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In hunt for fintech unicorns, venture capital looks to Latin America

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In hunt for fintech unicorns, venture capital looks to Latin America

The Latin American startup space has seen record flows of equity investments over the last two years, as global funds look to secure stakes in promising startups bound to become regional leaders.

VC funding for startups nearly quadrupled from $500 million in 2016 to nearly $2 billion in 2018, according to figures from the Latin American Venture Capital Association, or LAVCA. Roughly a quarter of those funds were captured by financial technology, making it the leading recipient for those investments. So far this year, private figures are showing that even more money is flowing in.

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In 2019, Japanese conglomerate SoftBank Group Corp. announced it would deploy a $5 billion fund to target local tech companies. It later announced it would partner with local funds such as Kaszek Ventures, and very recently raised its stake in Banco Inter SA. Chinese tech giant Tencent owns a stake in Brazilian online bank Nubank worth $10 billion in valuation, along with U.S. based Sequoia Capital, among others. Goldman Sachs has a $100 million credit line open with Mexican Konfio, as well as a stake in Argentine mobile wallet operator Ualá.

"All this money is driving valuation prices up. There is now a serious competition in funding between Asia and North America," Bruno Diniz, head of fintech at the Association of Brazilians Startups, said. "There is much more funding for startups now that we ever had," he added.

With $1.3 billion funneled to startups during the past year, Brazil holds the lion share of the market in Latin America, followed by Colombia with $334 million and Mexico with $175 million.

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"Given the region's relative immaturity and large population, VC investors see strong potential related to the introduction of disruptive technologies," KPMG wrote in a recent report.

For fintech specifically, Latin America's large unbanked population — nearly half of the population doesn't have a bank account — combined with high smart phone penetration rates, present a huge potential, industry experts say.

To be sure, fintech adoption in the region is still in its nascent stages, and questions remain on how much of Latin America's financially excluded will be lured out of the informal economy by new technology. But Nu Pagamentos SA's Nubank, a payments fintech which has quickly gained traction in Brazil and is now expanding into Mexico and Argentina, has demonstrated that plenty of demand is out there.

"The success of Nubank in Brazil was crucial to the sector and a wake up call for investors," fintech specialist and entrepreneur Thiago Paiva told S&P Market Intelligence. "It showed that it was possible to compete with traditional banks, since it is now Brazil's sixth largest bank with more than 13 million customers."

The development of digital market places and payments companies in the region has paved the way for new ventures in the acquiring sector and, more recently, in lending and credit solutions.

"The capital that is coming in to the region speaks very well of the validation that we are seeing from international investors towards the LatAm opportunity and the quality of local entrepreneurs," said Juan Savino, a partner at Altment Capital.

According to LAVCA, the fintech sector received an estimated $700 million in 161 deals in 2017 and 2018. Latest private figures compiled by CB Insights show $553 million in financing during the first half of 2019 alone.

Additionally, increased transaction sizes from investors has contributed to the buildup of the so-called unicorn club, made up of technology startups valued at more than $1 billion, such as the Nubank, PagSeguro Digital Ltd. and Stone Pagamentos SA.

According to Diniz, the most sought after startups usually share a common feature; that is, the potential of becoming "regional champions."

International funds will be crucial to enable these types of start-ups to expand to a regional level, as Latin America's domestic capital markets don't have the ability to support such growth, Altment Capital's Savino noted. "Either you list on Nasdaq or NYSE or depend on these large corporations to fund long-scale growth," he said.

But that also presents a risk to regional venture capitalists, who ultimately could be displaced or diluted by increasingly larger valuation rounds. SoftBank, for instance, struck a $1 billion investment in logistics company Rappi, making it "the largest technology funding round ever in Latin America," according to KPMG.

"Softbank is the million dollar question," Savino said. "They are changing the venture capital game worldwide, but with that kind of firepower, there is doubt on whether the rest of the players will be able to keep up the pace in a very small market like ours."