LatAm and "The Bridge"
We are now six months since the official?opening of K Fund’s Latin American office in S?o Paulo, Brazil .
The last months were marked by an intense agenda of meetings with the region’s main investors, venture capital firms, founders and several other members and components of the Latin American venture capital ecosystem, which has evolved dramatically over the last years, going from US$600mm in venture funding in 2015 to a record US$15.9bn in 2021, as per?LAVCA data .
With the global macroeconomic headwinds and interest rate rises happening worldwide, 2022 saw a 51% YoY drop, registering US$7.8bn in venture funding, which still higher than any year prior to 2021. The quarterly?data shows US$1bn in venture funding in 4Q22, which is a steep drop from the US$4bn registered in 4Q21, but still higher than any quarter prior to 2Q20, and 2023 already started with January’s volume being 38% higher than December’s, albeit still the slowest January data over the last five years, according to Sling Hub.
From an investors perspective it is clear that the 2022 tech correction found Latin American LPs overallocated to growth as an asset class, which includes venture capital. The region’s investors, historically used to high short term fixed income securities, fueled local and global VC firms’ rapid fundraising growth specially in the “go go years” of 2020 and 2021 and found themselves somewhat more exposed than they should when markets came falling down. This created an environment in which fundraising got intensely harder all across the spectrum, affecting not only startups but VC managers as well.
That’s the bitter taste of the boom. On the other hand, all this capital funneled the creation of a whole ecosystem, which now has all the components needed for a sustainable evolution, such as skilled and experienced talent, a tech receptive B2C and B2B markets, multiple proven exit routes and very successful and inspiring stories, amongst others.
Technology as a long-term value creation trend continues present on all investors and founders’ minds and the potential of this region with over 660 million inhabitants and a combined GDP larger than Germany’s is clearer than ever.
What is also clear is the lack of funds targeting the later stages, especially Series B and above. All of the region’s main countries have great local and international VC firms doing pre-seed and seed stage investments, but the early growth (Series As, Bs and above), which were mainly dominated by foreign VC firms, especially the ones from the US, are much rarer and there appears to be somewhat of a glut around these stages. The colossal entrance of Softbank in the region in 2019, with an initial US$5bn fund to be channeled into a region with a VC funding of only US$2bn in 2018, followed by its abrupt atrophy in 2022 created not only a big mess in the whole ecosystem but a special vacuum around this early growth stage?– which is exactly where Leadwind comes in, finding a very receptive market in LatAm.
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Seed funding investment actually rose last year, going from US$650mm in 2021 to over US$1bn in 2022, while all stages after that experienced large declines in funding, with startups increasingly seeking non-dilutive capital such as venture debt, which reached a record US$1.2bn across the region, compared to US$833mm in 2021.
These trends seen in funding volume are met with data concerning average tickets. The only stage which saw an uptick in average ticket was seed, going from US$1.4mm in 2021 to US$1.7mm in 2022, whereas early-stage ones dropped 19% YoY to US$13.6mm and late-stage ones dropped 51% YoY to US$63.5mm, according to LAVCA. Of course there are several explanations for this difference in seed average tickets, specially concerning the higher experience of the founding teams, but there is a good uncertainty as to how this will behave when these companies fundraise for their next rounds in the years to come.
Brazil and Mexico accounted for 62% of such funding and, over these last months, K Fund has advanced considerably in the establishment of local networks within these countries. In recurrent meetings and both formal and informal talks with founders, management personnel, angels, VCs, regulators, academia, institutional investors, and several other vectors of the ecosystem, Leadwind’s value proposition uniting financial investment, corporate backers, a bridge to Europe and a team composed of founders with deep knowledge of enabling technologies is second to none and very complementary to the local VC players. Over 2023, we shall deepen these relationships as well as strengthen our roots in Colombia, Latin America’s third largest VC market.
From the perspective of the founders, the emergence of more techy business models, involving complex technologies and highly skilled teams, also seems to be one of the byproducts of the evolution of this ecosystem, which begun with startups very much focused on less complex products and more modern distribution channels and is now populated by companies with both a very local and savvy go to market and distribution mindsets and a far more complex tech stack than its predecessors. Machine learning-based processes, blockchain-based registries and artificial intelligence-based analysis are evolving in a rapid pace throughout the whole region, with an enormous space for disruption and value creation.
And, as these startups become more product and less distribution-centered, they also become more global. Their ambitions and expansion strategies feature internationalization much earlier than before, and I can say that, here, Leadwind’s proposal is also unique.
With shared language, high cultural affinity, and several companies operating on both sides of the Atlantic, the bridge between Latin America and Southern Europe is ready to be crossed. Latin American startups see Iberia as the ideal entry route for Europe, following the pathway of the more traditional companies which have made Spain the second largest destination for Latin American investment worldwide (accounting for about 12% of the Spanish FDI, only behind the US, UK and France) by the likes of Cemex, Banesco, CSN Steel, Bimbo, Alsea, JBS, Votorantim and Insud Pharma, amongst others, and already with the participation of more technological companies such as Globant, Creditas and Satellogic.
While 2022 was the year to begin all these efforts, we enter 2023 knowledgeable that our message, presence, and roots need to be highly engrained throughout Latin America so that, when markets come back, K Fund finds itself as central on this side of the Atlantic as it is in Southern Europe. We are only beginning but going in the right direction and highly excited to become the go-to VC firm for companies aiming to explore the Europe-Latin America/Latin America-Europe bridge that is more than ready to receive those building world-class top-notch companies.