Latin American Startups Face Risk of Unsustainable Valuations As Funds Get Tight

Analysts consulted by Bloomberg Línea foresee a drop in the rate of investment in startups in the region, but which is expected to bounce back when the capital markets recover

Buildings on Wall Street near the New York Stock Exchange (NYSE) in New York, US. Photographer: John Taggart/Bloomberg
October 17, 2022 | 04:20 PM

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Bloomberg Línea — At a time when pension funds are looking closely at their private equity assets, equities are heading for a bear market, investors start to look to cash returns and IPOs are drying up amid rising interest rates, venture capital funds are paying more attention to their limited partners.

Private equity firms usually exit through public listings, corporate acquisitions, or sales to other private equity firms, and the latter example is becoming more common as limited partners demand returns, venture capital managers tell Bloomberg Línea.

In August, Brazil Journal reported that venture capital firm Valor Capital sold part of its Fund II to US private equity firm StepStone to procure some liquidity. In an interview with Bloomberg Línea, Humberto Zesati, managing partner at Mexican private equity firm Latin Idea Ventures (LIV) Capital says he thinks it is going to be a different story in Latin America now that valuations “have come back down to earth”.

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The Mexico-based fund targets growth equity investments that have at least $30 million in revenue. “I don’t think we are going to see anywhere close to the numbers of investment that we saw in 2020 and 2021,” Zesati said.


“I don’t see a lot of firms continuing to invest at the same rates they were investing in the region in the past two years,” Zesati said.

Marcos Leite, co-founder and managing partner at Brazilian venture capital fund Canary is more optimistic, however.

“There are dozens of global funds very interested in Latin America, and are studying the markets. When the capital markets get better, there will be more funds investing in Latin America,” he told Bloomberg Línea in an interview.


Leite says that the last 10 months were outliers for investment globally. Now, due to risk aversion, investments have slowed, but that, compared to 2019, venture capital in Latin America is still growing.

“There is activity in early stages. This year we had nearly 20 investment rounds within our portfolio. These numbers are more or less 30% bigger than the amount last year. What is not happening is Series C onwards,” he said.

While volatility in Latin America still haunts investors, funding for growth companies is getting harder and will push valuations down, fund managers told Bloomberg Línea.

But dealing with a down round is not easy and it can kill a company, according to Sebastian Miralles, a managing partner at Latin American private equity firm Tempest.


“Often venture capital funds would rather see a company die than let it raise a down round,” Miralles said.

Venture capital and private equity usually invest in different stages of development of a company, with venture capital funds tending to come in earlier than private equity funds.

“PE and VC distinction originally came in the 1980s because of New York bankers who wanted to do leverage buyouts, very big investments that usually come from conservative investors such as pension funds. But now VC and PE are converging, and you can see this conversion in growth-stage PE and late-stage VCs,” Miralles told Bloomberg Línea.

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Besides investment vehicles, Tempest advises sovereign funds and family offices. The firm also participated in the Series C round of Mexican unicorn Clip, and currently has a $1.1 billion investment commitment.

“I don’t know how to invest in a company that is trading at a 24x valuation, for me, it’s something that doesn’t compute. That is just not reasonable. I run my models on most startups and I see that they are overvalued threefold, or sometimes even more. So how do you invest? You are in a tough dilemma. You either participate and try to be as conservative as you can, or you choose not to play,” said Miralles.

For him, by definition, the majority of startups won’t be huge, and that is how the industry works. “Some founders are not that big, and even for the ones that are big, valuations were off.”

“I told founders that if they raised at that valuation they would have killed their company. Not now, but in two years. After they spent all that effort they are going to discover they can’t grow into that valuation and funds are not going to let them raise another round.”


However, he does see the very best startups surviving the down rounds.

“Nowadays there is a whole generation that believes that VC is only about investing in the early-stage software business that is supposed to lose money. But it’s wrong and destructive for society,” claims Miralles.

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