Why support for Latin America's early tech hubs is vital for the region

Venture capital investment in Latin America has doubled every year since 2016, reaching an all-time high of US$4.6B in 2019. Despite years of hard work to get to this point, the region now faces unprecedented challenges to maintain it.

Between Q4 2019 and Q1 2020, deal count in Latin America dropped almost 60%. The COVID-19 crisis is causing both local and global investors to rethink their strategies, and while deals are still happening, many VCs are doubling down on support for existing portfolio companies and shying away from new deals.

Start-ups across Latin America have proven their resilience to economic shocks time and time again. Entrepreneurs know how to survive and thrive during economic hard times. In fact, vibrant tech hubs have blossomed in countries like Argentina, Brazil, and Colombia despite periods of political and economic uncertainty.

The impact of COVID-19 on Latin America’s emerging start-up ecosystems

The current slowdown is affecting start-up investment regardless of location. However, it could prove particularly damaging to smaller start-up ecosystems, like the ones emerging in Peru, Ecuador, and Bolivia.

Organizations that support start-ups are facing their own challenges to sustain their activities during the pandemic, whether it’s due to a lack of funds or technical limitations. The Inter-American Development Bank (IDB) recently surveyed 429 organizations involved with entrepreneurial ecosystems in 18 Latin American countries, and two out of three said they have significantly reduced or stopped their work altogether.

Start-ups in these less-developed ecosystems now have fewer resources and may face longer recovery periods than their counterparts in the region’s more established tech hubs. The IDB survey reached more than 2,200 entrepreneurs in 19 Latin American countries to learn about the impact of COVID-19. While respondents in countries like Uruguay, Costa Rica and Chile have seen positive support from the entrepreneurial community, start-ups in places like Bolivia, Ecuador, El Salvador, Honduras, and Venezuela pointed out a significant lack of resources.

Start-up communities in Uruguay and Chile showed positive signs of flexibility and continued activity, but others in Bolivia, Ecuador, Peru, Panama, Guatemala, El Salvador, and Venezuela all indicated that they are facing difficulties. When asked how well community organizations have responded to the crisis, 44% of entrepreneurs said the responses have been slow and insufficient, and 29% said responses have been non-existent.

Start-ups in Latin America’s smaller and more nascent tech ecosystems are at a higher risk of losing ground as resources and funding dwindle. Supporting them will be vital not only for the region’s recovery but to protect the extraordinary growth that has been achieved so far.

Doubling down on local partnerships

One part of the solution could be more foreign investment to these smaller tech hubs. In Latin America, cross-border investment between regional and global investors is rising, though primarily for later-stage start-ups. In 2019, all but one transaction over US$50M involved a cross-border co-investment, with US$1.7B deployed across 74 co-investment deals. Latin American start-ups with significant traction have finally been able to attract growth-stage capital that, historically, has not been available.

According to Brian Walsh, Head of WIND Ventures, much of the region’s later-stage capital has come from abroad, whether it’s from SoftBank’s Vision Fund, Silicon Valley funds, or corporate sources. With that said, Walsh suggests, “In times of enhanced uncertainty, you can expect sources from abroad to recede, focusing on regions closer to its local networks. Latin America still needs to mature in providing a full funding continuum, from seed, A, B, C+, for its founders within the region itself.”

However, cross-border investing for early-stage start-ups remains in its infancy in Latin America and fundraising in the current environment will be especially challenging. Most cross-border deals still occur in the region’s more mature tech hubs. In 2019, half (50.5%) of all venture investments took place in Brazil, followed by Mexico (22.7%).

When times are difficult, investors are likely to retract to locations where they already have connections or processes in place, and where deals are easier to get done. This means that start-ups in the region’s less developed ecosystems will likely see a decline in funding opportunities from outside their home countries as travel restrictions hinder cross-border business activity.

Fostering cross-border collaboration between regional investors can help founders who are already starting out at a disadvantage in smaller start-up ecosystems. With an inability to meet with founders face-to-face, regional funds will need to rely heavily on local partnerships to establish trust and source deals. Local funds can reduce friction points for foreign investors by getting them engaged in the fund progress. Establishing transparent and repeatable cross-border processes now will also help regional investors compete for deals in the future when global funds return to the region.

Getting founders the support and resources they need

A majority of founders in Latin America indicated that their team members (56%) and friends and family (39%) are their only support networks. Very few have received support from the government or community so far. VCs have become a primary source of mentorship and guidance to entrepreneurs during this difficult time, but there’s more work to be done. First Round put together this helpful guide on how to create a mentorship programme that works well and how to make a bigger impact as a mentor.

Additionally, most accelerator programmes, competitions and networking events in the region have been suspended or shifted online. Many start-ups who do not have access to these types of programmes and resources in their home cities or countries rely on opportunities abroad for funding and expansion opportunities. While online events provide more flexibility for founders located anywhere to participate, the virtual setting adds its own set of unique challenges, especially when it comes to meeting and building trust with potential investors.

Start-up community organizations in Latin America shifting their activities online for the first time can learn from other firms that have already done so successfully during the crisis. For example, 500 Startups recently provided an in-depth guide on how they operated their first-ever virtual demo day for their start-ups. Splice Media, which helps media start-ups in Asia, also shared a guide on how they organized an online support session for entrepreneurs to share tips on handling the current crisis.

Entrepreneurs in Latin America’s smaller tech hubs have made significant strides in the last few years. Maintaining support of start-ups in these ecosystems is vital to the entire region’s future.