Brazil saw five unicorns being born in 2019, which took the Latin American ecosystem to a new level. From September 2017–when Argentina’s Despegar debuted at Nasdaq becoming the first Latin American startup to be valued at over $1 billion–to the end of 2019, the region gave birth to a record number of 17 unicorns.
Only in 2019’s first six months, Latin America have raised $2.6 billion in venture capital, according to the Latin American Private Capital Investment Association (LAVCA). The Brazilian innovation platform Distrito estimates that, based on LAVCA data, Latin American startup investment in 2019 will likely reach $3.5 billion.
While this year promises new investment records, there will also be a search by these companies for local consolidation, new foreign markets and, most importantly, financial sustainability.
Some experts have put the unicorn mythological figure aside to use the term Rabbit, for Real Actual Business Building Interesting Tech. They insist on the fact that even SoftBank and friends are growing leery of cash-burning companies, such as WeWork, and that they prefer to bet now on profitable startups. Some recent regulatory advances may even help Latin America in this regard.
In an interview with LABS, the founder of Startup Farm accelerator and Dínamo, a Brazilian group of investors and founders focused on the development of innovation-oriented public policies, Felipe Matos, explains that recently the major economies in Latin America have made regulatory advances in terms of legal registration and bureaucracy for creating startups as well as key areas of the financial system for accommodating the segment that most attracts investment in the region: fintechs.
In Argentina, says Matos, a legal landmark named Ley PyME was built. Although not specifically designed for startups, this new law has modernized some bureaucratic issues related to small and medium businesses in the country. “In Mexico, the government has created a series of incentives for attracting venture capital investors. And there, the discussion of instant payments has also begun. The Mexican monetary authority recently launched a regulation for the standardization of QR codes as a way to accelerate inclusion in the financial system,” says Matos.
In Brazil, the region’s most mature ecosystem, the Startups Legal Framework should finally be sent to Congress by February. For more than two years under discussion, the milestone proposes a series of legal changes in favor of Brazilian startups, including a review of the Brazilian Corporate Law, which includes a new Simplified Company regime in the country. This scheme is more appropriate for startups because it protects the investor, who becomes a shareholder and not a partner in the company.
“We are consciously in the best moment of the innovation ecosystem in Brazil, with the accelerated emergence of new startups, and the growth of the existing ones at a fast pace leveraged by the accelerated pace of the entry of international capital in the country,” says the president of the Brazilian Startup Association (AbStartups), Amure Pinho.
Also in Brazil, the rules for the early stages of deployment of open banking and instant payment systems are expected to come out in 2020. In the case of open banking, however, there are still doubts among experts as to whether the country will be able to set a standard for the system by the end of the year–as promised by the president of the Brazilian Central Bank, Roberto Campos Neto.
“I hope to be wrong, (…) but I believe it will take a few more years for open banking to be effectively implemented, due to the complexity of the system and the big players involved,” says Matos.
The legal framework and technical structure for the implementation of open banking in Brazil are indeed complex. Under the open banking concept, financial data belongs to the customer, who may choose to share it with any financial institution for a better financial assessment. Through this system traditional banks and fintechs will be able to offer a whole range of products not only to their own customers, but to the customers of other institutions, from cheaper personal credit due to a deeper and more agile profile assessment to a whole range of services.
This is happening today, occasionally, in some partnerships between banks and fintechs in the country. This is the case, for example, with those who use the GuiaBolso application and have authorized the financial app to access their current account data at the bank or even small businesses that are clients of Banco do Brasil and open their data to the financial management startup ContaAzul.
With the open banking system in place, however, such financial interoperability arrangements will not depend on agreements between A and B. With a standardized system, organizations will only have to meet the criteria and technical conditions required to connect to that system and have access to a number of clients from other financial organizations.
This is because, in practice, open banking is done through Application Programming Interfaces (APIs), so the data is not effectively visible to any of the system actors and cannot be shared.
There is a public consultation opened by the Central Bank of the country until the 31st, and both banks and fintechs are actively participating in the construction of Brazilian open banking.
The biggest startup challenge remains in 2020
Despite having received a record investment in the previous year, Latin American startups will have to grow by 2020 amid a known challenge: the lack of skilled workers. Of the 15 professions that should concentrate the most qualified jobs this year in Brazil, according to LinkedIn, 12 are in the technology area.
“To ensure that there is no ‘technical blackout’ in the coming years, we need to invest in capacity building for future skills and incentive policies. Innovation will only happen in a prepared and supportive environment,” said the angel investor and participant of the Shark Tank Brazil Camila Farani in a LinkedIn post last week.
To meet this challenge, Latin American startups are not just betting on young talent. They are also hiring mature professionals from traditional sectors for senior positions; opening offices and technology centers to attract talent in other regions (such as Loggi, which opened an office in Lisbon, and Creditas, which is looking for 100 professionals for its new address in Valencia, Spain); and making acquisitions with an eye on talent attraction (such as Nubank, which bought consulting firm Plataformatec because of the company’s 50 software engineers team, and Gympass, which bought American artificial intelligence startup Flaner).