COVID-19’s Silver Lining in Latin America: Startups

The massive migrant caravan making its way to the United States from Latin America is another symptom of the economic ills that currently plague the region. Prior to the COVID-19 pandemic, the region’s gross domestic product was expected to grow at a rate of 1.8%. However, the pandemic caused Latin America’s GDP to contract by 7%, even as global GDP contracted by 3%. While the U.S. and Western Europe are witnessing a significant economic recovery, the picture in Latin America seems bleaker, as the region continues to struggle with job recovery and economic revitalization.

There appears to be a ray of hope breaking through the austere economic panorama that COVID-19 brought to Latin America: startups. The internet boom that was beginning to take shape in the region was accelerated by pandemic lockdowns as Latin Americans, like most of the world, became more reliant on technology for basic needs. This increased reliance is creating an ideal ecosystem for Latin American unicorns to flourish and catch the eye of some of the most renowned names in private equity and venture capital. According to preliminary data from the Association for Private Capital Investment in Latin America, the region saw a grand total of $6.2 billion in incoming venture capital in the first half of 2021. This figure dwarves the $2.6 billion invested in the same period last year and easily surpasses the $4.1 billion invested across all of 2020.

Kavak, a Mexican startup that runs a pre-owned car marketplace in Latin America, exemplifies the burgeoning startup ecosystem that COVID-19 has helped nourish. With the pandemic making it more challenging to use public transportation, Latin Americans turned to pre-owned cars for their needs. The increased demand seems to be paying off. Last month, the company announced that it had raised a staggering $700 million in a Series E round, doubling its valuation to $8.7 billion. Kavak is just one example of Latin American startups benefiting from the startup boom rocking the region.

While it would be naïve to assume that startups alone will address Latin America’s many economic challenges, they have the potential to be a channel for economic development in the region. Kavak, for example, recently announced that it plans to create over 16,000 jobs in Brazil. Currently, the startup employs about 5,000 people, up from 300 employees a year ago.

While data on startup-led job creation is hard to measure in Latin America, startups in the United States have proven to be powerful economic engines. According to a recently released analysis by the Congressional Research Service (CRS), startups account for 5-6% of all businesses with employees, but account for “almost all [net] job creation in the economy.”

Although these numbers are impressive, it is important to note that many of the startups generating these jobs are what the CRS’s study calls “high impact” startups. These are companies that have doubled their sales over the most recent four-year period and have substantially increased their number of employees. Typically, these startups have been around for over five years and have surpassed the 20-employee mark.

Of course, few startups end up becoming “high impact” startups. In Latin America, where the lack of access to substantial capital and political instability can hinder startups’ success, the likelihood of a startup becoming “high impact” is even slimmer. It is also no secret that the vast majority of startups will die in their infancy and that their job creation will be negligible. However, as Latin America continues to reel from the economic devastation brought by the COVID-19 pandemic, any glimmer of hope, as minute and remote as it may seem, is a welcomed sight.