#2. Nearshoring: A Shift in LATAM Transport & Logistics

By Ty Findley, General Partner & Natan Reddy, Investor

Welcome to our second edition of The Blueprint, Ironspring Ventures’ new series to share what we’re thinking about, observing, and predicting across the digital industrial innovation ecosystem. Want to learn more about The Blueprint? Check out this primer. This piece focuses on nearshoring and why the trend presents a generational opportunity for supply chain innovators, in LATAM markets specifically. Let us know what you think – we’re eager to discuss and collaborate.

Reshoring, nearshoring, friendshoring, etc. descriptions are all current hot topics that will in large part define a major storyline of this decade’s digital industrial innovation curve. We believe at Ironspring Ventures that this global shift represents a generational opportunity for supply chain innovators, and we’re excited to share our point of view specifically on how transport and logistics is evolving to meet this shift within the Latin America (LATAM) geography.

Transport and logistics have always been the backbone of the global economy. Like every other industry, the transport and logistics industry faced several challenges during the pandemic. COVID-19 created an imbalance between the supply and demand of goods, significantly affecting supply chains globally which were only further disrupted by associated boiling geopolitical tensions. In the US, all of this sparked a wave of reshoring and nearshoring, much of which shown a spotlight not only on the US-Mexico cross-border freight market, but also the larger logistics industry within LATAM and the major growth opportunity that exists within this vertical and this region.

When zooming in on the transport and logistics industry in LATAM, what are the key characteristics and macro-trends that make this  an exciting area for innovation?

·       Technology at the heart of new age logistics: Over the last decade, a first generation of logistics tech companies have digitized the logistics arena, particularly across the US, setting the stage for innovation in other regions to follow suit. A recent study by McKinsey showed that early adopters of AI in supply chain saw logistics costs decrease by 15% and inventory levels decrease by 35%. The recent democratization of AI will only make logistics solutions in the space easier to build, particularly across LATAM.

·       Healthy trade between the US and Mexico: While Mexico represents only a single country within LATAM, it represents one of the most active regional players and is among the US’s largest trading partners, with the multi-billion cross-border freight market (which stood at $61B in December 2022, a 7% YoY increase) ripe for digitization and automation. Increased nearshoring driven by COVID-19 and increased geopolitical tensions, coupled with higher interest rates, are driving the Peso to its strongest  value since 2015, relative to USD, as discussed by Matt Silver, Founder of Forager.

·       Internet penetration and e-commerce growth: In two decades, 57% of Latin America’s population gained access to the internet (vs. 3% in 2000), according to Statista. LATAM’s population with internet connectivity represents ~10% of internet users globally. This alone has driven a strong proliferation of startups across the region, including in the last-mile delivery, 3PL, and broader logistics sphere in LATAM.

While historically corruption, bureaucracy, violence, language barriers, and funding availability have been risks in the region, government and regulatory bodies are continuing to push policies and foster social and economic conditions favorable to growing a tech-friendly ecosystem for founders and investors. This ecosystem maturity will only accelerate as we see a continued private investment push/rush into the region that will require business processes and regulation  to safeguard those assets.

See below for more information on the type of companies we include in this report as part of our definition of the LATAM transport and logistics space.

As the LATAM transport and logistics startup scene continues to proliferate, we can see parallels in its evolutionary path compared to trends across the US, Europe, and Asia. See more below.

LATAM transport and logistics startups have raised $5.2B+ in funding since 2016 across 58 startups that we analyzed in the region.

The number of investments in the LATAM transport and logistics space grew significantly from 2018 to 2021 as the COVID-19 pandemic and geopolitical tensions catalyzed consumer demand for home delivery and brought to light underlying supply chain challenges globally. Rappi, Loggi, and Frete.com accounted for a large majority of dollars raised in the region.

Even though the deal dollars are currently concentrated in a few startups, we view this as a clear indication that the region is at the perfect early inflection point in developing the talent networks (already witnessing talent spin-out to form new companies), engineering know-how, and tech infrastructure to build and scale startups, while attracting brand-name US-based investors.

While the sector has seen a recent decline in investment activity, in line with the overall tech industry and economy, Ironspring Ventures feels strongly that its more important than ever to invest in the LATAM transport and logistics category given the major opportunity driven by macro-conditions discussed in previous slides.

In examining the space at a high level, we created a robust (though not exhaustive) market map that covers LATAM transport and logistics startups. These include tech-enabled last-mile delivery services, freight marketplaces, digitally-enabled e-commerce fulfillment services, and logistics-focused fintech solutions, as well as operations and fleet management platforms, among others. Some of the companies featured include: Rappi (large-scale e-commerce and delivery), Solvento (smart factoring and payments for carriers), and Nuvocargo (cross-border trade brokerage). Note the categories in this map are not mutually exclusive.

When thinking back to major drivers of tech adoption within LATAM that we mentioned in our introductory slide, regulatory changes have made headlines, particularly within Mexico. As you can see on the slide below, the government has instituted a number of reforms over the past several years that shed light on the fragmented and undigitized state of the industry. This presents a clear opportunity for platforms that deliver operational and payments efficiency to flourish in the market. As noted above, increased private investment interest, driven by nearshoring, is only accelerating regulatory pressure across these regions for greater digitization and automation to help protect assets.

The SMB market, which comprises the vast majority of commercial trucking carriers in Mexico, is undergoing a lending transformation with many new alternative players and solutions emerging that provide working capital access to small businesses which are often shut out of the wider economy and global trade.

While some traditional institutions have stopped  lending to SMBs within the country (Citi announced its exit in 2022), emerging players, such as Konfio and Marco, have made headlines with their $200M+ credit facilities in 2023, aimed at serving small businesses. With SMBs accounting for 78% of national employment and driving 52% of GDP, according to The Economist, it’s no surprise that new players are capitalizing on this growth opportunity, including our portfolio company Solvento that is helping to bring payments efficiency to the critical Mexico trucking industry.

Zooming back out to LATAM as a whole and considering all the factors that are positioning the region for accelerated growth at the intersection of technology and logistics, we synthesized a collection of key characteristics, that while non-exhaustive, we feel are vital to any startup looking to enter and succeed in the space.

These same characteristics echo many of our fundamental points of view and sector theses as we continue to source and diligence within this category. Some of these key takeaways include:

Clear, Yet Flexible, Product Vision & Capability: While having a niche product and technology has proven to be a reasonably successful strategy for logistics tech startups to enter markets and capture customers, there needs to be a necessary – yet flexible – product build-out plan to attack the high priority and highest value products and services for the markets these startups are operating in and the customers they are catering to.

As part of this vision, it’s important to remember that many of the customers that LATAM transport and logistics startups will service do not currently have expansive tech integrated into their existing operations. This gives these startups a greater opportunity, but also a responsibility, to build this architecture from scratch for their customers. It will be critical to hire the proper technical and product talent on this front.

And to this point – the success of startups like Rappi, Frete.com, and Nowports demonstrates that the region has the talent, engineering know-how, and tech infrastructure to build and scale logistics tech startups.

Diversified Network and Investor Base: Given the high growth potential and inherent complexity of LATAM markets, it is crucial to build leadership teams with diversified networks across LATAM and the US. While a LATAM network and investor base will bring access to lucrative profit-generating customers and local know-how to navigate the commercial, legal, and regulatory landscape,  US relationships and investors will be essential to gain broader legitimacy and commercialization.

Globally renowned VC investors such as SoftBank, 500 Global, Sequoia, and a16z are active in the LATAM transport and logistics space, highlighting the attractiveness of the market and the importance of a diverse network and investor base.

Exposure to the Cross-Border Sphere: The LATAM transport and logistics market is booming with rising cross-border trade, e-commerce penetration, and tech-driven logistics solutions. However, gaining legitimate access to larger US-based shippers and US dollars will be a critical next step in driving sustained and scaled profitability.

Speed to Market: Given that there are often fewer competitors in the LATAM market for any given solution, speed to market and speed of execution will become critically important to enter a market and capture customers. LATAM startups must leverage their home-field advantage and potentially adopt innovations from developed economies based (see more here on Rocket Internet’s playbook) to gain market share within their respective geographies while understanding how they can also scale cross-border or internationally.

From the macro-economic conditions driving LATAM’s burgeoning tech scene, to international and geopolitical conditions catalyzing increased cross border trade, to our first investment in the space via logistics fintech solution, Solvento, the Ironspring Ventures team holds strong conviction in the future of LATAM logistics tech. We welcome the chance to discuss the market and opportunities with founders, investors, and folks from industry who share our sentiment.

 Special thanks to Sukrit Priyam, 2022 Ironspring Ventures MBA Fellow, for prior contributions to this work.


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