Why the global rise of Latin American startups is imminent

If you look at funding alone, you might come to the conclusion that the Latin American startup scene is somewhat in trouble. In fact, global venture capital and capital flows to the region have indeed slowed due to the global economic climate and a general reluctance to invest. And, in truth, it is not uncommon to see businesses in the region reporting layoffs, value losses, or business closures.

At the same time, however, many Latin American startups are proving resilient. While some are growing steadily, others are expanding globally – ready to compete with the infamous Silicon Valley of the United States. For example, last year brought the number of Latin American companies in the global F-Prime Fintech Index to five, including PagSeguro, MercadoLibre, Nubank, Stone and dLocal.

So while some believe the local ecosystem is at an inflection point, as an investor in the tech scene, I see a better time for revenue growth than ever before. If you look at the bigger picture, Latin American founders have never seen as much interest from venture capitalists. The reason is as simple as it is logical: Latin American founders have never seen as much interest from venture capitalists compared with the US or Europe – the boom of recent years has been more of an important help than a sole market driver.

So, with today’s funding cycles taking longer, Latin Americans are focusing on what they do best: Manage, pivot, show flexibility, cut budgets, and emerge stronger. Yes, some startups are disappearing now, but those probably wouldn’t have made it anyway. In fact, they’re just making more room for the high-flyers.

Let’s take a look at the signs that show why Latin American startups are poised to take the global stage and grow despite the funding slowdown.

If you’re used to crises, you start seeing the opportunities

Since the startup boom that started developing in 2017, Central and South American countries have impressively demonstrated their entrepreneurial strength. Despite the unique challenges the countries face – lack of infrastructure, inequalities, high poverty rates, and a lack of local funding, just to name a few – founders in the tech scene have shown tremendous growth patterns.

2021 was by far the peak investment year in Latin America, making it the world’s fastest-growing region for venture capital. This is even more interesting when you consider the situation most economies and populations in the regions have faced at that time due to COVID-19: Economic uncertainty, healthcare challenges, and stagnant economic growth due to lockdowns and apathetic customers. But while many other countries like Germany or the US were able to exploit their resilient economies to meet the challenges of the pandemic, Latin American countries had to dig deeper into their bag of tricks and adopt an old but golden practice: Self-help.

Many have found strategies to achieve scale while being locked in their living rooms. They’ve teamed up with other founders, experimented, and lived for months on end with little money to get their businesses to grow. Instead of relying on broad support, they developed models that either had excellent growth potential or made cash from day one. Some would consider it cynical to say that the pandemic was the greatest opportunity for our region. But for many founders, it was truly definitive as this slowdown, the uncertainty about the future, awakened their creativity and entrepreneurial spirit. And it also accelerated the adoption of new technologies. And also for tech entrepreneurs, it brought a bunch of new people to adopt technologies.

Startups have become the drivers of modernization

It’s worth noting that more than 50 high-valued “unicorns” emerged at a time when many local economies like Brazil, Argentina, and Colombia were impacted by inflation and instability. Still, the true effect is much more profound. The startups haven’t just developed unique ideas that investors like to bet on. They have brought about profound changes in society and the economy.

From unlocking sources of finance for millions of citizens like Nubank Brazil did, to optimizing infrastructure and shipping as Mexico’s Nowports, to better distributing goods and food like Rappi Colombia, entrepreneurs have managed to modernize our nations. And this momentum isn’t over yet. We see big potential for the next unicorns emerging, as new solutions now start digging even deeper into traditional industries: For example, one of our portfolio companies, NUQLEA is transforming the construction and cement industries, which are key indicators of the economy in LATAM, and Agrotoken is allowing people to convert your grains to digital assets and trade them for goods and service.

And in the process, there has been a mindset shift in our societies. Today, the vast majority of politicians, people, and stakeholders are keen on supporting the fast-growing startup scenes. By now, everyone recognizes the importance of innovation and young talent like never before, and together, our societies are looking for strategies and ways to drive this movement forward.

Since the funding slowed down, founders are obsessed with balance sheets

Fast-forward to 2023. The current economic downturn is not a financial crisis that catches our founders off guard. Instead, it’s another challenge that entrepreneurs are eager to overcome.

Most Latin American startups rely on balance sheets rather than financing, which puts them in a strong position for growth versus startups in the U.S., which got used to endless amounts of funding. Startups in the region are showing their path to profitability and taking strict but important measures to make their numbers work, such as cutting 34% of jobs, building more robust customer success, and continuously innovating their products and services. They have also successfully used alternative models for funding, like debt financing, community investments, and, mostly, bootstrapping.

Talent sits on the springboard, ready to take the plunge

Another reason why Latin America is yet to take off is the exorbitant growth in talent. Higher education in Latin America has grown to more than 3,000 higher education institutions over the past forty years. Of the 17 million students in higher education, Brazil, Mexico, and Argentina account for 10 million, with 739,000 graduates in Latin America annually.

According to a study by Daxx, Latin America is currently the most popular destination for North American technology companies looking for software developers abroad. In fact, many technology companies in the U.S. that are short on talent are now looking South for new employees. This talent will now train in the U.S. and gain essential skills to penetrate international markets. And this knowledge, accumulated locally, will drive the next wave of innovation and entrepreneurial prosperity.

A good example of a startup taking advantage of this upcoming talent boom is our portfolio company Sirius: it helps startups grow by enabling them to outsource their technical projects and business development initiatives to highly specialized talent hired and trained by Sirius.

Latin American startups safely expand from regional to global

When I look at our portfolio companies, I see a strong growth dynamic from national to regional and international. Startups like Alephee e-commerce solutions or the sports tech Oliver are taking advantage of opportunities in the region by first expanding into neighboring countries. They start in Brazil, Argentina, Mexico, Chile, Uruguay, Colombia, and Peru, to then expand to the U.S. or conquer Europe. Just think of Rappi, Kavak, and NotCo. These are companies that have become very active throughout the region in a very short time.

Indeed, regional collaboration is Latin America’s strongest asset. Local accelerators and tech innovator groups like Y Combinator and LAVCA are committed to fostering growth in Latin America and the Caribbean and have joined forces to help more promising entrepreneurs in the region.

This trend “from regional to global” is one of the main reasons we hold regular Mexico and  Miami Summits uniting our portfolio companies and key stakeholders. Mexico currently plays a pivotal role for many companies moving north and traversing the vast Mexican market to enter the U.S. market with a sustainable and successful business model. Miami, on the other hand, is often the first port of call for startups from the region, especially since it has the largest Latin American communities in the U.S. and plenty of opportunities for networking, cross-cultural exchange and Latin American-inspired tech innovation.

Founders know it’s not time to lose momentum

We’ve seen the many positive signs that Latin America’s hour has just struck. With the global economic uncertainty, the cards in the world are being reshuffled – but the rules of the game are also changing. The structural inequality between Latin America and the rest of the world is no longer putting a break on economic growth in our countries. With a rising thirst for education, growth, and innovation, we expect to do well, and we will do everything we can to continue to show the world what we are worth.

Sure, there are still many challenges that we must overcome. Unemployment and high poverty rates are the most critical challenges to solve, as a strong middle class are key to stable growth. Interestingly, this is where I also see the most significant potential. As more and more young Latin Americans have access to smartphones, the Internet, e-learning and information technology, they are building unique capabilities and expertise like programming skills, project management, marketing, and globally spoken languages like German or Mandarin. This access to new resources and knowledge will help lift more people out of poverty and put them in positions where they can contribute to the economy for the first time in their lives. This, in turn, will boost economic growth, an important prerequisite for the success of entrepreneurs and their ventures.

For all these reasons, to me, the question is not whether Latin America will overcome some of the structural challenges it has had for years, but simply: how long will it take?

This article was authored by Diego Noriega, Managing Partner at Newtopia VC, Argentina