Latin America, for instance, can learn and benefit from the expertise of our Asian companies," Mr Maciel said.

Latin American startups flush with fresh capital are also eager to tap additional markets.

While Brazilian banks have struggled to post strong returns from acquisitions abroad, local fintechs are hoping their online platforms will cross borders more seamlessly.

Nubank has opened offices in Mexico and Argentina, while lending platform Creditas, which raised US$231 million in a SoftBank-led funding round last month, plans to expand into Mexico and opened a research and development centre in Spain.

Colombian delivery app Rappi has ramped up operations in Mexico and Argentina, with plans to use most of the US$1 billion it raised from SoftBank to expand in Brazil.

In the case of Brazil's Gympass, which sells flexible gym memberships to companies as an employee perk, its multinational clients encouraged it to expand not just in the Latin America but across Europe and the US, said executive Marco Crespo.

The fitness startup, which clinched unicorn status with a US$300 million round led by SoftBank in June, now operates in 14 European countries and several US cities, serving clients including Unilever and Volkswagen.

Most of its affiliated gyms are now outside Brazil, with just 22,000 of the total 47,000 in its home country.

Other firms are counting on unique tech solutions to address global concerns such as privacy.

In Loco, an indoor geolocation services startup founded by computer science students in northeastern Brazil, is opening an office in New York and appealing to US clients by turning the data it analyses into anonymous profiles to address privacy concerns. The company announced a US$20 million funding round on Wednesday to finance its US expansion.

"Brazil has become a beta market for the world," said Scott Sobel, founder of Valor Capital, a venture capital fund that owns stakes in Gympass and In Loco.

Even smaller investors are pushing for the international expansion of their invested companies. Pedro Melzer, founder of e.Bricks Ventures, a fund that has deployed around US$75 million, has seen one of the companies in its portfolio, Infracommerce, a Brazilian startup providing e-commerce solutions, expand into Argentina.

REUTERS