Fabrice Serfati
General Partner & Managing Director
IGNIA Partners

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Has VC Doomsday Hit Latin America Too?

By Fabrice Serfati | Thu, 07/07/2022 - 12:00

These are, indeed, interesting times. In six months, we have seen the VC ecosystem go from ecstatic and bullish to doomsday and bearish. We’ve gone from a world where every 10 minutes a new huge valuation and a unicorn would be announced to one where funding is scarce and “reasonability” and “take your time” are more often heard during fundraising decks.

I hear some of my colleagues at public events stating that we will never go back to the valuations we have seen in the past year. I read posts by YC or Sequoia warning founders about the next 18 to 24 months. I hear people using tech public stocks as a proxy for private startup valuations. There’s a LOT of noise out there!

My view on the VC ecosystem for the Latin American market is that this continues to be the BEST time to invest in digital platforms in the region and the best time to build long-lasting companies that will bring products and services through digital platforms to the emerging middle class in the region.

My last contribution to MBN was about the fundamentals/demographics of the region and why I was bullish on the region. Nothing has changed. The underserved markets are still here, the connectivity is still here, the willing customers are still here. I will agree that inflation is eroding purchasing power but since most of the needs are being satisfied by suboptimal solutions, in many cases the digital product offer is a substitution of traditional products at a better pricing.

In our region we have been exposed to many economic and financial crises. This is the time to put to use that built-in resilience and continue building value in startups.

If anything, clearly this is the time to get back to basics. Some ideas for founders in that spirit:

  1. Entrepreneurs should always be fundraising. Growth is about having cash at hand to build a team, a product, a customer base. Always have enough runway even if that means sacrificing ownership through dilution.
  2. Building a valuable business is through healthy and sound unit economics, even if there is a ton of money around, if your unit economics are poor, you will hit a wall. Critical mass does not create value. Sure it can absorb fixed costs but it will not enhance the individual unit economics, so better to focus on improving your lifetime value and the cost of acquiring customers before growing. Be brave and bold when looking at the economics of your business.
  3. Be sure that the value proposal of your startup actually solves a problem for your customer base. This is the best way to maintain the relevance of your company for your clients. As a founder, having constant feedback and communication with your users is the way to understand what is working and what needs to improve. A healthy balance between growth and retention should give you color on the relevance of your product.
  4. Having an engaged team will be an asset in turbulent times. Talent retention is much more than just the economic benefit. A sense of empowerment in the company and a strong purpose have proven through the years to be ingredients for a culture to stick around.
  5. Having in your cap table relevant partners is important all the time. Having a strong cap table during a crisis will define your survival. Funds that will continue to support the company, funds that will bring in new investors, funds that are in it for the long term are the ones that you should prefer.
  6. Finally, and this one can´t be said enough: the startup creation business is one of creating long-term partnerships. Founders who have built their businesses by roughing up investors, their teams or any relevant partner of their companies will have a hard time surviving difficult times.

Coming back to valuations, they are the “price” of the equity of the company. In times of scarcity, we all know we are overpaying for something, either a participation in the equity of a startup or for the money. This is where having a long-term vision can “regulate” the conversation. In the long run, crises will alternate with “bonanzas.” The sound way to create partnerships and lasting businesses is by sharing value.