State of the Market: Latin America
Latin America is a region diverse in culture, terrain, and history, and its SaaS landscape is no different. As the region undergoes a rapid digital transformation, a complex ecosystem is coming into focus. According to MarketWatch, the SaaS market in Latin American countries will grow at a compound annual growth rate of 24.79% from 2018 to 2023, an enviable growth rate and one that mirrors the early days of Silicon Valley.
In fact, the SaaS market in Latin America is growing at a pace that outstrips even the U.S. Perhaps more telling is the fact that Brazil, the largest market in Latin America, has produced as many unicorn companies in the past six months as it did in the previous 20 years. At the heart of this burgeoning SaaS scene is São Paulo, where 50% of Brazil’s SaaS startups are based. The region is awash in SaaS talent, and this is reflected on a smaller scale in several cities throughout the region. Brazil and Mexico are becoming leaders in SaaS, with Chile, Colombia, and Argentina developing thriving startup ecosystems of their own.
Not only is the region producing superstar SaaS contenders, but the interest from local and international venture capitalists is on the rise. Despite this rapid growth, until recently Latin America had been underserved when it came to some of the crucial elements that any burgeoning tech scene requires. Venture capital was in short supply—more than 71% of SaaS startups are still bootstrapped, according to the website Latin American Business Stories—but firms like Redpoint and DGF have taken up the mantle and are now supporting several world-class local startups.
A look at the data reveals a few vital moments in the funding history of the region. Starting in 2001 with the establishment of DGF Investimentos, there has been a steady addition to the roster of funds, with key periods in which a few funds got started at around the same time.
Most well-known funds experimented with funding Brazilian and Latin American B2C ventures. Unfortunately, not many bets paid off, as the economy crashed in 2015 and stayed in turmoil for another two years. By 2017, as things stabilized, venture capital firms such as Accel and Tiger returned to the region, while a new breed of local seed-stage funds were established. This time around, though, their focus was not so much on e-commerce as on SaaS. Since then, global funds Sequoia and Andreessen Horowitz have followed suit and are active in the region.
There is also an influx of Asian investment giants turning their eyes to Latin America – SoftBank leads the charge with its Innovation Fund, dedicated to investing in tech companies focused on Latin America. The fund has expanded to $5 billion since its inception and has spurred growth throughout the region. Many analysts believe that the parallels between the emerging economies of Asia and Latin America makes Asian venture capitalists and Latin American tech companies ideal bedfellows.
Today, there is no shortage of SaaS investors in Latin America. With a wealth of innovation in Latin American SaaS companies, savvy venture capitalists are capitalizing on the rising tide of SaaS businesses that are fueling Latin America’s economic boom.
Key Trends
Many of the key trends in Latin America mirror the markets of Europe and North America in their nascent stages. Of course, there are nuances and differences throughout the region, as much geopolitical as they are technological.
The rising trend of e-commerce in Latin America is one that has created opportunities for various subsectors of SaaS. Logistics is a rapidly growing area for Latin America SaaS companies, fueled in part by the e-commerce boom.
With unicorns such as Ebanx – the first start-up from the southern part of Brazil to top a $1 billion valuation – showing unprecedented growth, the market is beginning to open up to integrations. Specifically, in the payments sector, complex API layers can be built on top of existing infrastructure to further market competition.
However, payments in Latin America are very complicated (and this is perhaps an understatement). The difficulty of building a recurring payment platform means that many businesses default to using Stripe–which isn’t completely customized for specific countries and includes a hefty tax charge. With this in mind, there is a clear opportunity for savvy SaaS businesses that can provide alternatives to the current payments system. The growth of fintech as a sector in Latin America clearly demonstrates the market’s appetite for simple, effective solutions to bridge the payment gap.
Product-led growth is another trend that is coming to Latin America. Many established businesses are seriously examining how to move to a product-led growth strategy, with SaaS companies asking themselves how best to transition to the business model everyone is talking about. The effects that product-led growth models will have on existing sales and marketing strategies are some of the key questions in the ecosystem.
As we start to see a move away from the predictable revenue model of inbound sales and see a greater focus placed on the customer, customer-centricity is becoming more important than ever. Many consider product-led growth to be a key lever in uncovering and responding to customer needs. Smart CEOs are laser-focused on aligning internal teams around the product, turning the product data into the company’s growth engine. So many SaaS companies have seen success with product-led growth on foreign soil that many Latin American-owned companies are using it to fuel their land and expand strategies as they set their sights on more mature markets.
There is no shortage of SaaS investors in Latin America, and with a wealth of innovation in Latin American SaaS companies, savvy venture capitalists are capitalizing on the rising tide of SaaS businesses fueling the region’s economic boom.
Landing and expanding is another key trend in the region, with many Brazilian born companies extending their reach into Mexico, Argentina, and Chile. Ebanx has operations in Brazil, Mexico, Argentina, Chile, Peru, Ecuador, and Bolivia, and plans to expand its local payment solution, Ebanx Pay, into Colombia in 2020.
On the flip side, many Brazilian SaaS businesses are eschewing their fellow Latin American nations, setting their sights on the shores of North America. They are employing various strategies to reach these markets, but one of the more interesting trends is market entry via acquisition. Rock Content made the decision to expand into Canada and America in this fashion, laying out a model that many other businesses based out of Latin America would do well to emulate.
One of the perhaps more surprising trends is that more and more local SaaS start-ups are expanding into the U.S. via Silicon Valley. Mosyle, Pipefy, and Gympass have all taken this route. The relatively close time zones and short geographic distances seem to be decisive factors (as well as the larger valuation potential of key accounts) in propelling these businesses onto U.S. soil.
When it comes to European expansion, however, the market is not so bullish. It’s just not that easy to land in Portugal or Spain and expand outward. Each European nation differs from the others in regulation, language, and culture. This is not to say that Latin American SaaS players are not venturing into Europe, and it’s certainly a trend to watch out for in the future. The first-mover advantage will be significant for those who can nail and scale across Europe.
Opportunities for B2B SaaS Businesses
There are many ways in which Latin American local players have a competitive advantage. Alongside language and culture, there is also the added bonus of market familiarity, meaning locals are better equipped to manage the regulatory environments of the region’s disparate markets.
But SaaS for the financial services ecosystem presents opportunities for outsiders and insiders alike. There is a clear need for better ways to pay and transact. In the banking sector alone, around 70% of Latin America’s 400 million population is unbanked or underbanked, which leaves a huge sector of that marketplace ripe for viable competition.
As the critical eyes of international investors focus on the business models of burgeoning SaaS companies, CEOs and their boards must align their reporting around the metrics that matter. SaaS leaders can easily be seduced by vanity metrics that play well with marketers yet ignore the realities of cash flow. As large funds such as SoftBank’s Vision Fund stimulate the competitive landscape across Latin America, it is crucial for founders to have a firm handle on company finances in order to secure investment. Growth is no longer the most important metric, and potential investors will interrogate the balance sheet.
Latin America is a flourishing region ripe for growth, and investors and savvy CEOs alike are waking up to its potential. Although the majority of the focus of the international community (and the funding) is concentrated on Brazil, there is no doubt that the sleeping giants of Mexico, Colombia, and Argentina are hot on its heels.
State of the Market: Asia
Since each market in Asia is vastly different in terms of legislation, regulation, culture, and ways of doing business, it is difficult to speak broadly about the SaaS ecosystem of the entire continent. While Asia doesn’t lack the bullishness or hustle of any other part of the world, it has its own challenges. Adoption of SaaS in the region is still slow, which is preventing the market from truly flourishing in the way Western markets are doing. There are many reasons for this, primarily a less than optimal infrastructure along with fundamental societal challenges such as corruption and a need for localization of products from one country to the next.
That means that most Asian companies, with the exception of those in mainland China, must be international first. Many SaaS businesses, such as Hong Kong’s Talkpush, Singapore’s Near, and the Philippines’ Lifetrack Medical, have done exactly this. But for the international-first approach to be a growing trend, rather than simply a handful of one-off occurrences, external help and guidance are needed. That starts with honing go-to-market strategies, improving pitches, and offering matchmaking with investors.
What makes the market challenging also makes it very attractive for international SaaS entrepreneurs. With the ecosystem lacking many of the SaaS solutions that are commonplace in Western markets, the area presents a very exciting opportunity. Established global SaaS companies have the success stories to prove just how much SaaS has helped companies of all kinds improve their bottom lines by adopting the cloud-based subscription model. But even the most successful companies must localize, adapting to complex tax laws, languages, behaviors, and systems.
The Asian SaaS industry itself is still not dispersed enough to cater to specific countries, nor is it connected enough to cater to the full suite of needs of Southeast Asian consumers and businesses. The industry is still in the early stages of verticalization. Fewer enterprise SaaS startups exist, and a lot more growth is needed to catch up with the U.S. and European markets. Many analysts predict that this growth will occur over the next two to three years.
Popular verticals for Asian SaaS companies are insurance, fintech, logistics, e-commerce, transportation, procurement, and supply chain management. The companies who can address the needs of a disparate market, providing connection and homogeneity, are the ones that will win out against the competition.
Key Trends
The fragmentation of the Asian market brings a key challenge into sharp focus: internationalization. Countries can seem alike on a superficial level, but once you dig deeper you explore different complexities and customs. In Asia, questions of scale are seen through the lens of culture. How to scale large teams, find the right talent, and retain company values in the growth phase – common issues in the global SaaS space – are tough business puzzles to solve. Many SaaS businesses in Asia are looking to remote work as a potential solution.
The remote-first approach can be a boon in solving issues of cultural fragmentation. [Remote-first companies design processes, communication efforts, and tools to accommodate a distributed team, unlike remote-friendly businesses whose culture and systems remain rooted in their physical location. Remote SaaS businesses that build strong company culture and processes can seize a market opportunity while others struggle with their all-hands meetings.] Businesses that can provide these kinds of pan-Asian opportunities and address the talent diaspora will find themselves on a path to scaling quickly.
Several other nuances provide ample opportunities to capitalize on the burgeoning SaaS market. The rise of so-called super apps is feeding demand for cross-industry expertise aided by collaborative applications. Since the communication revolution is putting huge amounts of information at consumers’ fingertips, organizations are in need of customer relationship management software to meet their customers’ expectations. Because there is a lot of tech behind innovation – which often goes unconsidered – first movers will have an advantage over their more cautious competitors.
Opportunities for B2B SaaS Businesses
Fragmentation can be seen as an advantage for Asia. The region is still a long way from catching up to the West in terms of SaaS penetration, high adoption rates, or revenue levels. Therefore, SaaS is an essential value multiplier for Asian startups and businesses looking to be competitive. Popular verticals for Asian SaaS companies are insurance, fintech, logistics, e-commerce, transportation, procurement, and supply chain management. The companies who can address the needs of a disparate market, providing connection and homogeneity, are the ones that will win out against the competition.
