3 ⅓ Mega Trends in Latin America

If you’ve been paying attention to Latin American tech, you know there’s never been a better time to build or invest in the next great startup. The potential of technology companies targeting a young connected population of over 600 million, building the infrastructure for dynamic integrated economies and transforming industries ripe for disruption is one world’s most exciting VC opportunity.

Moreover, the new VC correction has made scaling startups much cheaper than before, built by a new generation of engineers and operators eager to build with software. Collectively, Latin Americans have learned how to start, finance, scale and exit multi billion dollar companies.

As we, ALLVP, start investing our new fund, our team has identified three waves that will positively transform the region, create economic value and returns for smart investors. We analyze and describe the trends we’ll be leaning in in the next three years.

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AI powered Latin America

Jimena Pardo & Blanca Sañudo

After decades of AI research and development, Generative AI made its way into the mainstream at the end of 2022 with the success of ChatGPT, creating a new frontier of human-machine interaction. These new generative models go beyond pure analytical tasks to participate in creative and design processes from writing to coding to imagining new worlds.

In Latin America, a majority of data pools are sitting idle in banks, retailers and government data warehouses. Paired with these new more powerful tools, software will reshape how thousands of businesses design, sell and operate. What’s more, API connections and open-source protocols make companies access generative AI models, allowing them to enhance their value proposition and distribution potential.

Through embedded AI, startups can make their products 10, 20 or 100x better, more accessible and cheaper. Entrepreneurs in Latin America can now solve hard problems at scale by combining intelligent models, computing power and proprietary data pools.

The potential of organizing AI-ready data in Latin America

Take Mexico’s example on real estate data, or should we say lack of it? In the United States, at least in California, tenant registries are unified statewide and allow any homeowner to perform checks on potential tenants. There is no such thing in Mexico. Flat, portfolio proptech, has built the largest private data pool of property prices. Flat could now feed this data to AI models and use them to power property underwriting and provide immediate pricing or predict property prices with nearly–surgical precision.

E-commerce skyrocketed in Latin America propelled by the pandemic restrictions and continues to do so at the fastest pace in the world. The digital footprint left by millions of mobile-first users creates an attractive pool of data which today remains largely untapped and fragmented. Tapping into those vast amounts of data and using it to power generative AI models can bring strong defensibility to these technologies.

Taking advantage of the potential of a data-ready Latin America is Palenca, the Mexican startup creating API infrastructure to access income and job data from millions of workers in the country. Accessing such vast repositories of data is just the beginning to unlock behavioral predictions, product suggestions or tailor-made rewards programs, to name a few.

We see more and more companies using both traditional and alternative data to power risk models, collection strategies, marketing campaigns or health treatments. The process is expensive and time intensive. What if companies could embed AI models to power these processes? We believe that companies who ride this wave will be able to multiply their impact either from inception or as they build their 2.0 version.

Human capital startups can ride the AI wave

In the healthcare sector, companies that have access to large amounts of data can improve patient roadmaps. Take Yana, the mental health app helping more than 10M users through their mental wellbeing journeys who has a repository of millions of data points. No other organization on the planet has more mental health conversation data points in Spanish. Adding an embedded AI layer will allow it to process that data to create hyper-personalized treatments that could significantly increase positive outcomes.

Edtech startups are another set of players who have years of data across a range of student profiles. The Peruvian edtech ecosystem is in a great position to lead the way, with players like Crehana and Talently. Through embedded AI, historical student data can be used to shorten course creation processes 10x. With these technologies, startups can unlock the capacity to personalize each course based on past performance and engagement. Slang, one of our portfolio companies, has offered professional and specialized English courses to more than +400k students accessing its app across 19 countries. It will use all that student data to power its course design cycle and modify modules almost immediately depending on each student’s progress.

“Entrepreneurs in Latin America can now solve hard problems at scale by combining intelligent models, computing power and proprietary data pools.”

What startups are building?

We’re excited to see applications in a wide range of industries, which we believe reflect the far reaching applications of AI in our region.

Yalo is using AI to enhance customer service and conversational capabilities. To streamline sales and innovation processes, we’ve seen a number of startups using these models to develop testing campaigns, centralize orders from multiple platforms, reduce the time to develop products and build automations in complex systems at a fraction of the cost. Treble.ai is leveraging AI to boost demand generation, using automation to reactivate customers with abandoned carts, recover lost customers and increase cross-sell of products.

Prosperia is a clear example of how healthtech startups can use AI models for early detection of diseases. Startups in the agtech space are also leveraging these models to monitor crops and suggest means to protect harvests from external threats.

We look forward to meeting new Latin American startups riding the AI wave to create differentiated products that transform creative, analytic or repetitive processes at scale.

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The future of money: a massive shift to digital money and inclusion

Antonia Rojas, María Fernanda González & Delby Pinilla

The future of money is being shaped by multiple technological changes, including the development of digital infrastructure, the emphasis on interoperability, and the growing popularity of decentralized financial services.

These trends are set to change how consumers use, move and invest money. SMEs will quickly follow to make their businesses leaner, more productive and free of the burden of cash. These will power a massive shift from cash to digital money and financial inclusion.

Improving security and ease of transactions with infrastructure

Digital infrastructure is being developed to improve the security and ease of transactions. This includes systems that can offer real-time processing, support different payment methods, protect against hacking and fraud, and offer user-friendly solutions for consumers and merchants.

Brazil’s introduction of free instant payment rails, PIX, has propelled the country to 4th place, up from 8th, in the world ranking of economies with the most real-time transactions. With the implementation of PIX, they've enabled 45 million people to join the digital payments system. Mexico’s CoDi and other local Central Bank initiatives now have a clear roadmap to broad adoption.

In the past decade, major economies developed electronic invoice capabilities to help formalize economies in the region and enhance fiscal potential. These efforts, particularly successful in Chile, Mexico and Brazil, have created an infrastructure that startups have leveraged to make money smarter.

What startups are building?

In the B2B space, Mendel is leveraging digital invoicing and payment infrastructure to make expense management for companies easier, by automating cash flows and invoice reconciliation. Reworth on the other end, is connecting thousands of merchants to financial institutions to build the digital infrastructure for cashbacks and rewards. There are other companies in the space that are leveraging this trend by streamlining payment processing and finding efficient ways to roll payment reconciliations such as Toku or Simetrik.

“The future of money is being shaped by multiple technological changes, including the development of digital infrastructure, the emphasis on interoperability, and the growing popularity of decentralized financial services.”

Interoperability: enabling access across platforms and networks

As the infrastructure for digital assets continues to develop, interoperability becomes increasingly necessary. This trend enables users to access digital services across different platforms and networks, and promotes the use of open finance and blockchain technology.

A study performed by Mercado Pago and Finnovista showed that there are more than 1,500 platforms worldwide with the capacity to provide more than 5,000 APIs to interconnect and facilitate the transfer of banking information with user consent. Latin America is beginning to take a significant role in this space, representing 3% of the total solutions available across the world and gradually implementing open finance regulation.

What startups are building?

There are many industries that will benefit from greater interoperability, one of which will be the wealth management space. As more information from consumers can be gathered on their preferences and needs, a better product can be developed. Fintual, is offering its customers a way of investing their money adjusted by their unique risk preference, with the option of integrating with other savings accounts in order to compare their existing performance, costs and make decisions based on data. Flink provides access to millions of young Mexicans who can now buy fractional shares of their favorite companies in minutes.

Many companies are investing in transformation and two Chilean startups, Fintoc and Shinkansen, are leading the way. They aim to improve information exchange and establish the infrastructure for it. In Colombia, Kala Tech is building efficient infrastructure for embedded lending transactions.

Decentralization: opening up new possibilities for the digital economy

As more countries shift towards digital currencies and cashless systems, individuals will have greater access to manage their money and engage in the broader financial ecosystem. This includes borderless transactions such as international transfers and digital payments and the rise of peer-to-peer lending and trading.

Research from the Global Findex Database has shown that receiving payments such as wages or remittances in a deposit account leads to increased use of digital services. Of the adults that received a payment, 40% will use it to save money, and about 40 percent to borrow money. Mexico is at the center of this, with the Mexico - US remittances corridor being the largest, reaching $25.2Bn in 2019. Solutions that decrease costs of transactions and ease of use, will continue its development throughout the region.

Digital currencies will change the perception of how to manage the resources securely. We expect progress in the regulation of digital currencies to allow for broader adoption. We are starting to see players leverage this potential like Littio who is offering innovative solutions for savings.

Entrepreneurs across the region, particularly in Buenos Aires, have not only started these waves but will build on top of them. The crossborder payment infrastructure in the Americas is still relying on rails built in the last century. As regional economic integration accelerates, money is bound to play a big role in solving money.

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A trillion dollar relocation

Federico Antoni & Nicolás Heeren

What triggered the wave?

The last couple of years have exposed the fragility of global supply chains. From a trade war between the US and China to a pandemic and the Russian invasion of Ukraine, the global context has created challenges that businesses must navigate as they try to produce and distribute goods. Despite the benefits of globalization, it has become clear that years of optimizing for efficient supply chains have led to a susceptibility to external shocks that can significantly impact local economies.

As a response, governments and companies are looking to increase the reliability of their supply chains by bringing manufacturing closer to home. Mexico is in a prime position to take advantage of this trend due to its proximity and existing trade agreements with the US, and to its well-developed manufacturing industry. It is also a gateway to North America for Central & South America.

Nearshoring: from the world to Mexico

The transition towards nearshoring has already begun, with companies such as Apple via Foxconn, Ford and Boeing reshoring their operations to countries in Latin America and the Caribbean. Many more seem to be on the way –such as Tesla, which is in talks to build a Gigafactory near Monterrey, Mexico’s industrial hub.

Raquel Buenrostro, Mexico’s economy minister, claims that 400 North American companies are exploring moving their operations from Asia to Mexico. A separate Kearney study of American manufacturing executives claims that 70% of surveyed CEOs have planned, are considering, or expect to move manufacturing to Mexico. Mexico’s manufacturing industry already grew at a rate of 5% in 2022, making it exceed its pre-pandemic size. According to an IDB study, this industry could add $35.3bn in annual exports as companies bring manufacturing operations closer to the US.

"Mexico is uniquely positioned to seize the trilliondollar opportunity brought by nearshoring, plus... having one of the strongest currencies in the world doesn't hurt. ;)”

Private-sector initiatives will benefit from unparalleled support from government programs. Countries are looking to transition towards friend-shoring –or shifting national supply chains towards friendly countries. An example of this is Joe Biden, Justin Trudeau and Andres Manuel Lopez Obrador’s summit in Mexico City to discuss economic cooperation. In an effort to bring chip manufacturing to North America, The Biden Administration signed the CHIPS and Science Act, intended to destine $280bn to fund research and manufacturing of semiconductors in the US and reduce their dependence on China and Taiwan.

Mexico is key to making that happen. For example, the US, Canada and Mexico just unveiled an agreement to coordinate investment in semiconductor manufacturing across North America. According to Fortune Magazine, Biden urged Lopez Obrador to enact new policies to capitalize this drive to boost semiconductor production. These agreements make Mexico uniquely positioned to seize the trillion dollar opportunity brought by nearshoring, plus... having one of the strongest currencies in the world doesn't hurt. ;)

What startups are building?

We believe that this presents an amazing opportunity for logistics startups in Mexico to capitalize on the increased demand for regional supply chain solutions. As companies develop manufacturing operations in Mexico, they will require efficient and reliable logistics providers to handle cross-border transportation.

Portfolio company Nuvocargo, the leading digital freight forwarder focused on USA-Mexico cross-border logistics, is in an excellent position to partner with companies launching operations in Mexico. Furthermore, the new plants being built will need new energy sources that we hope will be sustainable. Enlight, another of our portfolio companies, is already helping them achieve that by providing solutions to generate and store the solar energy needed to power the future of manufacturing in Mexico.

We see other unattended opportunities that will increase in scale as the nearshoring trend continues. Latin America currently lacks the embedded infrastructure to produce high-grade raw materials to compete with Asia. Technology will play a fundamental role in contributing to develop such production and make nearshoring more durable.

We’re looking forward to meeting a second wave of B2B marketplaces –such as Nuqlea and Agrizon– built to serve industrial players in the procurement of raw materials. Furthermore, there are significant legal, fiscal, and regulatory barriers that companies looking to improve their regional supply chains will face. Startups that can help reduce said barriers using software and automation may have a massive impact.

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One more thing… welcome to Mexico City

Patricia Maestri & Natalia Couttolenc

With imposing monuments, poetic sounds, colorful trees and beautiful streets, Mexico City is the fifth-most populous city on Earth, with 21 million inhabitants. Recently renamed CDMX after getting statehood from Mexico DF (DE-EFE), it is experiencing an urban renaissance, attracting thousands of people from all walks of life who find it a new home to relocate. The city has increasingly become the go-to destination for entrepreneurs seeking opportunities outside Silicon Valley or NYC’s competitive atmosphere. It has also attracted "digital nomads" with flexible work schemes that work for companies in their country while enjoying CDMX amazing weather and friendly inhabitants.

The New Williamsburg as it’s often called by the boho crowd, is also a cultural and gastronomic capital. You can walk to 2 of the top 10 restaurants in the world if you stay around Polanco or settle for a local taco joint with global Netflix exposure. The art and design scene is flourishing to the point of becoming a top destination for art galleries, fashionistas & cultural travelers.

What’s the attraction? Well, there are thriving scenes for food, fashion and architecture. In 2018, the World Design Organization named Mexico City its ‘World Design Capital’. The Oscars success of Alfonso Cuarón’s movie, Roma — named after the district in which it’s set — has only added to the cultural lustre. And then there’s the art. Casa Azul — the old home of Frida Kahlo, now a museum in her honour — is among the most popular sites in all Mexico. Yet, there is copious contemporary art worth seeing too. In early February each year, Mexico City becomes the centre of the art world, as the Zona Maco fair opens its doors. - Alastair Smart, Christie’s

What triggered the wave?

In a recent study conducted by Money in the UK, which analyzed where is the best place to relocate in the world, Mexico City ranked in the top 5 cities in the world in average property price compared to the square meters, as well as having an affordable cost of living.

According to SEGOB data, in 2022, the arrival of foreigners to Mexican territory increased by 250% compared to 2021. Mexico City is uniquely positioned to attract people from some of the most prosperous business hubs in the continent, shown by the more than 30 daily flights from JFK, SFO, MIA or AUS. Also, CDMX is ranked first worldwide in the ease of settling because foreigners feel at home at 82% compared to 62% in the rest of the world.

With a more diverse, cosmopolitan culture, new businesses have thrived, including restaurants from a variety of cuisines, markets, breweries, bars, art galleries, and endless pet-friendly spaces to cater to the large number of foreigners living in these areas. Today it is widespread to ask foreigners or entrepreneurs who live in la Condesa or la Roma for suggestions of places or restaurants since they are the ones who walk its streets every day and are aware of the new businesses and restaurants. When we need a restaurant or trendy place recommendation, we often ask foodies and friends Sheel of Better Tomorrow Ventures or Chloé of Hedosophia.

Come for the food, stay for the tech scene

We are convinced that Mexico offers a wide range of advantages to founders and digital nomads, plus it’s also known for its energetic entrepreneurial community and its welcoming culture to foreigners.

CDMX has attracted entrepreneurs from different countries who seek expansion in this booming place. Taking advantage of the trend of entrepreneurs looking to establish in new countries, our ALLVP Research analyzed approximately 700 startups that have raised +US$5M in Series A since 2015, and concluded that Mexico is the top destination for startups who are seeking expansion throughout Latam. According to our analysis, the top expansion route that led to Mexico was mainly from Colombia, followed by Argentina, Brazil and Chile.

Several pioneers chose Mexico as their home to launch and grow their startups. Some of the founders of our portfolio, such as Oskar and Dani of Cornershop from Chile and Vera and Jose of Apli from Europe, decided to move to what was once known as Mexico DF. Dario Peña chose Mexico as his home to scale Nubity, the leading Argentinian cloud management platform, back in 2014. Fast forward to 2023, there are entire ultra connected communities of expatpreuneurs from Santiago, San Francisco, Buenos Aires, NYC, Bogota, Paris and Lima.

These entrepreneurs and tech operators have been key elements in driving the growth and maturity of the ecosystem in Mexico, and their success and lifestyle has inspired other entrepreneurs and digital nomads to follow their footsteps.

For happiness and success…come to CDMX :)