As of April 2023, there were 1,000 active fintechs in Latin America (LatAm) with a vast majority focusing on financial inclusion, tackling the issue of 70 per cent of the population not having access to formal financial services. Em Conversa looks to uncover what the future of fintech could look like in the region, following a $2.1billion valuation in 2022.
The future of fintech across LatAm holds a lot of potential. However, along with the rest of the world, fintech funding and investment have hit a downturn in the past couple of years, making it more difficult to foster growth – and, in many cases, to survive.
To find out more about how one organisation is looking to support the region with funding, we sat down with Daniel Lloreda, co-founder and general partner at HTwenty.
Can you tell me more about the company and your role within it?
Daniel Lloreda, co-founder and general partner at HTwenty
HTwenty is an early-stage investment fund. We are based in Miami and particularly focus on early-stage startups across Latin America and fostering connections between the US and Latin American startup and VC ecosystems.
In my role as a co-founder and managing partner, I engage directly with our portfolio companies on strategic direction and growth, ensuring that we not only provide capital but also substantial value through strategic guidance and operational support.
What are some investment trends we’re seeing in LatAm?
One prominent trend is the growing scepticism towards unicorn valuations, as many investors are now seeking more realistic and sustainable investment opportunities. This scepticism is reflected in a broader trend in which investors increasingly favour startups with solid financial fundamentals, like those demonstrating positive unit economics, which refers to when the direct revenues from a product or service exceed the direct costs associated with producing and delivering it. The investment community is increasingly seeing these companies as more reliable investments compared to high-growth but high-risk ventures.
Additionally, the rise of specialised software, particularly vertical Software-as-a-Service (SaaS), is reshaping the investment focus in LatAm. Vertical SaaS targets specific industries with tailored products that address particular industry challenges, contrasting with horizontal SaaS which offers more generic products across various industries. This specificity allows vertical SaaS companies to serve niche markets effectively, often resulting in better market penetration and customer retention.
Another trend I believe is significant is the growth of fintech, particularly in the area of B2B payments. Fintech remains a hot sector in Latin America despite falling in other areas of the world, drawing interest mainly because it can resolve common consumer pain points associated with traditional financial services in the LatAm region. B2B payment infrastructure improvements are now allowing companies to sell to a cross-border audience with lower fees and reduced pain points.
Moreover, investors are focusing on startups that are geared towards solving more localised market needs and pain points. We want to focus on innovation that aligns more closely with the particular characteristics and regulatory environments of LatAm markets so that startups maximise their potential with the available capital by allowing them to address clear market needs for their technologies.
What is HTwenty doing to improve the investment sector in LatAm?
We are heavily focused on redefining success in the venture capital space by backing Latino founders who show not just growth potential but also sustainability and profitability in their companies. Our approach involves nurturing startups that solve real problems with solid business models, particularly in underserved verticals, and providing that US-LatAm connection that helps them succeed in a wider market.
For example, there are companies in our portfolio that specifically focus on offering technologies, platforms, and payment options for migrants and other underserved groups. I believe this kind of focus sets a new standard for investment practices in the region.
How does the LatAm investment sector compare to that of the rest of the world?
LatAm’s investment sector is a high-growth region compared to most others at the moment. The region is making significant strides as a hub for innovation and entrepreneurship, particularly in fintech and e-commerce. These sectors are attracting investment and fostering technological advancements. Also, I think there’s no question that Latin America is particularly important now in the global investor economy with the growth of nearshoring making it more attractive for investors, particularly in the United States.
What are some unique challenges associated with the region in the investment space?
LatAm countries often experience high levels of economic volatility, which you can attribute to various factors like fluctuating commodity prices, political instability, and inconsistent economic policies. This same volatility can affect consumer purchasing power and investment stability. This means that financial planning becomes more complex, and companies often find themselves needing to adapt to sudden changes in the economic landscape.
The regulatory environment in LatAm can also be unpredictable, with frequent changes that can affect how businesses operate. There are political shifts, economic reforms, and efforts to modernise outdated legal frameworks. For fintech and e-commerce especially, sudden changes can pose compliance risks or necessitate costly adjustments in operations.
Also, in fintech and various other industries, regulatory frameworks governing digital payments, cybersecurity, and data privacy can differ vastly across borders within the region. So any companies that are dealing with cross-border payments or partners in other countries will have to navigate those regulations carefully to avoid penalties and ensure continuous operation across different markets.
What’s in store for HTwenty in the future?
Looking forward, HTwenty plans to continue expanding our influence by raising new funds and extending our reach into more niche markets within LatAm. We aim to solidify our position as a leader in early-stage investments and help shape successful enterprises that are both profitable and sustainable. Most importantly, as a US-based fund with strong connections in Latin America, we plan to help strengthen the relationship between both regions through strategic investment.
Any final thoughts?
The future of venture capital in Latin America is incredibly promising, but it requires a thoughtful approach to both investment and support. By focusing on companies with solid business fundamentals and providing them with the tools and guidance they need to succeed, we can drive substantial and sustainable growth across the region.
The post Em Conversa: Investing in LatAm Fintechs With HTwenty appeared first on The Fintech Times.
