Venture capital, commonly referred to as VC, has emerged as a key driver of innovation and entrepreneurship in Latin America. However, like any industry, investors face a series of challenges and obstacles today.
A Promising Investment Opportunity facing growing challenges
Jorge González Gasque, Managing Partner at G2 Momentum Capital, highlights the following: "Investing in startups in Latin America means betting on the region's growth and innovation. Latin American startups remain attractive to venture capital funds, particularly in the early stages, due to their goal of promoting financial inclusion in a region where a significant portion of the population lacks access to financial products and cash remains the primary payment method."
According to data provided by Statista, venture capital investment in Latin America reached $4.6 billion by the end of 2022, experiencing an impressive 300% growth compared to 2017. However, over the past 18 months, a slowdown has been observed in the growth rates of VC in the region, contrasting with the levels recorded in 2020 and 2021.
Challenges and Opportunities of Venture Capital in Latin America: An Analysis by Isabel Soto
Isabel Soto, an expert in the field and Director of Services at G2 Consultores and Partner at G2 Fintech Fund, has been advising startups on strategic planning, business strategy, and processes for the past 8 years. Her extensive experience has led her to be recognized as a prominent professional in the region. She explains that G2 Momentum Capital has identified five main challenges for VC in Latin America:
- Education on Venture Capital Investments: There is still widespread lack of knowledge among many investors regarding this type of investment asset and how it works, leading them to continue investing in more conventional assets such as ETFs, stocks, or government bonds, among others.
- Uncertain Key Regulations: While fintech regulations have spurred ecosystem development in some countries, challenges still persist. These include the need to expedite obtaining operating permits and consolidate secondary laws related to open banking. It is important to consider that each country has different regulations, complicating the design of regional expansion strategies for startups.
- Immaturity of the Ecosystem Impacting Liquidity: The scarcity of large-scale investment funds in Latin America and the lack of dynamism and complexity in the stock markets restrict exit opportunities for venture capital funds in the early stages. Nevertheless, notable interest from influential global investment funds to enter the region has provided some Latin American companies with the possibility of achieving successful market exits internationally.
- Political and Economic Instability in the Region: Political and economic instability in certain countries in Latin America can create unease and uncertainty among investors when considering investment opportunities in the region. However, despite these challenges, startup ecosystems in nations such as Brazil, Mexico, and Chile have achieved remarkable growth and demonstrate considerable potential.
- Currency Risk: Investors are exposed to significant risks due to fluctuations in exchange rates when making investments in the Latin American region, especially during periods of economic complexity or high inflationary pressure. These fluctuations can have a considerable impact on investment returns.
Despite the challenges faced by venture capital in Latin America, the region remains attractive to investors due to its growth, market potential, and the opportunities offered by startups to drive innovation and improve quality of life in the region. With a focus on education, regulation, ecosystem development, and economic stability, venture capital in Latin America can overcome these challenges and continue to play a crucial role in promoting entrepreneurship and innovation in the region.