Understanding Valuation and Raising Capital in 2020
Latin America Edition
Discrepancies in valuation between companies are always subject to heated debates. When we start comparing startups from different geographical regions, founders often wonder if there are any significant differences in how their company’s valuation is perceived.
This article focuses on some of the fundamental causes behind valuation discrepancies between Latin American Startups and their peers in the U.S. and Canada. We will also examine how the investment landscape is set to change over the course of this year, and explore the many ways Latin American startups can use others’ experiences to adapt for these times of turbulence.
Why is Latin America subject to a valuation discount?
As with any good or service, a consumer’s willingness to pay (i.e., demand) determines its price. For the most part, the gap in valuation in Latin American startups is due to the type of investor ecosystem.
Venture Capital
Local investors are relatively new to venture capital compared to their equivalent peers in places like Silicon Valley. What this means is that, for starters, they are not willing to risk writing big checks. This effect trickles down to later stages of funding, and it signals other investors to remain conservative.
M&A
Along the same lines, Latin American corporations execute very few acquisitions. Whenever they do, the valuations are significantly lower compared to other parts of the world. Fewer transactions imply fewer valuation rounds that can serve as future reference points for investors.
Return On Investment (ROI)
A vital component of the investment process is the payback an investor gets for the risk it takes when choosing to put his money in a company. With fewer opportunities to transact and conservative valuations, investors are incentivized to pay the least amount of money to maximize their ROI. It’s a vicious circle.
Have funding opportunities changed due to the pandemic?
The environment of today is difficult for businesses across all stages. No matter your size, there are adjustments to be made, or at the very least, companies have to be prepared to make changes if required. The ability to raise capital in an environment like this is not necessarily scarce, but it is more difficult than before.
Recent Funding Rounds
In the past few months, companies have received funding, but founders should be attentive to the characteristics of these rounds. For the most part, this capital was allocated to companies for which the due diligence process was already underway, or to companies that had a pre-existing relationship with the investor.
The Investor’s Focus
Like any business looking to reassess priorities and ensure its survival, investors’ current attention is in ensuring the success of their portfolio during this crisis. They are working tirelessly with their portfolio companies to address funding, operational, or other strategic issues. If you’re planning on reaching out to pitch, be sensitive to this, and set your expectations.
Raising Capital in 2020
Investors typically do not waste a “good” crisis. Therefore, the interest and the ability to deploy capital are there. However, the question is: “How?”
From our conversations with various VCs, we know that they are foreseeing to see more:
- Co-investments: the opportunity to pool their money with a group of investors enables VCs to reduce their exposure by committing less capital. Also, VCs may mitigate their risk by leveraging the additional resources at their disposal (e.g., founder connections, sector expertise).
- Mergers and Acquisitions: Should investors not have the appetite or the opportunity to participate in co-investments, another way for them to deploy capital is through mergers and acquisitions. By providing money to their portfolio companies, investors can execute investments indirectly. The portfolio companies can use the additional cash to buy out competitors, strategic partners, or any other company that can augment their internal capabilities.
How do you adapt to stay afloat?
One of the current advantages of Latin American entrepreneurs is the relative “lag” in the region concerning the stage reached by the ongoing pandemic. A significant opportunity for founders is to learn from the changes other companies around the world have had to make in response to the crisis.
With a bit of research, founders can answer questions like:
- Will there be more or less demand for my product (or service)? Bicycle sales appear to be performing better than expected in France.
- Should I expect to allow employees to work remotely for more than six months? Jack Dorsey told his employees that they could remain at home forever if they wish to.
- How likely is it that I will have to shut down my business? It depends. Some businesses are expanding their business models to address the new demand in the market.
With a latency window at their disposal, startups can learn from their peers and adapt quickly. The opportunities are endless. ■
Thank you for reading.
For questions or suggestions related to our content, leave a comment below or message us directly at tfa@avivanco.com.
