#039: Why startups in LatAm fail
#039: Why startups in LatAm fail
What founders and investors (dis)agree about
Olá technopolists,
I’ve asked several loyal investor-readers the same impossible question in the last few weeks: when will the market return? Their consensus: probably not until spring 2024.
The answer, while interesting, is much less useful than the logic used to get there. Here’s the skinny: most cash-burning startups raised 18-24 months of runway during their last big fundraise, and many bought an additional 6 months of runway by making layoffs. In rough terms, that means the average startup has a little over two years between its last fundraise and its next one. By extension, the many startups that raised during 2021’s white-hot funding frenzy will begin returning to the market at the end of 2023. At that point, the startups that need to fundraise will need to fundraise – but investors have the upper hand since they don’t need to invest. Expect the market to get choppy in the back half of this year as downrounds, acquisitions, and quiet collapses ripple through the ecosystem. Then let another 6 months pass before valuations settle again. By then, hope that inflation and interest rates cool off.
On the theme of cullings and failures, our stat this week looks at why startups fail in LatAm, according to both founders and investors.
What’s hot
🥒 Carrefour and Mercado Libre team up in Brazil. Mercado Libre has announced that supermarket giant Carrefour will be its newest fulfillment partner for online grocery sales. The initial launch will be small, with Carrefour providing only 300 non-perishable products through Mercado Libre’s marketplace. The partnership represents a fusion of incumbents in a small, fast-growing space. Online grocery sales only account for 1-3% of total grocery sales in Brazil, but within that small sliver, research shows that Mercado Libre has the highest market share (17%) over close rival Amazon (16%). Carrefour has the greatest market share in Brazilian grocery overall, with 20%. Interface, meet infrastructure. (Neofeed)
🏦 Neon packages and ‘sells’ its loan book. The Brazilian challenger bank announced that it raised $65mn through a savvy new investment vehicle. The funds come from Credit Rights Investment Fund (FIDC) that bundles Neon’s loan receivables (mostly credit card debt) and promises future cash flow and consumer payments to investors in return for cash today. It’s a clever way for the company to continue scaling in a non-dilutive way — a distant, but not unrecognisable cousin of revenue-based financiers like Pipe and Uncapped. The new FIDC is the second of its kind and brings Neon’s total FIDC portfolio to $275mn. (Startupi)
👩🏽💻 WeWork launches a hotdesk marketplace in Brazil. The SoftBank-backed coworking company announced an $8.6mn (R$44mn) investment to grow Station by WeWork, a digital marketplace for office space — think Gympass for hotdesks. WeWork, which currently operates 32 locations across Brazil mostly in dense urban locations, quietly launched Station last September and has registered 240 partners and 4,000 users. The play is a chance for the struggling company to justify its tech company bona fides (and valuation); today, WeWork currently trades at an all-time low market cap of $1.2bn — a far cry from its $47bn peak under founder Adam Neumann. (Época)
What’s not
🧨 Brazilian crypto company is under solvency scrutiny. Braiscompany, which touts itself as the largest crypto holding company in LatAm, is under investigation by Brazil’s securities exchange commission (CVM) after customers logged complaints of frozen funds that have triggered fears of collapse. Up to 10,000 Braiscompany users have logged complaints regarding their inability to withdraw crypto from the platform since September 2022. The company has countered oddly, first by requiring nonstandard data disclosures from customers before releasing funds and later by accusing Binance (which accounts for 80% of Braiscompany’s assets) for freezing their funds in turn. Prominent crypto analysts have warned Braiscompany users that the company is a pyramid scheme on the verge of insolvency. (Brazil Crypto Report)
💳 Jeeves pulls its Chilean credit card. The NY-based, LatAm-dominant fintech unicorn announced it will shut down its credit card product in the country. The company did not provide any rationale for the move, though it did explain that companies with operations in the US, Brazil, Colombia, or Mexico will be able to continue using the card in Chile, leaving us to speculate that the withdrawal is related to local regulations or failed partnerships. Chilean users will still be able to access other forms of working capital financing beyond the credit card. (Tekios)
Stat of the week
A bleak market outlook reminds us of the harsh truth that roughly half of startups fail to make it to their next fundraising milestone. But what blocks them from getting there? A new report asked founders and investors around the region.
So what? Everyone agrees that lacking product-market fit is crucial: achieving it is the result of a whole host of factors, and missing it can happen by lacking only one.
The differences in opinion are more instructive. Founders are more likely to cite causes outside of their individual control that involve luck, such as fundraising, founder misalignment, and timing. Investors are more likely to cite skill-based causes: lack of prior experience, poor product execution, and a lack of network connections.
Psychology has an explanation for us: the fundamental attribution error. This cognitive bias refers to the phenomenon that when we fail, we tend to see external forces as the cause — but when others fail, we tend to fault their personality or character. The converse is also true: when we succeed, we tend to overemphasise the importance of our own skill and feel like we deserve it, while we attribute others’ success to luck, as demonstrated in a landmark study about a rigged monopoly game. It’s this cognitive bias that underpins the cult of the self-made man that runs rife throughout startupland.
Psychology aside, the simple, actionable truth that founders and investors can agree on is this: make networks and communication channels for knowledge and fundraising as transparent and accessible as possible. Great founders are less likely to be sidelined by chance, and investors and more likely to find outsized returns. Win-win.
Smart links
Report: Fintech Radar México 2023 (Finnovista)
Report: Why Latin American startups fail (Rockstart)
English learning edtech Slang starts operations outside of LatAm (Bloomberg Linea)
How a Mexican launched a Spanish-language streaming service targeting Latinos in the US (Bloomberg Linea)
Colombian neobanks gain ground and reach 32 million users (La Republica)
Apollo and Marcelo Claure in talks over buyout of LatAm telecom Millicom (FT)
Aerus, the new Mexican regional airline, announces the purchase of 30 electric aircraft (TechLA)
What women-led startups in Latin America lost and gained during the recent tech downturn (Rest of World)
Deals (January 24 - 30, 2023)
M&A
🇲🇽 Mendel, a corporate expense management platform, acquired 🇲🇽 TeFacturo, a digital tax invoicing platform, for an undisclosed sum. The purchase helps Mendel comply with Mexico's new tax “invoicing 4.0” regulations.
🇧🇷 Nuvini, a B2B SaaS holding company, announced the acquisition of 🇧🇷 SmartNX, an omnichannel commerce platform. Financial details were not disclosed.
Funding
🇧🇷 Órigo Energia, a solar power provider, raised a $49mn investment from Augment Infrastructure.
🇲🇽 Zenfi, a consumer financial health platform, raised an $8.5mn round led by Magma Partners with participation from Cometa, Redwood Ventures, Polígono, Conny & Co. and an AngelList syndicate.
🇧🇷 Juvo, a non-bank microlender, raised a $7.8mn investment from SRM Ventures.
🇧🇷 Paketá, a payroll lending fintech, raised a $3.1mn Series A extension led by IOB.
🇧🇷 Symbiomics, a sustainable agriculture biotech, raised a $2mn seed from MOV.
Ad hoc
🇲🇽 DILA Capital, a Mexico-based early-stage VC fund, closed its fourth fund at $115mn. It has already invested in 11 companies from the fund and plans to invest in 20-25 in total.
🇧🇷 Neon, a digital bank, raised a $65mn investment through its second Credit Rights Investment Fund (FIDC). XP Investimentos arranged the FIDC.
🇲🇽 Medsi, a healthcare financing company, raised a $10mn credit facility from CAPEM Mexico.
Did I miss any deals? Let me know!