The Venture Capital Cycle in Latin America
Between 2020 and 2025, venture capital in Latin America experienced one of the most dramatic cycles in its history: an unprecedented boom in 2021, a sharp contraction over the following years, and a subsequent stabilization at much lower levels.
Startups across the region raised US$4.3 billion in 2025, nearly identical to the amount raised in 2020. Yet between those two years, the world witnessed a global pandemic, a historic investment surge in 2021, and significant shifts in U.S. monetary policy. Much of the industry attributes the recent swings in venture capital to the latter.
Behind this apparent return to the starting point lies an important question: What explains the volatility of venture capital in Latin America?
Our recent analysis focuses on U.S. monetary policy and addresses three key questions:
- Does the U.S. Federal Reserve's interest rate drive venture capital flows in Latin America?
- Have countries in the region responded in the same way?
- What can we expect in the coming years?
To answer these questions, we analyzed annual data from the region's five largest venture capital markets—Brazil, Mexico, Argentina, Colombia, and Chile—between 2020 and 2025, comparing investment trends with changes in the Federal Reserve's policy rate and the broader regional investment cycle.
Does the Federal Reserve Drive Venture Capital Flows?
Comparing venture capital investment in Latin American startups between 2017 and 2025 with the average annual Federal Reserve policy rate reveals a striking relationship.
The region's investment peak—US$16 billion in 2021—occurred when the Federal Reserve's policy rate was effectively zero. The subsequent decline coincided with the sharp increase in the benchmark rate from 0.08% in 2021 to 5.02% in 2023. Venture capital then stabilized at approximately US$4.5 billion while U.S. interest rates remained above 4% throughout 2023, 2024, and 2025.
The Federal Reserve's policy rate determines the cost of U.S. dollar financing and strongly influences international investor behavior. When interest rates rise, investors tend to shift capital toward safer assets, reducing exposure to higher-risk investments such as venture capital in emerging markets. When rates decline, the opposite tends to occur.
One way to quantify this relationship is by measuring the sensitivity of venture capital to changes in the Federal Reserve's policy rate—that is, how much investment changes for every one-percentage-point movement in interest rates.
Applying this methodology to Latin America between 2020 and 2025 produced a sensitivity coefficient of -0.37, estimated through a linear regression between annual changes in the Federal Reserve rate and annual percentage changes in venture capital investment. In practical terms, within the sample analyzed, each one-percentage-point increase in the Federal Reserve's benchmark rate was associated with an approximately 37% decline in venture capital investment across the region.
It is important to emphasize that this statistical relationship does not establish strict causality. Venture capital markets often react to anticipated changes in monetary policy, with timing differences across investment cycles, while local market conditions also play an important role. Nevertheless, the observed relationship is sufficiently robust to serve as a useful starting point for analysis.
Importantly, the regional average conceals significant differences across countries.
Argentina: Latin America's Most Volatile Venture Capital Market
The region's five largest venture capital markets followed a similar initial pattern. After the investment peak in 2021, venture capital declined between 60% and 84% by 2025.
Behind this common trend, however, lie substantial differences in the magnitude of the decline, the pace of recovery, and market volatility.
Brazil—the region's largest market—was the only country still experiencing declining investment in 2025. It closed the year with US$1.67 billion, while its share of total venture capital within the five-country group fell from 60% to 41% over five years.
Mexico presents the opposite case. It finished 2025 with US$1.43 billion, representing 69% more investment than in 2020, making it the only country to demonstrate a clear recovery trajectory.
Argentina exhibited the highest volatility by far. The ratio between its strongest and weakest investment years reached 11.5 times, more than double that of any other country in the sample.
Colombia and Chile followed intermediate paths. Colombia stabilized at approximately US$550 million, while Chile—starting from a smaller investment base—closed 2025 with around US$250 million.
To better quantify these differences, we estimated two complementary indicators.
The first measures each country's sensitivity to Federal Reserve interest rate changes, using the same methodology applied at the regional level.
The second measures each country's sensitivity to the regional venture capital cycle, indicating whether a market amplifies or dampens investment movements occurring across Latin America.
Both indicators were estimated using simple linear regression coefficients.
For Federal Reserve sensitivity, the coefficient measures how much venture capital investment changes in response to a one-percentage-point movement in U.S. interest rates. The more negative the coefficient, the greater the market's sensitivity to the global monetary cycle.
For regional cycle amplification, a coefficient of 1 serves as the benchmark. Values above 1 indicate that a country's venture capital market amplifies regional fluctuations, while values below 1 indicate that it dampens them.
During the period analyzed, Argentina and Chile—both relatively small venture capital markets—displayed the highest sensitivity to Federal Reserve interest rate changes.
Brazil and Colombia showed the lowest sensitivity, while Mexico occupied an intermediate position.
The same ranking appears when measuring amplification of the regional investment cycle. Chile (2.0) and Argentina (1.9) amplified regional movements by nearly twice the regional average, whereas Brazil (0.7) and Colombia (0.8) moderated them. Mexico (1.3) again fell between the two groups.
Taken together, these findings suggest an important structural pattern: smaller venture capital markets tend to amplify investment cycles, while larger markets tend to smooth them.
One possible explanation is that, in smaller ecosystems, a handful of large investment rounds—or the arrival of a single international fund—can significantly alter annual investment totals. In larger markets, a greater number of transactions provides diversification that moderates these effects.
Sensitivity to global monetary conditions, therefore, depends not only on external financial exposure but also on the size and structure of each local venture capital ecosystem.
What Can We Expect in the Coming Years?
During the first months of 2026, the Federal Reserve began easing monetary policy. The effective federal funds rate declined from an average of 4.2% in 2025 to 3.6% between January and May, remaining relatively stable within that range for five consecutive months.
This marks a clear shift from the tightening cycle of 2022–2024, although interest rates remain well above the historic low of 0.08% recorded in 2021.
The key question is whether this monetary shift will also mark the beginning of a new chapter for venture capital in Latin America.
If the relationship observed between U.S. monetary policy and regional venture capital continues to hold, the recent moderation in interest rates could support a renewed increase in capital availability—particularly in markets that are most sensitive to global financial conditions.
However, the evidence also suggests that any recovery is unlikely to be uniform. Smaller markets are likely to experience stronger rebounds by amplifying the effects of improved global liquidity, while larger venture capital ecosystems are expected to respond more gradually.
