latin american entrepreneurship Capital and growth investments through 2018 averaged less than $2 billion per year. With quality growth companies starving for capital, the few active investors in the region were making a fortune. For example, having invested in its Latin American franchise through different cycles, General Atlantic has an IRR (internal rate of return) of more than 50% of those crops.
As a banker covering technology, I thought there was an opportunity to invest in the region and decided to quit my job at JP Morgan and give it a try. When I called my former boss Nicolás Aguzin to thank him for his support, he told me that he would introduce me to Marcelo Claure from SoftBank. By March 2019, we launched SoftBank in Latin America with an initial commitment of $2 billion, which was worth more than the entire industry at the time.
Large companies such as Nubank, Inter, Gympass, Quinto Andar and several others were in their infancy at the time, but the market dislocation did not last long. Latin America became the fastest growing VC region globally, with the market expanding to $16 billion in 2021. In 2020, I founded a new growth fund to fill the funding gap in the region , which gave me the opportunity to see how recent vintage startups fared in a boom scenario.
Fast-forward to today, late-stage financing in Latin America has been hit hard: volumes were down 93% in the third quarter of 2022 from a year earlier. Our assumption is that, going forward, the region will suffer more than other markets from a lack of available local growth capital.
The graph below shows that of the 290 investors focused on late-stage rounds in 2021, only three were active in Q3 2022. Furthermore, only 24% of those investors in 2021 were local, most of whom were not dedicated. growth capital and included a large number of individuals, hedge funds and family offices.
By solving local problems, new companies will build pricing power, which should allow them to prosper.
Early-stage financing has been relatively active so far this year, with many good companies raising seed rounds, with the expectation of hitting the market in 2023. But more than 200 late-stage Latin American companies are holding on for as long as they can. they can before attempting to raise additional capital. Foreign capital will only cover a part of these financing needs.
I started my career in private equity in 2002, but my first job at JP Morgan was simple: writing portfolio reviews and helping to dismantle a large portfolio of Internet companies that had had their share of glory, but were by then mostly failures. What I learned from those days about how some companies thrived while most failed is part of what we share with our portfolio companies today.
Here are some takeaways:
Milk every dollar, save every penny
Below are a couple of examples of how companies did everything they could to stay afloat and eventually thrive:
In 2001, MercadoLibre employed a freemium strategy to gain market share in the highly competitive Latin American online auction market. Users could sell their products on the platform at no cost, which of course fueled GMV’s growth. In 2003, that disappeared, and the company quickly introduced fees in all of its markets.