Momentum Works’ predictions for 2019 – Latam

The year 2018 has been a particularly vibrant one for Latin America’s tech and VC ecosystem. The competition between Amazon and Walmart is intensifying; Airbnb has seen exciting growth; Uber, Spotify and Netflix are all commiting to the region. Companies including Yellow, Rappi, and Nubank have received huge amounts of financing.

Ever since Didi’s acquisition of 99 in Brazil and direct entry into Mexico, both happening this year, Chinese investors are playing a more active role in the region. Alibaba, Tencent, GGV capital and Bytedance have all made significant investments or committed resources to Latin America this year.

What can we expect in 2019? Here is our attempt to predict:

1. Didi rebrands 99

Despite having Uber as its biggest shareholder, Didi has been partnering with and investing in Uber’s competitors around the world.

However, it’s approach in Latin America has been visibly different. First, after acquiring Brazil’s 99 in early January this year (second largest market), it replaced 99’s CEO, Peter Fernandez, with Didi executive Tony Qiu a few months later. Second, it went to launch its own brand app and operations in Mexico, making a direct entry instead of partnership or investment.

After elbowing Uber (and many others) out of China, watch Didi attempting to cement its dominance internationally with a special attention to Latin America. In 2019 we expect Didi to replace 99 with Didi brand in Brazil, and expand into a few more markets.

2. More than US$2 billion VC money gets invested into the region, with 3 more startups becoming unicorns

Momentum Works has analyzed the two waves of tech investments in Latin America. The first was in 2013, when Rocket Internet deployed forces into various global emerging markets. In Latin America, they built Linio, Easy Taxi, Hello Food and a few others. However, with Rocket morphing into more investment than incubation from 2015 onwards, its focus on Latin America also diminished.

The second wave began in 2017, when DST Global led the fintech company Nubank to its unicorn status, and Didi invested in 99 (and acquired it a year later). This year DST Global has propelled another startup Rappi to the top ranks. In this wave of investment, Softbank, TPG’s The Rise Fund, GGV, and Telstra Ventures are all entering Latin America for the first time.

2018 saw Latin America lend a fertile ground to the next generation tech startup successes.

The biggest success story was that of iFood, a Brazilian food delivery app that raised the largest funding round Latin America has ever seen. The $500m investment capital that was poured in was was greater than the combined VC investments made in the region in 2016.  

At least six big South American startups that were founded in early 2010s joined the unicorn club this year. They include Brazil’s 99 (which was subsequently acquired), PagSeguro, Nubank, Arco Educação, Stone Pagamentos (which IPO’ed later) as well as Colombia’s delivery startup Rappi.

The investments were also larger in size with multiple $100M plus rounds and increasing foreign investors like Softbank and Tencent who were more cautious in the previous years.

With the ecosystem maturing fast, expect 2019 to bring in more investments to this region to the north of $2 billion. More companies are also poised to spring into the unicorn club (we foresee at least 3) next year.

3. Brazil continues to lead the region in funding, and Colombia overtakes Mexico in the 2nd place

In terms of market size, the four largest markets in Latin America are Brazil, Mexico, Colombia, and Argentina. Among them, Brazil and Mexico are the fifth and tenth most populated countries in the world. However, in terms of investments, the gap between Brazil and Mexico is humungous with Brazil receiving thrice as much.

Brazil has been a centre for innovation and entrepreneurship in the region, and in the past few years, about 60% of the funds have flowed to Brazil. In 2019, Brazil will continue be the focus of VC attention.

Coming to Mexico and Colombia, they are the world’s largest and second largest Spanish-speaking countries respectively (the third is Spain). For a long time, Mexico, with a population of 130 million, garnered attention only second to Brazil.

Nonetheless, people familiar with Latin America would know the place best known for its tech environment and entrepreneurial atmosphere in the Spanish-speaking region is Colombia (some might say Chile, which we will mention later).

Contrary to the market optimism in Brazil, Mexico’s election this year of a left-wing populist president has created an atmosphere of anxiety among investors. Argentina too is on shaky economic grounds with little signs of getting behind the crisis soon.

Colombia on the other hand looks favourable, with its new president, Ivan Duque, expected to continue pro-business policies. Political stability, policy continuity and people’s confidence in the future are cornerstones for successful tech ecosystem development.

At the same time, the Colombian tech ecosystem is booming. In addition to Rappi, there are other dynamic startups such as Domicilio, Tappsi, SiembraViva, Fitpal, Viajara and Mercadoni which collectively make the country look promising.

We expect this to continue until 2019. Be prepared for investments in Colombia to exceed Mexico for the first time.

4. Brazil sees more homegrown VC capital, and they are talking to their US and Chinese counterparts more;

Brazil, running a trade surplus even to China, has a good stash of capital. For a long time those who hold the purse string would invest money in PEs rather than VCs. We expect this to change, with people seeing more successes in tech startups.

This is already happening, monashees, notably the most established early stage VC, recently raised a US$150 million fund with money contributed by Temasek and China’s CreditEase.

We expect more funds to be raised next year, from new and existing VC firms.

5. Early and growth stage Chinese VCs visit Brazil and Mexico en masse

Currently, Chinese tech investments into the region have mainly involved large scale, established players such as Alibaba, Tencent and GGV. Early investments are still a rare occurrence.

However, we see this changing soon. Over the last quarter, Momentum Works has received increasing number of queries from Chinese investors who want to learn more about Latin America. Don’t be surprised when many of them actually start traversing to Brazil and Mexico after Chinese New Year next year.

However, don’t expect these trips to turn into tangible investments very soon. It takes time to understand the market, and be willing to take risks in it.

6. Chilean entrepreneurs venture north;

With a population less than 20 million but a per capita GDP of $14,000, Chile is not a market to be overlooked. It has fewer red tape hassles than most Latin American markets, a healthy economy, and high levels of innovation and tech entrepreneurship.

However, the market itself is too small to sustain unicorns. That’s why we expect many good entrepreneurs from Chile to venture north to bigger Latam markets, after testing their business models in the home market of Chile.

7. More Chinese content/social/video companies enter the market, though only Bytedance starts effective monetization

Chinese content apps have been expanding overseas for a number of years. For example, a number of news aggregators rushed into Latin America as early as the first half of 2016.

Most of the early players did not manage to sustain though. Either because of timing or lack of localised understanding, they failed to monetizing or continue growing, or both.

More will come, though. In 2019 we will witness companies of content/social/video continue to push into Latin America. The region’s (or in fact any region’s) voracious appetite for content is evident – just that Latin America is richer than most emerging regions.

However, we believe that only Bytedance has a real shot on monetisation. Bytedance began large-scale overseas expansion in the second half of 2018 and has established an office in São Paulo.

Thus far, Bytedance has not been managing its local operations in the most effective way it is capable of. However, we think Bytedance, especially with Tik Tok, can monetize. Latin America’s online advertising market is five times that of Indonesia’s, and Google, Facebook and co have been able to monetise this market.

To achieve this, Bytedance needs to localise its team and content effectively, and taps into the existing ad distribution networks in the region. Chinese way of selling ads would not work perfectly there.

8. Fintech lending continues to grow in multiple countries, though with pressure from central banks and other regulators, especially in Brazil

Latin America is home to one of the world’s fastest growing markets for fintech and Brazil has the largest number of fintech startups in the region with about 300 seemingly viable enterprises (thrice the number since 2016). Furthermore, three out of four of the country’s unicorn companies are aimed at financial technology — NuBank, StoneCo and PagSeguro. This year, Chinese giant Tencent made its first move into Latam by investing into Nubank, and Ant Financial participated in StoneCo’s IPO.

However, the pressure on this industry is not small. In Brazil, for example, regulations involving the financial industry are extremely stringent. Last year, a medium-sized local bank was forced to liquidate because they did not meet the capital adequacy requirements.

The central bank has done so to ensure that the systemic risks in the financial sector will not be amplified. Fintech companies are usually worse-prepared for any crisis. Nubank almost failed in 2017 because of a new requirement by the Central Bank.

Nonetheless, the demand for fintech in the market is evident, as the previous monopolies in different areas of finance have been winded down. It is an opportunity to be seized in multiple countries, though with patience, not reckless pursuit for growth.

9. More investment goes into different parts of logistics

Various segments of logistics and distribution networks were investment hotspots of Latin America in 2018: In January, Brazilian mobile giant Movile invested $9 million in grocery delivery company Mercadoni; in September, Walmart acquired Mexico’s on-demand delivery service company Cornershop for $225 million; In the following month, Softbank Vision Fund invested $100 million in Brazilian Express startup Loggi. These are in addition to Colombia’s Rappi.

In addition, UberEats, Postmates,and Spanish company Glovo all entered Latin America in the span of two years. It is expected that investment and integration in this field will remain hot in 2019.

Maybe someone could resolve the strike problem of Brazil’s truck drivers once and for all?

10. OLX retreats globally, but Argentinean entrepreneurs finally find foothold in mobile age

Founded in 2006, OLX is the world’s largest classifieds platform with its own website in 45 countries such as India, Brazil, Pakistan, Bulgaria, Poland, Portugal and Ukraine.

Few people know that the company, acquired by Naspers in 2010, is headquartered in Argentina.

However, the business model of information classification websites is so 1990s and outdated in 2019. Different new business models have been eating its lunch.

At the global level, OLX is in retreat mode, having shut down some African operations this year. We believe that unless it renovates its business model drastically, which it will find difficult to, the decline will continue.

But Argentinian entrepreneurs will find business opportunities in other areas, regardless of how the relationship between Argentina and the IMF develops next year.

BONUS：

[ES] Como ustedes ya saben, conocemos muy bien América Latina. Algunos de nuestro equipo hablan español fluido (y portugués aceptable). Hemos estado en la región muchas veces, tenemos muchos amigos cercanos que están en diferentes partes del ecosistema tecnológico. El próximo año, construiremos una presencia permanente en Sao Paulo, Brasil. Vamos a trabajar juntos!

[PT] Como você já sabe, conhecemos muito bem a América Latina. Alguns de nossa equipe falam espanhol fluentemente (e português aceitável). Nós fomos à região muitas vezes, temos muitos amigos íntimos que estão em diferentes partes do ecossistema tecnológico. No próximo ano, vamos construir uma presença permanente em São Paulo, Brasil. Vamos trabalhar juntos!

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Momentum Works Emerging Markets Tech Investment Index

Momentum Works has released the Emerging Markets Tech Investment Index for various emerging markets. The image below is an example that shows the projected time between the different stages and the valuations you can expect at each stage:

We also launched Indonesia Fintech 2018 report and Indonesia ecommerce 2018 reports that comprehensively and systematically analyse opportunities, risks and investment opportunities in the respective sectors.

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