How Magma Partners Thinks about SaaS in Latin America

September 25, 2023

June 7, 2022

Latin America has produced some world class SaaS companies like Auth0, Vercel, and Pipefy (unfortunately not in our portfolio!). SaaS is one of the most attractive business models for both founders and investors. We have evaluated hundreds of SaaS companies and invested in 15+, most notably, Truora and Vozy

Even though we love SaaS, the vast majority of Latin American SaaS companies struggle to find the scale to drive the returns that venture capital funds need to be able to make money for their LPs. In this article, we’ll cover how we think about SaaS, along with some of the challenges and opportunities for SaaS founders in Latin America. 

We are looking for SaaS companies that:

  • Solve real problems with software that people are willing to pay for
  • Can reach at least $10M of ARR, ideally more
  • Can generate 10-20x returns for our LPs, after accounting for dilution

Latin American SaaS business models

There are plenty of different SaaS business models in Latin America, but they are generally in a few broad groups:

Companies that solve a Latin American problem that global companies won’t

We love SaaS companies that target the Latin American market to solve Latin American problems that the global companies are unable or unwilling to solve. LatAm-based electronic invoicing, accounting, finance, HR and other problems that require local understanding, local APIs and local sales techniques to win.

API enabled SaaS

API enabled SaaS are a sub group of companies solving a Latin American problem. We like these types of businesses because API connections both increase a company’s moat against competitors, but also in their clients to reduce churn.

There’s also a unique advantage for local startups as global companies are unlikely to create integrations for every Latin American country and there is typically less competition. 

Companies like Prometeo are great examples of companies that fit this part of our thesis. For instance, Latin American banks cannot simply replace Prometeo with Plaid, as they require specialized Latin American infrastructure.

Global SaaS with Latin American teams

Companies like Auth0 or Pipefy got started in Latin America, but the vast majority of their clients are global. We think there’s a great opportunity to be a Latin American SaaS competing with global competitors on the same level. Selling in the US or globally is harder than most Latin American founders expect, but you can do it.

SaaS that can be integrated into fintech, insurance or e-commerce

These businesses can either start out as SaaS companies that add fintech, insurance or ecommerce to their traditional SaaS business to increase revenue and take a bigger share of the market.

They can also start as a fintech, insurtech, marketplace or even an eCommerce that adds SaaS to its product to start to monetize more of its users.

We’re happy to invest in companies that start with either of these models.

Check out our previous articles The Rise of Latin American Marketplaces, How Magma Partners Thinks about InsurTech in Latin America and How Magma Partners Thinks About Fintech Lending In Latin America & Avoiding Loan Sharking as a Service.

We generally avoid Latin American copies of Global SaaS companies

We’ve seen many founders try to make a Latin American CRM, or a Latin American Slack. In our view, there is a category of global SaaS companies that people in Latin America will use. We use Basecamp, rather than a Latin American Basecamp. We use Google, Zoom and Box rather than a Latin American version.

When there’s no advantage to having a “Latin American X” type of SaaS, we think it's very hard to build a big business and generally don’t invest.

Most Latin American SaaS companies are not VC backable…and that’s great!

There are many amazing SaaS businesses that are solving real problems with software that people are willing to pay for. The issue almost always is whether they scale enough to generate 10-20x returns for VCs after accounting for dilution.

Startups that solve a real problem and reach a few million in ARR but don’t generate 10-20x returns for VCs might be great businesses, but are likely better off being extremely capital efficient and raising as little money as possible, sometimes even if VCs are willing to write the check.

As Itamar Novick says, “The mistake is potentially thinking that every company should be VC-backed. The reality is that most shouldn’t be VC-backed.” Read more about Building a Healthy VC-Entrepreneur Relationship With Recursive Ventures.

If we do invest in a SaaS company, we want it to try to be as efficient as possible because of all of the headwinds pushing against Latin American SaaS companies. Track your Burn Multiple and payback periods, compound your growth and try to raise what you actually need to scale.

The smartest move for Latin American SaaS companies is likely to raise as little money as possible until you have steady and predictable revenue coming in unless you are really confident you will be able to generate $20M+ ARR, which very few Latin American startups have done.

We love talking to SaaS founders, even if your company is not VC backable. We can help you find other types of funding if you’re not a fit for the VC funding model or give you feedback on how to potentially be VC fundable if you’re sure that’s the path you want to take. It's always awesome to meet founders who create life-changing outcomes for themselves and their teams even if we can't invest.

Feel free to create a Magma Memo to get feedback, even if you think you’re not a fit.