Latin America has been a hotbed for startups, with countries such as Brazil, Mexico, and Chile, among others, making significant strides in innovation and entrepreneurship. In this article we’ll show you Investment in Latam Startups in Q1 2023.
However, the first quarter of this year has been challenging for the region, with investment in Latin American startups falling drastically. According to a report by CB Insights, venture funding in Latin America fell by 54% in Q1’23, dropping below $1B for the first time since Q1’20.
The report also states that funding for Brazilian startups was down 67% to $0.2B across 71 deals, while Mexico-based startups raised $72m in Q1’23, a drop of 44% from the previous quarter. The Latin American IPO market remained at zero in Q1’23, and the M&A route is predicted to become more popular as the venture market cools off in the region.
Overview of the Q1 investment report for Latin American startups
According to McKinsey & Company, Latin America (LatAm) has experienced a significant boom in venture capital (VC) investments in recent years, with an abundance of capital flow in the region. As of 2021, the number of unicorns in LatAm has reached 34, approximately 4 times the number in 2018. The growth of venture funding in the region has been six times higher in 2021 ($18B) than in 2018 ($3B), and there has been a 2.4x increase in investors active in Latam.
The Q1’23 investment report for Latin American startups was not encouraging, with investment dropping significantly across the region. According to a report by Crunchbase News, investment in Latin American startups plummeted in Q1 2023, down 84% YoY to its lowest point in over two years, driven by a sharp contraction in late-stage dealmaking.
Furthermore, late-stage and technology growth investment totalled just a couple of hundred million, down 87% YoY, with no acquisitions of venture-backed Latin American companies exceeding $100m, and no high-profile IPOs. Early-stage funding also dropped precipitously YoY, as did seed investment, down 73% YoY in Q1. Deal volume is also down, but not as markedly as investment totals.
Despite the decline in investment, there is still hope for the region’s startups. The Latin American startup ecosystem has shown remarkable resilience, with startups continuing to innovate and grow despite the challenging economic environment.
- Investors are still bullish on Latin American startups, but there is a shift towards investment in earlier-stage companies.
- Seed investment is becoming the norm in Latin America, with the average financing round dropping below $5m, down from $10m a year ago.
- Furthermore, late-stage rounds may be taking a hit, but very early-stage investments in the region remain strong.
- Investors are betting on the region’s potential and are continuing to invest in the Latin American startup ecosystem, albeit with a more cautious approach.
Despite a decrease in capital volume, venture capital investment in Latin America remains strong and is 63% above pre-pandemic levels. Most of this investment is directed towards early-stage startups. Almost a third of startups in the region have less than 18 months of funding available, underscoring the need for increased venture capital investment to support their growth.
Investment cycles are getting longer, and venture capital funds are taking longer to close deals. Although there is greater diversification in funding sources, 80% of the largest venture capital funds in Latin America are still in Fund III or later stages.
Angel investors are gaining ground in Latin America, although there is still a low volume of investment compared to other markets. Angel investors could play an important role in supporting early-stage startups, but they need more opportunities and greater professionalization of the industry.
Venture capital funds need to evolve in terms of how they support startups, especially in areas such as management support, mentoring, and access to networks. Angel investors can also play an important role in this regard.
Early-Stage Funding and Seed Investment
Early-stage funding and seed investment are critical for the growth and success of startups. However, the first quarter of 2023 has been challenging for early-stage funding and seed investment in Latin America.
According to the Crunchbase report, early-stage funding dropped precipitously YoY in Q1, down 73% YoY. Additionally, seed investment is becoming the norm in Latin America, with the average financing round dropping below $5m, down from $10m a year ago.
Overview of early-stage funding and seed investment in Latin American startups
Early-stage funding and seed investment have seen a significant decline in Latin America in Q1’23. The Crunchbase report states that the decline in investment is due to a sharp contraction in late-stage dealmaking. Furthermore, the lack of exits, such as IPOs and M&A deals, is making investors more cautious, leading to a decline in early-stage funding and seed investment.
Seed investment is becoming the norm in Latin America, with investors betting on the potential of early-stage startups. According to a report by Fintech Nexus, big rounds took the most significant hit, with rounds surpassing the $10m threshold seeing a 70% decline. This shift towards seed investment is making it more challenging for startups that were planning to raise late-stage funding.
According to McKinsey & Company report, Startups’ top priorities are growth, product development, and funding.
- Organic growth is the main strategy to acquire new customers, followed by online marketing and offline marketing.
Startups that invest in new products grow at higher rates. Pivoting is a core strategy for startups, with 32% having pivoted one aspect of their strategy, and 68% of those that pivoted their product doing so two or more times.
Also, geographic expansion is relevant, contributing to around 20-40% of total revenue for startups in Latin America.
Discussion of the impact on startups and investors
The decline in early-stage funding and seed investment is having a severe impact on startups and investors in the region. Startups that were planning to raise early-stage funding and seed investment in Q1’23 are now facing significant challenges. With the decline in investment, it is becoming harder for startups to raise the capital they need to launch and grow their businesses.
On the other hand, investors are becoming more cautious as they navigate the uncertain economic environment. With the decline in late-stage and technology growth investment, investors are shifting their focus towards earlier-stage companies.
Seed investment is becoming the norm in Latin America, with investors betting on the potential of early-stage startups. However, this shift in focus is making it more challenging for startups that were planning to raise late-stage funding.
Fintechs Receive the Most Funding
Fintech has been a rapidly growing industry in Latin America, with many startups disrupting traditional financial services. According to the Fintech Nexus report, Fintech received $0.6bn of funding in the first quarter of 2023, accounting for 46% of the total investment volume, with seed rounds becoming the norm in Latin America.
In this section, we will discuss the significance of fintech in Latin America and its impact on the region’s startup ecosystem.
Overview of fintech in Latin America
Fintech has been a rapidly growing industry in Latin America, with many startups disrupting traditional financial services.
The Fintech Nexus report also states that seed rounds are becoming the norm in Latin America, with the average financing round dropping below $5m, down from $10m a year ago.
The growth of fintech in Latin America can be attributed to several factors. Firstly, the region has a large unbanked population, with many people lacking access to traditional financial services.
Fintech startups are filling this gap by providing innovative solutions to financial problems. Secondly, the regulatory environment in the region has been favourable to fintech startups. Governments in the region have introduced measures to encourage innovation and investment in the fintech industry.
Brazil and Mexico Face the Biggest Decline
Brazil and Mexico are two of the largest economies in Latin America, and they have been significant players in the region’s startup ecosystem. However, both countries have faced a significant decline in venture capital investment in the first quarter of 2023. In this section, we will discuss the decline in investment in Brazil and Mexico and its impact on the region’s startup ecosystem.
Overview of the decline in investment in Brazil and Mexico
According to the CB Insights report, venture funding in Latin America fell by 54% in Q1’23, dropping below $1B for the first time since Q1’20. Brazil and Mexico, two of the largest economies in the region, faced a significant decline in venture capital investment in Q1’23.
Funding for Brazilian startups was down 67% to $0.2B across 71 deals, while Mexico-based startups raised $72m in Q1’23, a drop of 44% from the previous quarter. The report notes that the Latin American IPO market remained at zero in Q1’23, and the M&A route is predicted to become more popular as the venture market cools off in the region.
Outlook for the Rest of 2023
The first quarter of 2023 has been challenging for startups and investors in Latin America. The decline in venture capital investment, particularly in late-stage dealmaking, has made it harder for startups to raise the capital they need to launch and grow their businesses. In this section, we will discuss the outlook for the rest of 2023 and what it means for the region’s startup ecosystem.
The potential for a rebound in investment
While the first quarter of 2023 has been challenging for startups and investors in Latin America, there are signs that the region’s startup ecosystem may rebound in the coming months.
The report by Foley & Lardner notes that although there has been a drop in later-stage funding, very early-stage investments in the region remain strong. Furthermore, investors are still bullish on Latin American startups, with a shift towards investment in earlier stage companies.
The importance of innovation and resilience
Innovation and resilience have been critical factors in the growth and success of Latin America’s startup ecosystem. Despite the challenging economic environment, startups in the region have continued to innovate and grow their businesses.
This innovation and resilience have attracted the attention of investors, who see the potential for long-term growth and success in the region.
The need for supportive policies and regulations
Supportive policies and regulations are essential for the growth and success of startups in Latin America. Governments in the region have introduced measures to encourage innovation and investment in the startup ecosystem. However, more needs to be done to create an environment that is conducive to the growth and success of startups.
The potential for new opportunities
The decline in venture capital investment in late-stage dealmaking has created new opportunities for startups in Latin America. Investors are shifting their focus towards earlier-stage companies, creating opportunities for startups to attract investment and grow their businesses.
Furthermore, the growth of fintech in the region is creating new opportunities for startups to disrupt traditional financial services and attract investment.
The decline in venture capital investment in late-stage dealmaking has created new opportunities for startups, particularly in the fintech sector.
The Importance of Diversification
Diversification is an essential strategy for reducing risk in any investment portfolio. It involves spreading investments across different sectors, industries, and asset classes, reducing the impact of any one investment on the overall portfolio.
In the context of Latin America’s startup ecosystem, diversification can help startups and investors mitigate the risks associated with the decline in venture capital investment.
According to McKinsey & Company report the current dilemma is how to balance growth and profitability. 4 clusters of startups are identified based on how they manage this balance: Great Gatsby (35%), Embryo (34%), Peter Pan (12%), and Rockstar (19%).
- Rockstars report growing at a faster pace while closely tracking their profitability aspirations.
- The main industries for these startups are Fintech (41%), SaaS (23%), Construtech & Proptech (9%), Edtech (9%), Others (18%).
- The journey to breakeven can take much longer than the average startup cycle from launch to monetization, which is less than a year.
Startups seeking cost efficiency focus on CAC optimization, IT cost reduction, and workforce resizing. LTV/CAC shrinks throughout startups’ journey to maturity, as customer acquisition becomes more difficult and growth investments increase.
Companies with high engineering productivity use micro-services architecture, infra as a code, resilience by design, and automation.
The benefits of portfolio diversification
Portfolio diversification offers several benefits to startups and investors in Latin America’s startup ecosystem.
- It reduces the impact of any one investment on the overall portfolio, reducing risk and increasing stability.
- It allows startups and investors to take advantage of new opportunities in the region’s startup ecosystem, positioning themselves for long-term growth and success.
- It provides a hedge against market volatility, ensuring that portfolios remain stable in uncertain economic environments.
Strategies for portfolio diversification
There are several strategies that startups and investors can use to diversify their portfolios.
- They can invest in startups in different sectors and industries, spreading their investments across a range of businesses.
- They can invest in startups at different stages of development, from early-stage to late-stage companies.
- They can invest in startups across different geographies, taking advantage of the growth and potential for success in different Latin American countries.
Wrapping Up
The first quarter of 2023 has been challenging for startups and investors in Latin America, with a significant decline in venture capital investment. However, there are signs that the region’s startup ecosystem may rebound in the coming months, with a shift towards investment in earlier stage companies, particularly in the fintech sector. Diversification is an essential strategy for startups and investors to mitigate risk and take advantage of new opportunities.
At Newtopia VC, we will continue to monitor developments in Latin America’s startup ecosystem and provide insights and analysis to help startups and investors navigate the uncertain economic environment.
If you enjoyed this article, be sure to check out our other great content on the latest trends and developments in the startup world.
FAQs about Investment in Latam Startups
Who invested in LATAM startups during Q1?
Venture capital investment fell 54% in Q1’23.
What sectors received investment in Q1’23?
Fintech was the most funded sector in Q1’23.
How did startups cope with the decline in investment?
Startups continued to innovate and grow their businesses.
Who can diversification benefit in the startup ecosystem?
Diversification can benefit both startups and investors.
What are the benefits of portfolio diversification?
It reduces risk, takes advantage of new opportunities, and provides a hedge against market volatility.
How can startups and investors diversify their portfolios?
They can invest in different sectors, stages of development, and geographies.
Objection: Is the outlook for LATAM startups negative?
While Q1’23 was challenging, there are signs of a rebound and a shift towards earlier stage investment.
