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LatAm Early-Stage Startups Are the New Focus of VCs as Valuations Adjust

Endeavor and Tofino Capital are among the investors looking at early-stage startups in the region with new funds

Investors are taking advantage of lower prices to buy shares of early-stage companies in Latin America.
April 29, 2022 | 10:32 am

Bloomberg Línea — Endeavor is opening the fundraising of its second fund to invest in early-stage startups, the Scale-Up Ventures 2. The fund intends to invest R$ 100 million ($20 million) in 60 Brazilian startups and, for Igor Piquet, Endeavor managing director in Brazil, the moment to buy equity from early-stage companies couldn’t be better.

“Now that we are experiencing a correction, continuing to invest in early-stage startups means you are buying one of the biggest revolutions that are happening in humanity at better prices than last year,” Piquet said in an interview with Bloomberg Línea.

Last year, Brazilian startups received US$9.4 billion in investments, according to Distrito, a record that drove up the valuation of the startups. Now, interest rates and the macroeconomic backdrop may have caused venture capital investments to slow down, and valuations are being adjusted. CB Insights’ State of Venture report shows that venture capital investments were down 19% globally in this first quarter compared to the last quarter of 2021.

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“The share price of these companies is slightly corrected and so you get the same upside at slightly lower prices. The same company that six months ago was raising with higher valuations is today’s company, with the same technology, the same potential. Those who stay invested and bet in bearish times, end up doing better in the long run. When you are investing only in the upswing, just because it is hot, or in the media, you buy at more expensive prices,” said Piquet.

The first early-stage fund from Endeavor to invest in Brazil, the Scale-Up Ventures, was a R$ 84 million ($17 million) fund and invested in approximately 40 companies, from Seed to Series A. Piquet explains that the Scale Up Ventures, both the first and the second funds, are agnostic in sectors. The only condition is that it is a technology company, or a tech-enabled business.

Global interest in early-stage startups in LatAm grows

Early-stage investments in Latin America have also attracted global competitors, such as BluStone, Picus Capital, and local ones, such as Polymath, and 17Sigma, from Ualá founder Pierpaolo Barbieri.

Recently, Tofino Capital, a new firm from insiderPR founders Eliot Pence and Aubrey Hruby, announced a $10 million fund to invest in early-stage startups in Latin America, Africa, Asia, and the Middle East.

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“The idea is that we invest in super-early, Pre-Seed, and Seed. So far, we’ve raised $5 million, our first close, and the fund will be $10 million,” Pence said in an interview with Bloomberg Línea. “But we already started investing.”

Asked about why international VCs have been looking at early-stage in Latin America now, Pence said the talent in the region is phenomenal and many of the entrepreneurs have come from big startups like Nubank or Rappi. Allied to that is the size of the market. “It’s almost as big as China, and it’s pretty much in the same time zone as the United States. What’s very interesting about Latin American talent working remotely is that you now see a lot of US tech companies hiring Latin American developers. It gives them knowledge of how Silicon Valley works, and from that, they can pitch their companies,” he said.

Pence said Tofino’s differentiator is not the capital, but the networking that investors have with global companies. “We can help founders tell their story to a global audience,” he pointed out. Fintech theses are expected to receive most of the new fund’s investment.

“We are very focused on the founder’s track record, we like to invest in serial entrepreneurs who can attract talent,” he said. Pence says Tofino Capital is not a passive investor. “One of the problems with venture capital in emerging markets is that it tends to be passive. And we want to be very active. We have a lot of previous experience with organizational and operational problems in different markets.”

He explains that while the challenges in emerging markets are not the same, they are “similar”. “When you have a European or US VC coming into these markets, they try to apply a model that has worked in the US or Europe to Latin America or Africa. I don’t think that’s the solution. I believe in adapting emerging market models to other emerging markets. Things that work in India, tend to work in Brazil and Colombia.”

Tofino Capital intends to invest $15,000 to $500,000 in about 16 companies.