As commented, the slowdown in capital in the first quarter of 2022 is not new. But global numbers can hide divergent realities around the world, and a closer look at regional data shows that this is indeed the case.
According to the latest reports, funds flowing to startups based in the United States and Asia decreased, in line with the global trend. However, their counterparts European, Canadian and African attracted more capital in the first quarter of 2022 than in the previous quarter.
Latin America is an interesting space to anticipate the future of startups. Why? Because venture capital investment in the region didn't just start slowing down in the last period: funding has fallen for three consecutive quarters in the region. In other words, this trend reversal precedes the war in Ukraine, the sell-off in tech stocks, and signs of a global slowdown by several months now.
Some of the questions raised by the venture capital slowdown in Latin America are the same as elsewhere: How can private investment in startups keep up a brisk pace when interest rates are rising and public valuations are sinking? ? Other questions, however, are more region-specific: did valuations rise too much, too fast compared to other regions? the FOMO syndrome (fear of missing out, fear of letting go, fear of missing out) peaked earlier in Latin America? Does long-term optimism still make sense?
beyond the data
Looking at the evolution of the volume in dollars and comparing the first quarter of 2022 with the fourth quarter of 2021:
Venture capital investment in the first quarter of 2022, in dollar terms:
- Latin America in general: 3 billion, 25% less than in the fourth quarter of 2021
- Mexico: 258 million, 59% less than in the fourth quarter of 2021
- Brazil: 1.5 billion, 32% less than in the fourth quarter of 2021
- Colombia: 457 million, 56% more than in the fourth quarter of 2021
- Argentina: 47 million, 46% less than in the fourth quarter of 2021
- Chile: 182 million, 17% less than in the fourth quarter of 2021
The first instinct is to dive deeper into the discrepancies between, say, Mexico and Colombia. This approximation is not correct.
There is less money, but more business: this could be key to understanding how Latin America can be both in sync and out of sync with the rest of the startup planet.
world context
Latin America does not exist in isolation, and the same factors that have led to a global slowdown are also present in the region. On the macro front, consider interest rate volatility, inflation, and slowing GDP growth across the region as drivers, and all of these metrics have changed markedly in the past six months.
In Brazil, for example, interest rates started to rise in August 2021 and are now close to 12%, which undoubtedly makes risky investments less attractive than they used to be. From that angle, this pullback is more emblematic of a global pushback by later-stage investors than it is specific to Latin America.
Another trend that is affecting Latin America is the turbulence in the valuation of public technology companies. Fintech stars such as Nu, the parent company of Nubank, PagSeguro and Stone have seen their capitalizations suffer in the US stock market where they were listed, while the IPO opportunity in Brazil is practically closed, which will have a impact on short-term late-stage fintech financing.
Being susceptible to global trends is one thing, but does it paint a complete picture of what is happening in Latin America? Several funds do not think so. In his opinion, it is “only half the story”.
The rest of that story
There are factors contributing to the slowdown of Latin American companies that are specific to the region. At one end of the spectrum, the general slowdown in investment could be a correction after some overheating. On the other hand, the increase in business volume indicates that early-stage activity is weathering the general downturn well.
You can be bullish on the long term in Latin America, but valuations have soared in the region relative to the exits that have been seen and will likely push back on valuations and late-stage investments as expectations return to the low. reality. That said, in the early stage, investors are placing 7-10 year bets and are less affected by current outflows and public market volatility.
It's never easy to tell when things are getting out of control. Looking at the quarterly data for Brazil and Mexico, in the second or third quarter of 2021, outliers already appear in hindsight. The record amounts of funding were due in part to mega-rounds in newly minted unicorns, or soonicorns, fueled by FOMO, but the huge numbers may have peaked.
One of the main drivers of FOMO for Latin American startups in recent quarters among foreign investors was price appeal, as valuations were lower than in the US with comparable performance. However, this has started to change, which could explain some of the course corrections that are being seen.
Not to mention, it was during 2021 that valuations for some regional unicorns rose much faster between rounds compared to the 2.6x “average rise” seen in QXNUMX. When those companies' public competitors battle it out in the stock markets, the valuation gap between the new companies and their potential exit value becomes more apparent, resulting in new benchmarks.
Speaking of valuations seen in the first quarter, most of the declines occurred around the Serie C and later, with the rounds of the Serie B little affected. Regarding the offers of the Serie A, there is a little less enthusiasm, but not a big difference with the previous stage. Translating this into numbers, it is estimated that a deal that could have closed at a valuation of 200 million a few months ago could now average about 160 million, which is an adjustment, but not a huge one.
When it comes to early stage and seed, the picture is very different, with a Q2022 XNUMX showing very high valuations.
In any case, we are seeing more offers of seeds and the Serie A Now that six months ago.
What to expect
Does the early-stage activity simply enjoy a grace period? After all, public market problems tend to trickle down stage by stage, starting with later series. But there are reasons to think that seed deals could remain unscathed, at least for the time being.
No big slowdown in seed funding is expected in the region. The amount of money from private investors flooding the market and the explosion of new funds dedicated to the region that will continue to drive funding.
There is significant momentum going on, which could last long enough that early-stage startups are never affected. But even if that were the case, it would only lead to lower valuations. Some companies that have been raising seed rounds at $20 million valuations could drop to $10 million or $15 million.
However, taking into account the later stages makes us anticipate lower figures. In 2021 it will be hard to beat in terms of the flow of funds to the region.
It seems only natural that things will start to slow down as funds that have not historically been focused on the region rebalance and reconsider their strategy in light of a global slowdown and challenging macroeconomic conditions.
Funds that were just testing LatAm might be taking a break, but they will stick around. A few years ago there were doubts about the region's ability to create large technology companies. With Rappi, Nubank and others showing otherwise, the concern has completely disappeared.
This poses an optimistic long-term scenario: There are so many talented founders and teams being formed in the big markets that the slowdown seems temporary and certainly doesn't appear to have affected early-stage startups significantly.
