Options to accelerate entrepreneurship and its financing

If I could have a word with the Mexican and Latin American entrepreneurs who feel that they missed out on a chance to ride the biggest wave of venture capital financing that has hit the region (with a historical record on 2021), I would tell them that the trend that brought it along may have slowed down, but it’s still stronger than ever.

Beyond the circumstantial factors affecting the global economy and the turbulent political environment in our countries (which is not new), there is still an immense potential market, the possibility of extraordinary returns compared toot her investments in more mature markets and a solid entrepreneurial talent base.

This is the opinion of the economic journalist Enrique Quintana regarding the positive performance of FDI in Mexico during this year’s first quarter, compared to the general investment that is still at rock bottom, at the same level of 11 years ago. Pondering if foreign investors see something that Mexicans fail to notice, he concludes that, in the end, they bet on the country, not on a government, and that makes a huge difference when considering risks and opportunities from a long-term perspective.

Colombia’s case also comes to mind. While politics is increasingly polarized, there is a true entrepreneurship boom, with new unicorns worth more than a billion dollars and a growing number of startups raising significant investments and expanding to other countries.

For now, according to records from the Association for Private Capital Investment in Latin America (LAVCA), with more than USD 15.7 billion invested in the region—more than in the entire previous decade—there are no signs of cooling, at least a similar rate in the rest of the world.

The volume of venture capital funneled to new Latin American companies in this year’s first quarter shows a slight decrease compared to previous quarters, but capital raising reached USD 2.8 billion, 67% more than in the same period of 2021 and more than four times the amount observed in the same quarter of 2021.

Additionally, early stage funding did not decline. Rather, there was a significant increase in the average size of investments: 1.6 and 2.6 times more than in the same period last year for seed and early stage tickets, respectively.

It must be noted that these figures focus on investments in which at least one institutional venture capital fund participated. Therefore, they do not include some of the most important investments; for example, debt or corporate venture capital. According to the monitoring from Crunch base, which specializes in startups, funding in this quarter amounted to USD 3.4 billion, 30% less than in the last quarter of 2021, but higher by a percentage similar to the first quarter of a year ago.

What do investors from around the world keep seeing in Latin America, apart from the still-wide interest rate differentials? The same as many entrepreneurs in the region: products and services markets that can only grow from the paths opened by the digital revolution. The greater the lag and greater access, the more room for what is known in the venture capital industry as scalability.

The case of the fintech sector is illustrative. Consider the case of Mexico.According to the recently published National Survey of Financial Inclusion2021, out of a universe of 90 million people aged 18 to 70, more than 33million do not have a formal financial product, be it a savings account or a pension plan. Less than 18 million have some type of insurance and credit holders do not reach 33% of the adult population, which can be seen as a virgin market of more than 62 million people. With regards to payments, for purchases of MXN 501, around 80% used cash, less than 13% used a debit card, only 3.4% used a credit card, and 3.3% other means, such as electronic transfers, checks, prepaid cards, and direct debit charges.

Coming from a hyper-concentrated market and with much greater resilience and a minimal fraction of the operating costs and capital requirements that burden large banks, fintechs can potentially fill in the gaps, which are open as a market with the reach provided by technology. Innovation and even the reinvention of products, services and business models come full circle.

Further more, scalability is extended to the regional level. On the one hand, this is because there are lags and similar opportunity areas in terms of financial inclusion across Latin America. On the other, technology also makes it easier to enter new markets, with reduced costs and capital requirements to bring a successful innovative model from one country to another.

In short, our problems are similar. That is why we see so many startups fromColombia, Chile, Argentina or Brazil in the Mexican market, and many Mexican firms doing the same in those countries, all supported by a common culture.

Investor shave not just spotted that perspective: they’re increasingly looking for it in the prospects they review, and not only in the fintech sector. What can entrepreneurs do to streamline, increase and diversify their capital raising? They should consider the scalability of social benefit endeavors and a market projection at the regional level.

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