SoftBank recently announced their new US$5 billion Latin America-focused venture capital fund, the SoftBank Innovation Fund. The fund has a $2 billion commitment from SoftBank itself and is set to invest in tech startups throughout the Latin America region, covering areas like e-commerce, digital financial services, healthcare, mobility and insurance.

“Latin America is on the cusp of becoming one of the most important economic regions in the world, and we anticipate significant growth in the decades ahead,” said Masayoshi Son, chairman and chief executive officer of SoftBank Group.

But why is SoftBank so confident about the outlook of the region? What is the “secret sauce” that makes the region ready for such tremendous technological jump?

Solid Economic foundation and massive consumption-ready middle class

Although Latin American countries have not experienced a miraculous growth rate like China or India in the past decade, the economic foundation of many countries in the region is actually quite solid compared to most other emerging markets.

According to the World Bank standard for income categorization, Latin America entered the middle-income era as early as the 1970s. Many countries even proceeded to enter the higher-middle-income range in the 1990s. All the major countries, including Brazil, Mexico, Colombia, Argentina, Peru, and Chile, currently present a GDP per capita (PPP measured) of above US$13,000. What’s more, the region has an urbanization ratio of more than 80%. All of this means that people in Latin American are used to living in an urban middle-class life where basic needs are met, and consumption becomes aspirational.

The consumption data also proves this point. In the major countries, consumption accounts for more than 77% of the GDP, much more than the 52% of China. From as early as 2010, per capita consumption already reached US$3,986 in Brazil, US$2,337 in Colombia, and US$1,663 in Mexico. At the same time, per capita consumption in China and India were only at US$1,401 and US$354, respectively.

The size of the middle class in Latin America is also growing rapidly, currently represents about 30% of the population – this is similar to the level of China, and much more significant than the 3% of India.

The massive and growing middle class is reflected in the consumption structure of the countries. Compared to other emerging markets, Latin American families spend more money on areas that are not basic needs per se, but are more likely to spend on transportation, health, technology and others.

Source: World Bank Global Consumption Database

The long periods of middle-income status of Latin American countries helped people form habits of consumption, establish brand awareness and also willingness to pay for new services. Such consumers will be relatively easier to acquire and strike higher customer lifetime value.

Digital economy can solve the unmet needs of frontier markets

Despite having relatively mature customers, the region has historically fallen behind in serving the needs of the middle class.

The long-term, bumpy-growth period has pushed the middle-class consumers to make decisions to maximize value for money. However, traditional business models are not designed to provide such value proposition. Instead, informal sectors have traditionally been the solution to fill the void in Latin America.

The new economy, however, will bring game-changing business model innovations that can effectively close the gap. Technology and the internet can significantly reduce operating and transaction costs, thus providing better products and services to a much broader reach.

This is essentially the basis of why the Latin American markets have huge potential for digital transformation: There is massive number of customers who have diverse needs and solid purchasing power, more than most other emerging market countries; and they will be ready to switch to digital businesses as soon as these businesses are able to provide better options.

The rapid development of on-demand deliveries in Latin America is a great example of such transition of behavior. Companies like Rappi, Loggi, and Glovo were able to achieve exponential growth in the region leveraging technology and the existing demand of convenience and personalized services.

Latin America is well prepared to embark on digital transformation

Apart from the strong economic base, the high mobile and internet penetration in the region also forms the foundation for the digital change.

Just a few numbers to illustrate:

Internet penetration is at 57% in Latin America, much higher than Southeast Asia, South Asia or Africa;

70% of the population have mobile subscription services;

Mobile internet penetration is more than 51%, and is expected to grow at 6.2% CAGR;

Smart phone penetration is at 55%, and is expected to grow to more than 70% by 2020;

Additionally, survey data also shows that Latin American people spend more time on mobile internet than their global peers – average time online is 3.5 hours for Brazil, Mexico, and Argentina.

Image from Digital in 2018 report by We are social and Hootsuite

The other key factor driving the speed of change is capital. Latin America has historically been lacking venture capital funds, both regionally and globally.

Before 2017, the total VC money invested in the entire region was merely US$500 million a year – that is how much money a rising Chinese tech company would raisein one round.

Data from Crunch Base

The situation is now changing fast. Since 2017, investors have shown growing interest in the region, and the capital invested is also doubling year over year. At the same time, mega rounds also started to materialize with stronger participation of leading international investors and tech giants like SoftBank, Sequoia, Andreessen Horowitz, Accel Partners, as well as the Chinese Tencent and Didi Chuxing.

With the new SoftBank Innovation Fund laying a foot deep in the region, positive spillover effects can certainly be expected. Tech companies in Latin America are going to be much better equipped to take advantage of the massive customer base and make global headlines in no time.