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Breaking Point or Resiliency: Facing an Economic Downturn

By Cinthya Alaniz Salazar | Tue, 06/21/2022 - 15:19

Latin America was one of the fastest-growing venture capital destinations, growing three times over in 2021. However, ballooning interest rates and compounding macroeconomic conditions foreshadow an economic downturn that could potentially wipe out startups in 2H22, according to data from an Endeavor report. 

This situation “will generate for entrepreneurs: a slowdown in investment activity, a freeze in hiring and even dismissals, market capture strategies versus continuing with international expansion, as well as less favorable valuation conditions,” reads the report. 

Mexico’s economic recovery continues to sputter, undercutting initial growth projections by the country’s central bank. This is true for other Latin American and Caribbean countries that have similarly been impacted by the Russia-Ukraine war, high inflation and a slow employment recovery, according to estimates by the Economic Commission for Latin America and the Caribbean (ECLAC). Cumulatively, these conditions have coalesced to detract the fiscal momentum that was observed in 2021, posing serious implications for the region's startup ecosystem. 

As this situation unfolds, Latin American startups are seeing investors pull back, forcing them to reevaluate their business strategies and resort to cost-cutting counter measures. At the disappointment of startups and unicorns in the region, some may have to delay their IPOs for some years. Across the board, indiscriminate of industry sector, startups have already announced a wave of layoffs including: Facily, VTEX, Bitso and most recently Kavak. The greatest challenge, however, will be to navigate the second half of the year during which the investment slowdown will be more pronounced. 

“A more complicated landscape is expected for entrepreneurs in the next 12 to 18 months. However, there is a ray of hope for some… this is an opportunity for the strong to become stronger,” said Martin Escobari, Co-President, General Atlantic. 

In other words, 2H22 will be the ultimate trial period for startups and unicorns to demonstrate their capacity for resiliency in the face of austere liquidity. As indicated by the report, companies will have to take a serious look at their strategic roadmap and consider how an economic recession in the US is likely to impact the inflow of venture capital in the region. According to the research, it is expected for consolidated companies to pursue mergers and acquisitions with liquidity events.

The data used in this article was sourced from:  
Endeavor, ECLAC
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Cinthya Alaniz Salazar Cinthya Alaniz Salazar Journalist & Industry Analyst