Alejandro Villalobos
Managing Director, North Latam
Cumplo Mexico
Expert Contributor

Time for a Reality Check

By Alejandro Villalobos | Mon, 08/15/2022 - 16:00

The world is facing uncertain times. Companies are aware that the main reasons have come from “outside:” the war with Ukraine, along with the COVID-19 pandemic, which has, for the past two years, continually transformed several consumer models and production chains, temporarily or permanently.

However, from a more regional and even local perspective, there are other factors we could have prevented and whose tangible consequences we are already starting to experience. Global warming is diminishing our ability to produce and distribute food in different latitudes, which seems to indicate we are irretrievably approaching a food crisis. Approaching a sustainability profile from within the business model and organizational values is no longer an option; it is practically an obligation.

On the other hand, we have the effects of the reckless growth of some startups that took advantage of the appraisal “boom” and are facing several unfortunate consequences today. Last month, we talked about how becoming a unicorn is not the only way to grow and how it shouldn’t be an end but rather a consequence. On that same track, there is a lack of understanding about how to make decisions on flux acquisitions that are not in line with the operational reality, which can place us in risky situations.

The market is already presenting signs of this. Last week, the Irish startup Stripe saw its value drop 28 percent, according to sources from The Wall Street Journal. This appraisal adjustment can be added to others, such as Klarna, which saw its appraisal fall 85 percent and other startups whose value promise is beginning to adjust to the current trend.

As of July 18, 2022, the website StartUps Alumni shows almost 650 profiles have left regional companies in the last three months. Six percent of the candidates come from unicorns and close to 30 percent from financial technology (fintech) companies. It is noteworthy that 54 percent of them are in Mexico, followed by Colombia with 28 percent; however, there could be a relevant bias: the webpage is focused on the Spanish-speaking market, so Brazil’s participation, at least on this list, is very limited.

During a webinar we recently offered at Cumplo, in which we invited startups that grew during the pandemic, Chiara Sheldon, COO of Reworth, said something that was incredibly reasonable: “Many companies still have the goal of becoming a unicorn and nowadays that is not sustainable because to be a unicorn you have to grow very fast. What you have to be is a camel; the camel can adjust to external environments and, from that perspective, maintains a balance and attains sustainable growth.”

The pressure for accelerated growth comes from grand investors who force startups to “fatten” the organization: they increase their headcount believing there is a correlation between payrolls and growth speed but this is not necessarily reflected in product quality or the offered services.

Often, the diminishing returns of growing uncontrollably not only have an impact on the top line but can also produce a negative overall effect: without a clear and differentiated value proposal that doesn’t become obsolete in the medium term, without an operational structure that finds the balance between flexibility and efficiency, without a transversal corporate culture that manages to agglutinate the values and organizational criteria, and without a responsible leadership that is not fooled by vanity metrics, many entrepreneurs might be running into walls some higher than others that they will have to jump over sooner rather than later.

There is always opportunity in times of crisis, which is why observing the situation in which we find ourselves, understanding our market, generating value proposals, and finding the correct customers are relevant points. At the same time, identifying how to bring profits into our current business, beyond projecting to five or 10 years, can make the present a moment to settle and be flexible. Make those choices unequivocally to experiment speedily. Considering the risks, of course.

We must learn the lessons from the current context: aim for the long term but focus, now more than ever, on offering results in the short term. A lot is said about unit economics as an increasingly popular criteria among investors to evaluate business: how much profit can you generate with each individual sale? What short-term investment instruments benefit me in the short term and allow me to face my liquidity problems and settle the business that is allowing me to grow today? Should I offer short-term financing (30 to 120 days) or a longer term of four years when facing a highly uncertain and potentially volatile scenario? Every business is different and for each one there are specific answers but what we all must agree on is that today, more than ever, we must take two steps back and evaluate all the cards we have laid out on the table.

Photo by:   Alejandro Villalobos