Em Conversa uncovers the secrets in Latin America (LatAm) that have caused the fintech market to boom, from being worth less than US$50million in 2016, to US$2.1billion in 2022.
In November 2023, NXTP, the early-stage B2B venture investor in Latin America, announced the closing of its third and largest fund, NXTP III. With $98million in commitments, the fund focuses on partnering with the most promising technology founders in Latin America.
To understand what makes a promising fintech firm and what investors are looking for, we sat down with Bruno Dalapria, principal at NXTP.
Can you tell me more about the company and your role within it?
Founded in 2011, NXTP is one of the most established and active early-stage venture firms in Latin America, with offices in Buenos Aires, São Paulo, and Mexico City.
The fund invests in technology start-ups at the pre-seed, seed, and Series A stages with checks ranging from $500,000 to $5million. It applies a thesis-driven investing approach across several B2B technology verticals. These include fintech, SaaS and cloud, e-commerce enablers, B2B marketplaces, and AI.
To date, the firm invested in +130 companies, of which six are unicorns, including Auth0, Nuvemshop, and Mural, which have reached unicorn status, with over 30 exits.
I am a principal at NXTP, and my main responsibilities rely on identifying and investing in early-stage companies. My role includes working closely with portfolio companies to help them grow and scale their businesses, building relationships with key players in the ecosystem, and developing and implementing NXTP’s investment strategy.
I joined NXTP as the first Brazilian in the team. I have been working in venture capital since 2017 when the market was relatively small. Earlier in my career, I also served as a private equity professional and an entrepreneur. I also hold an MBA from INSEAD.
What are some B2B investment trends we’re seeing in Brazil?
Three investment trends we’re observing in Brazil have to do with the following industries:
Infrastructure for PIX payments:
Brazil’s real-time payments network, PIX, has witnessed swift adoption, surpassing India’s UPI, which was launched earlier. In the first quarter of 2023, PIX transactions exceeded the combined total of credit and debit card transactions for the first time.
Data from the Brazilian Central Bank indicates 8.1 billion PIX transactions compared to 4.2 billion credit card transactions and 3.8 billion debit card transactions during the same period. Although the new technology brings numerous benefits, there are challenges and opportunities for improvement in its infrastructure.
Fraud is a notable concern. According to Experian, phishing scams reached a record high in 2021, the first full year after PIX’s launch in November 2020. Those scams caused estimated losses of $500million during 2022, with around 70% attributed to PIX operations. As the Brazilian Central Bank works on introducing new features, such as automatic debit, a promising opportunity arises for fintech startups to innovate and address gaps in PIX’s capabilities, eventually adding more infrastructure core features.
Receivables’ digitalisation:
The Central Bank of Brazil has implemented regulations in the credit card receivables market, requiring merchants to centralise their receivables through registrars like CERC, Nuclea, and TAG. Additionally, the regulatory body has expanded its measures to benefit the receivables market, strengthening the regulation of commercial invoices (duplicatas) through Resolution BCB No. 339 and Resolution CMN No. 5,094.
These resolutions signify a milestone that propels the advancement of virtual receivables implementation in the country.
In response to these regulatory changes, fintech companies are poised to play a pivotal role in reshaping back-office infrastructure, streamlining credit operations, and enhancing efficiency. Although there has already been a surge in companies addressing the receivables opportunity, we anticipate this new regulation will unlock fresh use cases and business opportunities across various receivables registrars and supply chain industries, aiming to provide a seamless experience.
AI “tropicalisation”:
In navigating the challenge of a prevalent emphasis on the infrastructure layer in Brazil’s generative AI landscape, a strategic opportunity emerges for local startups to pivot toward the application layer. This shift involves tailoring solutions to address specific local challenges, enabling these startups to carve out a distinct niche for themselves.
While infrastructure solutions boast universal applicability, the adaptability of applications to regional contexts enhances their defensibility, positioning Brazilian enterprises to deliver highly relevant and resilient solutions.
Twilio 2023 Segment’s report underscores Brazil’s dynamic AI landscape, positioning the country as a leader in AI adoption within Latin America. The data reveals that 98 per cent of companies are experimenting with AI in marketing channels, highlighting the appetite for AI technologies and innovation.
We believe that specialised areas like credit scoring and other local financial products or AI-driven fraud detection tailored to Brazil’s regulatory environment present ripe opportunities.
What is NXTP doing to improve the B2B venture investment sector in Brazil and LatAm?
Firstly, we have focused sector expertise: NXTP transcends conventional investment models by immersing itself in B2B sectors. Through thorough research, we pinpoint trends, challenges, and opportunities within the segment. This targeted sector approach enables us to invest precisely in startups with disruptive solutions, solidifying our position as one of the few B2B-focused LatAm funds while positively contributing to the industry’s development.
We also do community building: founders are at the core of our investment theses. That’s why we aim to be proactive, cultivating communication among portfolio companies and offering support across diverse dimensions. NXTP today has +1,000 founders in its network. By disseminating knowledge and providing founders with the skills and insights essential for navigating the intricacies of the B2B landscape, we actively contribute to fostering the growth of B2B businesses in the region.
We have robust due diligence: embedded within our investment framework is a thorough due diligence process designed not only to assess but to actively enhance the value of B2B companies. As we analyse each startup, identifying both challenges and hidden potential, we aim to empower founders, encouraging them to transcend conventional boundaries and critically evaluate the trajectory and evolution of their businesses.
How does the Brazilian B2B investment sector compare to that of the rest of the world?
The Brazilian B2B investment sector is both similar and different to the rest of the world in several key aspects:
Similarities:
- Growth-driven focus: similar to what’s happening globally, investors are prioritizing companies demonstrating strong growth and bottom-line profitability with high potential for returns;
- Timing between rounds has extended: underlying business metrics play a greater role in deal valuation and dynamics;
- Emphasis on due diligence: Brazilian investors are increasingly conducting thorough due diligence before investing, a trend mirrored globally;
- Large deal sizes: Brazilian B2B investments tend to be larger than average compared to other Latin American countries and closer in size to the average seen globally.
Differences:
- B2B penetration: B2B e-commerce market penetration in the region is negligible, with less than three per cent of orders done online, compared to more developed countries such as Japan and the US, which have 30 per cent plus and 15 per cent plus penetration, respectively. In Mexico and Brazil alone, there’s a market of approximately $500billion plus with over 10 million small-to-mid-sized retailers. In Latin America today, most small retailers (90 per cent plus) are still relying on traditional manual and inefficient means for procuring supply, including messaging one-off relationships, brokers, trade shows, etc., resulting in a significant market opportunity for newcomers. We believe the market for B2B wholesale retail in Latin America is massive and in the early innings of what we believe to be a multi-decade-long trend in digitisation.
- High potential with lower capital needs: compared to B2B markets in developed economies like the US and Europe, Brazilian startups often require less capital to achieve significant growth and scale. This can be attributed to factors such as lower operational costs and labour costs;
- Second- and third-time founders: in contrast, in Latin America and Brazil, a significant number of founders in the B2B sector are embarking on their first ventures. This highlights the region’s burgeoning entrepreneurial spirit, with newcomers actively contributing fresh perspectives and innovative approaches to business-to-business dynamics. On the other hand, breaking ground on a B2B venture for the first time poses distinct challenges.
What are some unique challenges associated with the region/country in the B2B investment space?
At this point, the main challenges stem from the funding situation and the less developed business environment in Latin America, which is still considered an emerging market. On the one hand, founders often must create comprehensive solutions from scratch, tackling complex issues since the necessary infrastructure isn’t always readily available. This is unlike more established markets, where they might focus on refining existing features or processes.
In terms of funding, several US and international funds that were very active in the early stages during the market peak have shifted their focus back to their main markets and growth stages. Despite this shift, early-stage activity, while slightly reduced, has stayed relatively steady. Founders are working with less funds, essentially having to do more with less.
Looking ahead, for the companies that haven’t raised much funding and were able to prove profitability, we do expect to see them raising seed and Series A rounds in the following year.
Plans for the future (roadmap and growth plan)
NXTP’s plans revolve around three primary areas: investing the recently announced ~$100million fund, supporting the growth of current and future portfolio companies, and maintaining an active role in the entrepreneurial ecosystem by aiding both invested and non-invested founders.
In pursuit of the first goal, we will strategically deploy the capital over the next three years, with a strong focus on the Brazilian and Mexican markets, especially in our areas of domain expertise, including fintech, SaaS and cloud, e-commerce enablers, B2B marketplaces, and AI.
For the second goal, we’ve bolstered our team by bringing on a VP of growth. This addition is crucial for assisting companies in structuring their go-to-market and distribution strategies, fundamental elements for the scaling and monetisation of any product.
Additionally, our team is actively engaged in supporting portfolio companies with various strategic initiatives, including business development, recruitment, fundraising, and more.
On the third front, we maintain an active online presence on platforms like LinkedIn, sharing insights on topics such as opportunity analysis and key metrics for B2B SaaS businesses. Moreover, we organize numerous events throughout the year, primarily in Brazil and Mexico, to further contribute to the growth of the entrepreneurship ecosystem.
Final thoughts
In the dynamic Latin American B2B venture landscape, we have successfully raised three funds and invested in over 130 companies. Looking forward, the team is not only excited about the future but also bullish on the vast potential of the Latin American market. Amidst a less frenzied market atmosphere, there’s room for growth, especially in comparison to more saturated markets like the United States. Latin America’s rich talent pool and a shift toward seasoned professionals further contribute to the region’s development.
As the market matures, the landscape presents businesses embodying much-valued characteristics for NXTP for fintech and B2B businesses: recurrent, high gross margin, asset-light and with a greater focus on profitability and cash flow.
