Behind every successful entrepreneur, there is always a first sponsor. In this context, venture capital funds have been playing a crucial role in the life of businesses all accross Latin America. The region has great potential to innovate and despite the crisis brought about the COVID-19 pandemic, investors did not stop betting on the region in 2020.
In fact, as LABS has shown, LatAm’s innovation ecosystem was surprisingly resilient in 2020. The past year was a record year for exits, with more than $11 billion divested across 106 exits. And, the flow of VC money going into promising startups hardly let up with more than $4.1 billion invested across 488 deals, according to data from the Association for Private Capital Investment in Latin America (LAVCA).
However, the health crisis also made crystal clear the inequalities that exist in LatAm’s entrepreneurial ecosystem. The Economic Commission for Latin America and the Caribbean (ECLAC) predicted that by the end of 2020, the coronavirus crisis would cause the bankruptcy of at least 2.7 million businesses in the region, a figure equivalent to 19% of the total.
But the truth is that each country has gone through its own storm. In the case of Colombia (considered one of the best countries in the region to do business), after overcoming multiple obstacles, at the end of last year, more than 80% of the country’s businesses continued their operations, and only 5% had to close their doors, shows the annual report of Bancamía, an entity belonging to the BBVA Microfinance Foundation (BBVAMF).
Brazil, the largest economy in Latin America, suffered the loss of almost 10 million companies due to the pandemic, 18.3% more than the number of closed businesses in 2019, according to the Brazilian Micro and Small Business Support Service, Sebrae.
Financial stress had a strong impact in Chile. In the first months of the pandemic, 85.1% of businesses in the country were affected, 50.2% more seriously, according to the survey Impacto Pandemia, prepared by the entrepreneurs association of Chile Asech.
The association of entrepreneurs of Argentina (ASEA), in its turn, conducted a survey to measure the impact of the coronavirus in the country and found that 27% of the businesses nationwide closed permanently, while 64% stopped operating between March and April 2020.
And Mexico, considered the second-largest Latin American economy, suffered a negative impact that affected 85.5% of the country’s companies, showed the National Institute of Statistics and Geography (Inegi).
Eugenio Perea, a venture partner of the investment fund Magma Partners, believes that the regional ecosystem experienced an unprecedented crisis, from which many entrepreneurs failed to emerge.
The challenge of existing without support
Based on surveys carried out by the main business associations in Mexico and Argentina, one of the factors that most affected entrepreneurs as a whole during the pandemic were the lack of support from their respective governments.
In Argentina, the ASEA showed that 34% of the ventures were affected by government regulations; other 34% by the lack of customers; 11% by the financial challenges generated by the health crisis, 9% were not able to pay for their rent.
In Mexico, small and medium-sized companies (SMEs) and entrepreneurs are responsible for generating 72% of the jobs in the country. However, the association of entrepreneurs of Mexico (ASEM) revealed in its last report that 22% of businesses closed because they did not have access to financial support or credit.
Since 2019, the Mexican ecosystem faces multiple challenges. On October 17 of that year, the National Entrepreneur Institute (Inadem) ceased to exist, forcing entrepreneurs to find new sources of financing.
The highest authority of the Mexican entrepreneurial ecosystem was born in 2013 to support those who had a business or the intention of starting one through resources, advice, and training. Still, a year after its creation, the budget assigned to the entity began to decrease. With the arrival of President Andrés Manuel López Obrador, the institute was closed.
It is as if in Argentina, the Secretariat for Small and Medium Enterprises and Entrepreneurs (Sepyme) were extinguished, or in Brazil, the Brazilian Support Service for Micro and Small Enterprises (Sebrae) ceased to exist.
In its last year of operation, the institute received MXN 3 billion, one of the lowest amounts in its history and below the MXN 4.137 billion that were allocated for 2018’s fiscal year.
The private capital island of opportunity
Magma Partners is one of the largest VC firms in Latin America. It is dedicated to making early-stage investments of $25,000 to $75,000, Seed investments of $100,000 to $500,000, and Series A rounds of up to $1.5 million.
Within its portfolio are Mexico’s Albo, a branchless mobile banking service; Chile’s Trabajos, the most visited job search platform in the country, and Colombia’s On top, a startup that helps international companies pay remote workers and contractors around the world while complying with rules and regulations.
In the particular case of Mexico, entrepreneurs have an important source to boost their businesses, which is not limited to venture capital, also involves the so-called private equity. Figures from the Asociación Mexicana De Capital Privado (Amexcap) show that available resources amount to $60 billion. The capital raising rounds accelerated 4.3 times in the last decade, with an average growth of almost 16%.
Alejandro Diez Barroso, a managing partner at DILA Capital, assures that the pandemic’s effect on the firm’s portfolio was positive due to consumers’ forced digitization. For more entrepreneurs (those of the new economy, at least), venture capital became an alternative to overcome the crisis.
In February, DILA Capital raised $35 million for its new investment fund DILA IV, with which it seeks to invest between $750,000 and $3 million in pre-Series A and Series A companies that want to do business in the Latin American region.
An uneven entrepreneurial ecosystem
Most entrepreneurs in Latin America were not prepared to face the new coronavirus pandemic – the biggest crisis in the region in 100 years. Not for startups. New, technological and scalable businesses have flourished amidst adversity.
The clear example is that of the Mexican online supermarket Jüsto, which, in February this year, received $65 million in the largest Série A round ever raised in Latin America. The deal was led by General Atlantic.
“The inequality between businessmen has deepened with this crisis. On the one hand, you have success stories like Jüsto or DILA Capital with millionaire capital increases, and on the other, entrepreneurs who had to close their doors because they couldn’t survive,” says Perea.
Companies that leveraged the digital momentum derived from this crisis will succeed in consolidating themselves, while those that did not will have to rethink their business model or face a harsh fate: death.
Amid the chaos, Mexico’s witnessed the birth of its first unicorns: Kavak (a startup dedicated to the purchase and sale of used cars) whose valuation exceeded $4 billion last April; Bitso (a cryptocurrency exchange), worth $2.2 billion; and Clip (an electronic payments fintech), with a market value estimated in $2 billion.
Barroso recognizes that venture capital is not for all businesses because if there is no technological and innovation component, it is difficult for them to enter this accelerated growth mode. “For entrepreneurs looking for funding, I would recommend that they first know who they are partnering with because funds have different ways of operating. Venture capital is growing in Latin America, and whoever rides this wave has to be aware of the existing risks. As with everything else, there are upsides and downsides to observe.”
Translated by Fabiane Ziolla Menezes