Latin America appears set to chalk up another quarter of falling venture capital activity, adding to a string of successive periods when the value of investments in the region fell.
Leaning on PitchBook data and looking at venture-backed companies in Central and South America, a TechCrunch analysis indicates that investment volume in deal and dollar terms is set to decline in Q2 2022. With a few weeks of data left to collect as June continues, the picture may shift, but it would require a simply incredible run of closed deals to halt the now-regular decline in venture capital investment in Latin America.
This does not mean that deals are not still happening; they are. And falling venture capital interest does not mean that Latin America’s promise as a startup hub failed to materialize; huge companies have been scaled there and taken public. And we are not working today to imply that any particular region won’t prove a hotbed of startup activity and technological innovation more generally, in time. Instead, we’re just looking at the latest ticks in the tape to see where investment is flowing — and slowing — today.
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Signs of softening in the Latin American startup market abound. Not merely in aggregate datasets, something we’ll get to in a minute. Even the region’s more impressive recent rounds have a touch of sponginess to them. For example, Ecuadorian fintech Kushki recently raised what it called an extension to its Series B. Naturally, it’s a little bit hard to call a $100 million round an early-stage extension, but in prior climes, we suspect that the funding event would have been a natural Series C with new participants, instead of a Series C from repeat investors with a “Series B extension” label slapped on top.
After posting quarters of falling venture capital investment, Latin America has turned the corner and is now trending toward quarter-on-quarter and year-on-year declines in Q2 2022 VC activity. The correction has arrived in the region.
For reference, recall that globally, through the first quarter, global venture capital activity was up on a year-over-year basis. We have yet to parse total market data for the part of the second quarter we’ve already consumed, but if Latin America is a leading indicator, the signs are not positive.
Let’s dig into the early data and then discuss the halo effect — or lack thereof — of Latin American giants like Nubank, as well as some regional matters that could complicate the region’s startups’ access to venture capital.
The Latin American venture capital correction
Let’s start with caveats. We are working with an early dataset, which means we’re not looking at a full picture. Instead, we’re hunting for directional trends to better understand Latin America, while not getting too hung up on particular data points. The data will change.
Still, nuance in hand, it is clear that the Latin American region will post Q2 2022 venture capital results that are smaller than every quarter since Q2 2021. Per PitchBook data, 319 deals worth $10.5 billion were closed in Central and South America in the second quarter of 2021. Those numbers shifted to 336 deals and $9.8 billion in Q3 2021, 326 and $9.0 billion in Q4 2021, and 316 deals worth $8.6 billion in the first quarter of this year. (Note: CB Insights data showed slightly sharper declines, in case you wanted a second source.)
Thus far in Q2 2022, 191 deals worth $3.9 billion have been recorded. Extrapolating for the rest of the quarter, presuming the same pace of investment holds steady, we expect around 260 deals worth $5.3 billion to be announced in the region.
After four quarters of declines, however, the Latin American venture capital market is hardly moribund. Indeed, if we look back at results from 2020, startups in the region never got above $3 billion in recorded venture investment. So, the current quarter, declines in hand, is still cranking at nearly twice the pace set during 2020, a pivotal year for startups and their financial backers.
This means that the Latin American market is correcting, yes, but perhaps to a higher base than it previously enjoyed. So the news is not great, but it’s also not bad, provided that we compare present-day venture flows to any year that wasn’t 2021.
If you are surprised at the deceleration in Latin American VC activity, you are not alone. A year ago, it would have been a somewhat surprising prediction. But in recent quarters, we’ve seen some leading lights dim, which helps put into sharper relief the frictions that could be accelerating the slowdown.
Dark halo
It would make sense to expect success stories from Latin America to have a halo effect on startups there. They did, initially. For instance, many U.S. investors only took interest in the region after Sequoia led Nubank’s Series A round, and even more so when the fintech company went public. But precisely because Nubank and the like have been used as a gauge, their recent woes are reflecting upon private startups, too.
Nubank’s parent company isn’t the only Latin American fintech whose U.S.-listed stock is tanking. PagSeguro and Stone, too, are far below their all-time highs. But Nubank’s case is emblematic because its IPO was only a few months ago — it goes to show how fast the market has changed.
According to analysts quoted by the BBC, some of Nubank’s problems are self-inflicted. For instance, its executive pay policy proved controversial, as was its decision to dabble in bitcoin, which some saw as a distraction.
Most of Nubank’s troubles, however, are due to external factors. This is worse news for Latin American startups because they are likely affected, too. How can huge multiples still be justified in private markets when similar public companies are taking a hit due to shared macro reasons?
Macro troubles are fairly global, but they are even more pronounced in Latin America. Think inflation and interest rates are high in the U.S. and the EU? Well, Brazil’s federal bank increased its target interest rate to 12.75%, up from 2% in January 2021. As you can infer, this makes it very hard to lure investors into venture deals that are perceived as high-risk and now, comparatively, not-much-higher-reward.
There’s another factor that is shared by Nubank and many startups in the region: That they are hoping to make new products and services accessible to new segments of the Latin American population — in startup speak, democratize them. But if a recession hits, these new users might not see their buying power increase as planned, which is bad news for disruptors in fintech and beyond.
“People who became Nubank customers were attracted by the promise that the bank would not charge fees. [The question] is, how to monetize your business if interest rates are very high and your customers are not taking credit? This is a huge problem for them,” Nord Research analyst Danielle Lopes told BBC News Brasil.
A lot of Latin American startups now face similar challenges as Nubank. It also doesn’t help that mega-rounds, especially in fintech, were driven by foreign investors. They may still double down on supporting their portfolio companies, but new deals could slow down as they potentially opt to wait and see.
Add in that it is a presidential election year in two of the region’s main markets, Brazil and Colombia, and it is easy to understand why venture activity seems to be plummeting. But of course, we will wait for full-quarter numbers to draw final conclusions for the first half of the year.
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