ImpactAlpha, February 27 – Street demonstrations, populist leaders and economic strife dominate news headlines about Latin America. Less appreciated are the entrepreneurs who are finding viable ways to address the social, economic and climate-related issues roiling the region.
“The entrepreneurship ecosystem is booming,” says Rodrigo Villar of Mexico City-based New Ventures, which is hosting the Latin American Impact Investing Forum in Mérida, Mexico this week.
“We’re living in hard times, in one sense, with more oppressive governments that aren’t promoting innovation,” Villar says. “But we’re living in probably the most exciting time in terms of entrepreneurship.”
The FLII, as the forum is known, will be chock full of examples. Making the scene: fund managers responding to the entrepreneurial boom with specially-designed vehicles for underserved and underinvested founders and sectors.
New Ventures, for example, is rolling out a $20 million revenue-based finance fund to support founders addressing women’s health issues across the region. Elevar Equity, which has been investing in the region for 15 years, is in the market with its first dedicated Latin America fund. Other fund managers are hitting the market with new vehicles to regenerate landscapes and support environmental conservation.
Beyond venture capital
Private capital’s interest in Latin America held up in 2022, despite the global economic environment. Investors committed $28.2 billion to deals, compared to $29.9 in 2021, according to the industry association LAVCA. The number of deals inked last year increased from the year before.
Big winners: renewable energy and other infrastructure projects. The number of new climate strategies hitting the market also increased.
Private debt and credit became more readily available. Venture capital did not: investors wrote checks to more Latin American startups in 2022 than they did in 2021, but more than halved the number of dollars invested.
VC numbers aren’t indicative of the impact opportunities in the region, says Villar.
“Social innovation isn’t about unicorns. To create unicorns in Latin America, you have to think about regional growth,” he says. Most high-impact strategies he sees don’t have easy or obvious pathways to regional growth.
Take women’s health. “Each country has different issues and approaches to how they’re providing health services, so most of the companies we want to serve won’t be able to scale regionally,” Villar says.
New Ventures’ new fund will offer revenue-based financing. The model follows the firm’s format for Viwala, a small-ticket debt fund that focuses on women-led businesses, and Adobe Capital, the impact investing group it sold in 2021 to Canada-based Deetken Impact.
“We believe revenue-based lending still works really well for businesses that have proven they have a model and are having great impact, but will probably not scale to the point that they’ll be able to sell the company,” Villar explains.
Other fund managers using revenue-based financing include Guatemala-based Acceso Impact Fund, a women-led and gender-focused fund that is addressing small businesses’ need for debt and revenue-based financing. Ecuador-based IMPAQTO Capital is also using revenue-based finance to invest in high-impact enterprises in the Andean region.
Impact entrepreneurs still need equity, of course. With the region’s political and economic volatility, the steadiest bet for equity investors is in companies providing or innovating on essential services, says Johanna Posada of Elevar Equity.
“There is a lot of resilience within lower-income and underserved communities. People will continue to spend on basic services,” she explains.
Elevar, which describes itself as part-VC, part-private equity investor for companies dedicated to lower-income consumers, inked two deals in Latin America last year. It backed Sao Paulo-based Galena, which provides online job training to Brazil’s low-income high school graduates who struggle to pay for traditional higher education and have a higher likelihood of ending up in low-wage jobs or unemployed. It also backed Mexico City-based Fairplay, which provides inventory financing and logistics services for small businesses, nearly 70% of which otherwise struggle to access affordable working capital.
Fairplay is part of the cohort of companies that attracted a flood of capital in 2021 and 2022, as investors discovered the digitalization opportunity among informal and small businesses providing basic goods and services to their local communities.
“A few companies in our portfolio benefitted from the pandemic because of the digital transition” that it inspired, says Posada.
Nuvemshop is one example. The Buenos Aires-based company launched in 2011 to help micro and small businesses in Latin America build an e-commerce presence. The company raised two back-to-back funding rounds of nearly $600 million in 2021 (Elevar first invested in 2017).
Also: Mexico City-based Justo, an online grocer that “prioritizes fair treatment of its suppliers and the environment,” according to Elevar. The company, which launched in 2019, saw a boom in demand amid the pandemic and raised multiple equity rounds between 2020 and 2022.
Elevar is in the market to raise up to $100 million for a Latin America-specific fund. It’s the first time the impact investor, which invests in Latin America and India, is creating separate funds for each geographic region. Investors’ growing interest in impact investing is a key driver; the strategy is more aligned with larger investors’ geographic mandates and limitations.
Tech enablement will be a key part of Elevar’s investment strategy going forward. “The shift in how people and businesses are interacting with technology is a big opportunity,” says Posada. Elevar doesn’t invest in “tech companies,” she says; potential investees have to be primarily driven by the needs of low-income consumers. “But we’re excited about how to leverage technology for access and distribution for the underserved.”
Impact funds in Latin America largely play the role of market shapers. They’re providing early-stage capital, addressing alternative financing needs, and doing the de-risking for other investors. Natural capital is one area where the region’s entrepreneurs and fund managers have long stood out as creative responders and strategizers.
For years, Latin America has served as a test bed for climate resilience and adaptation strategies, despite the fact that the overwhelming majority of climate capital focuses on mitigation (i.e. climate tech).
Organizations have piloted lending incentives supporting smallholder farmers; partnerships with Indigenous communities on forest restoration; carbon credits for Amazon restoration; and pay-for-success forest conservation.
Fund managers like Eco.business Fund and EcoEnterprises Fund are investing in sustainable agriculture, ecotourism and rainforest restoration.
States in the region are leading a broader shift of capital into nature-based solutions and conservation. Belize and Ecuador have struck agreements to refinance hundreds of millions of dollars in sovereign debt in exchange for nature conservation and protection commitments.
Latin America encompasses 25% of the Earth’s forestland and 30% of water resources. Unsustainable agriculture, agroforestry and land use jeopardize not only natural ecosystems and biodiversity, but also Indigenous and other vulnerable communities.
“The greatest climate mitigation potential is in land use,” observes Laura Ortiz Montemayor of Mexico City-based advisory firm SVX Mexico. “Everything that uses land has the most important and attractive potential for addressing real climate change.”
The march of new natural capital strategies in the region—many of which are not tech-focused at all—is accelerating. Among the new additions: Amazonia Impact Ventures, based in the U.K., is in the market with a fund that invests in climate change mitigation and adaptation efforts in the Amazon rainforest that empower local Indigenous communities.
Most such strategies are still in the early days of deploying capital and proving their theses. Building track records takes time given the complexity of the solutions they’re supporting, says Ortiz.
“Silicon Valley has hyper-simplified climate change and sees it as an equation that can be optimized. It’s not, it has so many complex layers,” she says. “The more we embrace the complexity, and nature’s intelligence, the more we will be aligned with it.”
There are signs that investors are starting to do just that, Ortiz adds. TPG, for example, recently backed San Francisco-based Terra Global, a new fund that finances nature-based projects in rural communities and helps them secure verified carbon credits.
“Mainstream impact investing is getting its head around nature-based solutions and its potential,” she adds. “We’re finally getting there.”