Despite some significant recent changes in market dynamics, wealth creation can still be promoted through the smart deployment of investment management services, according to industry experts.
The venture capital (VC) and investment management sector experienced a rough landing in 2022 that revealed much about the state of the industry, according to Luis Barrios, Founder and CEO, Arkangeles. The first five months of 2022 contrast sharply with an extremely successful 2021 that was characterized by large funding rounds being announced at an accelerating pace, resulting in record numbers of new unicorn and “soonicorn” entities and entrepreneurs, particularly in Latin America. Now, sobering market indicators and the problems arising in the crypto and NFT spaces have challenged the positive assumptions made at the year’s outset. Barrios says that this is an opportunity for companies to focus more on their commercial divisions and a little less on technology so as to consolidate their resilience and flexibility. “Funds will notice the ‘cockroach’ companies that can survive this nuclear winter. This will lead cockroaches to transform into unicorns,” said Barrios.
The Mexican and Latin American VC and startup spaces can “evenly match and overcome their competition in the US and the EU, so that we can remove that attitude as colonized countries that dictates that we cannot hope to compete,” said Barrios. Simultaneously, he cautioned against complacency from Mexicans, making clear that foreign startups or Mexican startups led by foreigners can easily overcome them. “Mexicans should not expect to have an advantage in Mexico simply because they are the ones working in their own national territory,” said Barrios. Fund and investment managers must also be honest with themselves about what they are selling to their customers, he added. While many companies offer a path to financial freedom, they do not fulfill that promise, leading to more skepticism and lack of trust.
These conditions outline the obstacles ahead for the sector. “There needs to be more audacity among traditional companies to draw in skeptics and to accelerate the ecosystem. Collaboration between big and small companies also needs to be strengthened. There are still biases among large transnationals against purchasing from newly created companies,” said Barrios.
While the years before 2022 were extraordinary, the nervousness that this year has generated is quite palpable, said Javier de la Madrid, Head, GBM+. Numerous investors with a prominent presence of cryptocurrencies in their portfolios are now scrambling to deal with sudden and sharp contraction of this market. However, fintechs could still benefit new adopters, said de la Madrid. The reason is that many in Latin America are unbanked and those with a bank account are not satisfied with the service, representing an enormous opportunity to offer new ways to build wealth. “Banks have not managed to innovate at the same pace as fintechs and this represents a big opportunity. Latin America is at a very good moment. Large capitals have entered the region and many of the funds still have a considerable share of that capital. Proactive companies with a talented team can still access the available capital.”
An important part of fulfilling this sector’s promise is the matter of diversity, according to Anna Raptis, Founder and Managing Partner, Amplifica Capital. The risk capital industry is in serious need of more inclusion initiatives that drive the diversification of its participants. This diversity needs to cover gender and race, but also socioeconomic status and cultural background. “A large challenge is to drive inclusion and provide access to a larger segment of the population, fostering creativity and enriching the risk capital sector,” said Raptis. Other issues to be addressed include the need to simplify regulations, which are quite complex in Mexico, according to Raptis. The sector also needs to foster grassroots efforts to support smaller national funds and companies. As Raptis explains, “It is key to support local funds. These are the foundation of the industry in Mexico and it is necessary to strengthen their results.”
Supporting local funds also means giving more access to risk capital to local companies that address needs specific to the region. It also means giving more access to investment services to local populations whose needs and capacities might be ignored by larger transnational entities, said Raptis.