Latin America’s tech industry is thriving on adversity

When the US sneezes, Latin America catches a cold, runs the adage. Yet while the US tech sector has been shivering through big lay-offs, its counterpart further south looks surprisingly perky.

Far from firing, Mercado Libre, Latin America’s answer to Amazon, is hiring. It will take on an additional 13,000 people this year and its shares have risen 55 per cent since January 1, outperforming the Nasdaq tech index by a wide margin.

Chief executive Marcos Galperín says his hiring vindicates the company’s philosophy of gradual steady expansion. “When everybody was going overboard, we were not,” he explains. “We take risks, we try new things but we try not to go crazy.”

Despite having the same funding challenges as their US counterparts, Latin America’s tech chief executives are more optimistic for several reasons. Firstly, the region’s gaps in development mean bigger potential markets. Ecommerce companies had to build entire logistics networks in countries which lacked them and develop new payment systems for consumers used to cash. Now they can reap the rewards.

“The opportunity set is larger in Latin America than in more developed markets . . . because you are building markets that were not there before,” says Nicolás Szekasy, co-founder and managing partner of Kaszek Ventures, the region’s biggest venture capital firm. He points to Brazil’s large digital bank Nubank, currently valued at $30bn. “There’s no Nubank in the US because the incumbent banks offered a digital experience that was good enough.” 

Millions of Latin Americans who lacked bank accounts have joined the financial system thanks to the region’s fintechs. “In Argentina, the people playing music in the subways have a QR code,” says Galperín. “The people selling stuff in the streets have a QR code. That formalises the economy like nothing else.”

The beneficiaries include start-ups such as Brazil’s Dock, which provides the technology for other companies to offer financial services. Chief executive Antonio Soares describes it as “one of the biggest engines for financial inclusion”.

Secondly, Latin America’s techs had to jump higher hurdles to start with. Francisco Álvarez-Demalde, co-founder and managing partner of Riverwood Capital, says the complexity of tax systems and bureaucracy in countries such as Brazil spurred innovation. “A company that was able to build a product for such a complex market is then fully ready to drive into other markets,” he says.

At Riverwood’s Latam Tech Forum in Miami last month, where the FT was a conference partner, start-up founders acknowledged that much tougher funding conditions had obliged them to focus on expanding their core business profitably and cutting costs. But they remained bullish about the longer term.

According to the Latin American private capital association LAVCA, venture capital investment in the region shrank to $800mn in the first quarter of this year, barely more than a quarter of the amount invested a year earlier. Valuations are lower and start-ups are postponing plans to come to market.

But for entrepreneurs used to navigating annual inflation of more than 100 per cent (Argentina), six presidents in five years (Peru) or sudden lurches of economic policy (Colombia and Chile), tighter financial conditions seem less threatening than they might to an American entrepreneur.

Other trends are helping the region. American companies are cutting costs by contracting out software development to cheaper locations in Latin America, boosting the local tech industry. Mexico, Colombia and Chile all have a higher proportion of students graduating in STEM subjects than the US, according to Unesco.

And while Latin America’s formidable geographic barriers such as the Andes mountains or the Amazon rainforest have stymied physical trade, they present no obstacle to the spread of online software and services in countries with similar cultures which speak two closely related main languages.

For now, investors seem happy to continue betting on the region’s entrepreneurs, albeit on a smaller scale. Álvarez-Demalde says that Riverwood’s portfolio companies had their highest growth ever last year. Szekasy said Kaszek had “no problem” raising almost $1bn earlier this year to put into start-ups. Latin America’s tech sector may not be as feverishly exuberant as in the boom of 2021 but it has yet to suffer a heavy cold.

michael.stott@ft.com