The Importance of Investment Rounds for Latam Startup GrowthBy Andrea Picardi | Mon, 05/09/2022 - 14:00
Financial support can make a world of difference between an idea in a pitch stage and one that can put its name on the billboards of the most important stock markets in the world.
Recently, Crunchbase revealed that the startup ecosystem in Latin America is the biggest worldwide in terms of growth when it comes to venture capital investment. This announcement may come as a surprise but, in reality, it is a consequence of the entrepreneurial ecosystem development in the region. This proves that Latin America is a hotbed of ideas designed to solve real problems. These ideas create small or medium businesses (SMBs) and these SMBs need a vote of confidence to grow: financing.
Classified as seed investments, early stage investments (A and B) and last-stage investments, which include Series C, D and further successive letters, investment rounds are essentially the growth process of a business via an external investment. They are steps in the process of turning a clever idea into a revolutionary enterprise.
When investors see potential in a startup, this leads to the pre-seed financing. It is normal that at this stage the money comes from the so-called angel investors, in the vein of the popular TV show Shark Tank. It can also come from family or friends, or even the personal savings of the business’ founders. This is the first gamble for investors and, normally, it involves the least investment of capital. Hence, it is also the riskiest because, as I mentioned earlier, in the end it is a vote of confidence for an emerging idea.
As startups keep growing, the rounds’ names also progress. Series A and B are crucial because they represent the necessary equity injection to invest in concepts such as a marketing strategy, talent acquisition and an increase in research and development departments.
Series C and D investment rounds are perhaps the most representative in terms of growth. To achieve Series C and D rounds is an indicator of great performance within a startup, as these investments allow them to expand toward new markets, purchase other companies or develop new products. For example, it was during a Series C round that Kavak, a startup specialized in the commercialization of used cars, became the first Mexican unicorn by obtaining investment funds from partners such as Softbank, Greenoaks Capital and DST Capital. According to Crunchbase, a big part of risk investment in Latin America belongs to Series C investment rounds.
The entrepreneurial ecosystem in Latin America is experiencing a historical moment. However, regardless of the miles traveled, startups always face numerous growth challenges, such as finding a monetary ally that allows them to seize the opportunities offered by the premium financial sector. It is understood that the SMBs belong to a segment sometimes eschewed by the traditional banking schemes, or rather, they do not receive the necessary or adequate backing to enhance their growth. This is why they find ideal aides in fintechs in order to free themselves from local financial barriers, learn about new technologies and expand the ecosystem. In many ways, this gives them more than a shot to survive beyond investment rounds.
Financial support is fundamental for the sustainability of any business, whether it is an early stage, Series A-funded startup or a unicorn. Speaking about the obstacles, McKinsey revealed that around 200 million SMBs in emerging economies lack access to savings and formal credit. This is one of the biggest challenges in the industry, and the creation of digital financing solutions is poised to become the best strategic resource to close the financial gap for up-and-coming entrepreneurs.