Latin America’s on-demand economy has been at the top of the region’s startup headlines for over a year. At the end of 2018, Brazil’s iFood raised $500M in the largest startup round of all time in Latin America, beating the total VC investment for 2016 with a single round. Just four months later, Colombia’s Rappi doubled the record, raising $1B from Softbank to attack the region.
A significant portion of Softbank’s massive investments in Latin America has been in on-demand economy startups, such as Loggi and Buser. Cornershop’s acquisition saga, ending in a $450M deal with Uber for 51% of the company, also makes it clear that the gig economy will play a major role in developing Latin America’s tech-driven economy.
The rapid growth of this business model has raised questions about regulations, workers’ rights, safety and fraud, and long-term profitability for investors. It has also created work for thousands of migrants, made consumers’ lives easier, and started generating liquidity and ex-employee groups who can start new companies using their startup experience. As Latin American consumers become accustomed to the on-demand economy, here’s a look at how this market will evolve throughout 2020.
1. Regulatory challenges for the Latin American gig economy.
International on-demand startups like Uber experienced (and continue to experience) a regulatory gray area while entering the Latin American market. As homegrown companies like Rappi, Cornershop, and iFood have become a dominating force across the region, governments may start taking a closer look at workers’ contracts and rights.
In particular, on-demand startups that rely on massive, external workforces have been a significant source of work for migrants who can start working from day one without a contract. Rappi admits that up to 30% of its workers are migrants, many of whom are from Venezuela and are escaping a crisis at home. In 2018, Colombia’s Domicilios (acquired by DeliveryHero) became the first delivery startup to provide social security for its workers.
Governments across the region may begin to expect gig economy startups to provide certain benefits like these to their workers in 2020 as these companies begin to employ a significant portion of Latin American workers.
2. The market opens for companies that support the gig economy.
The need for further regulation and protection of workers in the gig economy is creating a new market for startups that serve these large companies. Tech startups that provide insurance, fraud prevention, and benefits to on-demand economy workers now have a pool of millions of potential clients who are connected to the region’s mega-startups.
For example, Colombia’s Truora can provide instant background checks for gig economy employees to prevent hiring bottlenecks and fraud. Companies that can offer tech-driven solutions for market research, insurance, healthcare, and financial inclusion for the on-demand economy will continue to grow in parallel to this booming market in 2020.
3. VC funding for on-demand startups holds firm.
Over the past two years, international VCs have poured billions into the Latin American on-demand economy, creating a market for dozens of competitors in the region’s biggest countries like Brazil, Colombia, Mexico, and Chile. The growth of the Latin American middle class, almost all of whom has access to a smartphone, is also bolstering the rise of on-demand startups to serve every niche.
While most of these startups struggle to become profitable, even in markets like Latin America and Asia, investors who have backed the on-demand economy in the US and Asia understand the model and are willing to support Latin American versions. As these startups burn a lot of cash quickly, investors will likely continue dropping large checks on the winners as they try to capture the market. Startups that bring an on-demand model into new industries may also benefit from this influx of capital over the next year.
4. Niche copycats from the US and Asia enter the market.
Latin American consumers have proved to be rapid adopters of on-demand economy solutions, driving new business models to serve an increasingly sophisticated public. For example, Latin America’s ghost kitchens and supermarkets are beginning to raise large rounds in markets like Brazil and Mexico. Brazil’s Mimic, a cloud kitchen startup, recently raised a $9M Seed round to expand locally, while Mexico’s Justo, the first “cloud supermarket” for Latin America, raised $10M to consolidate in the Mexican market.
While these models are still in the early stages of development, the on-demand economy will continue expanding into new industries and business models in 2020. Startups are now using gig economy-style workforces for market research, AI precision-testing, and other crowd-sourcing models, as well as new niche delivery markets. As capital continues to flow into on-demand economy startups in 2020, these new applications of the gig worker model will likely proliferate.
5. Competitors consolidate in the biggest markets.
Just as investments are driving the growth of new on-demand business models, VC support is also helping consolidate the region’s largest startups into “super-apps” that can solve users’ problems within a single platform. Rappi is one of the best examples of these apps, where users can now book an e-scooter, get money delivered, buy food and groceries, and even pay and send money. While all of the Rappi features are not well-known by users yet, this model hints at a trend toward Asian-style all-in-one apps like WeChat.
Brazil’s Movile has also acquired several regional startups to provide a marketplace of options within its platform, including on-demand delivery (iFood/Mercadoni), video content (PlayKids), and payments (Zoop). These well-funded companies will continue to grow and consolidate in 2020, potentially acquiring smaller startups that can add value for their customers and injecting liquidity into the on-demand startup market.
There are over 415 million mobile phone users in Latin America, over two-thirds of whom access the Internet almost exclusively through their phones. The region’s first on-demand startups have opened the market to reach these consumers by providing them with convenient and affordable services directly through mobile apps. These companies have even found workarounds for payment challenges through cash payments and integrations with local convenience stores to onboard the booming Latin American middle class rapidly. There is still tremendous opportunity to reach Latin Americans with on-demand services in new industries and expand current offerings to new cities and customers throughout 2020.