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It is no secret that 2022 was a global complicated year for the startup ecosystem. In the case of Latin America, there was a decrease in the injection of venture capital (VC) with US$7,697 million invested through November 2022, well below the US$20,200 with which 2021 closed. There were also fewer mega rounds.
In fact, late-stage financing fell 92% in the third half of the year, according to LAVCA data. That’s not to mention the wave of layoffs at multiple companies, even those with unicorn status such as Kavak, Bitso, Wildlife, and Betterfly.
In Contxto, we talked to partners from different VC funds, who agreed that the decrease in investment amounts this year is due to the global crisis, which is causing uncertainty for investors.
As for the layoffs, they believe they are due to the fact that several companies received a lot of capital too quickly, and their investors are asking for results quickly. The layoffs would have been a way for the startups to maintain their equity, avoiding selling a very large portion of the company and thus surviving.
But what’s next for 2023? Are these trends that will continue next year? Are they bad signs for the ecosystem? Which sectors will be most favored by investors? These and other questions were answered by 500 Global, Latitude, Wollef, Platanus Ventures, and ALLVP.
Venture capital predictions 2023
Less capital for late-stage startups and more activity in early-stage startups
At the close of 2021, a record amount was invested in VC in Latin America (US$15,000). However, then «there is a re-stabilization in terms of global investment,» said Damaris Mendoza, partner at 500 Global. This was due to high inflation and interest rates, said Rogelio Rea, visiting partner at Platanus Ventures.
Federico Antoni, Managing Partner at ALLVP, agreed with these comments and said that in 2021 the focus was on very capital-intensive models and they were favored by buoyant public markets. He says that for the following year there will be good activity in early-stage startups, but investments will be slower in advanced-stage companies.
For his part, Brian Requarth, co-founder of Latitud, says that the first semester of 2023 will be very similar to the second semester of 2022. Erick Perez Grovas, co-founder and General Partner at Wollef, said that everything will stabilize and growth will return.
VC funds will return to the discipline of previous years
Venture capital firms in Latin America are facing uncertainty in the face of a critical economic scenario. For this reason, Damaris Mendoza stated that VC funds have to return to the discipline of previous years and that they will now invest in business models that make sense, are truly innovative, and with good fundamentals from the beginning.
Rea agrees with Damaris. He said that funds will now ask many more questions to startups and will be more demanding with the ROI and the productivity they generate. Therefore, Requarth said that from now on, companies should focus more on their unit economics (a method of analyzing the relationship between costs and revenues of a company, expressed in a unit, a metric that VCs look at to evaluate startups).
Startups founded in 2023 will be more scalable
Federico Antoni pointed out that although 2023 aims to be similar to 2022, with less capital for startups, startups founded in 2023 will be more scalable and with better financial prospects. This is because, as other venture capital funds have already mentioned, new companies will have better fundamentals and focus on their unit economics.
In a similar vein, Rogelio Rea states that «the best companies, the most successful ones, have been born in big crises.»
Mergers and acquisitions will continue
Even though the mergers and acquisitions (M&A) market had a 15% decrease in 2022, at a general level, not just in the startup ecosystem, several mentions that these will play a role in the 2023 outlook for LatAm.
Companies with fewer opportunities or less capitalized could be more favored by M&A. ALLVP’s Antoni says that «the lack of capital will force more startups to seek acquisition as an alternative to a shutdown.» He adds that there will be fewer small acquisitions, but we will see some large mergers between leading companies in the region.
Rogelio Rea added that with that in mind, startups will combine with a larger player in the same industry to scale. He believes that large, highly capitalized companies will look to smaller companies with a harder time raising capital to acquire talent or complementary products through their equity.
Perez-Grovas agreed, saying that mergers and acquisitions will strengthen startups, while Requart said that such moves will become more common as part of companies’ growth strategy.
Rea also said that Latin America could see the beginning of a trend that is being seen in the US and other countries: private equity funds will be financial buyers of startups. That is, they buy mainly thinking of making a profit with a subsequent sale.
The better-established startups will continue to grow stronger
Federico Antoni believes that «the strongest will get stronger» and that the best startups will continue to grow with better technology and greater efficiency. Rea added that there will be a «sort of purge of founders,» and those leading startups with solid fundamentals and that are profitable will remain.
Companies that offer B2B services will be favored
The fintech sector has been one of the most favored in terms of investment. In fact, of what was invested last year, LAVCA estimated that 42% went to this sector. The five VC fund partners in LatAm agreed that this will continue in 2023 because there are still large areas of opportunity in terms of financial services.
Beyond that, most pointed out that there will be more investments in software-focused business models, especially for those offering B2B services, which will have recurring sales and good gross margins.
Pérez-Grovas added that more attention will also start to be paid to the manufacturing and energy sectors. For her part, Damaris Mendoza said that the areas of health and mental health will become increasingly attractive.
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