Central America Is the Next Hot Spot for Startup Growth and Venture Capital

The Latin American startup ecosystem has become a red-hot investment magnet as investors chase the post-pandemic digital transformation taking place across the region. Now, Central America is the next big frontier.

Since early 2020, internet retail – including ecommerce, food and grocery delivery, streaming, and gaming – has boomed in Latin America. Mexico continues to be the U.S.’s top trading partner and has emerged as the fastest growing ecommerce market in the world per Euromonitor. It is quickly narrowing the gap between itself and Latin America’s largest ecommerce market: Brazil.

According to LAVCA, VCs invested $10.3 billion across more than 400 Latin American startups in the first half of 2021. That’s more than double the investment seen in the same period in 2020. Five newly minted unicorns have emerged from Latin America this year; increasing the total number of private and public tech companies valued at $1B+ and further spotlighting emerging tech-innovation opportunities in the region. Brazil and Mexico have generated the lion’s share of investor attention and startup activity, which isn’t surprising given their rankings as the two largest markets in terms of economy and population. 

But Latin America isn’t a monolith, and investors and merchants looking for opportunities in the region shouldn’t treat it like one. Latin America is an ethnically diverse landscape made up of more than 20 countries with distinct customs, currencies, buying preferences, social challenges and opportunities that are worthy of deeper understanding at the local level.

As a U.S.-born executive working at a hyper-growth Latin American startup, it’s my job to find new opportunities across the region. After many years of following its progress, I am bullish on Central America as the next big frontier for venture investment and startup growth, particularly in ecommerce which is booming across LatAm.

Why Central America?

Home to Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama, Central America is the bridge between North and South America. This diverse region, which has heavily invested in education and infrastructure, has been largely ignored by international investors so far. It is poised for tremendous growth during the next five years, particularly for internet-first businesses, and the local startup founders and global investors who understand this deeply have a leg up to cash in and build market share early on.

During the pandemic, Central America lost access to one of its largest and most reliable streams of revenue: tourism. While this change has led to more social and economic volatility, necessity is the mother of invention and the region’s internet adoption and entrepreneurship is setting new records for the region. Some of this growth is held back by low numbers of banking inclusion, particularly among women, which is why understanding how the region buys is the key to unlocking it.

In late May, the Biden administration announced its new Partnership for Central America initiative in an effort to ignite private sector business development and positive change at the local level. So far, 12 private companies and organizations including Chobani, Mastercard and Microsoft have answered Vice President Kamala Harris’ call to action for more “inclusive economic development” in the Northern Triangle of Central America, which includes El Salvador, Guatemala and Honduras.

Increased foreign investment and local job creation are only one piece of the Central American opportunity today. U.S. government agencies, including the State Department, are pursuing partnerships with local governments to address ongoing health and education disparities, many of which could be mitigated or even solved by internet-first companies and initiatives.

Paving the way to more financial inclusion

The pandemic has transformed ecommerce from a luxury to a necessity. The global ecommerce market is expected to reach $4.21 trillion in 2021 as an online surge continues, according to an Adobe forecast, which would be up 38 percent year-over-year. This pace is almost certain to become the new benchmark, which means global companies will be forced to find growth in less mature markets to keep driving more growth. 

This rapid rise in digital commerce explains the recent explosion of fintechs throughout the region. They are filling the gaps in financial inclusion that traditional banking has not addressed. 

Due to this, more people now have access to new types of bank accounts and online transaction processing in local currencies, various payment methods, and even options for cash-based transactions online. These new capabilities that are becoming more commonplace across the region are critical to reaching Central American consumers, a large population that continues to grow every day.

Another contributor to unlocking the promise of Central America is by helping those that perform their day-to-day financial tasks in local currency to continue to do so. For example, in Guatemala only 24 percent of its 16 million citizens currently shop online, and only a fraction of them have  access to bank accounts in USD. Merchants and digital-service providers seeking to reach the largest customer base need to go beyond credit cards and USD and give their online shoppers the ability to pay in quetzales using cash options.

With the increase in cross-border payments, more international companies have been expanding into the region, and they no longer need to incur the expense and overhead of having to staff their own local operations to service the market. With global merchants’ newfound ability to sell into Central America and settle transactions in their home currency, the region is a great option to quickly grow their total addressable market.

Internet penetration throughout Central America is now at 60 percent and continues to climb. When combined with new fintech and payment options, all the tools and infrastructure exist for local buyers to do more online shopping of all kinds – from buying household necessities and birthday gifts to running their businesses fully in the cloud.

Central America is poised for explosive growth. B2B SaaS and global brands looking to grow would be wise to take note of the next big opportunity in Latin America, either through direct sales or acquisitions. The key to turning the most underserved customers into vocal fans for democratizing access through local payment methods that make it not just possible, but easy, to say yes to offers from global merchants.