Latin American company capital and growth investments through 2018 averaged less than $2 billion annually. With quality growth companies starved for capital, the few investors operating in the region made a killing. For example, General Atlantic has invested in its Latin American franchise over several cycles and has an IRR (internal rate of return) of more than 50% of those vintages.
As a technology banker, I thought there was an opportunity to invest in the region and decided to quit my job at JP Morgan and give it a try. When I called my former boss Nicolas Aguzin to thank him for his support, he said he would introduce me to SoftBank’s Marcelo Claure. In March 2019, we had launched SoftBank in Latin America with an initial commitment of $2 billion, which at the time was worth more than the entire industry.
Big companies like Nubank, Inter, Gympass, Quinto Andar and several others were in their early innings at the time, but the market disruption didn’t last long. Latin America became the fastest growing VC region globally and the market expanded to $16 billion by 2021. In 2020, I established a new growth fund to close the funding gap in the region, giving me the opportunity to see how startups from recent vintages did it in a bonanza scenario.
Fast forward to today, late stage financing in Latin America has been hit hard with volumes down 93% year-on-year in the third quarter of 2022. Our assumption is that the region will suffer more than other markets in the future due to the lack of available local growth capital.
The chart below shows that of the 290 investors targeting late-stage rounds in 2021, only three were active in the third quarter of 2022. In addition, only 24% of those investors in 2021 were local, the majority of which were not – was dedicated. growth capital and included a large number of individuals, hedge funds and family offices.
By solving local problems, startups build pricing power, which would allow them to thrive.
Early-stage financing has remained relatively active so far this year, with many good companies raising early rounds, expecting to hit the market in 2023. But more than 200 late-stage Latin American companies are holding back as much as they can before trying to raise additional capital. Foreign capital will cover only part of these financing needs.
I started my career in private equity in 2002, but my first job at JP Morgan was simple: writing portfolio reviews and helping to wind down a large portfolio of internet companies that had had their fair share of glory, but by then were mostly were failures. What I learned from that time about how some companies thrived while most failed is part of what we share with our portfolio companies today.
Here are a few takeaways:
Milk every dollar, save every penny
Below are a few examples of how companies have gone to great lengths to stay afloat and ultimately thrive:
In 2001, MercadoLibre applied a freemium strategy to gain market share in the highly competitive Latin American online auction market. Users could sell their products on the platform for free, which naturally boosted GMV’s growth. By 2003, that was gone and the company quickly introduced fees in all of its markets.