VCs Advise Startups Running Out of Cash: Try in the M&A Markets

Hash, a fintech that was paving its way to be an unicorn, now doesn’t rule out the possibility of being sold, says source

With money running short, some startups explore negotiating mergers.
August 12, 2022 | 08:35 AM

Bloomberg Línea — At a time when the window for initial public offerings is “complex”, the main venture capitalists in Latin America, like Eric Acher, founder at Monashees, are suggesting that can be interesting to have M&As (mergers and acquisitions) in the portfolio. Kaszek is encouraging M&As so entrepreneurs can ‘come back and try again’ leading a company to IPO.

Yet, it is not the ideal. Santiago Fossatti, a partner at Kaszek, said the firm doesn’t want to invest in a company and sell it.

“What moves us is to help build some of the few companies that will be the leaders in Latin America. We want to dream of a company that will be worth $10 billion. We want them all to IPO on Nasdaq,” said Fossatti, although he acknowledges that 90% of entrepreneurs will not get there. Therefore, he says it is also important to have the IPO path in Brazil, in addition to M&As to “come back and try again”, he stated at an event of the Brazilian Association of Private Equity and Venture Capital (ABVCAP) this week.

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Brazilian payments fintech Hash last week disclosed to customers that “due to adverse market conditions” it is winding down operations with some client companies. With no runway, Hash has streamlined operations, ended initial projects, and laid off about 55 employees.

The company is now considering being acquired, according to a person familiar with the matter, who preferred not to be identified because discussions are private.

Hash received a Series C funding of $40 million led by QED Investors and Kaszek in October 2021. Now, with a more complex landscape for late-stage fundraising, the company is keeping only a few clients (such as Leo Madeiras and Banco Neon), said a person that knows the subject.

For clients that Hash is suspending operations, no new payment machines will be placed on the streets, but transactions with the existing POS (points-of-sale) will continue, according to this person with knowledge of the facts.

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João Miranda, Hash’s CEO, founded the company in 2017. He had previously been employed by Pagar.me, which was sold to Stone in 2016. Scaling the company, Hash transacted R$150 million in 2019. And last year, the company had been selected among the top 250 fintechs of 2021, according to CB Insights.

Now in survival mode, the startup is keeping operations at a minimal level, with key projects to try to turn things around while it doesn’t get a new round. Hash is considering both: a new contribution and being acquired.

Kaszek, an investor, does not comment on the case.

For VCs, the problem is not the companies that went wrong

With Monashees, Kaszek, an Argentine venture capital firm, is also investing in the Mexican company Casai. But with money running short, the startup for short stays is negotiating a merger with Nomah, as Bloomberg Línea anticipated.

Monashees is also an investor in ZAK, a startup for restaurant management, which was even considering a “down round” to save operations. The company made layoffs at a time when it was unable to get new rounds.

Even those who are already unicorns are cutting costs. Both VC firms are also investors in MadeiraMadeira, an e-commerce startup with a billion-dollar valuation, which on Tuesday joined the list of Brazilian unicorns that laid off this year and fired about 3% of its employees.

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“The decision is part of a move by the company to review structures with a focus on efficiency gains and prioritization of projects, continuing its strategy of growth and gain of scale,” MadeiraMadeira said in a press release.

Fossatti said the company has always proactively communicated with Limited Partners (LPs) - pension funds, and family offices, which have their assets managed by VCs - about any problems with the investees.

“They don’t call us because we call first. Just as we called at the beginning of the pandemic, we adjust a lot with LPs and especially with entrepreneurs,” said Fossatti.

Kaszek communicated to entrepreneurs as early as December 2021 that the winds were changing. And, even more so for Latin America, if the entrepreneurs had a way to raise money, he advised them to raise, because there could be a shortage of money. “All the biggest companies we have invested in are very well capitalized and, apart from growth, have a focus on delivering profit in the short term.”

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For Monashees founding partner Eric Acher, living with a company that didn’t work out is something normal for VCs. “Companies don’t work out for lots of different reasons. It’s very unique. We try to understand what we learn from it, but the most important thing for us is that we don’t miss the next big company that will be very big,” Acher said at the event.

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Fossatti said the biggest mistake a Venture Capital firm makes is not investing in a company that has gone wrong, but failing to invest in a company that has done very well. “We made some of those mistakes, but a clear case was dLocal (DLO),” he said of the Uruguayan cross-border payments company.

dLocal, with a similar business model to Stripe, has Brazil’s Ebanx as one of its main competitors in payment processing in Latin America. The fintech made its IPO on Nasdaq in June 2021, with a valuation of U$6 billion. Today, the company has a market cap of $9.21 billion.

“We talked to them in 2013, 2013, 2014, and 2015 and didn’t invest. How dumb were we to not understand the potential that that company had? That’s what takes away sleep, letting good companies pass by,” he said.

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Local IPOs

The Brazilian stock exchange has gone almost a year without seeing an initial public offering. For Monashees, both a local IPO and US exchanges are interesting. Monashees and Kaszek have shares in GetNinjas, which debuted on B3 in May 2021, with a paper priced at R$20.00. On Thursday, the company’s share was trading at R$3.43.

At the end of June, Monashees raised approximately R$8.3 million with the sale of 3,239,908 shares of its 8% stake and now holds 1,076,813 GetNinjas papers. Monashees was an early investor in GetNinjas, along with Kaszek, in 2011.

“The window has closed as a matter of cycle time, but the opportunity remains for tech IPOs. We are at the beginning of the history of IPOs in Brazil. There is a lot learned from investors on how to evaluate these companies and entrepreneurs on what it is to list a company. It was important to have that first generation,” Acher said.

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-- This article has been updated to clarify that Monashees, and not Kaszek, invests in Zak.

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