Why Latin America’s Startup Sphere Still Inspires Investor Optimism

Bloomberg Línea — Public companies have suffered a major adjustment in valuations, which inevitably has an impact on private companies, according to Carlos Ramos de la Vega, director of venture capital at the Association for Private Capital Investment in Latin America (LAVCA).

In an interview with Bloomberg Línea, Ramos says that the impact of this crisis will be more pronounced on startups in later stages of investment, and which coincides with what experts in the entrepreneurial space say, and who also foresee a lesser impact on early-stage startups.

However, in the face of a possible dip in valuations and amid caution among venture capital funds, Ramos assures that LAVCA remains optimistic about what the future holds.

“In the markets there will always be ups and downs in the short term, but in the medium and long term, as is the nature of capital, we remain optimistic,” he says.

LAVCA’s optimism is based on several factors, he says: more money to invest from local funds, in what are called opportunity funds; the historical investment in the Latin American region, which has given a boost to the entrepreneurial space, and the operational maturity of entrepreneurs.

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1. Venture capital investment in Latin America continues

This year’s first quarter was the fourth largest in terms of venture capital investment in Latin America. In the first months of 2022, $2.8 billion was invested through 190 transactions. From this point on, Ramos says, we began to see a trend of investors focusing more on early-stage startups.

Whereas last year 49% of the concentration of capital was in the late stage., today the dominant capital is in seed, pre Series A or Series A stages, which concentrate 39% of the total capital invested at a regional level.

Ramos says the region is returning to focusing more on the early stages as it has done historically due to the caution of the market. However, that does not mean there will be no more unicorns. So far this year, five have emerged in Latin America: Betterfly, Habi, Dock, Nowports and Kushki.

“So the tickets are still important,” Ramos says.

This is thanks to the traction of the Latin American market in terms of venture investments, he says.

“The record we had last year served a lot to provide visibility globally of Latin America as a region. And not only of the main countries, which we had always been seeing, but for example there is the listing of [Uruguay’s] dLocal; the financing rounds for education companies in Ecuador, or the record round for Venezuela that we saw for the super app in Venezuela, Yummy, which raised more than $40 million, all tell us that investors are interested in Latin America at a regional level.”

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In addition, LAVCA’s optimism is supported by the fact that several international venture capital firms are launching funds specifically focused on Latin America, especially in São Paulo and Mexico City, Ramos says.

“That gives a certain sense of conviction in the markets, and permanence that goes well beyond a couple of quarters when there may be fluctuations in the market.”

2. Opportunistic funds

In addition to the permanence of foreign investment funds, local funds are launching opportunistic funds in the region.

Local funds have managed to raise a significant amount of capital in 2021, which puts funds such as Valor Capital, Kaszek and monashees in a good position, Ramos says.

These firms are launching opportunistic funds with growth capital that they are earmarking to support companies within their portfolio that they invested in at an early stage. “The goal is to help them overcome this round of obstacles that they will have in the coming quarters, so we see a growing and resilient ecosystem,” he says.

These Latin American funds whose investment thesis is focused on early stages set up funds to continue supporting the most promising startups in their portfolio at more advanced stages and assert their pro-rata rights, which are rights in participation in subsequent rounds.

“Normally the early-stage seed fund is not built to have the economic capacity to be able to invest larger amounts,” Ramos explains.

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The venture capital expert explains that in the case of Kaszek, a Nubank investor, it would have been interested in investing in subsequent rounds in the neo-bank, but at that time it did not have an opportunistic fund.

“An opportunistic fund is a second, or alternative, vehicle with which funds can maximize financial return. And on the entrepreneur’s side, they can have the confidence to go back to the investors who have supported them from very early stages and ask them for a little more liquidity,” he says.

In Latin America, opportunistic funds have recently gained popularity. Kaszek, for example, launched a $450 million such fund last year.

So while some global funds are perhaps putting a pause button on Latin American growth equity investments for the time being, opportunistic funds could be an option to replace them in the coming quarters.

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3. More experienced entrepreneurs

The Latin American entrepreneurial sphere has been in place for about a decade now, and there are already some entrepreneurs who have successfully launched more than one startup. These entrepreneurs, Ramos says, have great bargaining power and enhanced operational capabilities due to their experience.

“We have seen an increasing participation of entrepreneurs who are already known operators in the ecosystem and are now launching a second or third initiative.”

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This helps them to have the support of investors, and which helps them raise more early-stage capital, he explains.

Ramos adds that the resilience of the Latin American entrepreneurial sphere and also the maturity of the talent, both technical and operational, is one of the factors that helped to have more conviction, not only on the part of investors entering the Latin American space, but also from growth capital investors entering at earlier stages.

This experienced talent makes investors feel more confident of financial return, he says.

Translated from the Spanish by Adam Critchley