Venture Capital Firms are Piling Into Early Stage Companies in Latin America: Accredited Investors Should Piggyback

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The amount of capital deployed this year into LATAM venture capital is going to blow away any figures in recent history.  

Average deal sizes are going up, new unicorns are being born in a rapidly increasing fashion and large financial players are paying more and more attention to the Latin American market. 

As the following chart shows, investors are bullish on LATAM. Deal values and deal count are reflective of that demand. 

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In just the first half of 2021 alone, venture capital investments into Latin America greatly surpassed all 2020 investments into the space.  What’s even more interesting, however, is that Latin America venture capital is catching up to the typically “hotter” venture capital markets of Southeast Asia and India and far surpassing the more nascent markets of Africa and Central & Eastern Europe, per The Financial Times

As a region, this is incredibly important and could signify a changing of the old guard, so to speak.

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Latin America is making its way onto the world stage of early-company investment and, as a result, larger companies are being created and grown. In fact, per Pitchbook, in 2021 alone there were five newly-minted unicorns (*Unicorns are defined here as VC-backed companies valued at $1 billion or more) established in Latin America. That is more than any other year in the history of the region.  What we are seeing is the birth of a venture capital hub in LATAM.  

Latin America as a Venture Capital Hub

As foreign investment comes into LATAM, unicorns are created and investors make abnormally high returns, more capital and more entrepreneurship will enter the Latin America market. The cycle of capital and innovation becomes self-sustaining and snowballs and an ecosystem is created. 

Softbank makes big bets in LATAM

One of the largest players entering the Latin American market recently is Softbank. Softbank is one of the stars of the early-investment world and a dominant global player due in large part to its “Vision Fund,” the world’s largest venture capital fund at about $100 billion. In September 2021, Softbank launched a $3.0 billion fund to invest solely in technology companies in Latin America.  This is in addition to the LATAM-focused fund Softbank launched in 2019 of $5.0 billion.  

In late October 2021, Javier Villamizar, Operating Partner of Softbank Investment Advisers, presented live at the 2021 ProColombia Investment Summit alongside Colombian President Ivan Duque and other of the nation’s governmental and business leaders. The focus of the conference was on the $32 billion of foreign investment capital that has recently come into Colombia and the desire to attract and place more capital into the country. 

Javier Villamizar’s presentation was notable macro-economically with respect to LATAM investment. He noted that within their global platform at Softbank that they are just now presenting Latin America portfolios and investment opportunities to the global board of Softbank.  A few years ago, even though Softbank had a few capital placements north of a billion dollars in the region, the executive team in Japan didn’t even discuss Latin America in their internal board meetings.  Now all of this has changed. 

Villamizar described how he sees the future, why Softbank is focused on LATAM and even presented how the Vision Fund will expand into more LATAM businesses.  In the chart below, you will see the history of the Vision Fund encased within the light blue and yellow highlighted areas. Readers will recognize the fund as being largely focused historically on developed markets as you see brands like UBER and WeWork prevalent.  Within the green box on the right, you’ll see the Latin America focused fund.  Villamizar has given this presentation before, but within this year’s presentation he clearly stated that the Latin American focused portfolio did not exist in this same presentation a year ago.  He elaborated to say that he expects this green block to match the size of the blocks on the left in the short-term. Simply put, Softbank is on record that they are committed to making a huge number of capital placements into LATAM companies in the coming years.  

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Other large capital allocators are joining Softbank in LATAM

Villamizar finished his presentation by stating that it’s not only Softbank making these investments in LATAM. Participating alongside Softbank are other large investment funds such as Sequoia Capital, who is coming off a huge win with its investment in Nubank. High net worth individuals, family offices and VC funds based in LATAM are joining in this bullish sentiment towards LATAM.  The success of LATAM businesses has even attracted the investment capital of Warren Buffett and Berkshire Hathaway. 

Why is Investing in Latin America Growing in Popularity?

We see four primary reasons for the increase in investing attention on Latin America in recent years:

  1. Dealflow is significantly lacking in developed venture capital markets, firms have excess capital and valuations are through the roof.  Venture capital firms and high net worth investors have to look outside their “home” markets for arbitrage level returns.
  2. Human capital, specifically local founder and executive level talent, has increased dramatically in Latin America in recent years.  
  3. Macro-economic factors such as large populations of generally young people with large propensities for entrepreneurship and digital technology adoption and steadily increasing GDPs are bringing more investors to the table.  
  4. There are identifiable gaps in the business ecosystem that can be exploited given the addition of foreign capital, real-world human capital and world-class technological integration.  Entrepreneurs are flocking to the region to fill gaps in historically inefficient industries in these markets such as banking and finance.

How to Participate in the Capital Wave to Latin America

The world is constantly changing and investors are always looking for the “next big thing.”  One could reasonably analogize present day LATAM to the economic liftoff potential that China had when it aggressively opened itself to capitalism via the actions of Deng Xiaoping in the early 1990’s. A massive market with huge production potential for export and a relatively untapped domestic consumer base attracted huge amounts of capital in subsequent decades. 

Several Latin American countries are making a similar pledge towards capitalism today, most notably Colombia and Mexico. Accredited U.S. investors would be wise to take note and judge if the wave into LATAM is worth surfing along with Softbank, Sequoia and others making big bets in the region.

Conclusion and Author’s Final Words:

While many accredited US-based investors may look at Latin America largely as an “unknown” within their investment scope, readers should dig a bit deeper.  From a macroeconomic perspective, there is no better time to enter a market than when valuations are still reasonable and you see a push towards foreign direct investment in the country by big players.  

We at Legacy Group believe that investment into select countries and industries within Latin America has the potential to far exceed total investment returns in early stage companies in the developed world over the next decade.  

  • There will be huge rewards for investors when entrepreneurs revolutionize outdated business ecosystems in LATAM:  Latin America’s business ecosystem has numerous gaps that require systematic attention in order for businesses to excel.  Early-stage companies in more developed markets, such as the United States, typically focus on just one identifiable issue to solve and build a business around that one solution. This limited scope is largely due to pre-existing efficiencies that are readily apparent in more developed markets with each new efficiency being a tack-on to prior successes versus revolutionary in nature. In Latin America, the system is much different. The business ecosystem here is just not as aligned and not nearly as efficient. In order to be successful, entrepreneurs have to focus on solving a chain of problems and inefficiencies to get the results they desire.  As these inefficiencies exist on a macro-scale, there is inherently less competition in the market and the rewards are higher to the victors. Opportunities like our own at the Green Coffee Company aim to control the entire value chain of coffee within Colombia, for example, not just a piece.  It’s not possible to be great at only one aspect of the value chain and create a viable company. The most successful companies modify or recreate the entire value chain to control a vast majority of it, and they will make significant returns for investors as they become successful. 

  • Big players in venture capital are stockpiling dry powder to deploy in LATAM – high net worth individuals should look to piggyback:  The fact remains that the biggest players in the investment world will always have access to better information than most accredited investors will.  Capital buys access to better information and superior information will drive material capital movements.  Individual investors should look to where companies like Softbank are aiming to deploy huge amounts of capital in early and developing stage companies and take note. In countries like Colombia, Softbank is openly presenting at national investment conferences specifically designed to showcase foreign direct investment in the country and clearly stating that they will be actively building a huge portfolio of companies both within Colombia and within the LATAM region.  Individual investors should look to invest directly in these same portfolio companies, in the same regions, especially if they can gain access to deals before the pros do. 

About Legacy Group

Legacy Group is distinguished by a singular tradition of service to our portfolio partners; the mutual commitment to, and the seamless collaboration of, a true partnership; formidable financial and legal talent across multiple disciplines and jurisdictions; and shared professional values that focus on client needs.

We provide experience and investment to a wide range of private companies spanning many industries, including real estate, hospitality, tourism, agriculture and technology. Contact us to learn more and to discuss current investment opportunities available to you in our portfolio companies.

*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.

Sources:

https://www.ft.com/content/5440b1cf-3523-4a4d-96bc-07a2c2132069

https://pitchbook.com/news/articles/startups-latin-america-record-vc-deals-2021

https://labsnews.com/en/articles/business/latin-america-has-a-record-of-over-6-billion-in-investments-for-startups-in-a-half-year/

https://docsend.com/view/49zkutri8yxtbgmu

https://www.reuters.com/business/softbank-renews-bet-latin-america-with-3-bln-fund-2021-09-14/

https://colombiainvestmentsummit2021.azurewebsites.net/Conference?id=NzY=

https://en.wikipedia.org/wiki/SoftBank_Group

https://en.wikipedia.org/wiki/Chinese_economic_reform