Gerry Giacomán Colyer
CEO & Co-Founder
Clara
/
Expert Contributor

3 Lessons From the Investment Boom in Latin America

By Gerry Giacomán | Mon, 08/29/2022 - 10:00

Over the past few years, Latin America has become one of the most attractive regions for investment as all of the right ingredients have come together: a deep talent pool of technology and business professionals looking to startups as the ideal destination for their careers, experienced entrepreneurs with big visions, and - after many decades of underinvestment - venture capitalists across all stages of a company’s lifecycles. It’s a shocking statistic: from 2017 to 2021 venture capital investment grew 18 times over. In 2021, the region received a previously-unimaginable $15.7 billion in VC investment, mainly focused in Brazil and Mexico.

However, as has happened around the world, this year the region has faced a cool-down in investment. During the first quarter of this year there were 35% fewer dollars invested than in the previous quarter. The reasons for this are complex, but they include the rise of interest rates (increasing the cost of capital and decreasing the value of anticipated growth), a rise in inflation and supply chain disruptions, war, and a general sense of uncertainty.

With capital flowing less freely and investors becoming more discerning, many companies have had to make adjustments in their financial and operative plans, including cutting down wasteful spending and restructuring the team. While these can be challenging times for all startups and entrepreneurs, for the best companies it can be an opportunity for those who boldly set their sails to the changing winds.

Financial Discipline

The current situation is a fair reminder that for all of its aspirational content and visions for changing the world, the venture capital world is eminently capitalistic - and rightfully so. The big outcomes are not created by those who just have a big dream or good intentions, but rather by those who can marry that vision with a financial plan and discipline to turn it into a large and self-sustaining enterprise that can create compounding value.

This is a time to question your company’s uses of capital and how they help get the company to that self-sustaining future. For example, instead of investing in an initiative that will have long-term benefits, focus instead on improving current products and processes in ways that can drive immediate results. Rather than recruiting many new team members who will take time to ramp up, consider investing in training and developing your current team. If you’re spending on marketing, look at your CAC Paybacks and how you’re bringing down the cost of each channel down to under 12 months.

Profitability

To become a self-sustaining enterprise, every company needs to attain profitability. Startups have the opportunity to not be constrained to their own revenue, and instead get an injection of capital to go through an investment period during which they can focus on creating rather than charging. It’s like a slingshot effect that allows for these leaps into the future to happen. But pull a slingshot too far back and it breaks.

In the current market, it’s become more important to show that the slingshot is not pulled too far back and that you can be profitable (and if you already are and are growing at multiples Y/Y, congratulations - a new mythical creature will be named in your honor!). Venture capitalists want to fund these slingshots, but they also want to know that the shots are solid. You can do that by demonstrating progress to profitability, simplified in order of increasing validity:

Unit economics: show, at least at a theoretical level first, how for every unit of whatever you create you can actually have a workable margin.

Gross profit: show through your actual operations how the revenue that you bring in is greater than the direct costs associated with bringing in that revenue.

Net profit: show that you can generate enough gross profit to cover all the fixed or overhead costs.

Do this, and you’re well on your way!

There’s Capital Seeking Investments

The past two years have been record-setting not only for startups and entrepreneurs, but also for venture capitalists. Last year venture and growth funds in the US raised over $120 billion dollars, and it’s estimated that they’re currently still sitting on over $200 billion dollars of capital to deploy. Kaszek and monashees - the two leading VCs in Latin America, have each raised record-sized funds recently. It’s clear that there’s still plenty of capital - arguably more than ever before - seeking the right opportunities to invest. But with more pressure being felt by investors themselves, ther bar has gotten higher. Ultimately, this is healthy for the entire ecosystem, and if we make the most of the moment we’ll soon be ready to reach new heights.