LATAM Startups' Quest for Investment

As the venture capital (VC) market shifts from overexcitement to a more cautious risk evaluation, startups are adjusting their strategies with a focus on achieving profitability. This is increasingly relevant as both sides seek alignment beyond the capital, especially regarding values and overall objectives.

According to reports from SlingHub and Itaú BBA, Latin American startups raised over US$5.75 billion in 885 funding rounds in 2023, marking a 34% decrease compared to 2022. Brazil led in total investment with 54%, followed by Mexico with 25% and Colombia with 11%. In terms of the number of rounds, Brazil also led with 55%, followed by Mexico at 13% and Chile at 10%.

In comparison to 2021, when Latin American startups raised over US$20 billion through 952 VC agreements, the gap has widened. Access to VC has been restricted since 2021 due to higher interest rates and rising inflation. “As a fund, when valuations start to explode, you do not want to miss out on the next Uber or similar opportunity,” says Ana Carolina Mexia, Co-Founding Partner, NIDO Ventures.

Andrea de la Garza, CEO and Founder, Pilou, describes facing a challenging environment as an entrepreneur. She highlighted intense competition from other startups and a landscape where some had remarkably high valuations. Andrea noted a shift in the VC’s focus, from the requirement for startups to showcase exponential growth to the imperative of demonstrating profitability.

Experts anticipate 2024 to be a market correction year, with VC activity expected to return to pre-pandemic levels in terms of volume and new investment. However, under the new reality, rounds are expected to be smaller and with less abundant capital. “Fortunately, we never stopped investing. I believe this is not a burst bubble, but rather a new normal for VC,” says Cecilia Ezquerro, Portfolio Director, 500 Global.

In this new normal, VCs will exercise greater caution and prefer to invest in more mature startups. This shift in focus means that capital will flow toward companies that are ready to receive financing, requiring robustness and strong projections from businesses, as well as demonstrating strong value embracement. “As corporate investors, we do not make investments unless there is at least a partial fit with Bimbo's vision. However, we acknowledge that evaluating values is easier for us than for a VC fund,” adds Constantino Matouk, Vice President, Global Bimbo Ventures, Grupo Bimbo.

Experts emphasize that the events of 2023 demonstrated that achieving a high valuation does not guarantee success. Consequently, VCs are placing greater emphasis on startups committed to sustainable growth and efficient operations, rather than those solely focused on raising capital through multiple rounds of investment. “The adjustment was necessary, irrational valuations did not benefit anyone, neither startups nor VCs. We are now noticing that entrepreneurs are also less concerned about valuation, contrary to what happened previously, when they were experts in justifying extremely high valuations,” Matouk adds.

While the VC market landscape has evolved since 2021, experts believe there is still a window of opportunity, particularly with the increasing adoption of technology in Latin America. Experts note that the Latin American startup profile also plays a positive role, as entrepreneurs are better prepared to work with fewer tools. “As Latin Americans, we know how to make things happen with the money and limitations we have. Just like founders of startups, we must know how to leverage these skills that our environment has helped us develop,” Ezquerro notes.

Despite the altered economic outlook compared to the times of abundant capital, experts believe that a window of opportunity still exists for startups in 2024. In this context, experts suggest that both startups and investors should be responsible. Startups should focus on people, rather than just thinking about accelerated growth, as noted by de la Garza. “VC funds should be more than just funds, they can provide support to entrepreneurs and add much more than just capital. This is not a one-sided relationship where the fund provides money and forgets about the company and vice versa. On the contrary, it is a shared journey to achieve the goals of all parties involved,” Alvaro Vertiz, Partner and Mexico Country Head, Dentons Global Advisors, says.