The FDI angle

• VC-backed start-ups in Latin America’s secondary cities grew to 25.5% in 2023.
• Major tech hubs’ share of new VC start-ups fell from 61.5% to 55% in 2023.

Why it matters: Emerging tech hubs offer new opportunities for entrepreneurs and foreign investors, who can benefit from improved infrastructure, talent retention and greater access to local capital. This enhances their appeal compared to traditional start-up hubs.

Emerging tech ecosystems in Latin America have grown their share of the region’s falling number of new start-ups financed by venture capital (VC), due to improved infrastructure in these cities, a shift in the VC landscape and entrepreneurs increasingly founding companies at home rather than relocating to major hubs.

In 2023, emerging tech hubs accounted for 25.5% of the 400 new VC-backed start-ups founded across Latin America, up from the 20.7% of the 628 such companies a year earlier, according to data from the Association for Private Capital Investment in Latin America (Lavca). These rising ecosystems include Florianópolis, Rio de Janeiro and Belo Horizonte in Brazil; Lima in Peru; Montevideo in Uruguay; and Monterrey in Mexico.

Over the same period, the share of new VC-financed start-ups in major hubs such as São Paulo in Brazil and the capitals of Mexico, Chile, Colombia and Argentina, fell from 61.5% to 55%.

This trend follows rationalisation in the global VC industry. After record levels of capital were deployed in 2021, VC funds pulled back significantly, particularly into later-stage companies, as interest rates rose and unprofitable private start-ups faced significant markdowns in their valuations.

Quarterly VC investment in Latin America has stabilised at around $1bn since the third quarter of 2022, meaning an annualised rate of about $4bn, according to Lavca data. This is a significant reduction from the record high of $16bn in 2021.

Carlos Ramos de la Vega, director of venture capital at Lavca, says that the sharpest pullback in VC funding has been “growth equity capital” for later-stage companies based in major hubs, which “usually comes from global investment firms that are more opportunistic in Latin America”.

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The pullback of capital commitments in Latin America by these overseas funds, mostly based in the US and Europe, is due to them tending to be “much more price sensitive and more reactive to the environment of [rising] interest rates because their first priority is to manage their local portfolios,” he explains.

Since peaking at 339 in the first half of 2022, new VC-backed start-ups founded across Latin America have fallen to a multi-year low of 145 in the first half of 2024, according to Lavca data. Over these two periods, the sharpest decline was seen in major tech hubs — from 206 to 75 — compared to a more moderate decline in secondary cities. “Emerging tech hubs have remained resilient against all odds,” Mr Ramos de la Vega observes.

The emerging ecosystem where the largest number of new VC-backed start-ups have been founded since 2022 is Florianópolis, the capital of the southern Brazilian state of Santa Catarina. Floripa, as it is known locally, has attracted a wave of new entrepreneurs from larger Brazilian cities in recent years as they have sought a better quality of life and more compact tech ecosystem with good infrastructure.

“Typically, a lot of the companies you saw in major hubs were born in these satellites and then ended up migrating to get access to clients and capital,” says Lorena Sánchez García, director of start-up accelerator Founder Institute in Mexico. “But as the pandemic taught us how to work remotely, some of the people who emigrated no longer needed to do so, or are commuting between the hubs.” 

Examples of successful start-ups set up by entrepreneurs from outside major hubs include online car marketplace Kavak in Mexico City which was founded by three Venezuelan entrepreneurs and São Paulo-based fintech Nubank, which was founded by entrepreneurs from Colombia, the US and Rio de Janeiro.

Improved digital infrastructure and internet connectivity in many emerging tech hubs has also made it easier for start-ups to sustain teams there. In the case of Montevideo, Mr Ramos de la Vega says many Argentine entrepreneurs relocate there, including the founders of e-commerce giant Mercado Libre.

“Many of these [emerging hubs] are home to great universities, large clusters of companies and family offices, making them attractive places to attract talent, generate business or raise capital,” says Agustín Rotondo, Bogotá-based managing director for Spanish-speaking Latin America at Wayra, the corporate venture capital arm of Spain-headquartered telecoms giant Telefónica.

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