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LatAm Tech Weekly - Special Edition
#145- Powered by Nasdaq: The LatAm Tech Ecosystem, unfiltered
Happy Sunday! This week, I collaborated with my dear friend and Substack writer,
, to create a special edition. After our discussions, we decided to present an "unfiltered version" of the current technology landscape (we will explain more below). We believe this will be useful for all our+ 18k readers. As we approach mid-year, it is important to assess what has happened to prepare for what lies ahead.We hope you enjoy it! I've also joined Lucas on the Abreu Podcast to discuss our study findings, the current tech market, and my journey as a content creator.
You can listen the episode on Spotify or Apple Podcasts.
For those that love the current news – I got your back. I left the most important ones (in my view) at the end of the newsletter.
Without further ado, let’s dig in!
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Opinions expressed here are solely my own and does not represent those of people, institutions, organizations that I may or may not be associated with in any capacity, unless explicitly stated.
Reflections on the Technology Investment Market in Latin America
Time is truly flying...
It’s already midyear, and we still have mixed feelings about the current state of the local tech market. After much thought and discussion among ourselves, we decided to “take the pulse” of what’s happening– literally.
That is: we created a task force and spoke off the record with more than 20 investors and entrepreneurs asking a simple question: what are your thoughts about the current LatAm tech market?
What you will read below is a challenging but real depiction of the landscape. We're not here to be optimistic or pessimistic, but to portray what is happening – raw and unfiltered. These impressions do not necessarily reflect our beliefs but rather what we have heard from these sources.
The general interpretation is that we are in the third year of startup adjustments: it all started at the end of 2021 when public company revenue multiples started to plummet. In 2022, between February and May, a new reality set in: private rounds, as always, followed the public market, and uncertainty about pricing significantly slowed the market down. These phenomena resulted from the increase in global inflation, which led to a rise in interest rates, thus impacting the global economies.
Then came 2023, a binary year: on one side, the emergence of one of the most important tech events of the last 50 years – the general use of artificial intelligence. On the other hand, tech companies like SaaS and marketplaces faced difficulties. Venture-backed companies that didn’t do their homework went through hard times, and VC funds also faced challenges raising more resources from LPs.
So far, 2024 has followed the following storyline: the market has returned, more liquid and more active. But the general confidence level is low. That is, LPs are less convinced that VC has great opportunities to remunerate capital in a world where the interest rate in Brazil (for example) is at 10.5%. VC investors are harder to convince when facing investment opportunities. Entrepreneurs are less convinced they will raise money. However, some say we are seeing the best cohort of entrepreneurs... the usual dichotomies of this market.
In other words, it seems that the most important link, which is the conviction that it’s the best time to build companies, is high, and that’s what matters. It's also in these moments of low conviction that the world’s most innovative companies are usually built...
With that said, here are more details on the VC market insights from conversations with the ecosystem:
Current Market: Frustrating and Opportunistic
The current scenario is described as both frustrating and opportunistic. The frustration comes from global and governmental uncertainties that make fundraising difficult. However, this also creates opportunities, as high-quality companies continue to grow and generate value in a less competitive market. It’s possible to spend more time analyzing companies without the "FOMO."
The opportunity also comes from cheaper valuations compared to recent years, with a 30-50% reduction from the peak. This creates a greater safety margin for funds. For Series A/Series B details, market multiples are lower: we heard that they are hovering around 6x for SaaS, but we don't have a significant sample to confirm this assumption. And, of course, we also heard about exceptions going out at 8x-10x.
Investments continue at a consistent pace, and the perception is that the market is more liquid than in recent years.
"Excellent products and competent teams do not wait for market cycles or favorable interest rates to build companies, and funds continue to invest."
Higher Bar for Investments
Most investors have raised the quality bar, investing only in the top quartile of opportunities. Funds are being more selective, prioritizing companies with the tripod: unit economics, high growth, and capital efficiency.
If one of these three elements is missing, negotiations become more difficult. For example, if high growth is projected by the end of the year, the fund will likely prefer to wait and see if the company actually performs.
"Everything that's supposed to happen in the future, the funds are waiting to see it happen."
Valuation and Exit Challenges
A significant challenge is the unrealistic valuation expectations of some entrepreneurs. Some anchor themselves to the valuations of the last round or the ones relative to the recent round of AI companies in the US.
Besides this factor, there's also the challenge of exits: selling a company is a complicated process, and to do an IPO, with the higher bar, “only with a significant figure for EBITDA.”
"For a region like Latin America, which is a buyers market, selling a company can be very hard. In my opinion, to conduct a relevant IPO, you need at least $100/150MM EBITDA”
Fintech and AI as Investment Focuses
Fintech continues to be a dominant sector for investments, especially in B2B fintech theses, embedded lending, credit infrastructure, and expense management.
But the queen of the moment, without a doubt, is "AI." VC colleagues comment that over 80% of opportunities are "AI-powered" in some aspect, across various sectors: healthcare, logistics, HR.
There are uncertainties about the competitive edge of AI startups in the region, with Brazilian investors still adapting to analyzing these companies. Most regional investors doubt the "edge" and defensibility.
As Victor Lazarte, founder of Wildlife, recently said: "Right now, investing in AI can be disorienting because everyone knows that we’re about to go through this incredible transformation. But in that transformation, where’s the value going to accrue?"
Confidence Challenges in the Ecosystem
We are facing a challenge in the tech ecosystem in Latin America, exacerbated by macro (high interest rates, governmental uncertainties) and micro (lack of significant returns from previous investments) factors.
On the micro factor, many funds are marked with high valuations but with very low DPI (Distributions to Paid-In Capital), reflecting the difficulty in realizing profits. As the investment money hasn't returned yet, there's disbelief in the market even though it may be one of the best cohorts in history. The challenge for managers is to convince that now is different and that it is the right moment to invest.
Foreign Funds
They are still here but even more selective. The interest from Asians (Chinese) has increased considerably, as well as from Arabs. A foreign investor investing at this moment is a testament to quality and generates a high impact, especially if it’s their first time (like Summit Partners and Bond Capital this year).
Stage
In Brazil, the pre-seed and seed market is active and functioning well, while Series A+ has become more challenging.
In the case of pre-seed, many founders go out to raise a $2MM check and fail to raise. These are founders who would have easily raised this amount 2/3 years ago. They end up closing a smaller round only with angels and then have to execute excellently to raise in the future. There's a movement of Series A/Seed funds going to pre-seed.
During the boom, the biggest and main funds increased their portfolio by investing in pre-seed or PowerPoint opportunities. Currently, the scenario is different. Apparently, funds are waiting for greater signs of product-market fit to invest
Conclusion
Despite the uncertainties, the technology market in Latin America presents unique opportunities. With lower valuations and a more liquid market, there is room for more investments.
Historically, the success of VC funds has been driven by two major waves: digitalization and the cloud boom. Now, a new wave is approaching: artificial intelligence. This signals that we are in a favorable moment for good investments and opportunities, as innovation continues regardless of economic cycles.
Entrepreneurs are more motivated than ever to build innovative companies. In short, the challenges are significant, but the opportunities are equally promising for those determined to transform the industry.
This article is a collective effort, and we thank each entrepreneur and investor who shared their experiences.
SELECTED NEWS:
In an unexpected turn of events, Alibaba and Magalu have decided to join forces to sell products. With this partnership, AliExpress will essentially operate as a seller within the Magalu website – and vice versa. The announcement of the agreement was made during a press conference featuring Kai Li, LATAM CEO of AliExpress; Frederico Trajano, CEO of Magalu; and Briza Bueno, LATAM Director of AliExpress, from the Alibaba group's headquarters in China.
Fintech Astride, based in the United States and with a story of 28 years in the market, is a startup offering tax consultancy for those looking to invest outside Brazil. The service is fully digitized and accessible through an online platform. After raising 3 million reais last year to accelerate technology, the fintech has just completed an 8 million reais funding round. The investment was led by Kiara Capital, founded by Michael Esrubilsky and Daniel Arippol.
Bolt Software, a pioneering company focused on digital solutions for the automotive industry, has successfully secured a $5 million investment from L4 Venture Builder, a prominent venture capital firm whose sole backer is B3, the Brazilian stock exchange. This significant funding marks a pivotal step in Bolt Software's mission to transform the automotive sector through advanced digital solutions.
Brazil at Silicon Valley (BSV), a nonprofit initiative led by students from Stanford and UC Berkeley, announces changes in its leadership. The organization bids farewell to Rosiane Pecora (Stanford DCI), Marina Mamer (Bain & Company), and Guilherme Cybis (ServiceNow). Replacing them are Luciano Snel Correa (Former CEO of Icatu Seguros and current Board member of the company), Ellen Kiss (Director of Design at Nubank), Bruno Rigonatti (McKinsey), and Isabella Canazza (Google).
Brazil has become a priority for Simetrik. The Colombian startup, which raised $55 million in a Series B round led by Goldman Sachs this February, believes that the country could not only become its main market by the end of this year but also represent nearly half of its revenue. Having doubled in size over the past few years, the fintech now projects that it could generate between $40 million and $50 million in revenue by 2025.
Sólides, a cloud-based HR management software, has launched a super app offering its services to 30,000 clients across Brazil, encompassing approximately 8 million employees. The new platform integrates five applications released today by the startup, combining a total of 35 functionalities.
Nubank announced the acquisition of Hyperplane, a data intelligence company from Silicon Valley founded by Brazilians, including former StartSe partner Felipe Lamounier. The deal was completed through a stock exchange between the two companies.
Amazon has become the fifth U.S. company to surpass a $2 trillion market value. It took Amazon over four years to add another trillion to its market capitalization since surpassing the $1 trillion mark in February 2020.
CRMBonus raises another round with Vivo Ventures, the corporate venture capital arm of Vivo, and Industry Ventures, a San Francisco-based VC firm with $5 billion under management, to its cap table. The funding, an extension of the startup's Series B round, was carried out under the same terms and valuation as the original round: R$ 2.2 billion, double the valuation from the previous round in 2021.
Starlight conducted the first DvP (Real Digital vs Tokenized Federal Public Bond) with privacy on Drex using the EY Starlight SwapEscrow this week. The operation took place between Banco do Brasil and Itaú Unibanco.
NeoFeed has learned that, since last year, Globo Ventures has been a shareholder of Nubank through a media-for-equity swap. In other words, Globo provides advertising space in exchange for a stake in the company. Nubank is the bank that appears as the sponsor of Jornal Nacional, a slot that costs around R$ 15 million per month in the advertising market.