Latin America startups broke debt record in 2022 due to capital shortage

By Yanin Alfaro

Investment in risky debt reached an all-time high in Latin America, accumulating US$1.3 billion in risky debt in 2022. This already exceeds the annual record of US$823 million in 2021, highlights an analysis by the Association for Private Equity Investment in Latin America (LAVCA).

Late-stage startups have turned more to credit lines from traditional investment banks as an alternative source of financing.

Amid a turbulent year for the tech sector, venture investment rounds in late-stage startups are being more cautious. This has influenced the unicorns, valued at more than US$1 billion, to resort to borrowing from international banks to continue growing.

Mexican startups with unicorn status such as Clara, Clip, Kavak and Konfio have opted for debt in recent months. Of the eight purely Mexican unicorns, half have resorted to this option, mainly with Goldman Sachs and HSBC.

The phenomenon does not occur only in Mexico. In Latin America, the Colombian Rappi, Mercado Libre in Argentina and the Brazilian Nubank have resorted to this resource even after the last two companies are already listed on the stock market.

Kavak, valued at US$8.7 billion, raised more debt (US$810 million) than the US$700 million he raised in his latest venture capital round with funds including General Catalyst, SoftBank, Tiger Global and Founders Fund.

Kavak’s credit line is not only the largest granted to a startup in the region, it is also more than the total amount of debt that Latino startups have acquired -except for the public ones Nubank and Mercado Libre- in the last year (US$622 million).

WHY WAS 2022 THE YEAR OF DEBT FOR STARTUPS?

Debt is often used among startups in more advanced markets, such as the United States, Denis Yris, CEO of Wortev Capital, told Bloomberg Línea. “Large companies that were previously startups were raising between venture capital and debt.”

In advanced stages, it is a guarantee for banks that other venture funds have already invested in these startups, says Yris.

Although it sounds like something very common, it is something new for the market in Mexico and Latin America, adds Luis Felipe Treviño, managing director of the private investment firm Beamonte Investments.

Treviño affirms that “one of the reasons why they are looking for debt, more than capital, is because it is currently very difficult to put a price on an operation.”

Unicorn company valuations and the way we analyze them changed in 2022. Previously, funds focused on user-based metrics; in growth and acquisition, emphasizes Treviño.

Yris, from Wortev Capital, adds that with the debt it is about avoiding a down round (a drop in valuations) because it also harms risk investors and not only the company.

“In those cases, startups may wait for a next investor to come along and buy that debt,” says Yris.

Debt as an investment instrument did not only occur in the unicorn stage, but also reached startups such as the Chilean Xepelin, which is currently in a Series B and has raised debt twice. Also the Mexican startups Nelo and Baubap, which acquired debt for US$100 and US$20 million respectively in recent months.

With information from Bloomberg