Illustration by Felipe Mayerle

2019: An investment Odyssey for startups in Latin America

Since 2017, an elite group of 15 of the region’s startups were valued at $ 1 billion or more. Learn more about it in the first article of the series Brazilian Rocket Ships

The term “unicorn” was coined by the American investor Aileen Lee at Cowboy Ventures, a term that refers to a special group of tech companies that could reach a market value of $ 1 billion or more—the figure was randomly chosen, most likely because it seemed like a challenging goal at the time.  In an article written in 2013, Lee estimated that a mere 0.07% of startups would accomplish such a feat. There were only 39 unicorns in the world at the time. Nowadays, there are 315 unicorns, according to the CB Insights platform.

Since 2017, a group of 16 unicorns in emerged in Latin America (browse the complete chronology), according to a survey completed by LABS which took into consideration the data from the following sources: the Brazilian Platform for Innovation Distrito, the Latin American Venture Capital Association (LAVCA), and CB Insights itself. One of those newly-minted unicorns in Latin America is Nubank, a startup that this year gained entry into the elite group of decacorns—companies valued at $ 10 billion or more.

According to the original term coined by Lee, only privately held companies could be considered unicorns, although this criteria has gradually changed over the years. LABS considered unicorns to be privately held companies that received investments, declaring a market value of $ 1 billion or more following the funds received; companies that conducted an IPO and went on to have a unicorn valuation; and also companies that were acquired by others, reaching the unicorn status due to such acquisition.

Numbers like those of unicorn startups in Latin America don’t seem to match the low economic growth and political uncertainties present in the region’s countries. But there is no contradiction between one and the other. Startups are characterized by their tendency to detach from the rest of the sector or economy, given their disruptive and highly scalable nature.

“Unicorns are the result of people solving a large problem. And I don’t even need to insist on the fact that Latin America is not only a giant market, with 600 million people and a significant GDP, but also a place of homeric problems,” observes the partner of Redpoint eventures, Rodrigo Baer.

“To have startups at such a valuation level [that of unicorns] also shows to the whole world that Latin America and Brazil are maturing and that investing here is worthwhile,” adds Daniel Quandt, who coordinates the Distrito Dataminer, the database of Distrito.

A common characteristic among Latin American unicorns and the region’s super startups as they get closer to the unicorn status is the sixth sense they demonstrate in attracting investments.

“Working with the mapping of startups and venture capital, we see that it’s not enough for a startup to have a good idea, to have a good business model, if it doesn’t have the ability to establish the necessary relationships to attract capital and make viable the scalability of its business. Companies have that. And the more investments the startup brings in, the easier it is to attract new investments, because the startup earns the confidence of the market,” explains Quandt.

Daniel Quandt, who coordinates the Distrito Dataminer. Photo: Distrito.

From the other side of things—that of investors—the availability of more and more risk capital, primarily in the seed and pre-seed stages, is due to the recent global shift towards lower interest rates—even in Latin America—a shift that has led families and organizations in general to search for improved returns in higher-risk investments, just like startups.

“We have been talking for some time about the seed funding gap here in Brazil, and I think that in terms of financial volume there’s still a gap, but the number of players that are this stage [angels, accelerators, pre-seed, and seed] has increased significantly (…) One of the reasons for the existence of such a gap were the high interest rates in Brazil. It wasn’t worth it to take such a high risk, for such a long period of time, because those investments were of five, seven, ten years. Now things have changed,” says Bruno Ceschin, CEO at Jupter, the innovation platform that is the branch of Founder Institute in Brazil and that became the partner of Bossa Nova Investimentos, the biggest micro-venture capital managing firm in the country this year.

Some weeks ago, Ceschin helped support the 3rd version of the Startup Investor Ecosystem in Brazil Map, created by MSW Capital / Fundo BR Startups, which shows the growth of players not only about to become unicorns, with rounds of B series and above, but also in the initial stages of investment.

Photo: Jupter.

Nowadays, if the entrepreneur is talented and is doing something that makes sense, he will obtain money and support.

Bruno Ceschin, CEO at Jupter.

Even after having received less than 1% of the $ 254 billion in venture capital investments in the world in 2018, according to the data provided by America’s Market Intelligence (AMI); Latin America has seen how the total volume of those investments has been increasing on a yearly basis.

According to LAVCA, the five primary venture capital (VC) and corporate venture capital (CVC) investments of the region in 2018 exceeded $ 100 million in each round and summed up to $ 1.2 billion, more than the total invested all year in 2017. In 2018, the region attracted $ 1.9 billion  in investments, with a round of $ 500 million received by Movile for iFood being the biggest one.

SoftBank’s debut is already setting records in 2019

The data provided by LAVCA for this year should only be made available next year, but the debut bets by the Japanese conglomerate SoftBank in the region already equal the figures of last year and indicate that 2019 will have a new record.

In April, the fund was responsible for the biggest investment ever made in a Latin American startup: $ 1 billion (close to BRL 4 billion) in the Colombian delivery platform Rappi. Other investments followed—whether exclusively or lead by the Japanese firm—in the physical activity platform Gympass, the fintech Creditas, the property rental platform QuintoAndar, and in the Brazilian home products platform MadeiraMadeira, all of them totaling $ 891 million (BRL 3.65 billion). Without taking into account the acquisition of shares equivalent to 8.1% of Banco Inter, in which the Japanese group invested BRL 760 million (close to $ 187 million).

ALSO READ: Banco Inter’s assets to be Brazil’s 6th largest yet in 2019

The figures of Brazil, the most mature ecosystem in Latin America, also set the tone for what this year will most likely be for the region. If in the first six months of 2019, risk capital funds (including together the modalities of venture capital and of private equity) already invested BRL 7.4 billion (close to $ 1.8 billion) in 115 startups in the country, according to the Brazilian Association of Private Equity and Venture Capital (Abvcap) and the consulting firm KPMG.

Both organizations believe that the investments total in both modalities (VC and PE) should reach BRL 14.8 billion by the end of the year in the country—9% more than in 2018.

“I believe that we are in the correct path for this next phase in the market’s evolution. Much has been said about stretched-out valuations and the possibility of capital availability in the coming years, which would certainly compromise this next step, since the evolution of startups on track to the late stage requires bigger rounds of capital. Yet I see the workforce as the fundamental bottleneck in Brazil, especially in the technological aspect,” explains Pietro Bonfiglioli, CEO at Fischer, a venture builder with a focus on fintechs.

Pietro Bonfiglioli, CEO at Fischer Venture Builder. Photo: Fischer.

ALSO READ: Collections – Trailblazers of Latin America: the companies that are winning over the region

It has never been so expensive to be a unicorn

According to the latest Unicorn Report from PitchBook and innovation platform Plug and Play, which arrived in Brazil in September in a partnership with Elo, the 187 active unicorns in the United States during the first semester of 2019 raised more than $ 600 billion in market value. The stock market debuts of Zoom, Pinterest, Lyft, and Uber are also included in this total. Seems like a lot? The figure is, actually, a bit lower than the peak of $ 603.3 billion reached in 2018.

For those that follow innovation closely, this small difference indicates that there is a growing consistency in the North American ecosystem, which is the most mature in the world, and that a new record may be reached by the end of this year.

“We anticipate more unicorns in emerging regions, such as the Asia-Pacific region, but the center of gravity remains primarily in North California. Hence, I hope that a greater production of unicorns may be located around that center of gravity. Although, the method will be different,” affirms Saeed Amidi, CEO and founder of Plug & Play Tech Center, in the report.

According to Amidi, the next giant companies in the tech industry “will be a pure disruption of traditional business models by way of technology application, rather than essentially being driven by a new type of technology or market.” 

This disruption of traditional activities requires capital. A lot of capital. During the first semester of 2019, the average contribution received by startups that reached the status of unicorns was of $ 126.1 million in the US. The consecutive funding received after reaching the initial unicorn status oscillates between $ 130 million and $ 175 million, according to Unicorn Report. In other words, it has never been so expensive to be a unicorn.

Even if the availability of resources for the scalability of startups has never been so high, the way to assess the returns on these investments may be changing.

More and more, those consistent companies—those that reached or are about to reach the breakeven point—are expected to attract the attention of investors, more than the classic disruption model that begins with a great idea but that never truly takes off.

The new unicorns of Latin America, according to what experts shared with LABS, are in the first group, alongside Zoom (which already debuted with profits in April of this year in Nasdaq, valued at BRL 15.9 billion) and Pinterest (that completed its IPO on the same day as Zoom, with similar results in terms of profits, and valued at $ 12.8 billion). Lyft and Uber are, for the time being, in the second group.

Translated by Axel Diniz