Brain Gain: Impact investing in Latin America’s new wave of startups



Here’s a provocative impact thesis: Supporting almost any forward-thinking, technology-based venture in Latin America is a form of impact investing.

Investing in companies that are using technology to close the region’s inequality gaps or to simply stop the brain-drain to other countries, is not just good for business, it is also an act of support for a knowledge-based economy and job growth in the region.

Many Latin American countries still face extreme levels of social and economic inequality. In 2014, the richest 10% of people in the region held 71% of Latin America’s wealth. Latin America is not poor region — it’s unequal.

Latin American entrepreneurs are showing us that they have the power to solve some of region’s biggest challenges. Funds like Mexico’s IGNIA Fund and Adobe Capital, Brazil’s Vox Capital, and global funds like Elevar Equity, Accion and Village Capital have invested in a wide range companies focused on financial inclusion, education, and more.

My firm, Magma Partners, has invested in more than 30 companies with sales and development teams based in both Latin America and the US. The investments we’ve made in these companies have introduced a new generation of Latin American entrepreneurs to startup best practices — such as stock options, well paying job opportunities, an open business culture, and flexible work schedules.

Those startups have helped break down barriers caused by racism, classism, and sexism, with investments in startup founders from all backgrounds and a willingness to hire employees who don’t have a university degree.

Local investors

Until recently, most impact investments in Latin America have come from foreign investors. Local impact investments have been held back by certain challenges at the enterprise level and by a lack of support for early-stage companies, according to the World Economic Forum.

That has created a so-called “pioneer gap,” in which many enterprises are too large for microfinancing but too small for banks and investment funds. The impact investing ecosystem in Latin America also remains fragmented at both regional and national levels.

We’re now witnessing a steady rise in local impact investment funds bridging the gap between the social entrepreneurs and the resources needed to grow their ventures. Every two years approximately 15 firms enter the impact investing space in Latin America, according to a recent study by the Aspen Network of Development Entrepreneurs, Latin American Private Equity & Venture Capital Association, and LGT Impact Ventures. The study shows that the number of impact investment funds in Latin America is indeed growing and there are now more than 40 local impact invest funds.

For Adobe Capital, competitive returns in Mexico run through social ventures

Powerful changes can take place when impact investing converges with the world of startups and new ways of thinking.

Mexico’s emerging ecosystem

In recent years, government regulations and support have spurred the growth of impacting investing in Mexico, accelerating entrepreneurship numbers particularly with the creation of the National Institute for Entrepreneurship. According to The Impact Investing Landscape in Latin America report, there are now 42 impact investing firms in Mexico, 15 of which are exclusively investing in Mexico. The attention of these firms, like Village Capital, is primarily on companies making an impact via financial inclusion, health, and agricultural innovations.

Backed by Adobe Capital, SalaUno is a healthcare social enterprise that launched in 2011 based on the model of Aravind Eye Hospital in India. More than 2 million people have cataracts in Mexico, and of those people 700,000 are blind. SalaUno has treated over 70,000 patients and performed over 10,000 surgical procedures — 65% of which were cataract surgeries.

In Mexico, local credit to the private sector is also below 35% of GDP, compared to 68% in Brazil. Afluenta, backed by the IFC and Elevar Equity, is another startup that is revolutionizing the market with its human approach to credit and investment. As a technology-enabled marketplace that connects lenders and borrowers, Afluenta is increasing the access and affordability of financial services in Mexico and beyond. IGNIA also recently invested in Afluenta to allow the company to continue its consolidation in the local and regional market. ePesos offers a revolving line of credit available 24/7 to small businesses with minimum requirements.

Each year, Miami Dade College and the Inter-American Development Bank bring together creative minds from Latin America to tackle development challenges at its Demand Solutions event. This year, companies selected from Mexico included Xintiba, an educational startup that develops therapeutic video games that accelerate the acquisition of cognitive skills in children with special needs.

Overcoming crises in Brazil

The number of both domestic and international impact investors is on the rise in Brazil, despite the political and economic issues plaguing the country. According to The Impact Investing Landscape in Latin America report, the number of active impact investors in Brazil increased from 22 to 29 between 2014 and 2016, and key impact investment sectors include health, agriculture, education, and finance.

Vox Capital, the first certified impact investing fund in Brazil, has invested in a number of companies offering innovative and scalable solutions to enhance the lives of low-income Brazilians. For example, ProRadis is a software company that helps offer low-cost medical care to the Brazilian population without health insurance.

Avante is another Vox Capital portfolio company that provides financial solutions for micro entrepreneurs in low-income regions, mainly in the Northeast of Brazil. The company’s goal is to become the most transparent and reliable channel for the Brazilian micro entrepreneur.

The Ford Fund Lab was also recently established in Brazil to provide training and guidance to startups that develop mobility programs geared to the needs of the country’s low-income population. The program is part of the expansion of investments the organization makes around the world to enable the necessary transformations in society. The Ford Fund Lab plans to provide acceleration for up to 20 entrepreneurs in the early stages of business development with a focus on promising social impact projects and innovative solutions that address the basic needs of communities with little or no mobility offer.

National reconciliation in Colombia

According to the same report, international funds dominate the impact investing ecosystem in Colombia, with only three local firms focused solely on the Colombian market. Unlike Mexico and Brazil, the private equity industry in Colombia is still in its early stages. However, impact investments have helped develop the industry quickly and helped turn the country into a stable place for investing activities.

As a result, new impact funds are being created in Colombia. Elevar Equity and Odiseo are funds focused on Colombian entrepreneurs and building profitable, scalable and impactful companies. Over the next five years, Odiseo plans to impact at least one million lives through products and services accelerated through the program and generate at least 4,000 new jobs in the country.

According to Harold Calderon Meza, Managing Director of Odiseo, impact investing is often confused with philanthropy in Colombia. He goes on to say that only recently has Colombia seen fund managers investing in entrepreneurs who generate solid financial returns as well as a significant positive impact.

The Global Impact Investing Network describes impact investments as investments made in companies or organizations intended to generate social or environmental impact, alongside a financial return.

In Latin America, that impact can be the creation of a new generation of entrepreneurs creating positive social change, through better work cultures and tech-driven services for the vast majorities of the region’s people.

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