Economic situation affecting investments in startups in Latam?

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Economic situation affecting investments in startups in Latam?

The economic outlook in Latin America could cause investments in startups to be affected. The biggest impact would be on the Unicorns

For Matthias Muchnickco-founder and CEO of Not Companythe economic situation in Latin America will have as a consequence that startup obtain more expensive financing.

Until now, the entrepreneurial ecosystem had been congratulatory in the region, reaching the peak of having received US$16.3 billion in investments last year. But this may not continue to be the case.

Not only are investors withdrawing from a scenario that does not convince them due to its volatility, but governments and banks are reducing their stimulus to the sector to focus on other economic problems.

This situation would especially affect the Unicorns that have been created, mergers may be inevitable as some plans to raise more money are shelved and the focus is on cost cutting and redundancies.

“It will be a violent adjustment, with some injustices,” he says. Martin Escobarihead of business at the private equity firm General Atlantic in Latin America, who has seen presidential impeachments and record recessions in his two decades investing in the region. “Now comes the hangover.”

The startup ecosystem is already showing signs of concern about the existing situation

Startup Landscape

According to CB Insights, investment has already begun to decline, and from the US$4 billion registered in the first quarter of 2021, by the same period in 2022 they have already dropped to US$3,000. Escobari is very harsh in his forecast, and assures that in all of 2022 investments will fall by up to 70% compared to the previous year.

Some signs are already seen. the startups fifth walk Y Loft Brazil Technology, already each laid off about 150 people in April, and their businesses are hurt by the rise in Brazil’s benchmark interest rate to 11.75%. On the other hand ebonyxa payment firm, and Hotmart B.V. a platform for online businesses, postponed their plans to go public.

The tech ecosystem would be one of the hardest hit. The average return of a basket of 10 tech-focused Brazilian stocks, including VTEX, StoneCo Y Nu Holdings, has fallen 44% from the beginning of the year to May 6. That’s worse than the 34% drop in the global index. Solactive FinTech and the 22% drop in Nasdaq-100 of heavy technology during the same period.

Moreover, initial public offerings that had been successful, such as the one achieved by the digital bank Nubankwith the support of Berkshire Hathaway Inc. Y Soft Bank Groupthis year its shares have fallen more than 47%.

Investment projections

SoftBank, a key investor in the region, is settling the books globally, including with senior management departures in the region, Bloomberg said.

Companies like SOftbank are reviewing their investments in the region

Companies like SoftBank are reviewing their investments in the region

With international investors “red-listing” Latin American startups, hurting late-stage financing in particular, some companies will be forced to consolidate, favoring well-capitalized ones, he says. Andrew Maciel, former managing partner of SoftBank in Latin America. “The next two years will be the best time to invest in Latin America,” says Maciel.

Found financing will also be more expensive, says Matías Muchnick, co-founder and CEO of Not Company. “We’re not going to find anything that comes close to the valuations we had last year,” says Muchnick, whose company is backed by high-end investors. And he is very emphatic in declaring that of the existing ones, “many of these companies are going to die.”

Finally Hernan Kazahco-founder of Kaszek Venturesdeclares that “we will observe this trend and it will look like an upward arrow”, to which he adds that “It is always a very Darwinian process: there are many companies that start and very few that succeed”.

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