Business

"Latin America's digital economy looks like China ten years ago," says IDB Lab Chief Investment Officer

n spite of political and economic turbulence, Latin America’s digital economy is at an inflection point: The penetration of internet access and smartphones has been growing at a fast pace, which opens the way to countless opportunities for entrepreneurs and investors. 

This is the opinion of Susana Garcia-Robles, Chief Investment Officer at IDB Lab, an innovation laboratory of the IDB Group (Inter-American Development Bank).

Garcia-Robles works in Washington, where she oversees an active portfolio of over USD 400 million committed in loans, equity investments, and venture capital funds. IDB Lab has already financed with grants, loans, and equities over 2,300 projects of social and digital innovation in Latin America since 1993. 

The Argentinian is a recognized expert in development finance innovation. In this interview for LABS, she stresses the great momentum of Latin America and the Caribbean in the digital economy, and highlights the strength of the “Made in Latin America” brand.

Susana Garcia-Robles, Chief Investment Officer at IDB Lab
Photo: Susana Garcia-Robles, Chief Investment Officer at IDB Lab

LABS – Why so many investors and venture capital firms are investing money in Latin America? Is this because of the size of the Latin American market or because of the type of technology the region has been developing?

This momentum is the reflection of some megatrends that have been taking place in Latin America and the Caribbean over the past years, and are shifting the investor mindset about this region.

The region is at an inflection point to becoming one of the fastest-growing regions in the world. Latin America’s digital economy looks like China’s 10-15 years ago, with technology penetration rates growing at a fast pace.

LABS – What brought us to this momentum, as you said?

First, two out of three Latin Americans have internet connection, representing more than 10.4% of all users around the world. This means that more than a billion individuals across Latin America will be connected to a mobile network by the end of the decade, equivalent to about three-quarters of the region’s population.

Additionally, the mass-market adoption of smartphones is a relatively recent phenomenon in Latin America (it grew from 10% in 2012 to about 60% in 2018). The move to 4G networks has also been slower in Latin America, compared to markets such as the US and Europe – but 4G has now reached critical mass in the region, providing coverage to 70% of the population. 

As the world’s first generation of digital natives and the largest generation, millennials are a driving force in the region’s evolving mobile landscape. The average age in Latin America and the Caribbean is just under 30 (in the United States, it is 37.9, and Europe, 32.6). This young consumer is very receptive to new technologies. By way of example, Facebook is the largest social network in Latin America, with an estimated 284.5 million users in 2018. Instagram will increase by 18.4% to 125.9 million this year, reaching 43.1% of social network users.

Second, Latin America’s most persistent challenges have become business opportunities for local entrepreneurs who are using technology to bridge some of the region’s most urgent gaps. 

Fintech is a clear example of this trend. Nearly 70% of the population do not have a bank account, and only 11% of Latin Americans have access to credit from formal institutions. Through innovations and new business models, more and more people are accessing mobile payments, credit systems, and P2P lending opportunities through recent advances in local Fintech, and investors are assessing this enormous opportunity. 

Another area of fast growth is e-commerce. Even though it is still quite small in comparison with Asian and North American markets, Latin America is the global leader in e-commerce growth, especially when it comes to mobile e-commerce. Online sales are expected to increase by 19% in the next five years (8% above the global average), with 155.5 million people in Latin American buying online goods and services in 2019.

E-commerce markets face many challenges in Latin America, including online payment security, low banking services usage among citizens, and serious logistics issues. Entrepreneurs are focusing on solving these issues with innovative business models.

Latin America has also emerged as a key consumer tech market globally. Beyond rideshare, Airbnb, Netflix, Spotify, and WeWork have flagged Latin America as a top growth market globally. Amazon launched its first-ever debit card in Mexico; Uber launched its first digital wallet in Brazil; Facebook is building a 1,553-mile fiber optic cable to boost internet speeds in Argentina.

Last, the investment ecosystem is getting stronger and gaining momentum. The regional tech scene is at a high point of acceleration, with the confirmation from international investors of their interest in Latin American startups. This is fueled by governments who have concluded that the only way to generate local innovation is with dedicated funds and policies that facilitate the creation and good business administration of this type of enterprise.

LABS – What makes up the ‘DNA’ of Latin American innovation? What do we do differently from other regions and developed countries? 

An unconventional brand of innovation, offering products and services made in the region, is being born: ‘Made in Latin America and the Caribbean,’ is possible thanks to the diversity of its people. 

What are the secrets of the region’s success? It is a region that presents great challenges when it comes to access to education, health, finances, decent housing, and clean water. Latin America also needs a renewed boost in vital sectors such as mining, agriculture, energy, food, and transportation. 

These challenges, which are seen as opportunities rather than problems, are key to the ‘Made in Latin America’ brand.

The other key component that fuels this brand is a large dose of frustrated entrepreneurs who are witnesses to challenges in their cities and communities. This frustration drives them to create companies that facilitate access to better education, health system, and a financing that effectively democratizes access to basic services for all citizens. 

It is a brand shaped by innovation, with a clear social and environmental awareness. These new entrepreneurs are interested in both making money and improving the lives of others. No one is better qualified to find a solution than the individuals who live amongst the problems. By default, solving these huge challenges make the companies scalable and replicable in other emerging economies, thus being very attractive to investors looking for companies with a large market and high adoption rates.

LABS – What is the role of local hubs of innovation in this process? How important are they in the creation of the ‘Made in LAC’ technology?

They are in fact very relevant because ecosystems tend to be local with a global reach. Investors look for these hubs as a way to understand talent concentration in a given place, as well as the results of such a concentration.

Innovations require a special ecosystem that includes top-level universities and research institutions, sufficient financing, a local market, and a skilled labor force, as well as cooperation among companies and global networking. This kind of ecosystem develops faster when all efforts by the public and private sector are focused on creating a vibrant community with a high quality of life and excellent business possibilities. 

Sometimes, like in the case of Ruta N in Medellin, governments decide to revitalize a neighborhood to help keep its people out of streets, violence or drugs, and give them economic opportunities. Other times, like in Sunchales (province of Santa Fe in Argentina), the actions of a corporation result in creating a tech hub for innovation that starts in the city and ends up reaching other countries as well.  

Agtech hubs in Cordoba, Rosario and Buenos Aires in Argentina can attract the attention of those looking for deals (family offices, corporations and VC/PE funds). Brazil’s hubs in tech and agtech are beginning to be well-known, as well as Monterrey and Guadalajara, in Mexico.

The entrepreneurs housed in these hubs are the ones who will develop the innovations addressing local, regional, and global challenges, hence creating the “Made in Latin America and the Caribbean” brand out of their own backyards.

LABS – What are the investments still needed for Latin America to become a reference in innovation and technology? What can be done to boost this environment? 

As a region, infrastructure and connectivity still need huge improvements and investment. More STEMpreneurs are needed: people who after having studied the sciences, create startups instead of just going to a research job. Researchers and academics have to work more with the private sector and startups, on commercial uses and products of their research. 

We need more inclusive ecosystems, where women entrepreneurs get the same access to funding as their male peers. We need to create conducive ecosystems for innovation and entrepreneurship, not only in the capitals and big cities, but also in small cities and rural communities. We need to work to change a culture that doesn’t reward taking risks and “punishes” any type of failure, since the innovation process is an iteration of go/stop, and go again. Pivoting should be a common activity for an entrepreneur.

Governments can help by creating better regulation and supporting the industry (for example, biotech needs to be supported with grants until the startups develop minimum viable products, then can be supported by accelerators, company builders, angel investors, and funds). 

Today, a number local ecosystems (Argentina, Brazil, Chile, Colombia, Mexico) have reached a considerable level of maturity thanks to a collective effort of governments, universities, and a growing emergence of VC funds, accelerators, and company builders. Still, we need to keep working with key public and private stakeholders to build strong and healthy ecosystems in less developed markets (i.e. Caribbean, Central America). 

The new generation of socially conscious tech-driven entrepreneurs will thrive if they can access not only capital, but also a set of tangible and intangible “nutrients” provided by various agents that are themselves part of the ecosystem.