SoftBank Is Funding Every Side of a Bruising Startup Battle, LatAm Bank Deals Ticked Higher Year-Over-Year in 2019, Brazilian Investors Pour Record $5.4 Billion Into Domestic Equity Funds, and More...

Other featured stories include: SoftBank-Led Group to Invest $125 Million in AlphaCredit, Colombian President Calls for Tech Level Playing Field, Belt and Road Initiative to Boost Chinese Lending in Latin America, Ingresse CEO Stands by the Choice to leave Silicon Valley to Start His Company in Brazil, and While Grow Mobility Faces Problems, SoftBank Reappears and iFood Advances Steadily into the Future

SoftBank Is Funding Every Side of a Bruising Startup Battle

Uber is under siege in Latin America amid a bruising price war as rivals Rappi and Didi Chuxing Technology Co. gain traction. Despite this competition, all three companies have the same tech investor in common: Japan’s SoftBank Group Corp., which has poured a total of $20 billion into the companies.

Startup investors typically don’t back competing companies. SoftBank, which runs the world’s largest venture-capital fund, has injected so much capital into popular tech categories that it created a sort of “circular firing squad” in which SoftBank-backed companies use SoftBank cash to compete against one another (The Wall Street Journal).

As reported by The Wall Street Journal, former managers of the three delivery companies say they were baffled by the amount of money the companies were willing to spend to compete. Uber (the only one of the three to disclose financial results) lost $8.3 billion in the 12 months through September.

In recent years, SoftBank has deluged the tech industry with spending from its $100 billion Vision Fund: the largest tech investment fund ever. As it tries to secure funding for a second Vision Fund, SoftBank has instructed its companies to focus on becoming profitable, reversing prior guidance to prioritize growth.

SoftBank CEO Masayoshi Son picked ride hailing and food delivery as two important areas for the Vision Fund, which invested $7.7 billion in Uber in early 2018, and is now the company’s largest shareholder. Through its various funds, SoftBank also has committed $1 billion to Rappi and nearly $12 billion to Didi.

After Uber started operating in the region 2013, the San Francisco-based company quickly overtook local competitors to become Latin America’s dominant player; therefore enabling it to charge high fares and take large commissions. The Wall Street Journal reports that at its peak, Uber operated in 14 Latin American countries and controlled nearly the entire ride-hailing market in big cities such as Mexico City.

Two competitors soon emerged, also equipped with SoftBank capital. In late 2017, SoftBank led a more than $4 billion investment into Beijing-based Didi. Shortly after SoftBank invested, Didi bought a majority stake in the struggling Brazilian ride-hailing service 99- Uber’s main competitor in that country-  for a reported $900 million. Next, Didi expanded into Mexico, first into the smaller cities of Toluca, Guadalajara and Monterrey, then into the capital. To gain market share, Didi inundated consumers with free and discounted rides, and offered double or triple the normal pay for drivers who signed up.

Didi took aim at Uber Eats in November 2019, launching its own delivery service in Mexico City called Didi Food. Uber Eats already was already competing with Rappi, an on-demand delivery company based in Colombia that launched in Mexico City in 2016.

In April 2019, SoftBank committed $1 billion to Rappi, the largest-ever single venture-capital investment in a Latin American company. The Wall Street Journal reports that “Rappi has seen sales growth in Mexico of 20% a month for the past two years, and has nearly pulled even with Uber Eats in terms of market share in Mexico City”, according to the Rappi executive.

Downloads of Rappi’s app in Mexico surged 141% in 2019 to an estimated 5.9 million, according to analytics firm Apptopia. Downloads of Uber Eats were up 45% to 6.2 million.

“The SoftBank-backed battle for market share appears to be hurting Uber. In 2017, its revenue in Latin America grew by 215%, making it the company’s fastest-growing region by far. In the first nine months of 2019, revenue in the region fell by 11% from the year-earlier period, while Uber’s revenue from the rest of the world grew by 26%” (The Wall Street Journal).

Uber Chief Executive Dara Khosrowshahi told investors in December he thinks revenue growth in Latin America will “accelerate to pretty darn healthy levels.” Uber’s shares are down nearly 20% since its May IPO (The Wall Street Journal).

LatAm Bank Deals Ticked Higher Year-Over-Year in 2019

While Latin America deal activity was lackluster overall in 2019, the banking industry managed to rise from prior-year levels, according to data compiled by S&P Global Market Intelligence.

Across all industries, deal activity in the region slipped 6% year over year. Despite economic and political uncertainty, Latin America recorded 21 bank deals, up from 15 in the prior year. A substantial number of these transactions occurred in Brazil: where fiscal reforms, favorable GDP growth trends and an “attractive exchange rate for foreign investment” added up to “real positive movement,” Venus Kennedy, an M&A partner with Deloitte, said in an interview. “We are seeing a lot of people buying,” she added.  

According to S&P Global Market Intelligence,

“Brazil was one of just two major economies in Latin America that saw overall M&A activity rise from a year earlier, with all-industry deals ticking to 699 from 658. The other was Colombia, where the number of deals rose to 131 from 101.”

In Brazil, 2019’s top deals included: Bosan Participações S.A.‘s $417.8 million sale of Brazilian Banco Olé Bonsucesso Consignado SA to Aymoré Crédito, Banco do Brasil SA’s purchase of Banco BV’s loan portfolio for $360.2 million, and Japanese conglomerate SoftBank Group Corp.’s buy-in at Brazilian digital bank Banco Inter SA.

"In highly regulated industries like banking, it is generally easier to enter a market through acquisition than through greenfield [investments], just because of how hard it is to get a license,” Kennedy added (S&P Global Market Intelligence).
Graphic Courtesy of S&P Global Market Intelligence

                                       Graphic Courtesy of S&P Global Market Intelligence

As reported by S&P Global Market Intelligence, in Central America, the biggest disclosed deal was the $730 million sale of Multi Financial Group Inc. to Banco de Bogotá SA’s Leasing Bogotá SA Panamá. Another notable transaction was Banco Panamá SA’s $210.0 million sale to Banco Aliado SA. In the Caribbean, various deals were driven by a decision from Canadian banks to withdraw from their decades-long positions after reassessing their exposure amid higher perceived risks in the region.

“2019 was the year of uncertainty … The big deals had kind of been done, so we saw smaller deals — more, but smaller — and for strategic reasons,” Deloitte’s Kennedy said. “There was too much uncertainty to do big deals, so people focused on acquiring specific tech. We saw lots of financial services companies buying small fintechs,” Kennedy stated.

Several banks’ strategies are focusing on the need to prioritize the growing presence of financial technology in the region. There were 18 recorded deals in which Latin American financial institutions- mostly Brazilian- acquired IT companies in the region. Moving into 2020, experts expect to see more of this, along with stronger deal activity overall.

“2020 will continue to be an attractive year for investments in the [Latin America] financial sector,” Marcela Chacon, a spokeswoman with consultancy Transactional Track Record, told Market Intelligence. She expects Brazil to again lead the pack in deal activity, “due to the positive outlook and excess liquidity for venture capital in this strategic regional area.”

Brazilian Investors Pour Record $5.4 Billion Into Domestic Equity Funds

Brazilian investors are pouring a record amount of capital into local equity funds, while foreign investors notched up their sixth straight week of buying, Bank of America Merrill Lynch said last Friday.

As reported by The New York Times, the bank stated that domestic investor inflows into Brazilian equity funds last week totaled $5.4 billion, the highest since the series started in 2014 and the 10th weekly inflow in a row.

“The average inflow over that 10-week period is $3.5 billion, around double the weekly average of $1.8 billion over the course of last year”, BAML added.

Brazil’s benchmark Bovespa stock market surged 32% last year: more than double the MSCI emerging market index’s 15% gains. Last Friday, it climbed to a fresh record high of 119,593 points.

This occurrence is notable for the absence of foreign investors. On Friday, Central bank President Roberto Campos Neto said this “was not a sign they had a gloomy view on Brazil, but suggested they might see greater value in other markets right now” (The New York Times).

SoftBank-Led Group to Invest $125 Million in AlphaCredit

A group of investors led by SoftBank’s Latin America Fund will invest $125 million in AlphaCredit, the Latin American financial technology platform said.

This investment will allow “AlphaCredit to consolidate its place as one of the leading financial technology platforms in Latin America, continue its expansion and leverage the competitive advantages of its proven and profitable business model,” the company said in a statement (Bloomberg).

AlphaCredit provides credit lines to individuals and small companies that are often underserved by traditional banks. To date, the platform has lent more than $1 billion to clients in Mexico and Colombia.

José Luis Orozco, Co-Founder of AlphaCredit stated,

“We are committed to financial inclusion through innovation and technological development. We bring the best of both worlds to provide efficient access to credit and financial solutions to sectors underserved by traditional banking” (PR Newswire).

On Wednesday, Softbank’s country manager in Brazil, Andre Maciel, said the group is looking for targets among Latin American lending startups, its.

“After reviewing more than 300 companies since last year … it’s getting harder to find good deals in Latin America,” Maciel told a Latin America investment conference in Sao Paulo, adding that the best alternative is to look for targets among lending startups that always need funding to grow their loan portfolios (Reuters).

Ahead of Uber Exit, Colombian President Calls for Tech Level Playing Field

Colombia’s President Ivan Duque said technology companies were welcome in the country, but they had to operate on a level playing field with local firms.

“It’s smart regulation to level the field and to … not … have unfair competition among parties,” he told Reuters at the annual meeting of the World Economic Forum.

President Duque’s comments follow a court order late last year against Uber Technologies Inc. which demanded the company to cease operations after a judge said it violated competition rules.

Reuters reports that, “Uber said it will stop operating in Colombia at the end of January, but has called the legal ruling ‘arbitrary’ and a violation of its right to due process. It has also said it will use all legal avenues to defend the rights of its 2 million users and 88,000 drivers in the country.”
Photo Courtesy of Reuters

                                                      Photo Courtesy of Reuters

“What you cannot tolerate in Colombia, in any place, is that you have unfair competition,” Duque said, pointing to controversies around Uber in countries such as Germany, Spain and the United States. “There’s no policy against technology as an instrument to connect consumers and the sellers of a product.”

Entrepreneurs have said Colombia’s out-dated regulations could threaten the country’s status as the region’s second-most popular destination for entrepreneurial investment after much larger Brazil.

“Colombia is a country that has been very attractive for technology. Colombia is a country that has rule of law,” Duque added.

Belt and Road Initiative to Boost Chinese Lending in Latin America

China’s Belt and Road Initiative (BRI) is jumpstarting new infrastructure and energy development projects in Latin America, while opening the door for more Chinese lending in the region, according to Reuters.

Initiated in 2013 by the Chinese government, the initiative seeks to build a modern version of the Silk Road to link China with the rest of Asia, Europe and beyond through large-scale projects. It is one of the most ambitious infrastructure initiatives conceived.

According to a report from Fitch Solutions, Latin America is projected to be the “bright spark” for Chinese investment throughout 2020 as more countries sign up to the initiative and Chinese companies obtain new contracts to construct and finance infrastructure projects in the region (Reuters).

China is the region’s second-largest trading partner, after the US. Trade between China and the region grew 19% year-over-year to US $307.4 billion in 2019 from 2018, according to Fitch Solutions. Since 2017, Ecuador, Chile, Uruguay, Trinidad & Tobago, Panama, the Dominican Republic and El Salvador have signed agreements to cooperate with China on the initiative.

As China’s President Xi Jinping seeks to strengthen ties with Latin American governments, the country’s biggest state-owned firms are increasingly winning construction, energy and transportation projects. Earlier this month, utility China Yangtze Power completed a US$4 billion bridge loan with the Bank of China, Industrial Commercial Bank of China, Santander in Hong Kong and MUFG supporting its proposed acquisition of Sempra Energy’s power assets in Peru.

“The favorite strategy of the Chinese investor is to invest in a Latin American company that has a connection with China, and they (China’s banks) prefer to lend bilaterally,” said a managing director at a US investment bank, adding that the country’s banks generally fund deals directly or on a club basis (Reuters).

For example, ICBC and the Bank of China are providing US $600 million in debt to help construct an oil refinery at the Mexican port of Dos Bocas, China’s Ambassador to Mexico Zhu Qingqiao told reporters on January 13th at a Mexican economy ministry event. According to various media reports, the refinery is estimated to cost up to US $8 billion.

“As Chinese-backed projects progress in Latin America, the pace of BRI-related works could slow down in 2020, as the Chinese government works to improve transparency and sustainability on financing with BRI-linked countries, according to the January 8 report from Fitch Solutions” (Reuters).

Given that most countries linked to the BRI are characterized as emerging markets that pose higher risks for investors, there has been some criticism. Many observers are fearful that opaque financing arrangements could lead to unsustainable debt and question whether the initiative is more about promoting Chinese influence than bringing development.

“There has been criticism around the types of projects that were advanced and transparency around projects’ costs, sovereign debt and the sustainability of government finances impacted by loans,” said Matteo Addonizio, an analyst at Fitch Solutions.

Moving forward, China’s approach to each country is expected to be more customized, which is likely to reduce reputational risk for China and help gain the trust of other BRI countries.

“This increased focus on transparency will slow the advance of projects overall as the deal-making process will lengthen,” said Addonizio, adding that these processes would be more stringent with heightened due diligence measures.

Ingresse CEO Stands by the Choice to leave Silicon Valley to Start His Company in Brazil: 'There Was More Impact to be Made Here’

Ingresse CEO Gabriel Benarrós took a big gamble in leaving Silicon Valley in 2013 to start a company in his home country of Brazil: a country less welcoming to tech startups, and a place where funding was less readily available.

“I always knew I wanted to come back. I wanted to do something for Brazil and in Brazil… I guess that’s a little bit patriotic of me,” he added laughing. “But I also knew that there was more impact to be made here,” the Stanford-educated executive said.

Benarrós co-founded Ingresse: a live experience platform that helps people discover and buy tickets to concerts, movies, plays, nightclubs and parties. According to Benarrós, the company has big plans for broadening its offerings to “revolutionize the live experiences market in Brazil” (Business Insider).

This December, Ingresse raised its third round of funding of 90 million Brazilian Reais ($21.5 million USD). The company’s pipeline of projects to invest that money include initiatives such as developing cashless wallets for customers to use to buy food and drink at the events they purchased tickets to. Ingresse also plans to make an entrance into the fintech world by co-creating a fund that will invest in the live entertainment market itself.

Investors in the company include ticketing company Rival, which is currently headed by former Ticketmaster CEO Nathan Hubbard. According to Business Insider, Rival’s buy-in is a strategic partnership that will allow the two companies to share research and development and bolster their positions throughout the Americas.

Trading off Between Brazil and the Silicon Valley

Back when Benarrós founded the company, he said that the tradeoff between Silicon Valley and Brazil was difficult.

“On one hand [Silicon Valley] is an amazing environment… You have some of the smartest people in the world and you learn so much,” he said.

Funding was hard to come by in Brazil, where capital was far less abundant according to Benarrós. But ultimately, the decision came down to the magnitude of impact that he could create. Opportunities to innovate are less bountiful in Silicon Valley, and he didn’t want to work on software that offered specific solutions or ways to optimize. He wanted to do something “more disruptive,” he told Business Insider.

“There are so many more fundamental problems to be solved in Brazil. People haven’t ‘solved’ delivery, logistics, banking … ticketing, telecommunications, the things you talk about on a daily basis haven’t really been ‘solved’ yet by tech. I think that’s really exciting,” Benarrós explained.

Brazil’s tech ecosystem is currently concentrated among a few elite.

“A lot of Stanford folks are involved, it’s the equivalent to the PayPal mafia here,” Benarrós noted; citing leaders in Sao Paulo’s tech ecosystem like NuBank’s David Velez and Movile’s Fabricio Bloisi. “That’s different from India, or China, or a lot of emerging markets right now.”

As venture capital funding has grown in the region, it’s an exciting moment to run a startup in Brazil. A new study tracking venture capital investment in Brazil estimated funding reached $2.7 billion, an almost 200% rise in funding from 2017, Forbes reported.

“People are more oriented toward companies that are more cash cautious, and that benefits us enormously… I think we’re reaching a healthy balance between growth and burn, unless you were doing business with funds that were somehow connected to WeWork. Unless that’s the case, I think everyone else that survived so far is going to benefit from this moment,”  Benarrós said.

The Great Startup Migration

Benarrós may have been an early trendsetter in choosing to leave the San Francisco Bay Area.

While Silicon Valley is an established global hub for tech and innovation, expensive rents and the soaring cost of living have caused its attractiveness to tech workers to wear thin.

Concurrently, increased competition from other cities and countries are drawing top tech talent away from California itself. Business Insider reports that cities in the U.S. like Pittsburgh and Austin have grown exceedingly attractive to tech workers. Industry watchers have predicted that business-friendly environments, lower taxes and lower housing prices, and higher numbers of engineering graduates from local universities will only cause the trend to grow in 2020.

Podcast: While Grow Mobility Faces Problems, SoftBank Reappears and iFood Advances Steadily into the Future

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