Venture Capital In 2023: What LatAm Startups Can Expect, According to Investors

The fundraising market is cooling and has yet to hit bottom, but a recovery could come in the second half of next year, investors say

The fundraising market for startups is cooling and has yet to hit bottom, but a recovery could come in the second half of next year, investors say.
December 22, 2022 | 05:46 PM

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Bloomberg Línea — The caution shown by investors in 2022 as a result of macroeconomic uncertainty and technology companies’ stock market declines are far from over, and there will continue to be a challenging investment landscape for the venture capital scene in 2023, say investors.

“Next year it will be more difficult and more meritocratic to access financing, although good projects that really add value, that transform, will be able to get capital,” Mariano Mayer, co-founder and managing partner of Argentine fund Newtopia, predicts.

The macro outlook generates challenges related to the decrease in consumption, budget management, fundraising, increased informality and the reduction of foreign investment, according to Laura Carrión, an associate at AMPLO Inversión de Impacto in Colombia.

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“These challenges demand actions from both public and private sector actors where entrepreneurs are fundamental to correct the market and contribute to economic growth,” she added.

A sharper fall in VC investment in 2023

For his part, Brian Requarth, co-founder of Latitud, a platform that promotes entrepreneurship in Latin America, believes that next year will be tough.

“The market is cooling down and has not yet hit bottom,” says Cristóbal Perdomo, co-founder and general partner of Mexican fund Wollef Ventures, and who agrees that this trend will continue during the first half of 2023.

In the last 12 months, venture capital reached a moment of stability, after an anomaly during 2021 when investment skyrocketed to amounts never seen before in Latin America, Requarth says.

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Last year was a record year for investment, with Latin American startups capturing $15.7 billion in funding, triple what had been raised in the region in 2020, when $4 billion in investment was reported, according to data from the Private Equity Investment Association for Latin America (LAVCA).

Despite the decrease from 2021, 2022 will still be the second-highest year for startup investment in the region, however.

“This was the result, not so much of Latin America, but of the reduction of investment in alternative assets derived from the rise in interest rates in the US, which brought as a consequence that much capital did not need to seek high risk to have returns,” Perdomo says.

Requarth says that the venture capital landscape is one of challenges, which differ at different stages of a company’s development.

The biggest challenges will be faced by startups seeking series A, B or C financing, Mayer predicts.

The latter two have seen a capital drought. In this context, it is likely that for the next few quarters there will continue to be higher growth, or lower impact on seed capital.

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In addition, 2023 will see fewer foreign fund investments in the region.

Perdomo explains that this is because they will focus on their natural markets, mainly because this is their first experience investing in Latin America and they are uncertain about how a recession behaves in the region compared to what happens in more developed markets.

More realistic valuations

Carrión explains that in recent years, venture capitalists have invested in companies under the assumption that they can have much higher expenses than sales in the initial phase (of one or two years) in order to generate a customer base that in the medium term will be able to acquire products or generate information that will yield positive profits.

The slowdown in the venture capital ecosystem has occurred because many of the companies that raised funds with business models based on these assumptions have had losses of millions of dollars. Although jobs are generated in the short term, business sustainability is not generated, so “bubbles” are created, Carrión explains.

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In 2023, the venture capital correction will continue, and valuations will become more realistic.

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“Certainly, the way companies were valued in the past is not going to come back in the short term. The industry is going through a time of contraction and my projection is that the next couple of years is going to continue to be a market where efficiency is more valued than growth,” said Latitude’s Requarth.

Companies are starting to make adjustments, such as cost reductions and staff layoffs, to accommodate the market, and this will continue for at least the next year, Mayer says.

“The positive thing is that, in turn, it is a purging of the market, as it involves the exit of funds that did not perform, but also the creation of new funds,” Perdomo says.

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Carrión, of AMPLO Inversión de Impacto, advises entrepreneurs to seek to build a long-term project by focusing on generating positive economic units, on better use of their budget, and on solving problems in the industries with the greatest impact on the population that is currently suffering the consequences of the recession.

This will give them a better chance of facing the new global and regional situation in the venture capital ecosystem in 2023, he says.