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Startup winter: when will the rough patch end and what to expect in Colombia?

2022 represented a challenging year for many Colombian startups as many principles in the ecosystem had to be rethought, and growth formulas that were considered infallible began to show inconsistencies in their foundations, resulting in a wave of layoffs, the contraction of certain businesses and the regrettable closure of others.

This situation was driven by the unavailability of risk capital and adverse borrowing conditions, as central banks opted for higher interest rates, in some cases at record levels, to contain the out-of-control inflation that followed the pandemic.

Thus, venture capital investment in Colombian startups reached US$1.234 billion in 2022, a 43.41% drop compared to 2021, according to figures provided to Bloomberg Línea by TTR Data.

BUT WHEN DO SOME OF COLOMBIA’S STARTUP LEADERS EXPECT THE STORM TO PASS AND THE MARKET TO STABILIZE AGAIN?

When questioned on the subject, the renowned entrepreneur and leader of edtech Platzi, Fredy Vega, said that from conversations with colleagues and funds, it is clear that the ecosystem would begin to level out after the so-called winter only until mid-2024.

This only “if we are lucky,” qualified the entrepreneur, who has been one of the most active voices during these difficult months that have accompanied startups not only in Colombia but in different Latin American markets affected by this situation.

“When we see venture capital investment numbers in the region growing again, I think it will begin to stabilize. For now, they are going down (…) The dot.com peak was not seen again on Nasdaq until 2015. But it’s also a new world: more people connected, more phones than ever, 4G and 5G everywhere, extremely online people addicted to TikTok and other things, etc.,” he told Bloomberg Linea.

In the opinion of serial entrepreneur Alexander Torrenegra, founder of the remote work platform Torre, what is currently being experienced in startups responds more to the challenges created in access to capital rather than to a “winter” in the business.

“I don’t think there is a winter in startups. I think there is a winter in startup investing, which is different. In fact, with so many people being laid off, right now is when we see more startups starting. It’s Spring! And it’s full of startups with more realistic plans and, when that happens, some more grounded investors understand that the best time to invest is when no one else is investing,” Torrenegra said.

From an international perspective, other founders such as José Luis López, CEO of Mexican fintech Finerio Connect, analyze that opportunities will arise to be capitalized by startups in this context but warn that it is necessary to prepare for the times that are still ahead.

“Personally, I believe that many of the same opportunities in 2021-22 will be there in 2023, and we have to focus on delivering results but with stable or lower costs. Those that can achieve that will be successful in this environment. Everything points to the fact that it will not be such a short recession, so the advice everyone is giving is to have two years of cash to survive until the market rebounds,” he explained.

On the current context and the causes that could have brought the ecosystem to this point, he said it is possible that startups went through “a speculative wave because given the interest rates in the United States, the money was practically free for many years and went to companies that really did not add that much value in the search for extreme returns in an environment where you could earn practically nothing by investing in bonds.”

“On the other hand, investors learned that it’s not easy to scale many businesses if they don’t burn that kind of money. So those that can grow, but with controlled costs, will be the ones that continue to be funded,” he concluded.

Investment funds are also reflecting on the matter and understand that things have changed, perhaps permanently, in the startup ecosystem.

In the opinion of the managing partner of the venture capital fund Newtopia VC, Diego Noriega, despite the challenges, “it is still a good time to invest in earlier stages, pre-seed and even series A so that the cycle is not cut” and in 2024-2025 companies with significant traction and health and that could even become unicorns can return.”

“I think it is important to promote this in Latin America, attracting capital from the US and other markets, something that has been happening strongly since 2020 but that diminished in 2022 with the arrival of the crisis,” he concluded.

With information from Bloomberg

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