Over the past few years, explosive growth in Latin American startups and sources of capital to fund them has piqued the interest of U.S. venture capital (“VC”) investors. Whereas Latin American technology has historically been criticized for only layering on a “local” component to existing technology, in recent years, we have seen real innovation with global application. While a correction in valuation expectations continues to work its way through the market, there continues to be a great deal of opportunity to tap into unmet needs and create new products and services for Latin American consumers, and for Latin American technologies to solve pain points for consumers worldwide. This includes everything from health care and fintech to e-commerce startups that can transform the region.
Of course, there is no hiding that investment in the region has slowed in recent months, consistent with global venture funding falling by 49% in Q2 2023 vs. Q2 2022. Nonetheless, consistent innovation, with both local and global application, continues to attract cross-border investment.
As VC investors in the U.S. consider making new investments in Latin America, they should proceed with full appreciation of the unique challenges and considerations that investing in this region may imply.
Regulations can vary significantly between countries in Latin America. What might work in Brazil could be very different in Chile or Argentina. Therefore, it is crucial to understand the legal and regulatory environment in each target country. This includes a thorough understanding of that country's foreign investment restrictions, tax laws, intellectual property protection, labor laws, and so forth.
There are also government incentives that are specific to each country in the region. Investors should explore the potential incentives for foreign investors within specific industries that might be available.
Political instability can significantly impact investments. As investors look at potential opportunities, they should carefully assess the political situation in the target country, including the current government's stance on foreign investment and stability in the region.
Economic factors in the country should also be top of mind, and conducting a thorough analysis of the target country's economic conditions will help mitigate risks. Factors like inflation rates, GDP growth, and unemployment can impact the success of your investments and should be examined closely over the short-, medium-, and long-term. The country's political stability can also significantly impact its economic strength, and these two can often go hand in hand.
Investors should assess the geopolitical and economic risks in the region and the particular target countries, considering the impact of events such as trade disputes, economic crises, or natural disasters, and mitigating factors like quality of the health care and social security system and civil society. These are consistently evolving, so it is essential to always stay on top of developments that could impact your investments.
Understanding each local market is essential to success no matter where you are investing. Cultural nuances, unique consumer behavior, and market dynamics can differ significantly from country to country within the region. To best understand the local market, it is helpful to partner with local experts or firms who can provide valuable insights and a deeper level of understanding so you can make the most informed decisions.
Building relationships with local partners, co-investors, and entrepreneurs can help investors navigate the local landscape and provide access to networks and resources. In addition to monetary investment, investing time in building a solid network in the Latin American venture capital ecosystem is also important. This could include attending conferences, joining local industry associations, or connecting with other investors who have had success in the region.
Since the pandemic, we have seen the incredible impact that supply chain and logistics issues can have globally. Infrastructure can vary widely within the Latin American region, affecting supply chain logistics and operational efficiency. Investors should consider how infrastructure and logistics issues may impact their portfolio companies in the short and long term.
Effective communication is crucial in any transaction. However, communication and language barriers can often present issues when dealing with cross-border transactions. While English is often used in business, especially in the startup ecosystem, local languages like Spanish and Portuguese can be essential for building relationships and understanding the market.
The issue of cultural sensitivity should also be at the forefront when you are working on cross-border investments. Having a deep respect for each country's local customs, culture, and unique aspects is paramount. There should be a high level of cultural understanding and sensitivity to build trust among the parties. This can be one of the key factors in creating a successful, long-term partnership.
The startup ecosystem in Latin America is fascinating, and the region is just beginning to realize its potential. Each Latin American country has its unique characteristics and challenges, so it is essential to tailor your approach to each specific market.
Partnering with local experts and legal counsel who understand the intricacies of each country's environment can be instrumental in your investment success in this region.
Many U.S. firms have entire Latin America groups headed by partners with many years of experience in dealing with cross-border transactions in the region, and investors should take advantage of their support.