In an increasingly austere global economic climate financing is becoming more costly for Latin American fintechs. Early-stage ventures in particular will feel the pinch while more mature firms will have to deliver results that prove their profitability, in order to generate cash and capture the attention of increasingly selective investors.
As we approach mid-year, it’s clear the record investments notched up the region in recent years won’t be repeated. On the contrary, access to funding will become even tighter, adding pressure on the industry.
And although venture capital funds see room to continue parking capital strategically, they recommend fintechs to prepare for a much more complex period ahead.
“Investments were very high from 2019 to 2021, and despite there being capital available, it’s reasonable to think we won’t see an explosion of new investments in 2022,” Eduardo Vieira, head of marketing and communications at SoftBank Latin America Fund, told iupana. The firm, one of the region’s biggest VC investors, has backed unicorns such as Creditas and Kavak; the latter dismissed 100 workers in Brazil last week, in a sign of the increasingly difficult times.
“This is largely due to the maturity curve of the region’s startup ecosystem. In the last two years they received a lot of resources and grew rapidly. It’s natural that, now, there’s a cycle during which these resources will be employed, focusing more on management, the search for talent, the improvement of their products and services, profitability, internal controls, corporate governance,” adds Vieira.
Global venture capital financing will decline 19% in the second quarter compared with the same period last year, according to CB Insights forecasts. The number of IPOs is projected to fall 34% and new unicorns cut by half.
The World Bank said last week the global economy is “in jeopardy,” partly due to Russia’s invasion of Ukraine, which has disrupted supply chains, pushed up fuel and food inflation, and prompted central banks to raise interest rates. This has had a direct impact on the valuation of fintech companies, which is worrying investors.
Shares of Brazil’s Nubank have fallen nearly 70% from the peak reached in December when the neobank debuted on the Nasdaq exchange.
You might also like: Friday Briefing: Investment arrives (more) slowly but surely
More selective investors
Fintechs have benefited from the fact that they cater to markets with strong fundamentals, such as savings and credit product for the financially excluded. However, company executives will need to start thinking harder about how they invest their resources, if they aren’t doing so already.
“Given the market landscape, we’ve been advising all portfolio companies to preserve cash and prepare for adversities in capital raising that they haven’t faced before,” Laura Martínez, investment analyst at Magma Partners, which has stakes in fintechs Truora and albo, tells iupana.
“We want to see companies adjusting efficiently to the new market reality, taking care of their unit economics and cash in the medium term,” which is up to 24 months for more mature businesses, she adds.
This coincides with warnings from the Y-Combinator accelerator, which recommended its founders to “plan for the worst.” And, as we previously reported, the wave of layoffs that’s already reached crypto platform Buenbit and the real estate fintech Quinto Andar is expected to advance.
“The global context advises caution, but on the other hand, Latin America is a region that demands structural investments because there is still a lot to be built,” adds SoftBank’s Vieira.
Despite the deteriorating investment climate, Chilean fintech Xepelin came away with US$111 million from a Series B fundraising in May led by Avenir and Kaszek, allowing it to continue expanding its payments platform and cash flow management service for businesses.
“The current inflation and economic scenarios makes our service even more necessary,” says Sebastián Kreis, co-founder and CEO of Xepelin. The firm’s products can help SMEs in Chile and Mexico organize their financial indicators at times like these, he adds.
Many of the investors that participated in his previous rounds doubled down in the Series B, says Kreis. However, he acknowledges that plans to expand to a third Latin American market may be postponed until the outlook is clearer.
Investment outlook deteriorates
Investment in the fintech sector in Latin America during the first quarter of 2022 barely reached 11% of the total raised in 2021.
“What we’re going to see is greater selection in investments. And secondly, […] many funds will look to companies that already have a certain volume, a certain size, because you want to make sure the company is going to be more resistant to the crisis than the smaller ones,” says Rodrigo García, CEO and founder of Finnovating, a platform that connects investors with startups.
However, García sees the investment crunch becoming more severe next year, as VC firms put together new funds; companies already have capital available for this year and need to use it.
“The funds have money, so in the worst case scenario, some investors will look for follow-ups of their own rounds. That’s because the vast majority of them have to invest, “he says.
Although the rounds this year have been smaller, and we haven’t witnessed the mega rounds of close to $400 million like last year, it’s not just Xepelin that’s raising capital. Last week, the Mexican fintech Klar raised US$90 million and Ecuador’s Kushki —which is part of Magma Partners’ and SoftBank’s portfolios — achieved unicorn status.
But evidently investors are being much more cautious about where they park their cash.
“The cost of capital has increased for everyone. Previously, the attitude was to generate growth at any cost —now it’s about understanding how to make money and generate sustainable growth”, says Magma Partners’ Martínez.
To delve deeper into this topic, we’ve put together a panel of top investors to discuss the investment climate going forward. Don’t miss it.