Latin American startups become billionaires in record time
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Latin American startups become billionaires in record time

Startups get investment rounds at shorter and shorter intervals and valuations skyrocket: LABS talked to Michael Nicklas from Valor Capital Group and Eduardo Vieira from SoftBank Latin America about the potential risks for companies and investors

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Although the infusion of venture capital into Latin American startups hit several records in 2021, reaching billions of dollars, some founders who take part in the venture capital game keep a wary foot about back-to-back rounds, within shorter and shorter intervals, that increasingly dilute the company’s equity.

And it’s not just about dividing up equity. Some executives have reported to LABS the risk of inexperienced entrepreneurs building companies for investors – which, round after round, raises the company’s valuation for the investors themselves. Something like what happened with WeWork: many investors bet that the company would turn a profit, but when it went public to make an IPO, it turned out to be a disappointment to the market, accumulating losses.

Other founders say that if the company raises too much funding, it can also create disproportionality in its operations, bringing investor pressure and risk to the company.

READ ALSO: Latin American startups get bigger fatter checks in November: average round size jumps from $13M to $31.9M

Asked about this risk, Valor Capital Group partner Michael Nicklas said that in most of the investments Valor enters at the earliest stages, in Seed and Series A rounds. Thus, in subsequent rounds, in which the company’s valuation is usually accelerated, Nicklas says that Valor “is a little more covered” because the fund has already entered the investments at an earlier stage.

Michael Nicklas, managing partner at Valor Capital Group. Photo: Valor Capital Group/Courtesy

“Our decision about participating in subsequent rounds is based on pro-rata [a contractual mechanism that allows an investor to maintain its initial equity percentage during subsequent funding rounds] or not,” he explained, since the same investor cannot lead subsequent rounds.

The VC market is really booming. We have several cases in which we closed an investment round and had not even made the injection yet, and the company had already received another term sheet. In these cases, we have to make a decision: if we are going to use our pro-rata and make the subsequent round. We assess this on a case-by-case basis.

Michael Nicklas, partner at Valor Capital Group

One thing is certain: company valuations have been rising faster and faster; the unicorn club is no longer so exclusive and now includes almost 30 startups in Latin America, as companies need less and less time to reach billionaire status. About four years ago, a Seed round in Brazil secured between $1 and $2 million. Today, that has doubled to $3 or $4 million, as Nicklas noted.

“But we have serial entrepreneurs who are able to demand more investments because they have more experience, have a wider network, the ecosystem is more mature, and the growth pace of the companies is accelerated,” he added.

READ ALSO: Latin America goes from 2 to 34 unicorns in four years, says Sling Hub

Such is the case with Pomelo, founded by Gastón Irigoyen, Google’s number 5 employee for Latin America. Pomelo is the fourth company created by Irigoyen, who was CEO of the Argentine digital bank Naranja X. Hernan Corral (CPO), who dedicated 12 years to building Mercado Pago, and Juan Fantoni (CCO), former director of Mastercard, have joined the founding team of the fintech with Irigoyen.

Pomelo has not yet started its operations but has already raised a $9 million Seed round led by monashees and Index Ventures, in addition to angel investor Angela Strange from a16z, in May.

In July, the fintech secured $1 million from Sequoia and in October get $35 million in a Series A led by Tiger Global. To LABS, Irigoyen said the investment came “naturally” as part of investor interest.

READ ALSO: All I want for Christmas is… funding. Some funds gave many gifts to Latin America in 2021

On one hand, early-stage investments are securing bigger fatter checks, on the other the investment cycle is becoming shorter. “In the past, we saw a 24-month cycle between rounds, between Seed and Series A,” Nicklas said. “You’d raise a few million dollars, use that to grow for 18 months, and in 17th month you’d start negotiating the next round, having six months to close the round.”

This, in Nicklas’ analysis, has to do not only with the ecosystem heating up, but also with the value generated by companies, which are growing faster. “Many times the company raises funding and six months later it’s already raising again because they are managing to prove their growth and KPIs,” Nicklas pointed out.

READ ALSO: The 10 most valuable startups in Latin America (so far)

“I think there is a certain balance. It happens a lot when you have a business model abroad, in China or in the United States for example, that is already tested. And you have a very good entrepreneur in Brazil. The funds are like, ‘I have seen this story, I know this narrative, and I know where this startup can go, so I am willing to value it now, knowing how this story is going to end.’ But we try not to do that because there are always many unforeseen events along the way,” he concluded.

Eduardo Vieira, SoftBank’s head of Communications for Latin America. Photo: SoftBank/Courtesy

Eduardo Vieira, head of communications at SoftBank in Latin America, agrees that second or third-time entrepreneurs, who already have more expertise on structural issues of the business, are making companies get more funding. “For example, they start with more experienced teams, don’t take six months to set up a C-level, and need more money,” he said.

Vieira also believes that the investments made in early-stage companies “have had a pretty unusual speed.”

Even in a market where agility is crucial, we have seen a certain excess. Obviously, there is a lot of venture capital available to put into startups. But in some cases, they have not yet developed their products and therefore do not have the best conditions to scale up.

Eduardo Vieira, communication director for SoftBank in Latin America

Another reason for this increase in the number of rounds, according to Vieira, is the global inflation of wages. He explains that with the increased competitiveness due to the pandemic, talents started to be disputed, regardless of geographical location.

“In any case, this is a phenomenon characteristic of the current situation. Since SoftBank has a long-term commitment, we are not so concerned, although we do see some excesses.”