Venture Capital Withdrawal Causes Loss of Funding for Latin America's Unicorns

In recent years, a large influx of venture capital had been invested into late-stage Latin American tech companies. However, this has now come to an end, leaving some of the region's most promising startups in a difficult position. As a result, they have had to let go of staff, reevaluate their growth strategies, and seek out bank loans for financial support.

In recent years, investors have created more than two dozen companies with a value of $1 billion or more. However, venture capital has significantly decreased for more established startups. According to the Association for Private Capital Investment in Latin America (LAVCA), late-stage funding dropped by 92% in the third quarter of this year compared to the same period in 2019.

Eric Reiner, founder and managing director of Vine Ventures LP, which launched a $140 million fund this year for investments in Latin America, Israel and the US, recently commented that he has not seen a growth round from a single company from Latin America in months. He went on to say that when capital becomes scarce, investors become more discerning and require companies to demonstrate that they are legitimate businesses.

Venture capital spending is experiencing its most significant decline in over twenty years, and this slowdown is being mirrored in Latin America. Just a few months ago, investors were eager to invest in startups in a variety of industries, such as fintech and real estate, leading to a surge in the number of quickly growing companies.

Data from LAVCA revealed that venture financing to the region in the last quarter decreased significantly from the same period a year ago, amounting to only $1.15 billion.

Due to high inflation and increasing interest rates, venture capitalists have become more cautious when it comes to investing in riskier sectors. Instead of investing based on potential growth, they are now looking for companies that can demonstrate a clear path to profitability.

Karin Tenenboim, an investment manager at Newtopia VC, a firm based in Argentina that focuses on the region, believes that it is still reasonable to be optimistic for the region, despite the corrections that have been seen. She believes that this is logical and natural, as investors are now requiring companies to demonstrate profitability. Tenenboim states that this is a different mindset.

Businesses from Mexico to Argentina have put a stop to their growth strategies and reduced their workforce in order to save money and increase their profits. In the past few weeks, this has been a common trend.

Héctor Jirau, the director of operations and investment at Parallel 18, a tech accelerator in Puerto Rico, has noted that the current economic slowdown has caused founders and investors to adjust the way they structure deals, such as utilizing more debt.

Major banking institutions such as Goldman Sachs Group Inc. and Citigroup Inc. are entering the market. Despite the increasing interest rates, startups have still managed to acquire $1.3 billion in credit lines from traditional banks, as reported by LAVCA.

Martin Pustilnick, co-founder and CEO of Mundi, a startup that works with Mexican exporters, noted that there has been a rise in the number of innovative financing options for startups in Latin America.

Mundi has taken out a loan of $100 million to support its expansion, which has provided it with more freedom as creditors are not as focused on short-term profitability, according to the company. It was noted that there will be a great chance for debt in the upcoming years as equity funds are withdrawing from the market.