What Does 2023 Hold for Venture Capital?

Thanks to Venture Capital, Mexican entrepreneurs and investors have a competitive ecosystem that allows the development of startups and SMEs with different approaches. As a result, our country is positioned as an economy that offers opportunities to emerging companies with high potential. 

Mexico has approximately 574 startups, ranking 26th in the world, according to Startup Ranking, and it is the second-largest startup market in Latin America, behind Brazil. 

When talking about a startup, it is worth considering  that we are referring to a recently created company, dedicated to the commercialization of goods and services with a mainly technological approach. However, the application of new technology is neither everything nor the most important thing as there are traditional companies with attractive business models. That is why venture capital is a diverse  source of financing and it is important that companies that require an investment be properly aware of the type of fund suits their needs. 

One of the main appealing features of our country is its geographical position, making it a point of reference for starting projects and expanding into new markets, such as the US and Latin America. 

Venture capital can work hand to hand with entrepreneurs and business owners to improve their cash flows and review or rethink their business model. Private equity funds invest in companies that generally do not have access to traditional investment alternatives, such as bank loans. 

There are also some funds that inject venture capital into companies during their earliest  stages. To approach them, it is important to previously investigate if the project fits their investment thesis, as sometimes they may trust in an idea even if it is just in development. 

In contrast to loans or credits that charge high interest rates, venture capital offers funding resources in exchange for a share of the company. The startup or company receiving capital will return the money invested through the repurchase of the shares, or with the income acquired in case it is sold to a larger company or if it goes public. 

According to the Mexican Association of Private Equity (AMEXCAP) , in 2021, just over 70% of the co-investments that were carried out between Mexican and international funds were placed in Mexican companies. And all Mexican unicorns received investment from a foreign fund. 

Therefore, one of the main challenges to venture capital in our country is the need to promote investment from both individual and institutional investors since the industry has become more cautious. However, thanks to the support of business accelerators and specialized funds, the work of MSMEs does not remain only in investment, it goes further, with the intention of driving operational improvement. 

Among the most attractive sectors for venture capital investment in 2023, those industries concerned with inclusion and democratization, such as edtech or insuretech stand out. Among the key issues for making the best investment decisions are the concern over climate change and the need to provide solutions to social problems. 

Here is a list of the seven most attractive sectors to invest in: 

1. Impact investment: Specifically, projects that follow the UN Sustainable Development Goals. Global geopolitical factors, supply shortages and rising prices have become a watershed for clean energy development, research and innovation. In this way, the industry seeks to offer accessible solutions to society. 

According to Dealroom, emerging companies focused on generating clean energy and fighting against climate change were positioned as the best subsectors within impact investing. 

2. Insurtech: This sector specializes in companies that adapt different technologies to speed up traditional processes in the insurance sector. This combination has promoted progress in the industry, which makes it a field of opportunities for this year due the growing interest among the younger generations in taking care of their health and being insured. 

3. Software: Different industries have been forced to change or adjust some processes to improve the customer experience through the use of apps and software. In this sector we can find two categories: 

• Application software: those that make the task easier for users. 
• Infrastructure software: designed exclusively for use by companies and allows them to manage internal processes or databases. 

4. Foodtech: We make reference to the technology that transforms the food industry through different processes up to consumption. This field requires investment to continue with research and ensure the same growth rate. 

5. Biotech: The application of biotech in different sectors, such as medicine or agriculture, will be relevant to respond to different environmental and social  issues. As a result, investors will focus on promoting its progress. 

6. Edtech: This sector experienced high growth during the pandemic. Its main challenge is to make education accessible to everybody and to reduce the education gap. Latin America is a market with great potential in this area. 

7. Logistics: Consumer demand and the application of technology to stimulate the different processes involved in shipping a product until it arrives at the customer’s door, are attracting the attention of investors after an e-commerce boom during the pandemic. 

Subsectors like operational technology, sustainable operations within the supply chain, advanced technology, such as Big data or AI, and circular manufacturing practices will have to be considered . 

Let’s recall that venture capital as an investment model that looks for companies in development with high potential in their industry was introduced in Mexico more than a decade ago and continues to work to detonate key sectors in exchange for better profitability. 

Venture capital promotes research, entrepreneurship and innovation through key investments. It also promotes the economic development of the country by generating jobs and promoting the development of relevant industries in Mexico. 

To conclude, venture capital is an important support for startups and SMEs that are in a growth or expansion phase. Business owners  interested in raising capital for their companies should approach different funds; however, one of my recommendations is that before this contact, investigate whether  your investment thesis and project fit the profile of the fund and in turn, if the fund is coupled to the needs of the company.

Remember that behind venture capital, there is a group of investors who will be monitoring the growth of your business and they expect a profit generated by positive performance. The money invested is not a credit, so the investment can continue for a  period of approximately three to 10 years until the company achieves profitability and meets growth goals.