Buenos Aires — Global inflation, interest rate hikes, a war in Ukraine... These are some of the ingredients of the current global cocktail impacting the world’s startups and even giants like Tesla and Netflix. In Latin America, companies in these sectors have also been suffering due to the great global adjustment. The liquidity squeeze and the slowdown in investment rounds have resulted in a wave of layoffs in the region.
According to VC investor and ex-Softbank executive Paulo Passoni, only startups that are able to tighten their belts will be able to survive during the next two years. In this regard, he applauds the companies in the region that have dared to lay off dozens or even hundreds of employees.
This wave of layoffs has been reported in Brazil, Mexico and Colombia. However, with the exception of a few specific cases, mass layoffs have not been a frequent event in Argentina.
Bloomberg Línea consulted sources in the country’s startup and fintech scene on the scenario they face, the short and medium-term outlook, and why no massive layoffs have been reported here so far.
How much tech money has Argentina attracted?
There were 19 VC deals for $50.3 million in Argentina during Q1 2022, compared to $158.3 million in 15 deals during the same period in 2021.
LAVCA reported a preliminary total of $2.4 billion invested in 160 transactions in Q2 2022, marking 2022 as the second largest year on record for Latin American venture capital. Venture capital deployed in the region in the first half of 2022 ($5.1 billion) exceeded the full-year totals of 2019 ($4.9 billion) and 2020 ($4.2 billion).
Closures and layoffs in Argentina
One of the first to sound the alarm was Buenbit. In the last days of May, it was confirmed that the Argentine cryptocurrency exchange startup was laying off half of its staff, around one hundred employees of the firm, which operates in Argentina, Peru and Mexico.
In another surprising news, Itaú bank decided to disinvest in the digital wallet Ank, which will become idle as of July 29th following the failure of other alternatives. Ank has 168 staff members in Argentina and the news came as a surprise for several reasons: it is a business owned by the main bank in Latin America and prior to this decision it was analyzing regional expansion and opening a cryptoassets offer within Ank.
As Bloomberg Línea found out, layoffs are also happening in large companies. This has accelerated once the decrees banning layoffs and imposing double severance pay cease to apply. Business and industry sources requested Bloomberg Línea not to be identified and not to mention which companies are laying people off.
What is the outlook for startups and fintechs in Argentina?
According to Pablo Larguía, co-founder and CEO of SenseiNode, a blockchain services provider, Argentine talent is “very talented and economically competitive.”
He says that many companies “see Argentina as a haven for their operations, and that this is probably the reason why there are not as many layoffs as in other countries in the region: talent plus competitiveness.”
María Julia Bearzi, Executive Director of Endeavor Argentina, points out that at a regional level there is a slowdown in capital rounds as well as a wave of layoffs. However, she agrees that Argentina “has seen a slower pace (of layoffs) than other countries.”
There is also another factor: endurance. According to Bearzi, Argentine entrepreneurs have been enduring a bad situation for several years, so they have learned to be more cautious.
“If you don’t oversize, you don’t have to shrink when the market becomes restrictive,” Bearzi said, noting that “many of the surviving ventures are not outsized. They are well sized for the solution they offer in the market they are attacking”.
Mariano Mayer, co-founder of Newtopia ─ a fund that invests in Latin American startups in seed and pre-seed stages─ agrees that they are facing “a more challenging, complex context which in some cases has implied and implies layoffs.” However, he stresses that this happens mostly “in the case of bigger companies.”
Regarding the situation in Argentina, Mayer agrees that “Argentine entrepreneurs are used to being short of resources and tend to be very careful with cash. That prepares you for more difficult contexts.”
Mariano Biocca, CEO of Argentina’s Fintech Chamber says that “many of the companies growing rapidly along a certain roadmap, suddenly realized that it was time to review their strategy.” He argues that in Argentina, with some domestic complications, it was difficult to raise money, “and that is explained by the companies’ leverage level (...) As we have to operate against a background of greater scarcity, that shortage leads you to use resources more efficiently and not to plan everything expecting greater access to capital.”
James Green, General Partner of investment fund CRV, notes that “the Argentine financial technology market is less mature than in Mexico, Brazil and even Colombia.”
“I think Argentina will not be immune to the global tech crisis and there will probably be a slowdown, but it could be less aggressive than in other geographies because there is a lot of open space in the country,” he said.
Juan Manuel Porcaro, CEO of ARCAP (Argentine Association of Private Equity, Startups and Seed Capital), agrees that this is a period of adjustments. He adds that Argentina is not foreign to the scenario being faced by other markets but adds that the statistics for the rest of the year will be “counter-intuitive”, given that the figures for startup rounds in the first half of the year “are the lowest in the history of VC after 2021.”
The more hostile and less liquid environment, which triggered layoffs in other markets, necessarily requires a strategic rethinking.
“There’s an effort to adjust, stretch or review (plans) to have enough funds to cover the following 18 to 30 months,” says Mariano Mayer. “We are advising startups to undertake this procedure, assuming that in this context it will be more difficult to raise capital.” He adds that a shift like this could imply “reducing expenses, reviewing subscriptions, travel... different ways of stretching a little further and lowering the costs.”
Santiago Echazú, co-founder of Paisanos ─a developer of digital products─ reveals that one of those tips shows up in his bottom line. “I prefer not to earn money because at some point the people I employ are going to help me earn it,” he said.
Pablo Blanco, CFO of Alprestamo, a financial products marketplace, says a strategy he implemented was to reduce projected growth levels for certain projects. Julian Sanclemente, CEO of the firm, added that they also slowed down hiring: “It’s not about retreating, but rather consolidating a foundation on which to build for the future.”
MercadoLibre, the Argentine unicorn that entered the ranking of the 100 most important brands in the world, is also taking action to face this new scenario.
“Unfortunately, due to the macroeconomic context, we are forced to make some adjustments to partially compensate for the increase in our costs,” the company led by Marcos Galperín informed users a few days ago. Some of these new settings included updating the lowest price for publication, adjusting the value of the fixed cost per unit sold in sales of less than AR$5,500, and updating the charges for Premium sales.
What about crypto exchanges?
For exchanges that operate with cryptoassets, this perfect storm combines a cocktail of factors plus a sharp drop in the price of cryptocurrencies.
Some layoffs have occurred in this sector. One example is Buenbit in Argentina and another in Mexico’s Bitso.
Julián Colombo, head of public policy at Bitso, explains that one of the attractions of Argentina as a market is that “it is currently one of the 10 countries with the highest adoption of cryptocurrencies, and we believe that their adoption will continue to rise, especially for payments and for preserving the assets of individuals and companies.”
In contrast to the fall in fluctuating cryptocurrencies, Colombo highlights the country’s interest in stablecoins, “which allow us to protect ourselves against inflation and currency devaluation in an easy, fast and safe way. They are growing steadily”.
Regarding short-term objectives in the country, Colombo points out that Argentina is a fundamental country in Bitso’s strategy. “We plan the launching of more products and services for both our individual and corporate clients.”
Despite this context, companies such as Lemon and Belo opted, for the time being, to keep cashback performance, whereby users may get a percentage of their purchases back.
Yet, there were changes in their strategy: Lemon recently reported that it updated some terms of Lemon Earn, its remuneration of crypto balances, by rolling out dynamic rates.
Digital wallets’ consolidation
Another product targeted in this context is digital wallets. Ank is a sign of that. “Argentina has room for only three digital wallets, there are 44″, summarizes Julián Colombo, CEO of N5 ─ a startup focused on software development for fintechs and banks. Besides, he said, “97% of private banks earn money, less than 3% of digital banks earn money.”
“I remain skeptical as to the money-making potential of the wallet business,” said Colombo. “This does not mean that it is a bad business to have a virtual wallet.” According to him, “there will be consolidation in the market... some will close and some will reinvent themselves through some kind of convergence.”
Colombo points out that in a country without a stable revenue model for its financial industry, a submerged economy, high levels of informality, and a high tax burden, " digitization will never evolve because informality won’t shift to a digital wallet.”