Catalysts of Change: How Entrepreneurs Are Transforming Latin America

Introduction

Entrepreneurship stands as a pivotal catalyst for fostering development across Latin America and the Caribbean (LAC). By initiating innovative ventures, entrepreneurs create new job opportunities, inject vitality into local economies, and reduce unemployment rates. Moreover, they introduce novel solutions to long-standing challenges, from sustainable agriculture to financial inclusion, thereby bolstering productivity and competitiveness. Entrepreneurship nurtures a spirit of self-reliance and adaptability, traits that are crucial for nations striving to navigate the complexities of a rapidly evolving world. By developing a supportive ecosystem that encourages innovation, competitiveness, collaboration, and growth, LAC can begin unlocking its full potential.

In 2021, LAC was the fastest-growing region in the world for venture capital (VC) investment, reaching an all-time high of $15.7 billion. At the close of that year, a total of 47 Latin American companies had secured the requisite valuation to be considered a unicorn. Of these 47 companies, a total of 10 had gone public or been acquired in 2022. While 2022 was marked by a sharp $8 billion decline in VC investment compared to the year before, annual VC investment in LAC in 2022 remained strong at about $7.8 billion—still higher than investment across 2018, 2019, and 2020. Nonetheless, there has been a recent global downturn in VC investment across the region. Neither in 2022 or 2023 did LAC witness the mega rounds that contributed to its unprecedented VC growth in 2021. Figures from 2023 reaffirm the rapid deceleration, as VC investment for the year was closer to $4 billion.

Despite the challenges ahead, LAC entrepreneurs are resilient and agile in navigating political instability, inflation, and economic downturns. Investors, too, remain interested in the region, and even when the investment amounts are smaller, many LAC start-ups remain optimistic. The start-up ecosystem in LAC is having a considerable impact in the region, catalyzing a generation of innovators to increase competitiveness and economic growth. In addition, LAC start-ups have also tended to focus on addressing socioeconomic issues such as financial inclusion, services that promote digitalization, better healthcare, and climate solutions. While LAC suffered a GDP contraction of nearly 7 percent because of the Covid-19 pandemic in 2020, regional GDP rebounded by about the same amount the following year. As global trade and capital flows have shifted toward renewable energy, strategic commodities, and skilled workforces in proximity to the United States, foreign direct investment (FDI) flows into LAC have reached their highest point since 2012. From 2018 to 2021 digital bank transactions increased in value from $17 billion to $123 billion thanks to platforms like Pix in Brazil and SINPE Móvil in Costa Rica, further underscoring the role of digital technology adoption in facilitating a bullish post-pandemic market environment. By disrupting anticompetitive and inefficient traditional industries, VC-backed entrepreneurs in LAC can meaningfully improve the lives of citizens—saving them time, promoting social mobility, and increasing access to technology, education, and financial services.

Regional Challenges and Entrepreneurial Solutions

Successful entrepreneurs are as much a product of individual ingenuity as they are of the environment that enables them to succeed. Thriving entrepreneurial ecosystems benefit from strong cultures of innovation—where highly talented, motivated, and creative leaders from a diverse array of industries and backgrounds can collaborate to produce novel products and services that add value and efficiency to existing markets—or create entirely new ones.

Between 2014 and 2020, LAC experienced its most anemic level of growth in the last seven decades. Existing socioeconomic inequalities combined with recent pandemic-related shocks have created challenges for the region with respect to employment, market access, investment in human capital, and the formalization of the economy. LAC’s share of manufacturing employment and value added in total employment and GDP have decreased relative to other regions in recent years, and their economies have become less diverse and more dependent on the export of primary goods outside of the region. The cause of this backward step in the region’s economy can be attributed to an array of different factors, but it is hard to underestimate China's economic influence. Through trade deals and incentives, China has boosted the demand for commodities, which in turn has weakened industrial and manufacturing industries, leaving Latin America once again dependent on foreign countries. With the notable exception of Mexico, which by every measure has the most sophisticated manufacturing base in LAC, the region’s manufacturing sector primarily competes with that of sub-Saharan Africa—and lags far behind those in Southeast Asia. Innovation, start-ups, and entrepreneurs in general are a force to counter this trend; they can become the backbone for the development of advanced economies.

Despite these challenges, the region has seen unprecedented growth in private capital investment. Major countries like Brazil, Mexico, Colombia, Chile, and Argentina, as well as smaller countries like Peru, Ecuador, and Costa Rica, saw a boom in deals and capital flows. The emergence of disruptive technologies and the digitalization of the economy have sparked new entrepreneurial ecosystems across the region that provide jobs in highly value-added sectors like e-commerce, technology, insurance, financial services, and advanced manufacturing. According to a study by GSMA, every 10 percent increase in digitalization has the potential to generate a 1.9 percent increase in GDP growth for LAC countries. In Brazil, citizens reported using the internet to engage in financial transactions rose from 33 percent in 2019 to 43 percent over the following two years, highlighting the growing potential—and impact—of technology and entrepreneur-led industry disruption within the region that takes advantage of growing digitalization.

For instance, the “Brasil Eficiente” program includes the country’s digital development strategy focused on building out telecommunications infrastructure, expanding broadband access, and facilitating digital commerce, hoping to capitalize on the country’s future position as one of the world’s five major smartphone markets by 2025. Pix, a smartphone-based payment platform launched by the Central Bank of Brazil in 2020, has facilitated billions of dollars in transactions between hundreds of millions of businesses and customers. The app was launched with the specific intent to increase competition in Brazil’s highly concentrated banking system, reduce the use of cash transactions, and promote quick money transfers without incurring fees or requiring debit or credit cards. According to the International Monetary Fund, “Brazil has had the fastest adoption rate in terms of transactions per capita gained since implementation,” including with advanced economies. Brazilian authorities are also seeking to integrate Pix with other payment schemes, including the BIS Nexus system, and with similar platforms in other countries to facilitate cross-border transactions.

This widespread adoption of technology has greatly increased efficiency by streamlining workflows and lowering barriers to communication within and between firms, especially at the international level. For example,São Paulo-based Locaweb, with a market capitalization of nearly a billion dollars, has expanded its presence across the digital marketplace, having acquired e-commerce payment solutions company Vindi, marketplace integration service Ideris, and LAC’s most used social media management company, Etus. In Mexico and Colombia, companies like Habi, EmCasa, Flat.mx, La Haus, QuintoAndar, and TrueHome have revolutionized the home buying and selling process, aiming to eliminate the inefficiencies of the traditional real estate market.

The continued rise of LAC unicorns underscores the region’s potential as a hub for technology-driven industry disruption; this rapid growth has accelerated the development of vibrant start-up and VC ecosystems across the region, catalyzing an influx of talent in product development, engineering, marketing, and other fields. This has, in turn, boosted investor confidence in growth opportunities within the hemisphere and encouraged risk-taking. In addition, unicorns in emerging markets often focus on solving real life issues, meaning that businesses not only create more wealth but also serve to address regional challenges. These solution-driven models have allowed LAC start-ups to expand beyond the region to tackle similar challenges in other countries, including companies like Kavak, Rappi, Gympass, Incode, Mural, and many more.

Another space where start-ups are playing a role is in edtech, healthtech, and micro, small, and medium-sized enterprises (MSMEs). Geographic barriers have historically prevented the equitable distribution of services like healthcare and education. Outdated, inefficient, and bureaucratic processes in these sectors have increased barriers for MSME entrepreneurs seeking to start new businesses and prevented marginalized communities from gaining access to health and education systems. This exclusion contributes to the region’s large, untapped informal sector—the highest of any region in the world.

The success of an entrepreneur hinges on their ability to offer novel solutions to existing challenges. Despite major challenges confronted by LAC—inequality, inefficiency, informality, unemployment, crime, and corruption—innovative public policies and private sector mobilization coupled with rapid technology adoption pose unprecedented opportunities for LAC entrepreneurship.

Entrepreneurs Supporting Entrepreneurs

Addressing the population shift in LAC is paramount for the region’s stability. The proportion of young people (aged 15 to 29) relative to the total population in LAC has reached the highest level since the 1980s. One in every four inhabitants of the region falls in this category, or about 156 million people. But this window of opportunity will not last forever: current projections show that by 2050 the median age in LAC will have shifted from 31 to 41, making it the third-oldest region in the world, behind only Europe and North America. Despite higher levels of education than previous generations, young people in LAC experience significantly more unemployment and suffer lower wages; the rate of youth unemployment is around twice that of the total population in LAC. At the start of 2021, youth unemployment reached a high of 23.8 percent, compared to just under 10 percent among the general population. Moreover, 6 in 10 youth were employed in the informal sector before the pandemic, with low-income youth comprising a disproportionate share of the total and informal unemployed youth population. Coming out of the pandemic, youth unemployment fell precipitously from 20.7 percent to 15.1 percent between 2020 and 2022. Gender is also closely related to employment prospects; for example, the unemployment rate for women was 3.6 percentage points higher than the unemployment rate for men in 2021. youth population.

Supporting entrepreneurs is a key element in addressing the population shift and macroeconomic health. However, the high risks associated with entrepreneurship combined with a lack of financial and business services to develop successful businesses hinders many from pursuing entrepreneurial endeavors. According to the Inter-American Development Bank (IDB), only 1.5 percent of LAC university graduates pursue entrepreneurship, compared to 9 percent in the United States. MSMEs represent 99.5 percent of all businesses in LAC, but most lack access to the capital, financing, and training necessary to accelerate business growth. There is no shortage of potential entrepreneurs in the region, but lack of appropriate education—including lack of focus on science, technology, engineering, and mathematics (STEM) and business management—coupled with deep inequalities, lack of financial inclusivity, poor services for entrepreneurs, and regulatory hurdles and disincentivizes, means that few entrepreneurs have the tools to create a successful business. Yet, many entrepreneurs themselves are providing services to other businesses.

Tech Tools for Entrepreneurs

Between 2012 and 2022, internet penetration in LAC rose from 43 percent to 78 percent, with as much as 90 percent penetration in high-income countries like Chile. Usage of applications like Facebook within LAC exceeds that of Western Europe and North America. Moreover, e-commerce is projected to grow by 19 percent between 2022 and 2027, well over the global average of 11 percent, according to Mordor Intelligence. According to the IDB, “internet connectivity is positively correlated with increased labor force participation, employment mobility, job creation, and overall job growth” while “enabling access to critical public services such as education and healthcare.”

Due to this high level of internet penetration, LAC entrepreneurs have seen considerable success in creating new products and adopting new marketing services that incorporate technology into their business models. For example, Mexican freight forwarder company Nowports was started in 2019 with $150,000 in acceleration funding. The company builds customized logistics solutions for international trade operations that clients can track in real time, with offices in Mexico, the United States, Colombia, Panama, Brazil, Peru, and Uruguay. The company also plans to launch Nowports Capital, a service offering financing to customers who would otherwise be unable to afford the high up-front costs of engaging in international trade. Notable e-commerce platforms that cater directly to consumers, such as Mercado Libre, Americanas, and AliExpress, suffer from customer skepticism that purchases made online will arrive on time, without high delivery costs or fraud.

Despite high connectivity, critical gaps remain. For example, Chile “stands out as the only country where remote working is among the top three main uses of the internet.” Less than half of LAC’s rural respondents reported having access to a fixed internet connection, with citizens of Guatemala and Brazil experiencing the most pronounced urban-rural gap. Notably, 49.7 percent of households across LAC reported that high service fees were their primary obstacle to internet connectivity. In the case of Mexico, anticompetitive laws and entrenched monopolies have prevented the country from deepening its information and communications technology (ICT) infrastructure. In particular, the dominance of a single company has permitted it to capture independent regulators and maintain some of the highest spectrum fees in the world.

Financial Inclusion

Expanding financial inclusion within the formal banking sector across LAC among underserved populations is key to driving long-term, sustainable, and equitable growth. For example, only 10 percent of Mexicans have a credit card, meaning that only the wealthiest citizens are capable of building lines of credit that make them eligible for loans toward furthering education or propelling them toward car ownership. Approximately half of Latin Americans are unbanked, ranging from less than one-third in Brazil to almost 60 percent in Peru; start-up fintechs, which rely on digital technology rather than physical branch locations, eliminate concerns shared by underserved populations regarding opening bank accounts, with 60 percent of unbanked Brazilians, Peruvians, and Colombians citing cost as a major factor to opening a bank account.

Venture capital-backed businesses in LAC in the fintech sector have shown considerable promise in addressing gaps in financial inclusion across the region on several fronts. Companies like Clip in Mexico have led the way for the Mexican fintech ecosystem, and today the company is the most valuable fintech in Mexico. In Brazil, Nubank supported the financial inclusion of 5.7 million users on the credit card market, according to research from Data Nubank. Its users are overwhelmingly young (56.8 percent between 18 and 30 years old) and the platform caters to the 20 percent of citizens that exist outside of municipalities with physical bank branches due to the bank’s fully digital nature.

In part thanks to start-ups, LAC’s banking sector—which has been traditionally characterized by long wait times, cumbersome processes for the client, high interest rates and fees, limited availability, and poor customer service—has undergone a significant transformation in the past years. Nubank has competed with traditional banks by offering a more accessible, efficient, and less costly banking experience. 90 million citizens across Brazil, Colombia, and Mexico are Nubank customers, with 60 percent considering Nubank as their primary banking service. The impact of this fintech growth has also increased the availability of financial services for MSMEs and reduced cash transactions, serving to decrease tax evasion and increase transparency to combat money laundering. Further, fintech has helped the region weather the deleterious impact of the pandemic—as traditional banking slowed fintech lending, digital payments and digital banks continued growing—and overall, it has had a significant positive macroeconomic effect in the region.

Supporting Women Entrepreneurs

Women-led start-ups in LAC accounted for only 13 percent of the capital raised in 2019, 21 percent in 2020, and 26 percent in 2021. According to the International Finance Corporation (IFC), there is a $300 billion financing gap for women-owned small and growing businesses globally, and in LAC alone the gap is $92 billion. If current trends toward gender parity continue, the region’s GDP could grow by an additional 14 percent by 2025, and in a full-parity potential scenario, this increase would be 34 percent. Indeed, this financing gap is a significant barrier to economic growth and development, as women-owned businesses are key drivers of job creation and innovation.

It is crucial to promote women’s involvement in LAC start-ups, as their distinctive viewpoints and abilities can improve team performance and expand the customer and investor base. Establishing a work atmosphere that recognizes inclusivity is critical to successfully integrating women into start-ups, which can lead to a more creative future. Women face added challenges when it comes to raising capital, and cultural norms and stereotypes often hinder their access to emerging technology and entrepreneurial industries. This financing gap is due to a variety of factors, including a lack of collateral, discriminatory lending practices, limited access to networks and information, and a lack of business administration and financial skills. Strategies aiming to address the gap have tended to focus on the entrepreneurs themselves—for instance, by providing capacity development, including in the financial sector; providing business advisory services; or boosting enrollment in a business acceleration program.

Firms such as MAYA Capital—led by female co-founders Lara Lemann and Monica Saggioro—aim to disrupt the traditionally male-dominated VC space, where women make up a mere 2.5 percent of partners. According to Lemann, “a large majority of our deal flow is female founders.” MAYA Capital’s investments into more than 29 companies across 12 sectors in Brazil, Mexico, Colombia, and Chile has already resulted in the creation of two unicorns, plant-based food tech company NotCo and e-commerce platform Merama. The firm has also made conscious efforts to diversify their founder pool by connecting with members of Google’s Black Founders Fund and the Instituto Brasileiro de Diversidade e Inclusão. In 2020, Silvina Moschini, the founder of Transparent Business, became the first woman in LAC to create a unicorn. In July of 2022, STORI became Mexico’s first female-founded unicorn; the company focuses on promoting financial inclusion through credit cards for individuals who do not have a credit history. Another notable female entrepreneur in the region is Brynne McNulty Rojas, CEO and co-founder of Habi. The company was established with the aim of expediting and securing real estate sales in the Colombian market facilitated by a digital platform. Habi became Colombia’s second-ever unicorn, and it was the only LAC unicorn with a female founder and CEO.

There are multiple initiatives underway to support female entrepreneurship in LAC. Multilaterals, the private sector, and countries have supported several programs aimed at increasing access to finance for women entrepreneurs, including the Women Entrepreneurs Finance Initiative and the Women Entrepreneurship Banking (weB). In the past, institutions such as the IDB, World Bank, IFC, and many governments and nongovernmental organizations launched ambitious microfinancing programs in LAC. These efforts have had positive results, and although the financing gap for women-owned micro-enterprises remains considerable, Latin America is the region that has made the most progress toward closing that gap. Today, it has the smallest financing gap when compared to other developing regions. This shows that concerted efforts between international cooperation agencies, governments, civil society, and the private sector can have a positive impact and are extremely powerful when working together to effect change. 

Healthcare

According to the World Economic Forum, economic constraints prevent 30 percent of Latin Americans from accessing healthcare, while 21 percent face obstacles in seeking care due to geographical barriers. As one of the regions that was most severely affected by Covid-19, the pandemic exacerbated preexisting inequalities in healthcare access. However, the pandemic also led entrepreneurs to develop innovative healthcare practices and technologies that have increased their capacities to serve those who have historically been excluded from healthcare systems, including geographically isolated, indigenous, afro-descended, and LGBTQ+ populations. For example, Colombian healthtech 1DOC3 offers consultations in various specialties—including general medicine, sexual health, pediatrics, dentistry, nutrition, and psychology—to users in Mexico and Colombia with wait times less than one minute, allowing patients to bypass the bureaucratic red tape of scheduling through traditional services.

After fintech, the LAC healthtech sector received the highest level of venture capital investment as measured by deal count in 2019. According to a LAVCA survey sponsored by the IDB, of 35 healthtech start-ups in LAC, half said that the pandemic had a positive effect on their business growth and their cash runway. Usage of digital healthcare services skyrocketed within LAC following the Covid-19 pandemic. For example, 26 percent of Brazilians reported consulting a health professional online in 2024, a figure that has risen each year since the pandemic pushed these services into mainstream popularity. The widespread adoption of digital healthcare services contributed to VC investment in LAC’s healthtech industry to grow six times from 2016 to 2019.

Climate Change

Latin America is a region that has shown a remarkable growth of investment in clean tech and other forms of clean energy in recent years. According to the 2023 LAVCA Trends in Tech report, cleantech was the seventh most funded sector in the region, surpassing verticals that had historically attracted more investment. The region’s abundant natural resources provide a great potential for clean energy. The cost of renewable energy technologies has decreased significantly in recent years, and trends suggest that the cost will keep declining. The availability of natural resources in conjunction with more competitive prices in clean energy could not only take LAC closer to net zero, but it could also turn the region into an exporter of clean energy.

The growing demand for clean energy solutions will also create new opportunities for local consumption and exports. Electric vehicles (EVs), biofuels, hydrogen, and other low-carbon alternatives can help reduce emissions and local pollution from the transport sector. Although investment in clean energy, from green bonds to green energy, has been driven by foreign investment, Latin Americans are developing creative solutions that are local an often unnoticed or unacknowledged. Countries like Chile are pioneering clean energy solutions by heavily investing in wind, solar, and green hydrogen, while other countries like Costa Rica are also using native clean energy sources such as geothermal energy. And next to these government-led initiatives, there are start-ups developing EVs, such as Quantum in Bolivia or Reborn Electric Motors in Chile, and others such as Mombak, EuReciclo, Sistema.bio, and Lemon Energia, all funded in 2022. In fact, according to LAVCA’s data, 13 companies received VC capital in 2021, and in 2022, that number grew to 30 companies.

Agtech investment is another area that can contribute to climate change solutions. For example, with VC backing, Mexico-based e-grocery store Jüsto enables customers to order groceries to their homes from small- and medium-sized farmers with the goal of reducing food waste. However, the prevalence of small-scale farmers within LAC may be an impediment to the widespread adoption of such practices; 50 percent of all production comes from 14 million small-scale farmers. Moreover, 90 percent of small farm owners in Brazil do not use management software for farm finances. Considering that most farms are located in relatively remote and sparsely populated areas, entrepreneurs across LAC have sought to take advantage of rising rates of digital connectivity across the region through innovative services aimed at increasing agricultural productivity and efficiency—between 2020 and 2022, rural connectivity increased from 36.8 percent to 43.4 percent. By bridging the rural connectivity gap, farmers working in the informal sector gain access to credit, buyers, and markets through platforms like Verqor, a Mexican agricultural fintech start-up and Brazilian firm Agrolend. Other agtech start-ups include Solinftec, which utilizes artificial intelligence to make recommendations for farmers regarding planting, harvesting, and spraying based on real-time, in-field crop data. Colombian start-up Frubana connects restaurants and food retailers directly with farmers, eliminating the need for intermediary distributors.

Roadblocks and Other Challenges

There are countless challenges for entrepreneurs in LAC that intersect with the ability of investors to find viable business and of entrepreneurs to create and grow a successful start-up. There are challenges that entrepreneurs in LAC face when opening and running a business and accessing and attracting capital. These challenges range from structural issues; lack of innovation and human capital, unwelcoming rules, regulations, and taxation systems; and difficulties accessing capital.

Enabling Environments for Entrepreneurs

Entrepreneurship and innovation are certainly necessary for LAC to remain competitive on the world stage, but data from the report on FDI in LAC in 2023 from the United Nations Economic Commission for Latin America and the Caribbean show that the region is still mainly dependent on traditional industries, many of which are dominated by oligopolies and many others administered by governments as state-owned enterprises (SOEs). According to the IDB, “very few Latin American governments have relied on market mechanisms to improve the management and monitoring of their SOEs,” leading to inefficiencies and stifling competition and innovation. For example, in Colombia, state-owned conglomerates represent a quarter of the revenue generated by the top 100 businesses.

Regulatory bodies in countries across LAC are responsible for ensuring a level economic playing field while protecting consumers, workers, and the environment. Regulations should in some cases include risk-sharing mechanisms with investors, adapt quickly to address potential externalities brought about by new technologies, train local talent, and attract talent from across the region and the world. To build confidence among business owners and corporations, regulations should offer transparency and predictability. These regulations should aim to promote economic growth and strike the right balance between social and environmental considerations and the economy. Establishing a balanced role for governments is challenging due to the wide range of new industries, integrated economies, and digital technologies that often require new forms and flexibility. It is crucial to establish comprehensive policies that address important factors such as contract enforcement, cross-border trade, property registration, construction permits, immigration laws, and tax payments to ensure that companies can sustainably grow and observe regulations at the same time.

The private sector will only thrive in an environment where legislators and those in power seek conducive policies for the growth of new industries driven by technology. In Mexico, for example, a 2017 bill passed by the Senate brought the country in line with similar fintech regulations in the United States. Governments across the region must ensure that their regulations adapt to capitalize on new technologies and services that could catalyze investment in entrepreneurship.

Financing

Between 2018 and 2021, the fintech industry in LAC more than doubled in size, with its growth accelerating due to the Covid-19 pandemic. However, regulators are struggling to keep up with these developments as they strive to balance access to financing with promoting fair competition. New regulations have been introduced in LAC to address this issue. Chile approved a fintech law in October 2022 to regulate access to open finance. Likewise, Brazil implemented favorable regulations in January 2021 for the adoption and development of cryptocurrency markets. Colombia has also created a positive environment for fintech industries and financial inclusion and innovation. For example, in 2011, only 64.6 percent of Colombians used a financial product, but by 2021, the number had increased to above 90 percent.

The focus of regulation has been on open finance, low-value online payments, and cryptocurrency markets. Despite this, there are still unresolved challenges such as cybersecurity and cloud computing. Providing access to financial products and services is crucial, but companies also require financing mechanisms. To examine this issue, the IDB analyzed the financial regulatory frameworks of Colombia, Chile, Mexico, and Peru. The findings revealed that only 42 percent of respondents believed that the current regulatory framework in each country is adequate. However, there are a range of innovative regulations that countries in the region are introducing. Colombia’s Ministry of Commerce approved the regulation of the Financial Superintendency’s sandbox in 2021, allowing fintech firms to test their products and services. Mexico’s fintech law includes regulations for sandbox projects, which involve the public sector in assessing and mitigating risks for entrepreneurs.

Effective regulatory efforts must balance support for fintech innovation with risk management. Entrepreneurs have particularly pointed to the fintech law in Chile and the open banking regulations in Colombia as benchmarks for more responsible and modern regulations. Following these examples, Mexico’s National Banking Commission made beneficial adjustments when it opened the possibility of registering new types of fintech companies. Recent fintech legislation passed in Mexico would require firms to obtain banking licenses from the National Banking and Securities Commission to perform activities that the law reserves for financial entities, such as “investments, payroll portability, and higher deposit limits.” On October 19, 2023, Nubank applied for a banking license from regulatory authorities, which according to Nu México general manager Iván Canales, “will allow us to continue freeing more Mexicans from the complexity characteristic of legacy financial institutions.” In Colombia, Nubank is working with the Financial Superintendence of Colombia (SFC) to secure a second license required to provide financing services, granting the company permission to expand its operations beyond credit cards.

Education

Entrepreneurial ecosystems like Silicon Valley, Tel Aviv, and Boston are often located in proximity to universities, where young, like-minded individuals can meet and learn from faculty involved in research and development (R&D). Aspiring entrepreneurs with institutional connections also benefit from more readily available start-up capital from potential investors and have greater access to business strategy development services. But Latin American countries face obstacles in establishing similar innovation clusters due to a lack of focus on R&D and a limited number of universities, which puts the region at a comparative disadvantage.

This shortage of higher education institutions equipped with the research and training capacities necessary to create a workforce that can compete in global markets means that LAC ranks lowest in the world in its number of high-ranking universities, alongside Africa. Only 1.6 percent of the first 500 universities in the Shanghai ranking and less than 1.4 percent out of the 400 universities included in the Times Higher Education ranking are in LAC. In fact, when looking at a sample of 25 LAC unicorns, 18 of them had founders that had an undergraduate or graduate degree from universities in Europe and the United States. This not only exemplifies the lack of quality education in the region but also reinforces existing inequalities between those educated within LAC and those with the means to pursue higher education abroad. This shortage and lack of quality in higher education is a result of a long-standing lack of investment in education, economic challenges, and unequal distribution of resources. Powerful and well-established oligopolies stifle innovation and discourage risk-taking, while large swaths of the population remain excluded from financial and political institutions.

LAC lags other regions in terms of innovation; according to the 2022 Global Innovation Index, which ranks the capacity for innovation in 132 economies, LAC’s largest economies are far from the top: Chile (50th), Brazil (54rd), Mexico (58th), Colombia (63rd), and Argentina (69th). This innovation ranking, coupled with disappointing learning outcomes as measured by standardized tests like the PISA, comparatively less investment in R&D, and scarce availability of highly ranked universities—particularly in STEM—shows that the region’s education requires more investment. As a result, the region is not inculcating the basic building blocks of innovation and entrepreneurship.

However, the private and philanthropic sectors have stepped up to address worker skill gaps in high-value and entrepreneurial sectors. For instance, in Colombia, Grupo Empresarial Bolivar, a capacity development provider funded by corporate philanthropic foundations, has developed development programming for small, growing businesses that includes plan competitions, targeted consulting, and entrepreneurial training. Google also offers a three-month accelerator program for high-potential start-ups in Brazil, from seed to series A in the AI and machine learning sector. In Mexico, Orion Startups offers accelerator programs for technology-centered businesses in affiliation with the Tecnológico de Monterrey meant to impart promising start-ups with the skills needed to thrive in the digital ecosystem.

With nearshoring as a promising opportunity for LAC, closer collaboration between the private sector, universities, and governments to develop curricula that includes in-demand skills in high value-added sectors is essential. As the United States seeks to diversify its supply chain, there are ample opportunities for new start-ups to emerge in Latin America, yet new companies will depend on a trained workforce that can adjust to new market demands. Leveraging technology to reskill or upskill the workforce as the region faces the challenge of quickly adapting to emerging technologies will be essential across all sectors of the economy. The region has seen a boom in the edtech sector—sparked largely by the effects of the Covid-19 pandemic. Edtech will be an essential tool for workforce development, as it will not only complement traditional education but also offer alternative training paths that, unlike traditional education, are more adaptable and scalable.

Entrepreneurial Momentum

Access to Capital

VC offers unique opportunities for entrepreneurs, particularly those looking to innovate and grow quickly. VC grew from around $2.0 billion in 2018 to $15.9 billion in 2021—an unprecedented increase—before dropping again to 7.8 billion in 2022 and even further to under $3.0 billion in 2023. Beyond financial backing, VC firms provide invaluable mentorship, strategic and operational support, access to networks and experts across the globe, and business visibility. VC leadership has provided the basic structure for new and innovative ways of financing entrepreneurs, including impact investing and tools such as blended finance. The international nature of VC investments has also fostered cross-border collaboration, particularly as firms that receive VC funding are increasingly expanding regionally.

Successful entrepreneurs have been known to produce multiplier effects—virtuous cycles of entrepreneurial investment and risk-taking—that can disrupt traditional industries with novel products and services that take advantage of dynamics created by the work of other entrepreneurs. For instance, e-commerce platform Linio, based in Mexico City, pioneered the country’s rapidly growing e-commerce industry in the early 2010s as the populace quickly adopted digital technology. Many of the company’s founders and former executives—like Carlos García Ottati, founder of Kavak, Mexico’s first unicorn—went on to form 66 additional companies, mostly in the e-commerce space. In Colombia, Rappi shares a similar story: more than 110 companies have been formed by company alumni across a wide range of industries. These companies have collectively raised more than $2.1 billion in VC funding and employ more than 14,000 people.

Levels of VC investment in Colombia have skyrocketed; Colombian technology start-ups received over 1.7 billion in VC funding in 2021, compared to less than $100 million in 2017. Several governments in the region have played a key role incentivizing entrepreneurship by creating agencies to support entrepreneurs technically and financially. Start-Up-Chile is an example of such efforts. Launched in 2010, it stands as a regional and global example of how government initiatives can catapult the entrepreneurial ecosystem. In part, looking at Chile’s example, in 2012 the government of Colombia launched INNpulsa Colombia, its version of a national entrepreneurship and innovation agency. In addition, these two countries, along with Argentina, Brazil, Chile, Mexico, Panama, Peru, and Uruguay have adopted laws to promote their digital development strategies, which include “developing broadband infrastructure, promoting digital companies, and encouraging large and small companies to adopt digital technologies, as well as promoting general IT skills and competencies.”

Raising Capital in an Uncertain Economy

Access to VC capital has been on a downward trend since its peak in 2021. Late-stage investment deals led much of the earlier unprecedented growth, reaching over $9.4 billion. This compares starkly to Q1 and Q2 of 2023, which only reached $0.3 billion for late-stage investment. When comparing 2021, 2022, and 2023, investment has generally shifted away from late-stage fundraising and toward early-stage start-ups. While in 2021, late-stage investment accounted for most of the venture capital directed at LAC, 2023 marked a notable shift in the investment landscape: early-stage investment is now ranked first, followed by seed, venture debt, and lastly, late-stage. This shift is certainly a reflection of capital drying up across the globe and investors being more conservative considering the current economy. However, the sustained investment in seed, early-stage, and VC shows that investors are still interested in seeing the region grow and see potential—but also that their investment behavior reflects the current socio-economic reality in LAC.

Consequently, 39 percent of respondent companies reported not fundraising in 2023, according to the 2023 LAVCA Startup Founders Survey, instead focusing on “internal company restructurings and building leaner teams.” Start-ups have also worked toward building more geographically distributed teams in 2023 compared to 2018, with more financially mature companies more likely to hire full-time employees outside of LAC. However, given the rapidly changing venture capital landscape, it is difficult to make broad assumptions applicable to the entirety of the start-up ecosystem.

Foreign Direct Investment

Following the commodity boom of the late 2000s and early 2010s, major private equity firms like Carlyle, GA, TPG Capital, KKR, and Ajax Partners opened offices in LAC. However, a combination of political instability, protectionist policies, and slower growth levels had made foreign investment in LAC riskier, significantly worsened by the impact of the Covid-19 pandemic. FDI levels dropped from their 2013 peak of over $200 billion to about $100 billion in 2020.

However, in 2022, a post-Covid-19 recovery surge marked the first time since 2013 that FDI levels surpassed $200 billion; Brazil received 41 percent of total FDI, followed by Mexico with 17 percent. FDI flows grew by 55.2 percent between 2021 and 2022, as investors’ interest—especially in the region’s oil and gas, mining, and renewable energy sectors—grew substantially. Fourteen megaprojects in these sectors with total FDI surpassing $1 billion represented 41 percent of total investment in 2022. Moreover, 80 percent of the total investment in LAC toward announced energy projects was directed toward the top 170 largest projects.

In terms of FDI investment by sector, services had the lowest relative rate of growth (35 percent), while manufacturing experienced 47 percent more growth compared to 2021 but remained 50 percent lower compared to its peak in 2013. Within services, the subsectors with the largest share of investments were financial services, electricity, natural gas and water, information and communications, and transportation-related services. Natural resource FDI grew by 79 percent in LAC in 2022, with considerable growth in Brazil’s oil and gas sector. Colombia’s FDI in natural resource extraction grew by 228 percent in 2022, while Mexico’s FDI in the same sector declined after more than doubling in 2021.

Venture Capital Investment

VC investment in LAC has had a remarkably different trajectory compared to traditional FDI capital flows. While FDI levels stagnated and declined between 2016 and 2021, VC deal volume between those same years surged from 197 to 1,095, according to LAVCA. Furthermore, international investment in LAC start-ups has more than doubled since 2015 from a diverse range of international firms. Moreover, about 75 percent of VC investment in LAC went toward the information technology and financial services sector, indicative of the large, untapped potential of the region’s high levels of digital connectivity. VC investment in fintech services in LAC represented 43 percent of all tech VC investment in 2022.

Tax Systems

In LAC, where informal employment is a significant problem, businesses require clear tax regulations and incentives to legally hire personnel and incorporate workers in social security systems. This is especially important during the initial stages of growth when certainty for both entrepreneurs and workers is crucial. A predictable tax policy is essential for businesses to plan and budget effectively. Without a predictable taxation system and tax courts, businesses are forced to allocate resources to deal with unexpected changes, which can lead to reduced productivity and profitability, along with greater uncertainty. Additionally, having predictable tax regulations is essential in attracting foreign investment, which plays a crucial role in the growth and development of new businesses. Tax systems in some LAC countries have become especially complicated due to poor planning of federal systems and their interactions with provinces and states. A useful tax policy regulation needs to address and incorporate both local and federal taxes. Businesses can find it overwhelming to calculate, report, and pay taxes when dealing with provincial and municipal regulations. This is further compounded by the added responsibility of managing and administering complex social security contributions for workers. 

Navigating the Way Forward

Entrepreneurship is on the rise in LAC. In the last five years, start-ups from across the region have attracted record-breaking investment from abroad, disrupting traditional industries with innovative products and services that create more efficient markets and support the growth of high-value industries. Entrepreneurs have also confronted long-standing challenges of the region, such as its large informal economy, its overbearing bureaucracy, and the dominance of industries traditionally resistant to change. Governments that have worked to support the growth of their entrepreneurial sectors have benefitted from virtuous cycles of investment and innovation, creating resilient economies that are less vulnerable to commodity-driven shocks. To achieve this, public and private sectors would be well-suited to learn from the following recommendations:

Foster a culture of innovation and entrepreneurship. The job market continues to undergo significant changes due to ongoing technological change. As a result, more and more individuals are showing interest in starting their own businesses. The accessibility of this possibility has increased, leading to a surge in motivation to become self-employed and enjoy greater flexibility. The Covid-19 pandemic has also hastened the adoption of technology by businesses. However, there are still several challenges that must be overcome to fully benefit from the opportunities presented by technology, such as retaining talent and obtaining funding. Covid-19 has highlighted the need for the digitalization of processes, while insufficient information about financing and a lack of education about basic corporate finances remain problematic.

Clear, transparent, and simpler tax systems. Recognizing the role of predictable tax regulations in attracting foreign investment is vital for the growth and development of countries. Simplifying the calculation, reporting, and payment of taxes is essential to alleviate the administrative burden on small enterprises. Streamlining and coordination need to occur at all levels of government, particularly in countries with federal structures like Brazil and Mexico. Lastly, providing support and guidance for managing complex social security contributions for workers will contribute to a more favorable business environment.

Rethink the actors. The VC industry and its start-ups need to be developed in the region, and industry-led initiatives are uniquely suited to do this. VC funds are in a win-win position if they develop business that can grow or train the next unicorn. Initiatives that focus on acceleration, seed and early investment, growth investment, and social and environmental factors have an immense potential to grow their footprint in the region, while at the same time creating positive social, economic, and environmental effects.

Regional integration. VC has played an important role in regional and global integration, but there is much more to be done. The integration efforts should mostly come from two areas: government initiatives and the private sector. As rates of digital connectivity rise, the ease of firms from different countries to collaborate and conduct cross-border transactions will only increase. Successful start-ups can replicate their business models across borders and expand operations into new countries, like Nubank’s expansion from Brazil into Colombia and Mexico.

Streamlining business creation and dissolution. Simplifying the establishment of businesses by reducing bureaucratic hurdles and minimizing the time and cost involved can encourage more aspiring entrepreneurs to bring their innovative ideas to fruition. Moreover, facilitating the dissolution of businesses in a swift and efficient manner ensures that entrepreneurs are not burdened by protracted legal and financial procedures when their ventures do not succeed, allowing them to rebound more quickly and engage in new entrepreneurial endeavors. By creating a more supportive environment for entrepreneurship through streamlined processes, Latin American countries can unleash the potential for job creation, economic diversification, and increased competitiveness on the global stage—and more importantly, for innovation.

The new workforce. Adjusting hiring laws to be more business-friendly while safeguarding employees' rights and wellbeing requires a delicate balance. One approach is to implement policies that encourage flexibility without compromising job security. For instance, governments can introduce different types of employment options that consider the needs of the “gig” economy by providing more flexible employment regulations while also ensuring that employees have basic safety nets like insurance. Implementing social safety nets, such as unemployment benefits or retraining programs, can provide security for workers who may be affected by labor market adjustments and unforeseen circumstances. Ultimately, the key lies in crafting legislation that supports entrepreneurship and job creation while upholding employees’ fundamental rights and ensuring their protection in the evolving job market.

Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Juliana Rubio is an associate director with the Americas Program at CSIS, and Nathaniel Laske was an intern with the Americas Program at CSIS.

This report was made possible by generous support from the Chubb Corporation and General Atlantic.