As of April 2023, there are 1,000 active fintechs in Latin America (LatAm), the majority of which are focused on financial inclusion, with 70% of the population accessing formal financial services. I'm working on the problem of not being able to do it. Em Conversa is trying to figure out what the future holds for fintech in the rapidly growing region, which will be valued at $2.1 billion in 2022.
we sit together microphone packerPartner and Head of Latin America QED investors To better understand how the Latin American market is evolving and securing funding after a turbulent year for securing funding.
Please tell us about the company and your role within it.
QED Investors is a global early stage venture capital group focused on fintech. The firm has been around for 16 years and has made over 220 investments and manages approximately $4 billion.
We've all been operators in the past. As a result, we have a deep understanding of the sector, connect the global dots around the themes and investment themes we have, and as a result we want to actively engage with the companies in which we invest. Masu.
We tend to be the right-hand man for founders and founding teams when thinking about strategy, details of market dynamics, credit risk management, and other things in the fintech space. Our aim is to help entrepreneurs find their way in a less risky way.
We are currently investing from our eighth fund, a $650 million early-stage fund. He also has a second growth fund of about $300 million. That's why we're actively considering the next fintech opportunities to be part of our community portfolio.
I am leading the Latin America strategy. The Latin American strategy mainly consists of Brazil and Mexico, with Colombia being her third region which is very strong. Nevertheless, since our first investment, he has made 50 investments in the region. Nubank In 2013.
What investment trends are you seeing in Brazil and Mexico?
Brazil
I think Brazil is a very interesting market. There has been a lot of innovation over the past 8-10 years, much of it driven by central banks, which have been very supportive of the fintech space.
What we are seeing now are some trends in real-time payments, such as the PIX system that was launched there, and there will be a lot of opportunities and changes in the market as a result of PIX.
We are also very actively monitoring the emerging changes and role of open finance and open banking in Brazil. Combining these two technologies can create entirely new ways for consumers and businesses to transact, manage money, and do business. The field is large enough that it feels like we're still in its infancy.
Mexico
Mexico is a slightly smaller market than Brazil in terms of fintech activity and fintech exits, but we're still very excited about some of the themes in Mexico. And in our portfolio, we're actively looking at the almost certain trends that are happening in Mexico right now that are moving a lot of manufacturing to Mexico, especially from Asia, and creating a lot of economic activity. As a result, there are significant domestic fiscal demands to accommodate the surge in economic activity.
One interesting company in this field is Fincargo, provides import financing for small and medium-sized businesses that import supplies, raw materials, or specific products into Mexico. The company helps companies obtain the working capital they need to grow.
We are also investors in the company. Nubocargo It focuses on the U.S.-Mexico border and cross-border commerce. In particular, we'll look at how to make these transactions more fluid, more data-oriented, and more efficient.
There is excitement in Mexico right now about the payments sector. Not only on the consumer side, but also on B2B payments and merchant solutions across Mexico.
What is QED Investors doing to improve the various fintech sectors in the region?
We are a major player in companies in the region from seed to Series B stage. What we're great at is sharing external knowledge with the region, so we've been part of some really great stories.
We are expanding our focus on the region by talking about how great the opportunity is and how well our company is doing. We try to help companies find external capital, whether it's equity or more debt.
We aim to be active in the market for the long term. We aim to not only build great, sustainable companies, but also improve the ecosystem in the process. Most of this is done by funding startups and helping them govern as they grow.
Where will the investment come from?
It's mixed. A few years ago, much of the capital flowing into the Latin American technology sector was international. A lot of capital flowed in from the US in search of higher risk-adjusted returns.
But Brazil in particular has very strong sources of local capital. Brazil has several functioning markets on a large local scale, unlike some other countries. Nevertheless, Mexico and Colombia certainly have local money. One of the things we're seeing in both of these countries is that the banking sector is starting to get a little bit more involved in the technology sector, and that's what we're focusing on right now. That's another potential source of funding.
Certainly, I think many companies will say they need more. But it's starting to spread in local ecosystems as well.
How does the investment space in Latin America compare to other regions of the world?
Of course, compared to developed markets, Latin America is slightly smaller in terms of opportunities and size of the economy and technology sector. That in itself can make it difficult to find really great results. But it becomes easier to find specific opportunities because there are fewer of them.
It's hard to generalize because each country is different, but when it comes to technology, especially financial technology and sectors, the talent pool across Latin America is not as deep as, say, the US or the UK. experience.
The companies we look at are finding ways to solve challenges on a global scale. Therefore, we look at the market like any other market and have similar criteria for return on investment. We are looking for entrepreneurs who can support themselves in any region. We also look for opportunities that are large and interesting enough to yield material benefits. This is true whether it's Latin America, the US, Southeast Asia, or whatever market we're focusing on.
How do other developing markets compare to Latin America?
For example, I think Latin America is a little more advanced than the African region. I mean, it's difficult to generalize.
So let's see what Latin America has to offer. First of all, Latin America is geographically close to the United States and draws capital from there, so I think that helps. Second, I think the investment cycle in Latin America is ahead of other emerging markets, particularly the Middle East and Africa, and perhaps Southeast Asia.
Especially in terms of investment amount and ecosystem maturity. You could say that India and China are more sophisticated. The same goes for small parts of Southeast Asia like Singapore.
If you look at Brazil in particular, I think it's on the map as a very mature emerging market in that sense. It's purely because of the size of the ecosystem, the talent pool, the availability of capital, etc.
The demographics of Latin American countries are very favorable in terms of aging and digitalization of the population, similar to Africa and India. So there are many similarities.
This is one of the reasons why we think being global as QED is advantageous. For example, you can call: Sandeep Patila partner focused on India and Southeast Asia, you can also exchange notes or give us a call about real-time payment systems in India and real-time payment systems in Brazil. Gubenga AjayThe Africa-focused partner talked about the differences between the most innovative companies he sees in Lagos and those he sees in São Paulo and Mexico City.
It's great to have this kind of interaction not only between investment partners, but also between entrepreneurs.
What are the biggest challenges associated with this region?
Exit survivability and stability are the two biggest challenges. Everyone is looking forward to Mexico having that moment: exiting the big tech business (and for our purposes, exiting fintech). When that happens, the large capital investments that have been made will be validated and more capital can be deployed.
Stability is a major challenge within the region. Each election cycle brings with it potential instability and questions. Things temporarily stop or disappear, such as currencies, interest rates, trade balances, etc. So I think these are being maintained and other Latin American markets are in retreat, so to speak.
Although Brazil has had its share of periods of instability, it has proven to be relatively stable and has experienced significant withdrawal from high-tech sectors.
What are the company's future plans?
We've been in the region for eight years, and in that time we've established ourselves as one of the best options for partnering with fintech entrepreneurs. We've made some great investments, and we want to set ourselves up to win over the next eight years. So how can you find the next wave of fintech entrepreneurs and support them early and often?
What we're doing now is we have team members. camilla Vieira Fernandezprincipal of the Latin American team in São Paulo, and we Anna Christina Gadara-Maria, representative of Mexico's Latin American team. Both have established strategies across the region.
Why do you think 2024 will be a great year for fintech in Latin America?
The business model has improved. We are seeing companies achieve profitability at scales and levels that no one thought possible. There was a big question whether these companies would be able to turn a profit in 2022-2023, and now that's on the horizon. This gives investors greater confidence when evaluating business models in the region.
The second important point is growth. As you know, growth has been challenging in all areas, but we are starting to see tailwinds of growth returning in these subthemes and some new geographies.
Francis Binnell
