The COVID-19 crisis has hit Latin America hard and fast across many industries including tech startups, despite having still relatively low numbers of cases of the disease in the region. I want to share what I see is the current impact on the startup and venture capital ecosystem.
- Many startups have already been moderately impacted by drop of sales or revenues, specially B2C startups. Significant drops between 20% to 80% are expected for the next months depending on the vertical the startup is in. A minority of startups in e-commerce, last mile delivery, online education and SaaS tools for remote working have seen gains in their volumes. B2B startups have been less impacted but expecting to see churn in their SMB client base and delays in new large/enterprise clients. Lending fintech startups are seeing record growth in credit demand.
- Most startups have implemented plans to safeguard their teams moving to remote work for all their collaborators, which in most cases is not too difficult for tech companies.
- Also, most startups are implementing contingency plans focused on cash preservation by reducing expenses. Companies are cutting non-essential expenses, freezing new hiring and reducing the payroll cost by reducing headcount or temporary reducing salaries across the board (depending on labor law considerations).
- Economic analysts are forecasting Latam economies going into a deep recession during 2Q and seeing a significant negative impact for the full 2020. Growth rate for the region for the year is being forecasted in the -1% to -4% range, and these forecasts are being revised to the downside every week. The biggest uncertainty is not about the depth of the recession but its duration, which is heavily influenced by the evolution of the pandemic and the success of the policies implemented to defeat it.
- Some startups can flourish in this environment, where there are strong externalities for clients to switch to digital solutions/operations. Unfortunately, some others are not going to be viable in this recession. They should look to pivot their product and business or if not feasible, look to wind down.
- Funding for startups has significantly slowed down. Some deals in process have been completed during March but other have fallen through despite having signed term sheets.
- Startups with 18-24 months of runway under a revised downside scenario (that also includes cost reduction plans) should have enough time to survive the storm. Companies with less runway should seek additional funding and probably reduce burn rate further.
- Fundraising has become much tougher as most investors are currently on the side during this period of uncertainty.
- Valuations are being impacted downward. Valuations of public markets’ assets have fallen 30%-50% globally and that is a strong reference for valuations of private deals. Some companies are raising funds at flat valuations compared to the ones they had 2-4 years ago. Many startups are optimizing for cash liquidity instead of valuation.
Venture Capital Ecosystem
- Most fund managers have been focused on working with their portfolio companies – the startups they have already invested into – building contingency plans in the last weeks. The focus today is current investments over new investments.
- Depending on their investment stage, many funds might decide to focus their remaining resources for follow-ons of their portfolio companies and do none or few new investments.
- Depending on how the recession evolves, some LPs – the investors in venture capital funds – might default in their commitments to funds. Less likely with institutional investors (pension funds, DFIs), but not unexpected of some family offices and high-net-worth-individuals in a more risk-averse environment. Some of these investors have seen falls of 30%-50% in the value of their assets.
- Fundraising for funds is also expected to become much more tougher during this uncertain period. Normally investors want to have visibility on the macro picture before committing to specific funds. Once visibility increases, investors may run in to take advantage of the perceived opportunities.
Clearly the landscape for startups has become more challenging in Latam (as in the rest of the world) but this also creates opportunities for the best entrepreneurs which are flexible to adapt to this new environment. If well-funded they will have a sizable advantage in the next 12-18 months to survive and gain significant market share over their less funded competitors.
I’m confident the Latam startup ecosystem will be standing and in fact, come out strengthened, after this COVID-19 crisis. Startups and funds, let’s work together to pass through this period.
You can read my previous advise for startups at the start of the crisis here.