I came across this article during the week and raises some points on why LatAm startups are valued lower than developed market startups. While I do not agree on some points, it did get me thinking about the current stage of the LatAm ecosystem. Below a few thoughts on the topic:
- I think low valuations have more to do with slower growth and lower absolute numbers (traction) from startups than the exit landscape. I am a believer that if large/defendable businesses are created, buyers will come!
- Lower e-commerce & mobile penetration makes the addressable markets lower. Although offline markets are huge, online total market tends to be significantly smaller.
- Concentration of power from large companies within each country makes them less vulnerable to disruption from underfunded startups. They also have a mentality that they can build anything through their internal cash-flow generation.
- Its difficult to operate regional companies (laws, languages, cultures, etc). Mercado Libre and Despegar are examples of regional leadership, however, it is quite capital intensive to get to that scale and structure, meaning more structural costs to address the total market potential.
- LatAm GDP moves in tandem with the commodity price cycle. Recent years have been difficult for commodities, which impacts directly all economies and investment outlook. Im sure that if we get another commodity bull cycle, we will start to see more movement in the technology investment space.
- Startups in LatAm rarely have the product, access to capital and talent to compete with international players in their same category. Local advantages that the Chinese and the Indian markets have developed have yet to be seen for LatAm.
I would consider all of these additional factors when talking about the state of the LatAm startup ecosystem, however, I do see significant signals that some things are changing for the better:
- Recent acquisitions of Cornershop (200M+) & Linio (130M+) from Wal-Mart and Fallabela represent big checks written by incumbents which could generate shareholder value for their firms, proving to be success cases... hopefully
- SV VC´s investing in the region in companies like Rappi, Konfio, Runa, among others, will provide good practices, fresh capital and ambitious thinking to the local investing space
- Local funds are raising their 2nd and 3rd funds with a lot of learnings and higher investment amounts
- New wave of entrepreneurs that have experience building (and failing) or working for high growth startups. Many with a lot of scars that make them stronger entrepreneurs.
All of these points combine a recipe for good things to come in LatAm, however, I believe we need to see more hits and less home runs for the ecosystem to find its footing. My definition of hits are companies that can generate between 5M and 10M net-revenue run rates with 2x-4x growth YoY, at least for marketplaces.
Some side topics.
- Awesome to see Boston win the World Series again, made my day better after seeing Real Madrid get humiliated in Barcelona.
- We just came back from our yearly company outing with the Reservamos Team. We had an amazing time in Merida (ximxim) and glad that I was able to make it. Here is a picture of the team.
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