Why the next few months will be the best time to invest In VC In Latin America

  • Valuations are expected to rebound and investors have an opportunity to invest at attractive risk/reward ratios if investing today, taking advantage of a significant premium result of current market dynamics.
  • Entrepreneurs in the region have a better understanding of how to build successful venture-backed companies and are seeking the right partners to help them succeed.
  • Investors are realizing the importance of business fundamentals and valuations have slowed across all stages.
  • The normalization of private markets has led to a wave of layoffs in the region, which will ultimately lead to a more sustainable startup ecosystem.
  • New, complex and innovative business models are emerging, providing a great opportunity for investors to get in on the ground floor.
  • The historical uncorrelation between public markets and VC can provide investors with a buffer against market downturns.

It’s been a while since we’ve seen such positive signs for the VC industry in Latin America, primarily because of the normalization of private markets after last year’s unmeasured capital allocation. Today more than ever, most entrepreneurs in the region have a clear understanding of what it takes to build a successful venture-backed company and are actively seeking the right partners to help them reach their potential. On the investor side, there is a growing realization that business fundamentals are now more important than ever.

The first major indicator of this positive outlook is the slowdown in valuations across all stages during 2022, after a sustained period of growth from 2016 to Q4 2021. This slowdown was partly driven by an oversupply of capital into lower-return businesses and a lack of strategic focus. That said, valuations will rebound strongly during the next year as they normalize towards historic average growth levels, meaning investors have an opportunity to invest at a time window with very attractive risk/reward ratios for the first time in the region’s history, something that is unlikely to happen again anytime soon.

Deal Size and Valuations Over Time (2016–2022)

Another effect that this normalization has created is a massive wave of layoffs in the region. Just in the first week of December alone, more than 1,000 people were let go by latin american startups. This effect although negative in the short term, will have a positive impact in the long term as it will lead to a more sustainable startup ecosystem as companies allocate resources more effectively and some laid-off employees start their own companies, further boosting ecosystem growth, ultimately leading to the emergence of a new generation of successful startups, as experienced entrepreneurs with valuable skills and expertise enter the market.

Layoffs by company

Source: startups.alumni

In consequence, this new generation of startups will bring with it an important pivot intro in terms of the types of businesses that are thriving. In the past, many of the most successful startups in the region have been proven models with a lack of significant innovation (food delivery platforms, payment processors and corporate card companies). However, these will start to be replaced by more complex and innovative business models, such as applied AI, embedded lending and open banking APIs).

Investment trends in tech

Source: Mckinsey

These new types of businesses are just starting to take off (currently seed or series A stages), thus presenting a great opportunity for investors to get in on the ground floor of the promising companies and potentially reap significant rewards as they grow and mature.

Venture Capital Performance compared to Public Markets

Source: Pitchbook, NYU Stern, Aswath Damodaran, Banxico

Finally, the historical uncorrelation between public markets and Venture (VC has consistently outperformed both IPC and S&P500 over the last 22 years) can provide investors with a buffer against market downturns and help to protect their overall investment portfolio.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Angel Ventures Mx

Mexican Venture Capital firm currently investing in the fields of BoP, Healthcare, Fintech, TIC’s, Retail/Mobility and FoodTech. @AVM_Mex