Vincent Speranza
Managing Director
Endeavor

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Expert Contributor

The Music Has Changed but Latam Investment Party Is Not Over

By Vincent Speranza | Wed, 08/03/2022 - 15:00

Last year was a record year for the tech startup sector in Latin America, with valuations, unicorns, mega-rounds and investments announced almost every day. However, 2022 has reminded the ecosystem that every rise is almost always followed by a fall. This can be seen as a party that has been going on for a long time and is coming to an end, but the party is not over yet, only the rhythm of the music has changed.

It is important to remember that the venture capital ecosystem in the region continues to mature and we are not in the midst of an apocalypse, although we do find ourselves in an environment with different circumstances, such as alarmingly high inflation rates that cause uncertainty and raise questions regarding both current valuations and new investment rounds, generating doubts in the sustainability of the ecosystem.

With a history of low interest rates globally in previous years, the question among the guests of this great party is whether the potential of the investment activity that we experienced in 2021 will continue when the panorama becomes clearer.

The answer is that a global correction is beginning and entrepreneurs in the region will need to prepare for a more complicated fundraising environment in the coming months. Like any party, after the fun, comes something calmer: a hangover from which it is necessary to recover. Today, we are in that stage. Fortunately, it is temporary, but it will result in some new practices.

Let’s take a look back and see what made 2021 an extraordinary year, so that we can get up after this discomfort passes and continue with lessons learned and even more energy than before.

In this regard, Endeavor, together with the support of Glisco Partners, mapped and analyzed nearly 2,000 startups and scaleups from Brazil, Mexico, Chile, Colombia and Argentina, more than 3,650 investment rounds and more than 1,200 active investors in order to provide information to the region in both prosperous and uncertain times and allow the entire entrepreneurial ecosystem to make better decisions.

In 2021, venture capital investment in startups and scaleups originating from Brazil, Mexico, Chile, Argentina and Colombia totaled US$15 billion, a historic figure, almost quadrupling the previous year and up by 1,391 times since 2010. But let's break down what is behind this data:  about 80 percent of the investment is concentrated in Brazil and Mexico and in 2021, the fintech sector led the investments, followed by e-commerce. These two industries captured 63 percent of the investment.

But how difficult is that to achieve? An example is that only 5 percent of the technology startups and scaleups mapped have reached a Series C, which represents the complexity of raising capital and that success is not guaranteed even with access to capital. Also in 2021, the average time to reach a unicorn valuation was seven years, returning to pre-pandemic levels. On the other hand, we must consider the difficulty in terms of gender representation: only 2 percent of entrepreneurs in the technology sector who manage to raise an institutional round in Latin America are women.

Regarding the unicorn landscape, there are still challenges: globally, unicorns may be more common than they used to be in the region, they represent only 3 percent of the total and less than 0.0001 percent of the companies in Latin America. Furthermore, of the 31 unicorns in Latin America, 78 percent are concentrated in Brazil and Mexico (58 percent and 20 percent, respectively).

On the other hand, the soonicorns in the region represent only 9 percent of the companies that have managed to raise capital and 0.0006 percent of the companies in Latin America but they contribute to the generation of more than 34,000 jobs. Finally, in 2021, unicorns and soonicorns represented less than 11 percent of the companies that raised an institutional round and managed to capture 92 percent of the investment.

Other data to take into account and lift the spirits: the number of mega-rounds in the region increased by four times from 2020 to 2021 and by 38 times since 2017, with Brazil leading with the largest number of this type of round. On the other hand, in 2021, foreign investors participated in 62 percent of investments. Regional funds participated in 38 percent.

What made 2021 the “party” year for venture capital? Years and decades before in Latin America, the dream of entrepreneurship seemed to lack the necessary ingredients but, recently, the region laid the foundations for successful entrepreneurship. In addition, although the capital raised was still concentrated in a small percentage of companies, unicorns and soonicorns set an example for thousands of entrepreneurs in a region characterized by political instability and inequality.

We could summarize that 2021 was a year where the opportunity that exists in Latin America was more evident than ever. With a large percentage of the population still without access to financial services, technology in the region is often more about inclusion than disruption, which allows extraordinary opportunities to arise. In addition, the pandemic acted as a catalyst to boost electronic commerce and encourage the digitization of the Latin American user with an infrastructure that was prepared to allow it.

That was the “theme” of 2021. Now, as an ecosystem, we have to think deeply about what the next one will be or what circumstances will make it possible for this great party to continue in the coming years.

Photo by:   Vincent Speranza