Foreign investments have boosted a new phase of capital building across Latin America’s financial technology sector, but industry experts at a fintech conference in Miami this week caution that valuations are rising rapidly as the size of investment rounds grow larger.
While traditional Latin American venture capital funds engage in investments that average between $4 million and $5 million, those with foreign participation are growing much larger. These include Argentina’s payments startup Uala, which tapped $150 million, as well as Brazilian digital bank Nu Pagamentos SA, which raised as much as $400 million, and Clip, a Mexican mobile point-of-sale provider, which secured $100 million. Konfio Ltd., a Mexican digital lender, also has raised $200 million in recent months.
The large fundraising efforts came as Japan’s SoftBank Group Corp in April made the largest-ever bet placed in the region’s nascent technology space, deploying some $1 billion in Colombia’s Rappi, an online grocery purchasing and delivery platform. That investment from SoftBank is part of a new $5 billion investment fund for the region, a ground-shaking amount for a region that saw less than $2 billion of such investments in the whole of 2018.
With more foreign dollars flowing to the region to compete for investment opportunities, experts said the region’s technology companies have a much better chance of securing funding across their investment timelines — from seed capital to larger expansion rounds. But it also means that valuations are becoming inflated, and local venture capitalists may face an increasingly difficult time keeping pace.
“How inflated it is, nobody knows,” Mike Packer, a partner with QED Investors, said during a panel discussion at the LatAm Finnosummit in Miami. Packer noted that despite rising valuations, there continue to be “lots of very grounded opportunities and tons of margins to be captured by fintech disruptors.”
Fabrice Serfati, a partner with Ignia, noted that while increased competition will always raise prices — “that is simple economics,” he said — his firm is starting to also see more investors express a “fear of missing out; that is, investors being afraid of losing a good deal and increasing prices automatically.”
Venture capitalists at the event warned that while achieving a high valuation may be tempting for start-up founders, it could backfire, as the sky-high pricing often comes with sky-high expectations of a nearly “flawless execution” of their business plans.
The most recent cautionary tale attendees pointed to is WeWork Cos. Inc., the U.S. workspace company that garnered a $47 billion valuation only to lose it as governance and profitability concerns emerged as it made plans to go public. The company was forced to halt its IPO, its founder and CEO resigned, and SoftBank, which had made a massive investment in the company, stepped in with a rescue funding package.
The “WeWork case,” as Arc Labs managing partner James Sagan put it, is informing the market of the perils of losing the grip on inexperienced chief executives packed with capital.
“There is just too much money going around,” said Adolfo Babatz, CEO and founder of the SoftBank-backed Clip. “Capital is not a substitute for product development, marketing, distribution. The basic building blocks of any startup. It needs to be managed carefully or otherwise, it can burn.”
Still the level of competition, and as result inflated valuations, continues to be “much less intense” in Latin America as compared to the U.S. or Asia, Marcelo Lima, a partner with Brazilian VC Monashees, said. “You can get a good team and plug it into the right investment with capital, and you might find yourself alone in the vertical … whilst in the U.S. you could have six companies already working on that.”
“That’s the beauty of Latin America,” he added.