• damianolive0

Time to Raise (if you're a founder in Latin America)

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Warren Buffett

Early stage investors in Latin America are both fearful and greedy right now. Fearful of missing out on the investment opportunity of their lifetime. And greedy about the money they can make by supporting extraordinary entrepreneurs. They are investing in start-ups in the region at an unprecedented pace.

I’m going to make a simple argument: if you’re the founder of a Latin American startup you should be raising capital now. Perhaps you’re considering it and have it as a maybe within the next twelve months. That needs to change. The time to do it is now.

The rationale

Five reasons behind this argument:

1. Euphoria about Latin America. Latin American startups raised $11.5 billion during the first 3 quarters of 2021. That’s more than twice the previous annual record that was set in 2019. Money raised by startups means valuation mark ups for VCs. That results in successful fundraising for them, which creates pressure to invest the new capital. It’s a virtuous circle that is accelerating and working in favor of entrepreneurs. Extraordinary outcomes like that of Nubank in Brazil, Tiendanube in Argentina and Kavak in Mexico show that Mercadolibre wasn’t a one-off for Latin America. Investors have realized that a region with more than 600 million people and mid-level GDP per capita is fertile ground for startups to develop massive businesses.

2. China. China has changed in a big way. The ruling party decided to rebalance power by attacking successful entrepreneurs and technology companies. What this means for you is that the managers of endowment funds, pension funds and other institutional pools of capital in the US and Europe now have to reassess the risk profile of their investments in China. The rules of the game are unclear, so risk has gone way up.

3. Exits in the US. The US venture sector is flush with cash. In the past three years startups have generated more money in exits than in the previous 20 years combined. That capital will go back to work.

4. Competition for talent. Startups raising money in the region at record levels means that they have more resources to hire. The pool of talent for developers, designers, data scientists, marketers and salespeople is the same for all sectors. You are competing with well funded startups for those resources regardless of industry. It gets worse than that. You are competing on a global scale with startups and large tech companies from all over the world. The graph above should scare you, use that emotion to get going.

5. Cycles. Maybe you haven’t lived through many cycles yet. That’s ok, all you need to know is that financial markets don’t go up indefinitely. The technology revolution we’re undergoing justifies a lot, but it doesn't get rid of the basics of capitalism. Eventually there’s too much capital chasing opportunities. This creates oversupply and the cycle turns. We don’t know if it will turn in 10 days or in 10 years. But it will turn.

Further context on the investment landscape

Investors of all sizes, from large asset managers to individual investors, have these options today:

  • US treasury bonds yielding less than inflation. That is very unattractive, especially with the upcoming increase in rates that could crush long term bonds.

  • Public equities at all time highs with valuation multiples at near record levels. Stocks are not in a bubble, but they’re not very appealing either.

  • Private equity is doing great, but how will it perform in a rising interest rate environment? The cost of capital for leveraged buyouts is about to go up, perhaps significantly. There’s risk here.

  • Venture capital has provided extraordinary returns, and the technology transformation behind those returns seems to have plenty of room to keep going.

Those in charge of allocating capital see early stage investing as a bright spot in an otherwise unappealing landscape. The decision to maintain or expand asset allocation to early stage investing is having significant ripple effects worldwide. For instance top US venture firms are going all-in on markets outside of the US such as -you guessed it- Latin America.

You’ve decided to raise, now what?

If you’re already convinced that raising money is a good decision, where do you start? A key question to ask yourself and your co-founders before moving forward is whether you have product-market-fit or not. You can read this interesting article that describes how people think about it. Having that fit is a crucial difference in terms of how investors will perceive you.

If you are in the early stages of your startup and don’t have product market fit, it’s important to acknowledge it clearly in your communication with investors. Explain how the money they’re investing will help you achieve it.

Apart from that, investors want to see:

  1. A product that is extraordinary, meaning, it’s differentiated, well built and valued by customers.

  2. A very large end market.

  3. A team that can execute on the opportunity.

If you have those things and you explain them well you have a shot at raising capital at the pre-seed or seed stages. But it will be tough. Expect a lot of rejection despite the favorable market environment. Listen to the reasons investors are giving you, some of that information will be useful.

Note: these rules don’t apply if you’re a successful repeat entrepreneur or otherwise are well networked in the money space.

If you already have product market fit...

...and you haven’t raised capital within the past six months, your priority should be to get more money in the bank. Why? Because of the five reasons, plus some additional thoughts.

The percentage of startups that have a winning team, a great product, a large end-market and are past product-market-fit is very small. Congratulations. Except that doesn’t matter unless you can continue to compete successfully. Your company can still go to zero. How? Think of MySpace vs Facebook, Yahoo vs Google and so many others. Things change.

Taking every step available to maintain and expand your competitive advantage is the smart choice. One of those steps is to get capital in order to hire the best talent. That doesn’t guarantee success, but it does mean that you ran a good decision process given the environment.

There’s hope for Latin America after all

The most wonderful thing about this new reality is that Latin America's internet economy is flying above the political and economic instability that still plagues the region. Entrepreneurs have decided to build a new Latin America, a better Latin America. One that creates jobs and opportunities without interference from the political process. This is a new wave of wealth creation that deserves the support that it is getting.

If you’re building something that will improve people’s lives, go for it. Get the capital you need. The world wants you to succeed.

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