In a complex scenario for Latin American startups, where many technology firms shift focus to preserving capital and slashing costs, fintechs in Argentina push forward with plans for international expansion.
Financing for those endeavors recently picked up steam despite the current risk capital backdrop. Private capital to Latin American startups decreased by 19.4% in the year’s first half. However, two Argentine fintechs successfully tapped capital last month to fund their regional ventures.
Banking as a service provider Geopagos, which caters to prominent fintech and banks in the region, took $35 million in August in a round led by Riverwood Capital. Its goal is to grow aggressively in Brazil. Pomelo, another fintech infrastructure firm, raised $15 million to expand into Colombia and Peru.
Several mid to large-scale fintechs tempered growth ambitions in the face of scanter capital over the past few months. Yet Argentine entrepreneurs, fully aware of its home market limitations, continue to look outbound in pursuit of scale and better valuations.
Many founders abandoned region
Even though Argentina is the third-largest GDP in the region, a history of unstable macroeconomics, rampant inflation, and depreciated currency has led many founders elsewhere. Opening up to new markets is the most obvious way to expand the market size while mitigating Argentina’s systemic risk, the founders told Fintech Nexus.
“Argentina is a medium-sized market that unfortunately has been experiencing crises, recessions, devaluations, and inflation for several decades, among other problems,” Gastón Irigoyen, CEO and co-founder at Pomelo, said. “Unlike Brazil or Mexico, it is not a large (and predictable) enough market to justify venture capital investments. They understand that companies can start in Argentina, but there must always be a regional projection to justify investments.”
Less than two years after starting operations, the Argentine startup Pomelo focused on developing infrastructure for financial services companies, announced it had extended its latest investment round of $35 million in October. The company took an additional $15 million that it will apply to consolidate its recent expansions into Colombia and Peru. According to its co-founder, the company is also active in Mexico, where 35% of its revenue is drawn.
“Argentine entrepreneurs are among the most creative and resilient globally, mainly due to the repeated changes in the rules of the game and the constant need to adapt to the situation,” Irigoyen said. “This is highly valued by venture capital funds, especially in times of crisis when these qualities become more important.”
Several challenges
According to him, the main challenges while executing an expansion strategy are usually related to talent, new competition, the peculiarities of doing business in a new market, and different regulatory frameworks.
Going regional is, nonetheless, key for Argentine fintechs. Mercado Libre, the country’s most valuable company, is arguably the most significant example among all Buenos Aires-based companies. The revenue of the e-commerce giant has consistently diversified over the years. The relevance of Brazil, the biggest economy in the region, has multiplied to the point that it is relegated to its home country in terms of revenue creation.
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For smaller and medium-sized fintechs, deploying a compelling strategy in Brazil is both an opportunity and a challenge. Geopagos, which markets payment infrastructure through an omnichannel offering, already has clients in over 15 countries across Latin America, including Santander, BBVA, and Banco Estado.
“Business expansion in LatAm has been part of our strategy from day one,” Sebastián Nuñez Castro, its CEO and co-founder, said. Recent funding from Riverwood will be mainly applied to boost an aggressive foray into Latin America’s largest economy.
Presence across markets adds value
A relevant presence across multiple markets is valuable for private capital investors.
“It is a very difficult thing for a payments company to run a platform that is complying with all the local regulators,” Alex Porto, a principal at Riverwood Capital and a board member at Geopagos, told Fintech Nexus in an interview. “One of the exciting things is that they had already done the hard work, with an interesting presence in major GDP pools while launching in a bunch of smaller markets in Latin America.”
Brazil is a clear go-to strategy for Argentine fintechs, as it is for other companies from smaller-sized economies in the region. The sharp growth in its fintech ecosystem for infrastructure providers represents a massive opportunity.
“It is a large market still underserved,” Porto said. “If the market trend is for more players contrary to fewer players, that makes the opportunity set for Geopagos quite exciting as one of the leading information system providers to the space.”
