Five barriers that LatAm startups must overcome to survive 2023

The year that just ended brought with it a paradigm shift in the startup ecosystem in Latin America, which had to live with a higher price of money due to higher interest rates, less availability of venture capital, and a wave of layoffs that caused greater uncertainty in business.

2023 will not be without its challenges for startups, taking into account that, “given the fragile economic situation, any new adverse event could push the world economy into recession,” as warned by the World Bank.

In its World Economic Outlook report, it also warns that this “would be the first time in more than 80 years that two global recessions have occurred in the same decade.”

With this panorama, startups are getting ready to face a 2023 marked by a deteriorated economy in a scenario in which investors will seek to invest their capital more responsibly and consumers will also be more reserved.

Here are five things Latin American startups need to know to navigate a challenging 2023:

1. CAUTION ON VENTURE CAPITAL REMAINS

Startups will have to continue living next year with a cool venture capital market, while a good part of the funds in regions such as Latin America anticipate that the conditions of the auction of the year will continue.

According to KPMG figures, global venture capital investment fell from US$136.8 billion in the second quarter of last year to US$87 billion in the third quarter, as “signs indicate greater conservatism among investors in amid growing fears of a global recession.

The global cooling of venture capital is reflected in the fact that during the third quarter the number of global deals fell to its lowest level in almost five years to 7,817, while in the previous quarter 10,425 had been completed.

The CEO of the Brazilian venture capital fund Bossanova, João Kepler, considered in a recent interview with Bloomberg Línea that by 2023 “the outlook remains alert, with technology companies trying to understand the magnitude of the current recession in the US and in the main world economies, waiting for the best moment to return with strength to new contracts and investments. For now, the scenario remains prudent and should remain so in the first months of 2023.”

2. THE PRICE OF MONEY WILL REMAIN STRONG

Amid the strong push by central banks against persistent inflation, interest rates are expected to remain high and the cycle of increases is not over for several of the world’s major markets.

This scenario will continue to put pressure on the finances of startups by making their external financing more expensive to achieve their goals of international expansion, consolidation, among others that have proposals for this 2023.

According to Bloomberg, both the president of the US Federal Reserve, Jerome Powell, and the president of the European Central Bank, Christine Lagarde, are preparing to raise rates further at the beginning of this year.

And of the 21 other jurisdictions that are monitored by Bloomberg, 10 of them are expected to increase rates, nine to reduce them and two are on hold.

The president of the World Bank Group, David Malpass, analyzes that in this context of global slowdown “world capital is absorbed by advanced economies that face extremely high levels of public debt and rising interest rates.”

For this reason, “national policies to boost investment growth must be adapted to the circumstances of each country, but they always start with the creation of sound fiscal and monetary policy frameworks and the introduction of comprehensive reforms aimed at improving the climate for investment”, added the director of the World Bank Perspectives Group, Ayhan Kose.

3. TRADE DISRUPTIONS BRING ADDITIONAL CHALLENGES

After the pandemic, world trade was challenged by the disruptions that occurred in the logistics chain due to restrictions in key markets such as China, due to its zero Covid policy that it has just left behind, as well as the war in Ukraine.

And although the situation has improved, the high costs of transporting imported goods, the damming and the scarcity of certain products will be something that startups will have to continue living with, which will surely have repercussions on their plans and internationalization.

With the arrival of 2023, the demand for imports is expected to slow down, while growth in developed economies will be weaker this year, the Colombian National Association of Foreign Trade (Analdex) explained to Bloomberg Línea.

Already in October, the World Trade Organization (WTO) had anticipated that the volume of global trade could slow down to 1% in 2023 given the multiple disturbances that still weigh on the economy.

4. THE GROWTH STRATEGY AND VALUATIONS ARE RECONSIDERED

With the changes in the dynamics of venture capital, the high valuation of startups is reconsidered and in 2023 their financial performance, their healthy growth and their degree of adaptability to a context like the current one will increasingly be at the center of analysis.

Geiner Toro, manager of Ruta N’s Financial Portfolio, indicated in an interview with Bloomberg Línea in September that now “we have begun to see that ventures do not focus only on the valuation of their initiatives because, in the end, it is only about estimates and projections of how much they could sell their company at some point. The important thing now becomes the result that they are going to have with that company, measured for example with indicators such as EBITDA or cash flows, which give a quick view of how the core of the business is doing and its profitability”, he affirmed.

In this context, it must be said that “startups are rethinking their growth strategy, adjusting investment expectations and focusing on their main objective: survival. To achieve that goal, many have then reduced what is known as the burn rate (capital burn) in their expenses when receiving investments and, rather, focus on increasing their runaway, which is the time they have to remain illiquid or without capital to function”.

5. THE PRESSURES ON TECHNOLOGY COMPANIES CONTINUE: THE LAYOFFS DO NOT STOP

2023 got off to a rocky start for the tech industry after e-commerce giant Amazon announced it was laying off more than 18,000 employees, the biggest downsizing in history, amid recessionary winds.

This announcement followed that of other companies such as the software firm Salesforce Inc., which announced its intention to lay off 10% of its workforce in the coming weeks.

The wave of layoffs that marked 2022 was felt in large technology companies and spread rapidly in the startup ecosystem in regions such as Latin America, where there has been a phenomenon of rehiring of highly trained personnel from these companies.

In Colombia, said the renowned entrepreneur and co-founder of the edtech Platzi, Freddy Vega, “people from the technology industry who have been laid off are getting jobs in about a week or two after the layoff, because, although they are effectively changing the macroeconomic structure, the supply continues to be higher than the demand”.

When asked by Bloomberg Línea, the British recruitment company PageGroup pointed out that the profiles that startups are looking for the most by 2023 are those in software development, sales and finance.

With information from Bloomberg

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