Fintech startups in Latin America have reached the global front this year, attracting large funds from investors such as Softbank, and rounds of millions of dollars of capital. But the shortage of investment funds for early stages is a stumbling block for many Latin American fintech startups.
Investments and fintechs
While investors from around the world inject record amounts of capital into Latin American fintech, the shortage of funds for early-stage projects in the region remains a barrier for founders, industry experts say.
Latin American fintechs announced debt and equity investments of $ 827 million in the first half of the year. This happens after 2018 was a record year in investments, with 2 billion dollars in venture capital investment in Latin America, in all industries.
Since the beginning of this year, some of the most mature startups in the region have attracted investment rounds of hundreds of millions of dollars. A Latin American fund of 5 billion dollars from Softbank – a Japanese company led by Masayoshi Son (pictured) – has invested in mega rounds of Creditas in Brazil and Clip in Mexico. And in July, the Brazilian Fintech Nubank raised 400 million dollars.
Seed Capital Gap
However, despite the flow of capital to Latin American fintechs, little is allocated for startups in early stages. That creates enormous difficulties for the founders who are trying to raise capital to start.
The fintechs that responded to the startup survey of the Latin American Private Equity Investment Association (LAVCA), noted the limited access to international investors as the main block stone, said Julie Ruvolo, director of VC at LAVCA.
Half of those surveyed by iupana in an online survey on barriers to raising capital for fintechs said the shortage of angel investors and initial funds was the main problem. A fifth of those surveyed said that one of the difficulties was the handling of English, a criticism also mentioned by the judges of a recent global fintech competition. Another 20% pointed out the difficulty of fitting well, among investors and entrepreneurs.
“There is a great distance between the initial funds and Series A rounds that make it difficult for startups to grow and develop as they approach their period of growth”, said Andres Fontao, co-founder of Finnovista.
He pointed to a limited number of local or regional venture capital funds, and even less with negotiations and rights suitable for early-stage startups, combined with the lack of corporate venture capital funds (CVC).
No Exit
Investors are also holding back because of the difficulty in identifying clear exits, Fontao said.
Brazilian payment startups Stone and PagSeguro, which have gone public since this year in landmark deals, are the exception to the rule.
“Very few are successful when they take the IPO route,” said Fontao. “Previously, corporate purchases were thought to be the clearest path for entrepreneurs and investors to leave, but now with the Mexican competition commission rejecting the purchase of Cornershop by Walmart, this path is questioned”.
Having said that, interest in Latin American fintech continues to grow globally, Fontao said, with the clarity of Mexico’s Fintech Law, which offers more security for potential investors.
“We are hearing more and more VCs from outside and from the region that are actively seeking to make fintech deals in the region. CVC has been activated”.
At the same time, many venture capital investments in all Latin American industries combine local and global funds, Ruvolo said at LAVCA. Two-thirds of venture capital investments in Latin America came last year from companies that include local and global funds. Around 30% of the deals involved global co-investors, while purely local co-investments were scarce, according to LAVCA data.
Also published on Medium.