The 2022 Halfway Point: What LatAm’s VC Market Correction Means Amid the Global Slowdown

For the past two and a half years the world has been living through an ongoing state of uncertainty, fueled originally by the pandemic, and now by many factors that once seemed like distant possibilities, such as the war in Ukraine and a looming recession.

In what is officially marked as the middle of the year, headlines across the world include a Euro slump,—reaching a nearly 20- year low almost at par with the U.S. dollar—the “pink tide” gaining strength in Latin America as more countries in the region move toward a leftist government and the beginning of the earnings season.

So what implications does this all have for the startup ecosystem in Latin America? Let’s first take a look at 2020 and 2021, which were record breaking years for the region, and see what’s in store for the remainder of 2022.

A blast to the near past

Last year VC investment in Latin America reached a record $15.7 billion—more than triple 2020’s $4.2 billion, and more than the combined total of what startups raised in the 10 prior years, making it the fastest-growing region in the world in terms of venture funding. With Latin American consumers becoming more and more comfortable with online products and services, fintech and e-commerce startups attracted over 64% of the total VC capital invested.

The stellar year for the region’s startups saw notable mega-round investments (over $250 million) that included Bitso’s $250 million Series C, Uala’s $350 million Series D, Tiendanube’s $590 million Series D and E, Rappi’s $500 million Series F, Nubank’s $1.15 billion Series G and Kavak’s $1.2 billion Series D and E rounds of funding. It is important to note that more than two thirds of 2021’s funding — $13.3 billion — went to late-stage deals with bigger rounds, not necessarily more rounds.

The region also welcomed 18 new unicorns and saw Nubank’s IPO in the New York Stock Exchange, initially valuing the company at $45 billion.

Overall, Latin America experienced a 128% increase in early stage funding from 2020 to 2021, and there were 300% more exits over $50 million in 2021 compared with the previous year.

It was an outstanding period to be a startup, to say the least.

Correction time

The first six months of 2022 came in hot in terms of venture funding for startups, but the region did see a decline in investment volume in dollar amounts compared to 2021.

Investors poured $3.4 billion into funding rounds in the first quarter of the year, down 30% from tha last quarter of 2021, and $2.81 billion in Q2 continuing the downward trend quarter over quarter. Generally speaking, late stage investments declined overall in the first half of the year, although the region did see a couple of mega rounds such as Neon’s $300 million Series D, and Creditas’ $260 million Series F, as well as Kushki’s $100 million Series B extension officially making the Ecuadorian fintech the country’s first unicorn. The only segment that has kept the investment pace is seed stage, at around $300 million in funding per quarter.

With two quarters under the belt, experts predict that the investment slowdown will carry into the remainder of the year. But it’s not just a regional trend—it’s a global one. Although the deceleration might come as a surprise to many, it is only shocking when compared to last year’s unprecedented funding. Compared to 2020 however, investment in Latin America is still booming; the whole pandemic year saw the region attract just over $4 billion, two thirds of what has been raised so far this year. Not a terrible landscape.

What’s causing the global slowdown in VC funding that’s affecting LatAm

Global macroeconomic trends such as interest rate volatility and inflation have impacted the entire world throughout the first half of 2022. Just in Brazil, for example, the federal bank increased the interest rate to 13.25% compared to 2% in January 2021, a factor that is scaring off investors for high-risk deals and reverberating throughout the rest of LatAm.

Experts have wondered if the region is simply in a valuation correction and not a startup downturn. 2021 lured many investors with full pockets to the region given attractive prices on startups, as valuations were lower than in the U.S. for startups with comparable performance. The mega rounds seen last year in Q2 and Q3 raised mostly by unicorns and “soonicorns” seem to have reached their peak, and excitement to replicate the success of this mega funding has waned. Additionally Nubank’s recently celebrated stock is bombing, down 61.5% since its IPO, and other startups are feeling the consequences, although this turbulence is mostly due to external factors and not anything attributable to the individual startup itself.

Despite the woes, the outlook isn’t dreadful for the region. Early stage funding doesn’t show the same signs of slowing down: SoftBank’s LatAm investment arm created an autonomous entity, Upload Ventures, dedicated to backing early stage companies with around $100 million to invest per year. Maya Capital, a female-founded early stage fund out of Brazil, recently announced a second fund with another $100 million to invest in the region.

The list of most active startup investors in Latin America for this year contains many familiar names. The most active lead investor by deal count is Platanus Ventures, followed by Kaszek, DOMO Invest, Tiger Global Management and Y Combinator. The most active lead investors by aggregate deal size, meanwhile, are SoftBank Latin America Ventures, followed by Propel Venture Partners, Cargill, Kaszek and Advent International.

One thing that is likely to happen, however, is that startups that were raising money at a certain valuation, will need to drop their expected valuation to secure much-needed funds, all part of the rebalance that LatAm’s startup ecosystem is experiencing.

Investors will be much more critical in demanding a clear path to profitability from portfolio companies, although they remain confident in the region’s founders and the ability for nascent startups to become large tech companies. VC funding will likely stabilize and ultimately create a more realistic and sustainable funding outlook for Latin America.

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