Latin America is home to some of the world’s fastest growing markets and it has seen an exponential growth in startups, investments, valuations, and unicorns.
As a result, we are often approached by Asian VCs and entrepreneurs who are keen on getting in on the action as well.
So we thought, who better than ex-Rocket Internet executive Fernando Acevedo Pinheiro to give us insights into Latam (and Africa’s) startup landscape and challenges? And right we were.
Momentum Works hosted vibrant sharing sessions in Shanghai and Singapore where Fernando and our other guests engaged in passionate discussions on tech and investment landscape in Brazil, China and Southeast Asia.
If you missed out on the discussions, fret not. Fernando put together his observations from his trip and his thoughts on the similarities and differences between Latam and Asian emerging markets.
1. What are some key differences you observed between Latam and Asian markets in terms of –
- Hottest industries and verticals
China is focusing much more on high tech verticals like AI and hardware, while in Brazil/LATAM tech startups are more “service driven”, aimed at improving existing service industries with technology.
- VC investments and their backgrounds
There is massive liquidity of VC Capital in China with thousands of VC players, whereas in Brazil/LATAM there is lack of liquidity and VCs are fewer in numbers (there is a reason for that). Big international VC players are starting to look more to the continent, for instance, Softbank just launched a LATAM focused Fund.
- Entrepreneurial spirit
Vietnam, Thailand, and Brazil all feature in the GEM’s (Global Entrepreneurship Monitor) top 10 list and are all growing economies. That said, both regions have very strong entrepreneurial culture. To give you an example from within my own family for instance- my parents and few 1st degree relatives all owned/own their own companies.
- Talent pool
In big cities in LATAM, especially São Paulo, it is easy to find talent, the only challenge, and I think this is a global issue, is to find highly qualified developers, due the constant increase in market demand.
- Consumer trends
There are several differences in consumer trends, but I can give you an example specific to microlending.
Asian consumers are better at saving money and they get micro loans for only 30 days. In Brazil, on the other hand, people from lower income strata don’t save much. When they are in need of capital, they want to pay back in several instalments, which can go up to 36-60 months.
So what’s the impact of this on the micro-lending business model when you compare the two regions? Well in Brazil, the interest rates for this type of credit product will be extremely high (due to long repayment cycle), making it a very profitable operation. However, the downside is that there is a need for a much bigger working capital. Thus, it’s easier and more capital efficient to operate microlending in Asia than in Brazil for instance.
2. What are some of the misconceptions Asian entrepreneurs and investors have about Latam markets?
We know lots of cases of Chinese tech companies that that entered Brazil/LATAM and failed to take off because they didn’t have a proper understanding of the market, consumption behaviour, and local culture relevant to specific products and/or services. They simply tried to replicate the “Chinese way” or “business model” and struggled a lot or simply failed.
3. What are the top 3 challenges you observe for entrepreneurs entering Latam?
a. Deep understanding of the market, especially customer behavior. There is a massive difference between how Chinese/SEA customers consume products and services compared to their Latam counterparts- the repeat purchases, scalability, average basket size, CAC, etc. can be vastly different and can make the current business model unsustainable if necessary adjustments are not made.
b. Cultural differences while operating in Latam – I heard about a lot of Chinese entrepreneurs having a hard time while managing local professionals. Similarly, I know of Europeans struggling to manage SEA employees, and I myself have struggled to manage African employees. Lifestyle and motivational incentives can be completely different between different cultures, so you have to really put in effort to understand nuanced differences in cultures and implement strategies to effectively manage differences between the HQ and local businesses to make things work.
c. Understand Taxes & Bureaucracy – Countries like Brazil have a very complex tax system that can greatly hamper a business model. I would highly recommend seeking help from specialised advisors who can advise and guide you on how regulations can impact your operations and economics.
4. For investors looking to enter Latam, which areas in your opinion will attract the bulk of money? How do you see the valuations?
Brazil & Latam in general is a very entrepreneurial region and we are currently at the highest point of tech startups of all times. There are lots of different tech eco systems around the region with several very interesting projects going on. Valuation is something relative, but due to the lack of capital liquidity in the country, there is opportunity for fair/cheap deals for Chinese and Southeast Asian investors. Below are most attractive sectors-
a. Fintech (all segments, from Open Banking to Insurtech).There have been massive investments in this sector over the last few years. The banking industry in Brazil is highly concentrated in the hands of four big players, and lots of services are being dismantled into startups. There is a massive opportunity to eat into the market share of the four big banks on all of the hundreds of different financial services. Banks lack the agility and speed to compete with the various competitors that are and will continue to pop up.
b. Mobility. Startups focusing on mobility are thriving. There are two successful car sharing players (ZazCar and Turbi) and a big wave of new mobility startups exploded into the scene in São Paulo ever since Yellow launched its operations. Chinese and American players are going big in this market so much so that Uber is bringing its Eletric Bike service in 2019. An interesting fact unique to this market is that some of these startups ilke Yellow, work on a “credit” scheme instead of pay-per-ride, so you have to deposit some money with them. The floating money is then used to generate revenues and make investments. However, Brazil is massive and there are lots of cities where these services have not penetrated yet. I don’t think there is a major player (if any) that’s into car subscription model.
c. Software to SMBs. From niche ERPs to online accounting services, SMB-focused services are gaining traction in Brazil, with good average tickets and monthly recurrency.
d. Logistics. Logistics-related infrastructure in Brazil is a nightmare. Most of the goods in the country rely on road haulage. Just to give you an idea, transportation companies often need to use self-employed truck drivers and their trucks to transport goods from the deep interiors of the country to the coast. These guys are recruited via SMS and they often don’t show up, among other service glitches.
There are some startups trying to solve these pain points. The massive Louis Dreyfus Group, for instance, is working currently a joint venture with a major food player to address the issue because it impact their business (a friend of mine is leading the project). I was even approached for a job opportunity by a common connection from founders of a Rocket invested company here. The idea was to spin-off a transportation company out of their truck fleet.
Delivery is also growing strong, with players such as iFood raising $500M, and Rappi raising $100M. Their problem now is supply- there are’t enough delivery boys (locally referred to as motoboys) to support the growing demand. I personally think there is an opportunity in helping them build this supply shortage.
5. You’ve had extensive experience in ride-hailing in Latam and Africa. How do you view this sector and its players in Asia?
What I disliked was basically the monopoly of big players, making it more expensive for the user (I had to once pay an insane amount of money for a 2 km trip in Shanghai due lack of drivers). Often there are simply no drivers. In Brazil there are at least 6 ride-hailing players to choose from, and consumers can decide which one to opt for depending on the time and price.
I liked the product of GOJEK in Singapore (the app itself and the experience), the work they are doing focusing on supply made the experience much more smooth and I never had a problem to get a car with them (usually always quick). I know they started recently in Singapore and it is good for the market.
6. How do you view the startup landscape in Africa?
In Africa, I believe Fintech and Logistics are two big industries with lots of space to grow if the infrastructure of the particular country and the cost of operation is very low (this varies A LOT!!). The problem in Africa is that you often have to spend too much money for slow returns, in short be prepared to burn a lot of capital. So if you have a business model where you don’t require physical presence in the country to offer the services, (e.g., Travelstart.com in Nigeria) you can extract value.
If you ask Fernando what’s his fondest memory of his trip to China and Singapore, we can assure you Hot Pot won’t feature on the list. Amidst battling a serious case of Hot Pot food poisoning, hours of peak CNY traffic, and losing his passport in Singapore – he fondly remembers the city of Ha’ian, its people and its small city reality (a complete contrast compared to Shanghai) as well as the inspirational feeling after soaking in the energetic vibe and unique soul of Singapore.