Hey technopolists,
Divergence is here.
The question of the hour today is why, despite layoffs and VCs’ retreat, do new stats show that LATAM VC funding is still booming?
That’s why I have special briefing this week to help you make sense of the market’s turbulence (scroll to the bottom for more).
What’s hot
💰 May VC funding bounces back. In May, LATAM venture funding topped $1.3bn, a +15% increase on May last year and a whopping +61% rise over April. Proptech surpassed fintech as the most-funded sector for the first time since September ‘21 (thanks to Habi’s $200mn mega-round), and Brazil (unsurprisingly) garnered 52% of venture money. This is huge news given the divergence we’re seeing in the market globally; May marked the beginning of sweeping layoffs that rippled through unicorns (including in LATAM), so to see funding be greater than 2021’s top-o’-the-market creates some cognitive dissonance. More on this later. (LABS)
🚚 Venezuela joins the super-app wars. Yummy, the Venezuelan food delivery and transportation app, raised a $47mn Series B that’s being touted as Venezuela’s largest funding round ever. This pits them up against unicorns like Rappi, UberEats, and Jüsto in the race to be LATAM’s super-app. However, their $69mn in total funding is dwarfed in comparison to their competitors’ mega-rounds, so they’re hoping to win by focusing on the geographies that others don’t; namely, Venezuela, Bolivia, Peru, and Chile. (TechCrunch)
🇧🇷 Festa in Brazil. Brazil ranked as the strongest ecosystem in LATAM (for the second year running), followed by Chile, Mexico, and Argentina. Of the 20 best-ranked cities in the region, six are Brazilian, with São Paulo leading with a score twice as high as second-ranked Mexico City. (Startups Brazil - Portuguese)
What’s not
🪓 More layoffs. 2TM, the owner of Brazilian crypto exchange Mercado Bitcoin, has announced that it laid off 12% of its team (90 people), while Favo, the Brazilian social commerce platform, announced that it laid off 34% of its workforce (170 employees) and will be shutting down Brazilian operations. German-British payments provider SumUp also announced that 100 Brazilian employees have been let go. Several Colombian startups, though largely unscathed so far, are playing defence with hiring freezes and expansion delays. If you’re looking for new talent, check out these three sources for a running list of free agents. (Bloomberg Linea)
🇲🇽 Mexican investor sentiment. In a recent Banxico survey of private market analysts, 59% of analysts believe it’s a bad time to invest in Mexico, and only 3% of analysts agreed that now is a good moment. Investor confidence is its the lowest level since May 2020, the nadir of the first lockdown crash during the pandemic. While analysts cite the litany of macroeconomic indicators as concerning, their main worry is local governance and political insecurity (see: AMLO’s attempts at nationalisation). Analysts are following suit with consensus; Banxico themselves recently downgraded Mexico’s 2022 growth forecast, and as I’ve previously reported, UBS put Mexico at the greatest risk of stagflation in LATAM. (Bloomberg Linea - Spanish)
Stat of the week
May’s investment data is fresh, so here’s a recap of the biggest rounds.
Source: Sling Hub
P.S. Follow me on Twitter @_simonrodrigues
Smart links
FYI: I’m replacing For the culture with Smart links, a carefully curated roundup of must-reads that will help you stay sharp on LATAM. Whether you want to hone your macro outlook or just sharpen your banter, these links get my chef’s kiss of approval.
Nowports is becoming Latin America’s Flexport (Latinometrics)
Is Mexico’s Kavak headed down the same road as Carvana? (Bloomberg Linea)
Kavak: The Drive to Conquer (The Generalist)
Latin American startups are facing a wipeout, says Clip CEO (Bloomberg)
Digital payments have gone viral in Brazil (The Economist)
Brazil’s economic growth misses forecast as downturn looms (Bloomberg Linea)
List: 12 Mexican seed-stage venture capital funds (Startupeable)
How TikTok helped reshape Colombia’s presidential race (Bloomberg Linea)
Why Peruvian villagers tore down a flood warning system (The Economist)
Bukele’s third year as president of El Salvador, from A to Z (Bloomberg Linea - Spanish)
Special briefing: Making sense of market divergence
You’re not alone if conflicting headlines about growth and gloom are causing you confusion.
These are three camps of opinion emerging at the moment (hopefully you recognise yourself among them).
1/ The optimists
For some, it’s business as usual.
Enter Juan Franck, managing partner of SoftBank’s Latin America fund. Recently, Franck redoubled his commitment to the continent when revealing a $2bn addition to his Latin American fund that will be deployed in the next 12-18 months, despite macroeconomic risks. The expansion is huge, making up a 30% increase on the $6.5bn that SoftBank has already deployed in LATAM. “This expansion is not compromised,” he said, comparing venture investment to a long-term marriage.
The optimists, like Andres Pineda of Latamvest, share Franck’s long-term view, emphasising that LATAM has fundamental challenges to solve (like financial inclusion) with an improving talent pool. They also believe that local VC funds are well-capitalised and have their LPs’ confidence. The correction is a blip; nothing that a little marriage counselling can’t solve.
The LATAM optimists have data on their side. VC funding has generally been higher this year than last year, in spite of the growing consensus that agrees that 2021 was the top of an overheated market. dLocal proudly reported that payment volume on their platform increased 127% to $2.1bn, while Nubank just posted their best quarter of all time and CEO David Velez sees no reason to make any layoffs.
2/ The pessimists
The list of global pessimists is long and illustrious: Y Combinator, Sequoia, Jamie Dimon, Elon Musk. The pessimist logic is that LATAM will not escape the global reshuffling unscathed, and the 2021 bubble has burst:
“It was obvious that we were in a bubble. Many inexperienced entrepreneurs with bad ideas were able to raise tens of millions of dollars to create easily replicable businesses. But now that the market is returning to a realistic state, many of these startups will not survive.”
Alexander Torrenegra, CEO of Torre (Source)
Pessimists like Sergio Furio (CEO of Creditas) have already warned of slashed valuations and lower investment levels. Most newspapers, like Bloomberg Linea, sit in this camp, too, with a spate of stories about layoffs and macroeconomic doom. In their defence, they’re going off the overwhelming data on unicorn layoffs, inflation, rising interest rates, downgraded growth estimates, supply chain disruption, and political instability.
Arguing with the pessimists is difficult; being downcast in a downturn is a mainstream, consensus view. Being consensus and wrong is fine, but being contrarian and wrong in a downturn is both reputational and economic suicide.
It’s too soon to know if the pessimists are correct; they’re pointing to future forecasts while optimists are relying on data in the recent past . Layoffs are proactive preparation for a downturn rather than a definitive signal that it’s arrived.
3/ The correctionists
Then, there are the centrists, those who believe that 2021 was a fundraising circus and a modest slowdown in 2022 is both likely and justified. Funding will tighten, and investors will place more emphasis on economic sustainability. Growth-at-all-costs strategies are out, and unit economics are back in style. Mediocre businesses will perish, but the strong will survive and get stronger. A crisis is an acceleration, and a company’s existing trajectory will be sped up to its conclusion.
Most of the VCs in LATAM I’ve spoken with have expressed this sentiment, with one going as far as saying: “my dog could have raised a $5mn round in 2021… that’s not happening anymore.” Brian Requarth of Latitud summarised the correctionist stance in a recent LinkedIn post:
The correctionists have both sets of data on their side, too — the lagging data of the optimists and the leading indicators of the pessimists. Correctionists, however, see the impending tightening as a good thing, seeing 2021 as an unsustainable year. What differentiates them from pessimists is that they see VC similar to private equity: it’s longer term and more resilient during times of macroeconomic turbulence.
History as a guide
While 2022’s reset is unique, we can look to 2008’s crash to learn what happens in a downturn. Here’s a look at VC funding from 2008 to 2009:
The correlation is clear: the later the stage, the greater the pain. It shouldn’t surprise us that venture funding bears a stronger correlation with public markets the closer that companies get to being public.
Early signals seem to support this phenomenon in 2022, as Alex Iskold of 2048VC wrote in a Twitter thread summarising observations in today’s early-stage environment.
When a fire starts to burn
Startups and VCs love metaphors, so here’s my view.
Downturns are like forest fires. When a fire sweeps through a forest, the low-level shrubs incinerate and the surviving trees look even taller. Ashes fertilise soil, and the flora that follow the fire will grow more quickly with the newfound nutrients and space.
Stale companies (especially struggling at growth-stage) will vanish in the blaze, while the seeds underground (pun) will remain intact. The towering businesses will be singed but survive. VCs will be careful to make sure that they don’t purchase any burning bushes, and they’ll be clamouring to climb up the tallest trees until they can have confidence to return to the ground.
That’s why the smart companies are doing what they can to reduce their burn.