Riding to the palace, on the back of unicorns

An elite of Latin American entrepreneurs is emerging to challenge traditional oligopolies for economic power. These recruits of "destructive creation" are armed with software and scalable economic models. They go beyond capturing market shares from incumbents in banking, mining, CPG, etc: they develop innovative products, build platforms distributed in several Latin American countries and create new markets. Their emergence is not lost on anyone doing business in Latam. At this turning point, it is worth reflecting on the political implications of this new elite. If we look at history, the redistribution of economic power has been accompanied by a redistribution of political power.

Take Latin American banking; traditionally the most profitable in the world, with an estimated return on equity of up to 15%. These returns are typical of the lack of competition, typical of oligopolistic market structures, not of efficiency. All this until the incursion of fintechs. The founding myth of the digital bank Nubank, founded by Colombian David Vélez, is illustrative: Vélez shed blood, sweat and tears to open a current account as an expatriate professional in Brazil. Nubank streamlines the process, and is now worth $33.92 billion on the stock market. Compare that to the market capitalisation of Colombia's most powerful companies; Ecopetrol ($30.282M), Bancolombia ($8.519M) and Aval ($6.160M).

Vélez's wealth exceeds that of iconic surnames in the Latin American imagination. All that remains is for the entrepreneurs behind other multi-Latin startups such as Rappi or Kavak to have exits for the oligopolies and their historical shareholders to lose political clout. We would then be facing a moment comparable to when the industrial revolution raised a merchant class above the feudal nobility, with all due respect. Concentrated in large cities, they accumulated wealth and exchanged the ideas of the Enlightenment, which ultimately inspired social and political change. The transformation led to the French Revolution, which can be explained not so much by the sans culottes taking the Bastille, but by the demands of the new bourgeoisie, the true holders of political power.

It is true that the startup boom in Latam coincides with the global venture capital boom, which deployed record investments of $621 billion in 2021. There is a lot of demand chasing a few attractive opportunities. Valuations are therefore juicy. For the local entrepreneur, now is the time to raise capital, drawing on the increasingly dense personal networks that link the US to the region, often through its business schools, where this new elite is being trained. Capital has gone to seek risk and return in emerging markets, and Latam is within reach.

But Latam's potential is specific. The market capitalisation of Latin American technology companies, as a proportion of regional GDP, is less than 4%, compared to 14% in India and 30% in China. There is a long way to go: according to the Inter-American Development Bank, the value of the tech sector in the region grew from $7 billion in 2010 to $221 billion in 2020. VCs have spotted the opportunity and according to CB Insights, more than $20 billion of venture capital will enter Latam in 2021, distributed across 952 deals. The result is that Latam now has 27 unicorns -private startups with valuations above $1bn-, compared to 4 in 2018.

The multi-Latin idiosyncrasies of startups like Nubank, which treat all of Latam as a potential market, justify their valuations. They have a better chance of capturing it -because of their agility and scalability- than traditional players (Itaú, for example, is hardly going to be a leading bank in Mexico). There is a reason why Warren Buffet invested in Nubank and not in Bancolombia, despite its Central American expansion. Traditional oligopolies, on the other hand, tend to be national, or with not very strong international subsidiaries - it is fair to exclude Chile here.

Nubank's performance is helped by the fact that its business is multi-Latin, but its management is also multi-Latin. Could the rise of multi-Latin start-ups help the formation of a pan-Latin-conscious political elite?

Let's ground the visions of the scalable "patria grande" in the mire of day-to-day business. The cost of hiring a Colombian employer can be double what the worker's pocket is liquid at the end of the month - such a "fiscal wedge" will be no stranger to El Americanista readers in Latin Europe, though for the time being they have the counterpart of a decent welfare state. But the worker's loss of purchasing power continues given tariffs of over 35% on cars, clothes, and booze; not to mention the 19% VAT they pay on consumption and all sorts of additional taxes. Rappi does not want a 19% VAT, Nubank does not want a digital transaction tax, KAVAK does not want tariffs and import taxes on cars of more than 25% and nobody wants a population with such a deteriorated purchasing power.

It is not an easy task for this new entrepreneurial class. Nor is success guaranteed. In many cases, the mission is nothing less than to dismantle the protectionist framework, designed in the image and likeness of entrenched interests, which in the past were capable of capturing the state. But having become hardened as operators in this dense and unproductive business environment, these new entrepreneurs incorporate the values of openness and efficiency into their vision for their countries. It is desirable that they invest some of their social and economic capital in realising these visions. They can also translate practical solutions into public policy. Although from the outside their relative weight in the economy still seems small, if we assume that history is made by the leading elites, with clear visions and the resources to implement them, changes are coming.

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