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The tech market crash and why Latin America will prevail

By Courtney McColgan - Runa HR
Founder and CEO

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By Courtney McColgan | Founder & CEO - Mon, 08/08/2022 - 15:00

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2022 is starting to look a lot like 2000.

At the beginning of the year, startups were hot. Founders were on the covers of Forbes. Companies who had “made it” were being featured on Netflix. Investors were saying: grow, grow, grow. Valuations were rising (much faster than revenues), new unicorns were being announced on a weekly basis and companies were going public.

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Source:https://news.crunchbase.com/business/unicorn-board-startups-data-april-2022-shein/

A month ago, all that changed. The Nasdaq has dropped over 30 percent (a continuing trend since August). The world started to fall into a recession. Technology stocks plummeted in value. Hot tech companies that went public in December 2021 for US$50 billion lost 70 percent of their market value. Startups that closed US$200+ million rounds a few months prior, laid off large numbers of employees. Investors changed their tune to: fire, fire, fire. And going public? Well let’s just say that ship sailed.

Sounds like the dot-com bust of 2000.

In the late 1990s, there was a similar technology boom. There was a focus on growth, particularly growth over profitability. Companies were going public on a monthly basis without any rational economic grounding. Netscape was valued at US$2.5 billion without having any revenue and operating at a loss.

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Source: https://www.statista.com/chart/11443/venture-capital-activity-in-the-us/

Then, in March 2000, everything changed. The Nasdaq plummeted 60 percent. The world went into a recession. Technology stocks bottomed out. Pet.com, a hot startup that had just IPO'd at the time, saw its market valuation drop from US$300 million to zero. Amazon shares went from US$100 to US$7, a 93 percent decrease in value. And many technology companies (both public and private) went bankrupt.

So, what does that tell us about today? What happens to the technology sector now?

In the short term, a lot of pain. If you look at the dot-com bust of 2000, it took about three years for the technology markets to fully recover. Unfortunately, most startups don’t have that much cash in the bank. They are also far from being profitable. So, we will likely see a lot of startups close their doors.

In the long term, we will survive and even flourish. We recovered from the dot-com bust of 2000 and we will recover from the same bubble bursting in 2022. Technology is the fastest and cheapest way to solve today’s problems. That fundamental thesis has not changed and will continue to churn out billion-dollar unicorns far into the future.

What does this mean for Latin America?

The startup boom in Latin America is a fairly new phenomenon. I remember when we raised money for Cabify in 2014 and nobody from Silicon Valley would talk to us. The only open doors were from investors in Asia and the Middle East. Later, in 2017, when I first raised capital for our startup, Runa, not much had changed. Silicon Valley doors were still pretty much closed to Latin America opportunities.

It really wasn’t until 2019 that the tides started to change. A couple of factors motivated that shift. Softbank announced its US$5 billion Latin American Fund. Nubank raised US$400 million at a US$10 billion valuation (just seven years after launching). Rappi closed US$1 billion in funding (just five years after launch). The number of technology companies valued at over US$1 billion exploded to 15 from just two during the entire decade earlier. (Source)

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But those Latin American unicorns that received their spotlight in 2019 were not built overnight. They were built long before the capital market tides changed in 2019. They were built long before Silicon Valley funding flooded into the Latin America market.

While it won’t be easy, there’s more than one indicator toward a brighter future.

Technology adoption in Latin America is unparalleled. In the US, consumers went from owning a traditional phone at home, to getting their first cellphone, then getting a personal computer, and then moved to a smartphone that, in some cases, replaced all of the above. Comparably, the majority of consumers in Latin America went straight from a traditional phone to a smartphone, giving the region one of the highest and fastest-growing smartphone penetration rates in the emerging markets. Skipping steps has accelerated technology penetration in Latin America, making it an attractive market in which to build technology products.

Entrepreneurs in Latin America are also built differently. For a variety of reasons (political, economical, and social), doing business in an emerging market is challenging. Entrepreneurs in the region live and breathe uncertainty, making them highly adaptive and resilient leaders. Having limited access to investment has also made them more resourceful and creative when solving problems.

The problems are real and the solutions are hard to build in Latin America. The challenges are fundamental and massive banking the unbanked, providing affordable healthcare, making education accessible. One-solution-fits-all scenarios don’t totally work given differences politically, culturally and economically across countries. Massive bureaucracy and tons of red tape make the day in and day out of building a business in Latin America just plain harder than in the US.

But those that can build something great can make a massive impact and build multibillion-dollar companies in the process. What is more, these large-impact projects motivate leaders and employees alike, resulting in incredibly driven teams that can do anything to win and use that energy to sail through market downturns, economic recessions and more.

The next few months will not be a walk in the park for anyone but it will allow the technology sector to clear the air and create space for Latin American startups to, once again, step into the spotlight and shine. After all, if we don’t build it, who will?

Photo by:   Courtney McColgan

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