Latin America’s Tech Startup Boom: A New Era of Innovation
In recent years, Latin America has experienced a significant surge in the creation and development of tech startups and a vibrant enterprise ecosystem. This burgeoning sector offers a promising avenue for leveraging innovation and revitalizing regional business activity. However, its progress presents unique characteristics and noteworthy hurdles to overcome if it’s to achieve its full economic potential.
The Rise of Latin American Startups
Latin America has enthusiastically embraced the global wave of startup-led technology and innovation, resulting in the emergence of numerous successful companies. This boom has been fueled by a convergence of factors, transforming the region into one of the most dynamic in terms of tech ecosystem development. Major innovation hubs such as São Paulo, Mexico City, Bogotá, and Buenos Aires are leading this trend, with fintech and e-commerce sectors at the forefront. However, the phenomenon extends across many cities and economic sectors, characterized by distinct Latin American traits.
To maximize the economic benefits of startups in the region, a range of reforms and targeted measures are needed, focusing on both the tech sector specifically and broad economic areas.
Building a Tech Sector: Awakening Startups and Unicorns
Latin America faces economic challenges in the short and medium term, including sluggish growth and limited fiscal flexibility. However, the startup sector, composed of young tech and innovative companies, has the potential to catalyze a much-needed economic transformation via the introduction of innovative companies that promote economic growth and productivity.
There’s substantial evidence demonstrating a clear correlation between the adoption of digital technologies and economic development. Studies indicate the positive ripple effects the development of a tech enterprise ecosystem has on innovation and business-sector renewal. Positive impacts of start-ups on Latin America’s economy are evident in: (a) government support (in terms of funding, training and remedying market shortcomings); (b) the burgeoning of the digital transition in all economic sectors (which has sped up since the COVID interlude); (c) a pronounced degree of enterprise, implicit in Latin American DNA, with highly creative skill sets, driven in the technological sphere by universities, business schools and accelerators; (d) the ‘signalling effect’: from the founders of highly successful technology businesses to young entrepreneurs; (e) entrepreneurs identifying numerous needs arising from Latin American under-development (educational, financial and sanitary) as business opportunities; and (f) the wholesale arrival of foreign venture capital to finance the companies and help them grow.
In 2021, the Inter-American Development Bank (IDB) noted that there were already over 1,000 startups in the region, with a combined value exceeding US$100 billion and creating 245,000 jobs across virtually all sectors of the Latin American economy.
Another key metric for the growth of the tech ecosystem is the number of ‘unicorns’ – startups valued at US$1 billion or more. Although data limitations and defining startups can make comparisons difficult, the existence of unicorns showcases a region’s ability to quickly build large tech companies. Estimates suggest that Latin America has between 30 and 40 unicorns, surpassing Germany, France, and Israel (see Figure 1).
Successful Latin American Startups: Across Multiple Sectors
There’s a notably high concentration of successful companies in finance (fintech) and, to a lesser extent, in e-commerce and logistics. Nubank (digital payments company in Brazil), MercadoLibre (Argentine retailing giant), and Newport (Uruguayan freight specialist) are prime examples. But there are also notable companies and unicorns across almost every sector. These include Kavak (Mexican marketplace for used cars), Quintoandar (Brazil), Betterfly (Chile), and Despegar (Argentina). These companies are introducing new business models that enhance and reduce the cost of products and services while fostering innovation and productivity, creating competition for traditional companies.
Despite the success of thousands of companies, some observers believe that Latin American founders often adapt business models that have already succeeded elsewhere. But recently a new group of companies is starting to make its mark in deep tech sectors, such as generative artificial intelligence, blockchain/web3, advanced 3D printers, and messenger RNA vaccines.
Latin American startups aim for expansion within the region and globally. Private capital requires these companies to achieve scale and penetrate international markets to ensure profitability. This is particularly true for companies with disruptive, deep-tech technologies that aspire to offer global solutions, expanding into markets such as the U.S. and Europe. Venture capital has played a pivotal role in the development of Latin America’s entrepreneurial ecosystem. In 2021, startups received a record US$16 billion in venture capital investments, and nearly US$8 billion in 2022.
International venture capital is strongly attracted to Latin American companies because of their growth prospects in an emerging market. Additionally, valuations are often more attractive than in other regions (partly due to lower labor costs). Funds from the U.S., such as General Atlantic as well as the Softbank fund, have invested heavily in the region.
São Paulo at the Forefront: Key Regional Hubs
Some cities are leading the creation and development of the region’s startups. Measuring this growth is best done by analyzing cities, not countries. São Paulo is the only ecosystem in Latin America among the 30 largest in the world and has numerous unicorns. Mexico City and Bogota are also critical hubs.
Renewing Infrastructure and Closing Development Gaps
Startups have become increasingly important players on the Latin American economic scene. Their integration into the economic landscape offers many benefits including boosting innovation and productivity toward the regional economies’ growth potential. In a region where economic informality is widespread, some companies formally introduce their operations. For example, Kavak is the first large Mexican startup in the used-vehicle segment. These companies help to narrow developmental gaps, particularly in financial inclusion. Education also provides a promising sector. If the technological infrastructure is appropriate, a low-income student can receive online training from top global institutions.
Increasing Economic Impact
Structural reforms that improve the operation of SMEs will also improve the functionality of startups: currency stability, institutions that ensure competition, light-touch regulation, and taxation are amongst the key elements. Public funding is critical, directed toward instruments such as venture capital and participatory loans. Foreign capital is also essential for startup progression, and for ensuring that the ecosystem can grow to have a significant impact. For the innovation sector to continue advancing in Latin America, several key factors need addressing. This includes improving digital infrastructure. The absence of infrastructure in some districts coexists leading to under-utilization of networks in others. This factor limits the potential market size for the region’s startups, making businesses less profitable and limiting the size of these companies.
Conclusion
The flourishing of the tech enterprise ecosystem and startups in Latin America is a major milestone, representing a promising step towards increased innovation, productivity, and economic growth. Innovation hubs have helped create large tech companies in a range of sectors. However, this growth faces several obstacles, including how to allow the tech enterprise ecosystem to fulfill its transformative potential or contribute to greater convergence with other regions. Public policies and institutions, especially those responsible for microeconomic reforms and the business environment, have an essential role to play. Macroeconomic and institutional stability are fundamental for attracting investment. In conclusion, what has been achieved in recent years in the context of startups has been remarkable and undoubtedly encouraging. There is intense global competition for both entrepreneurial talent and venture capital, which makes various measures necessary to achieve ongoing development of startups over the years ahead.
