LatAm Tech Weekly: Evolving VC Dynamics

Before we dig into the news, a couple of announcements related to events. This week I participated in Itau’s Agro ao Cubo event, talking about artificial intelligence for agribusiness alongside great founders. If you are interested in tech within the agribusiness sector, be sure to check out the new season of Itau BBA’s Prosa Agropodcast – it will specifically cover only this theme! (PT only)

Shifting gears, this week came to my attention that São Paulo will host a Fashion Tech show in November, called “Moda Tech” featuring Brazil’s first holographic runway show with notable partners. The objective is to foment connections and discussions merging fashion with innovation. You can find more information here and stay tuned for news on this one!

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Opinions expressed here are solely my own and does not represent those of people, institutions, organizations that I may or may not be associated with in any capacity, unless explicitly stated.

On to the market usual update, a great read this week was PitchBook’s analysis on the evolving dynamics of the VC scene. It is no news that we saw a remarkable shift in the landscape during 2020 and 2021. The paper then sheds light on its consequences.

The post-pandemic era was witness to a tidal wave of capital pouring into U.S. ventures. The overcapitalization peak was reached in 2021, marking a staggering $55 billion. Delving deeper into this concept, it essentially means collecting more funds than are required for typical operational periods. This phenomenon of overcapitalization was palpable in the wake of the pandemic. A conducive environment was fostered by plummeting interest rates, which hovered around zero. Adding fuel to this fire were financial giants like SoftBank and Tiger Global, known for their penchant for massive, swift investments. Data from the year 2021 provides a testament to the frenzied deal-making activity of the time, capturing an impressive spike in U.S. deals – a leap from roughly 13,500 in 2020 to a whopping 19,000 in 2021.

Due to an unprecedented influx of capital into the market, startups substantially modified the traditional rhythm at which they returned for fresh rounds of funding, even amidst growing deal sizes. But what goes up must come down, and this capital surplus soon dwindled into a deficit over a span of 18 months. This was basically due to a rise in global interest rates and inflation. With that, capital became scarcer.

As a consequence, there’s a noticeable trend wherein both companies and investors are leaning towards a more cautious approach with their capital, stretching every dollar and seeking ways to elongate their operational capabilities. Such strategies are visible in the increasing reliance on layoffs and the choice of debt financing. These methods, not traditionally the primary options, are now serving as pivotal tools to extend companies’ runways. 

Furthermore, the capital-demand-to-supply model crafted by PitchBook gives an interesting insight. It suggests that today, late-stage VC-backed companies in the U.S. find themselves in a situation where their capital requirement is almost three times the available supply. To put it in perspective, the late-stage deal value in 2023 hovered around $76 billion, a stark decrease from the almost doubled figure in 2021. This tightened capital environment poses challenges for companies: should they attempt to secure an investment in a less-than-receptive market or try to weather the storm by extending their financial runway?

To gauge the balance of the market, PitchBook’s model recommends a demand-to-supply ratio of 1.0x. Anything less than this benchmark suggests a market that’s teeming with excessive capital. Interestingly, the U.S. venture market was swimming in such overabundance throughout 2020 and much of 2021. It’s a phase in financial history that will undoubtedly be analyzed and discussed for years to come.

Monday

• dLocal, Uruguayan payments giant, is reportedly exploring a potential private buyout following interest from prospective buyers.

• Recent study shows that Brazil is poised to be a leader in the production of affordable green hydrogen. Although costs are expected to decline with technological advancements, the exact extent remains uncertain.

• A recent statistic indicates that 40% of individuals have made purchases due to the recommendations of influencers, highlighting their significance in current advertising strategies in Latin America.

• Blip (previously Take Blip) has announced a partnership with Efi Bank to initiate payments through Whatsapp.

• Despite the Selic rate dropping, housing credit rates in Brazil have remained unchanged since May. They are expected to stay this way until the end of the year or early next year, according to experts cited by Valor Online.

• Nubank’s cryptocurrency, Nucoin, saw trading suspended after its value surged by 1,000%.

• Brazilian Natura collaborated with a local university, USP, to use bio-imprinting to produce 3D skin for cosmetic testing. This revolutionary tech boosts the “cruelty-free” beauty market, expected to hit $14.2 billion by 2027.

• Amazon introduces an AI tool that summarizes customer reviews, pinpointing product pros and cons.

• PicPay, Brazilian super app with 33 million users, is diversifying its marketplace offerings, with about 115 sales per second.

Deals:

• Web3Dev secured BRL 2.5 million in venture funding from MZ Web3 Fund to enhance community initiatives in Latin America.

• Fintalk, an artificial voice intelligence platform, raised BRL 6 million in seed funding led by Volt Partners. The capital will be directed towards expanding marketing, technology, and commercial sectors.

• HealthAPI, an AI-driven healthcare Brazilian platform, was acquired by Axenya, company from Uruguay.

• IneditaBio, Brazilian genome editing company, raises an undisclosed amount from Ecoa Capital, the company focuses on plant genome editing tech.

Tuesday

• dLocal announces Pedro Arnt as Co-CEO, the former CFO of MercadoLibre, as it reveals its Q2 earnings.

• In a surprising move, Apple Pay launched in Chile, unexpectedly including the RappiCard by Itaú, a credit card introduced last year as a collaboration between delivery app Rappi and Banco Itaú.

Deals:

• Klar, a fintech startup based in Mexico, has secured a $100 million credit facility from Victory Park Capital.

Wednesday

• According to Statista, Latin America is projected to have over 300 million fintech users by 2025 due to a rising demand for reliable, user-friendly financial solutions.

• A PwC Brazil study highlights an uptick in M&A transactions in 1H 2023.

  Announcement

• Tenpo, the largest digital account operator in Chile with 2.2 million clients, started issuing credit cards together with Brazilian fintech Dock. Dock’s mission in Latin America is to replicate Brazil’s advanced payment experience while considering local nuances and aiming for greater financial inclusion.

• The Brazilian Central Bank (BC) explores the inclusion of card schemes in the Open Finance system, which currently operates only via Pix.

• Endeavor reveals its new batch of startups for the Scale-Up program, spotlighting 47 companies across various sectors.

Deals:

Thursday 

• Bilheteria Digital, after experiencing ‘zero revenue’ for 18 months, anticipates generating R$ 1 billion from ticket sales.

• Cube Ventures and Arkangeles partner to promote tech startups in Latin America, aiming to diversify investments and support emerging businesses.

• Cora introduces a subscription plan named Cora Pro, featuring an automation tool for invoice processing.

Deals:

• Zaros, founded by Brazilians, raises R$ 2.75 million at a R$ 50 million valuation to democratize decentralized finance.

Friday

• Globant delivered good 2Q23 results, in line with Bloomberg consensus. The company showed solid quarterly figures, including adjusted EPS growth of 11.5% YoY. The 12-month attrition rate stood at 11.6%, the lowest figure on record for Globant. Management slightly updated guidance for FY23. The company expects revenues to end 2023 at USD 2,094 million (up 1% from the previous guidance), with an adjusted operating profit margin of 15%-16.5% (from 15%-17% previously) and an adjusted EPS of at least USD 5.72 (flat from USD 5.71 previously).

• After Banco Original’s retail customer base of 33 million migrated to PicPay in July, the fintech arm of the J&F group has begun piloting its investment platform. PicPay Invest emerged from the DTVM Liga Invest, which was initially designed for stocks and derivatives but never became operational. Now, the institution is launching with an offering of investment funds and fixed-income assets. By the end of the year, the plan is to raise BRL 18 billion in this sector, supported by a team of 150 specialists.

• Banco Galicia formed a partnership with Fintech Agrotoken to foment credit facilities for the agro sector. It will now accept tokenized crops as credit collateral.  

• Brazilian Fintech Bamboo established a partnership with global mobility startup inDrive: now ride hailing passengers will be able to pay instantly in Argentina, Peru and Chile.

• Solfácil, Brazilian energytech, offers solutions that can lead to up to 95% savings on electricity bills.

• Zenklub, Brazilian health tech, partners with brands like Omint and Vivest, expanding its emotional health plans and attracting a BRL 30 million investment from undisclosed investors.

• Monkey, Brazilian fintech, unveils SpikeCash, an open platform for receivables anticipation for merchants.

• Creditas, a collateral-based lending unicorn based in Brazil, reduces its Q2 losses to R$ 118 million.  

Deals:

• Mexican Wonder Brands secures USD $15.5M to boost Latin American ecommerce. Nazca and BID Invest spearheaded the funding alongside other investors such as CoVenture and SilverCircle. The capital could potentially reach up to USD $20 million, accumulating approximately USD $40 million in funds for the company.

On another note:

What did I learn from readers?

An avid reader sent over this week’s edition of a cool substack called Superfluid, written by Abhi. He wrote about the reason why mega VC funds exist and also how institutional investors allocate their capital across different strategies. Below you can find my key takeaways:

Venture Capital (VC) Ecosystem:

1. VCs primarily raise money from wealthy individuals, large institutions, and corporations.
2. Institutional investors like college endowments, pension funds, and large foundations are pivotal to the VC ecosystem.
3. VCs are responsible for deploying capital effectively, but there are emerging misalignments between institutional investors, VCs, and founders.

The Endowment Model:

1. Institutional investors have varied return expectations, risk thresholds, and portfolio preferences.
2. Large institutional investors such as grant-making endowments must annually allocate a certain percentage (usually 5%) for community grants.
3. The Endowment Model, by David Swensen, encourages investing in illiquid assets like Real Estate, Infrastructure, Private Equity, and VC.
4. Institutions adopting this model typically allocate 10-30% to private, illiquid investments, with 2-10% dedicated to VC.
5. The rapid growth in assets under management over the past 13 years has amplified the absolute dollar allocation to VCs, necessitating faster deployment.

Manager Selection:

1. VC investments operate based on the “power law”, with a few investments yielding most returns.
2. VC fund returns also show a power law distribution, emphasizing the rarity and value of high-performing funds.
3. Institutional fund employees often aren’t incentivized by outperformance, leading to safer, less risk-taking portfolios.
4. Access to top VCs like Sequoia is challenging due to persistent LP commitments.
5. To get vintage-year diversification, investors typically allocate to multiple funds across different years.

Fund Manager Selection Process:

1. New VC inclusions in portfolios typically arise from existing VC underperformance, allocation increases, or diversification needs.
2. Selection is based on:

• Track record and pedigree of General Partners.
• Ability to deploy and return capital.
• Sourcing investments, winning allocation, and supporting portfolio companies.
• Fund fit within the investor’s venture portfolio.
• Fund size compatibility with the strategy and ability to scale.

What am I reading?

What am I listening to?

Quote of the week:

“And I do want to say it’s still very early days. I think people tend to overestimate the impact of new trends in the short term but underestimate them in the long term” Unknown

Originally published on my Substack.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.