Fintechs in Latin America Draw Venture Capital Interest, Again

Global venture capital may still be scarce, but in Latin America, promising signs during the first quarter have raised high hopes among entrepreneurs that the worst may be behind in terms of available investment.

While venture capital investments globally plummeted to a near five-year low in the first quarter of 2024, investors are defying the trend in Latin America, historically known for its lower investment levels. Following over a year of caution amid declining rates, venture capitalists are now adopting a somewhat more aggressive stance in the region, although still influenced by interest rate dynamics in the United States.

In the first quarter of the year, total equity capital invested in Latin American startups reached $721 million, according to a quarterly tracker on investments by Brazilian bank Itaú and Sling Hub. This figure marks a notable increase of nearly 20% compared to the same period last year, with financial technology firms securing the largest deals during this timeframe.

Fintechs lead the charge

Conta Simples, a Brazilian digital bank account developer, secured $41.5 million in a series B round led by Base 10 Partners. Meanwhile, Argentinian financial infrastructure provider Pomelo raised $40 million in a series B round. Additionally, several Colombian startups made significant strides during the period. U.S. private equity firm General Atlantic spearheaded a $50 million series C funding round for Bold, while Addi also secured $36 million in funding.

When factoring in non-equity financing, total funding to Latin American startups surged by 24% yearly to reach $1.35 billion, marking a significant increase from $1.1 billion in the same period last year.

“Investment trends in Latin American startups are signalling positivity,” remarked Joao Venture, CEO of Sling Hub. Lower interest rates and improved regional macroeconomic stability fuel this optimism. Furthermore, the positive performance observed in global equities is also rippling into private markets in the region, amplifying the upbeat sentiment.

Fintechs Latin America: funding on ice since 2022

Since 2022, most venture capital firms have halted deals as a risk-averse sentiment gripped global markets. Latin American startups experienced their toughest year of investments since 2018. According to Lavca, a nonprofit association for private capital investment in Latin America, these startups received approximately $4 billion in funding last year.

Now, with Latin American central bankers leading the charge in easing monetary policy once again, many firms armed with available capital are diverging from the global trend. They are re-entering the high-risk, high-reward environment that Latin American fintechs present, recognizing the potential opportunities in the region.

“Latin America stands out in the global venture capital landscape due to its emergence as a hotbed of innovation, particularly in addressing critical pain points within the region,” Daniel Lloreda, a venture capital specialist and co-founder at HTwenty investment firm, told Fintech Nexus. “Investors increasingly recognise the potential for high returns by backing startups that are solving real problems for millions. We anticipate this momentum to continue throughout the year.”

Despite the setback of limited capital since 2022, the companies that weathered the storm of capital scarcity have emerged stronger. Neobanks in Brazil and across the region, adequately capitalized to withstand the pressure, have effectively streamlined costs and surpassed breakeven points by a wide margin.

“We are witnessing today the emergence of a new wave of startups in Latin America, characterized by experienced founders who have learned valuable lessons from past market cycles,” said Lloreda. ” Instead of chasing rapid growth at all costs, founders strongly emphasise early product-market fit, profitability, and sustainability from the outset. This shift towards a more disciplined approach to entrepreneurship bodes well for the long-term health and success of the region.”

A return to the 2021 bonanza could be exaggerated

Record funding exceeding $15 billion in 2021 was crucial in fueling the growth of prominent fintech companies that now dominate digital banking. While few anticipate a return to the bonanza of 2021, which birthed a slew of unicorn companies, a fresh wave of capital could prove pivotal for both existing and new startups in the sector.

The Latin American case for investing in tech is compelling due to the numerous gaps waiting to be filled. Take Mexico, for example, one of the least banked countries in the region. This has spurred the emergence of various digital banking initiatives in recent years, attracting interest from foreign institutions like the British neobank Revolut.

There, the number of fintechs continued to grow even in the face of lower capital available. By the end of 2023, the country boasted nearly 800 fintech companies, marking an increase of almost 300 from just over 500 two years prior.

Kaszek, the region’s largest Latin American venture capital firm, currently holds $1.3 billion in capital earmarked for deployment over the next four to six years. Meanwhile, QED has approximately $4 billion under management across 200 investments, with one-third of its portfolio allocated to Latin America.