Alejandro Villalobos
Managing Director, North Latam
Cumplo Mexico

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About Unicorns, Financing and Other Forms of Growth

By Alejandro Villalobos | Fri, 05/27/2022 - 13:00

The term "unicorn" first appeared in a 2013 article written by Aileen Lee. In the text, the investor defined a unicorn company as any enterprise that began operations after 2003 and reached a valuation equal to or greater than $1 billion.

Since then, joining this club has become a common aspiration for a large number of startups. Although the value of a company in its first years of growth relies on many additional factors beyond the capital it has raised, there is a popular belief that a company that is successful in raising capital is synonymous with a company that is successful in its business model. But beware: private capital financing is no guarantee of a solid or profitable business.

Venture capital is not always the most suitable source of financing for any type of enterprise. There are industries, such as the restaurant industry, that cannot offer the scalability required by most venture capital funds. 

The speed of growth to achieve an IPO going public — being acquired by another company or reaching profitability can compromise the health of certain kinds of companies. Increasing the number of users, branches, or service verticals can distract leaders and decision-makers from the necessary — and perhaps less attractive — metrics to maintain the financial or moral health of the business.

In addition, the capital-raising process can take months or years and very often depends on the capital available for different stages of growth. For example, in Mexico, there is usually more private capital available to invest in early-stage or seed-stage companies than for scaling and requiring much larger rounds of capital. This explains, in part, the presence of highly capitalized international funds, such as SoftBank or Tiger Global, in C or D rounds raised by Mexican and Latin American startups.

Even so, it is common for small and medium-sized companies to seek private financing to sustain their operations, simultaneously aspiring to become unicorns. Private equity is certainly a powerful option in a sector where more convenient options for accessing capital are needed. Furthermore, there is a lack of knowledge of other financing alternatives. Being aware of these options and learning how to use them according to the specific need for capital is more of a competitive advantage than a solution to liquidity challenges.

Resignifying Financing

Unfortunately, the term "financing" sparks an unfounded fear of credit in several Latin American countries. Some consider a credit-leveraged company to be a weak company that has been forced to resort to external capital to finance its operation. Three words are enough to disprove this belief: time is money. Those businesses that are able to reduce their operating cash flow through financing will be using the time to their advantage.

When the fear of financing is left behind, it opens up many possibilities, including leasing, credit, and factoring. The options are as wide-ranging as the purposes each serves. Yet, very few SMEs in Latin America have access to them.

To a large extent, this is due to the enormous obstacles to entry promoted by a financial industry that has historically focused on consolidated businesses. In Mexico alone, for example, SMEs represent 99.8 percent of companies nationwide, according to the National Institute of Statistics and Geography (INEGI). The remarkable relevance of these businesses for the economic and social development of our communities seems not to be reason enough for traditional financial institutions to pay attention to the segment.

The emergence of the fintech sector in Mexico, willing to combat this lag in financing for small and medium-sized companies, has turned out to be a great alternative. There is more and more fintech focused on these products and most of them are making a great effort to raise capital for them. One example is the recent agreement announced between Cumplo and Fasanara: the US $40 million Latin American fintech to finance more than 1,000 Mexican SMEs with working capital through the factoring offered by Cumplo.

There is still much to be done to offer more and better financing alternatives for SMEs but the starting place may be to focus on changing the paradigms. As an industry, we must not only offer financing with appropriate terms to the reality of each SME but also disprove, gradually and leveling expectations, that becoming a unicorn by raising private capital is the only option that might exist or the main objective to pursue.

Photo by:   Alejandro Villalobos