2023 will be a fantastic vintage for VC in Latin America
Updated: Dec 9, 2022
by Jimena Pardo
Anna Piñol (NFX); Is it a good time now to start a company in LATAM?
Brian Requarth (Latitud): I thought it was a good moment 15 years ago, it's an incredible time now!
-- Beta Podcast Latam, Episode 3.
2023 will be a fantastic vintage for VC in Latin America.
Next year's macroeconomic forecasts paint a bleak picture, with no end in sight for the Putin-Ukraine war, continued Covid-19 restrictions in China, the threat of invasion for Taiwan, rising interest rates as countries enter a recession, and public markets that have yet to hit rock bottom. So why am I so bullish on Latin America? Now is the perfect time to back founders in LATAM, and here's why:
The capital opportunity
Global dry powder is at a historic high and will lead to increased venture activity in the coming years in Latin America. Despite the market correction, the region continues to attract some of the most active foreign investors in 2021, with over 400 new investors entering the market in 2022. Some top late-stage funds, such as Greylock, Industry Ventures, and Battery, also invested in the region for the first time.
Number of deals per year.
Source: Press releases, Crunchbase, ALLVP Milky Way
According to LAVCA's Q3 2022 report, 44 funds have raised over $4 billion to deploy in the region. For those of us who have been building the entrepreneurial ecosystem in Latin America for over a decade, we are more optimistic than ever acknowledging that 2022 has been the highest second year for fundraising in LATAM. This historically high level of dry power will make it possible for the best startups to tap into the capital that'll make them regional and even global companies.
Overall, Latin America offers strong potential results for investors due to its large, growing markets and scalable business models that address the region's needs.
Money is more expensive for everyone today, which means companies will need to be more strategic with their use of capital and it will be harder to raise funds for growth stages. As a result, entrepreneurs will need to fundraise at lower valuations and prioritize cash over growth. They will also need to be obsessed with their value proposition and the market value of their service. In order to succeed, their companies will need to provide a service that is substantially faster or cheaper than incumbent competitors. Entrepreneurs will also need to shift their mindset from “valuation arrogance” to “product arrogance”, since the latter will be the true driver of growth, not spending on advertising.
Overall, starting a business during a recession can be a good way to gain experience and build a strong foundation for future growth. By positioning your business to take advantage of economic upturns as they occur, you can set your endeavor up for long-term success.
Digital momentum and infra
The pandemic has been a major catalyst for digital growth in Latin America. According to Atlantico's LatAm Digital Report, internet penetration in the region has surpassed that of China and India and is approaching the levels of developed economies, with a 78% penetration rate. This presents a great opportunity to build products for the less tech-sophisticated individuals. In Mexico, more than half of internet users joined in the last decade!
In Mexico 52 million people joined the internet during the last decade
Source: World Bank
Not only are more people joining the digital ecosystem, but the infrastructure in the region is also improving. For example, when we launched Carrot a decade ago, one of our biggest challenges was dealing with payments. We connected directly to Santander, but they would disconnect us every 15 days because we were flagged as "high risk" and our volume was too small for anyone to take notice. It was difficult for a startup to thrive when it couldn't even receive money. Today, entrepreneurs have a wide range of solutions available to them, from Stripe to Conekta to Toku, which focuses on recurring payment processing.
The entrepreneurial spirit is alive and blooming in Latin America. The region is home to amazing alumni from local successful startups, including Cornershop, Meli, Loft, Nu, Rappi, Bitso, Kavak… et all 🦄. This is the result of investment and support for innovative companies over the past decade, as well as the influx of big tech companies and foreign talent. Today´s talent in the region is more experienced and readily available than ever before.
While it is true that some startups will fail, the entrepreneurs and employees who are part of these ventures will emerge stronger and wiser. And even though only a small percentage of startups drive the majority of returns (6% of startups end up driving 60% of the $), the legacy of skilled, risk-driven talent will pave the way for future successful entrepreneurs. If you are in this position, be sure to hit our Office Hours ;).
Despite the challenges, entrepreneurship can provide a sense of personal fulfillment and satisfaction, especially for those who are passionate about their ideas and have a strong sense of self-motivation. Latin Americans are used to “challenging times” and brave enough to take this opportunity.
Most Latin American countries face common challenges, such as high levels of poverty and inequality, inadequate access to education and healthcare, crime and violence, corruption, political instability, low financial adoption, and inefficient high-cost services. Technology has the potential to significantly improve many aspects of life in the region, by implementing successful models from other parts of the world and creating huge addressable markets. This is why, at ALLVP, we back formidable founders solving Latin America's hardest problems.
These are my 5 cents on why 2023 would be an amazing year for VC. Feedback is a gift!