Venture capital investments in Latin America are on track to surpass the $10 billion threshold in 2021, as startups look to expand their operations and international investors show interest in the region.

In the first semester alone, private investment deployed in the region had already exceeded full-year levels from previous years, prompting several companies in the financial and technology sectors to gear up for rapid growth and regional expansion. Sectors like digital banking, financial services, payments, consumer internet, and healthcare are among the most attractive for both local disruptors and global players.

As of June 30, some $6.45 billion have been deployed in Latin American startups, up 57% from the $4.1 billion invested in all of 2020. It marks the highest reported level of investment in the region, according to historical data from the Association for Private Capital Investment in Latin America, or LAVCA. As large early-stage and late-stage rounds have continued into the second semester, experts believe this trend is likely to continue.

The COVID-19 pandemic accelerated the digitization of Latin America's economies, where startup founders and investors see the potential to begin to close a financial gap that remains for large segments of the underbanked population. Millions of Latin Americans adopted digital banking during the pandemic, as e-commerce and digital payments were embraced in a wider scale. This accelerated digitization trend led to bigger addressable markets for technological startups, which in turn resulted in a rise in their valuations.

"The number and quality of [exit strategies] that we've seen in the region, specifically in B3, Nasdaq and NYSE, are proving, once again, the resiliency of the tech ecosystem across Latin America. It has proven to international investors that there is a functioning model for venture capital investment that can be supported by higher ticket sizes and greater availability of capital," Carlos Ramos de la Vega, venture capital manager with LAVCA, said in an interview.

"The key question after the pandemic is how able are startup founders and investors that benefitted from these trends to actually capitalize on growing momentum once society goes back to a more hybrid basis," de la Vega said.

The momentum is likely to continue for the foreseeable future, in a region where banking spreads remain high and e-commerce penetration remains below 10%. The opportunity to offer more accessible and competitive products and services through improved solutions and a better user experience is still appealing for both startup founders and investors.

Not surprisingly, SoftBank Group Corp. recently doubled down its bet in Latin America by launching a $3 billion fund on top of its previous $5 billion investment in the region. The first trust has reportedly yielded an 85% return in little more than two years, the company said.

Bigger companies, with fintechs leading the way

Latin American startups, of which financial technology companies are a major component, have benefitted a great deal from growing capital availability. The average round in the first half of 2021 rose to $22.5 million, up from $9 million in the year-ago period.

"Companies today are much bigger than we ever imagined," Marcelo Lima, a partner with Brazilian venture capital firm Monashees Gestão de Investimentos Ltda., said in a recent conference. "A $10 billion or $20 billion Latin American company was just science fiction years ago. It is undeniable that prices have gone up, and that rounds are getting bigger and more competitive, but companies are also attaining market shares that were not achievable in the past."

In particular, fintech companies that target the underbanked through smartphone technologies have flourished, with the industry accounting for roughly 42% of all private capital invested in 2021, according to LAVCA.

In Brazil, the region's largest startup industry, the number of fintech companies has risen from just 54 in August 2017 to roughly 689 as of last year, according to a report by Moody's. In 2021 alone, LAVCA data shows some $3.74 billion have been invested in the entire Brazilian startup ecosystem through 180 venture capital deals.

"Fintech has been the leading category in Latin America," LAVCA's de la Vega said. "Not only because of the attractive return opportunity but also because of its potential for large-scale impact on society."

The expert said fintech was no longer considered a stand-alone industry, but rather one that is permeating different industries as digitization accelerates.

"It's not only about banks and fintechs, but also about retail companies entering the market," said Bruno Diniz, co-founder of Spiralem consulting and a fintech professor in Brazil. "Everyone can become a fintech right now, and players which provide banking as a service are the ones enabling it."

Companies go regional

Greater availability of capital is also driving Latin American companies to take a regional approach earlier in their lifecycle, as investors push for a geographical expansion that broadens the addressable market.

"When venture capital funds write a check, especially those big ones that we see from Softbank or others, they expect companies to begin an expansion [phase]," Diniz said.

Brazil's the largest digital bank, Nu Pagamentos SA, is expanding to Mexico and Colombia. Argentine payment fintech unicorn Ualá is consolidating operations in Mexico, and insurance technology startup Chilean Betterfly has recently partnered with Grupo Icatu SA in Brazil, in order to set foot in the largest market in Latin America.

"We definitely see cross-pollination across the industry," de la Vega said. "Startup founders are increasingly focusing more on the ability to conquer all of Spanish-speaking Latin America, as opposed to just saying I want to dominate the market in Mexico, or in Chile."