Bloomberg Línea — After a period of difficulty for startups in attracting investment, the venture capital market is beginning to show signs of improvement. Data from Carta, a global platform for equity management and capital instruments for companies, show that in the second quarter of 2023, US startups that managed to raise funds registered an increase in valuations compared to the first quarter.
The movement toward higher valuations, which tends to be reflected in other markets, has also been present in Brazil in some cases. A recent example was Sami, a health insurance startup for micro and small companies that received an investment of $18 million (around 90 million reais) in a round with a higher valuation than the previous one.
“We know that the market is not seeing many rounds and, when they happen, they are at stable valuations or below [a down round]. We are not going to announce the valuation, but ours is higher than the previous one,” Sami founder Vitor Asseituno told Bloomberg Línea.
Another Brazilian startup that received an up round was Cobli, a logistics technology company, which received a 100-million-reais ($20.8 million) funding led by IFC and Fifth Wall, among other investors. “We are not disclosing the exact valuation, but it was much more than it was in the last round,” said Rodrigo Mourad, the startup’s president and co-founder, in an interview with Bloomberg Línea.
In addition, Brazilian software startup Digibee received an investment of just over $60 million in early June. The investment represented a “significant up round,” CEO Rodrigo Bernardelli told Bloomberg Línea.
Daki received a $50 million investment in February 2023 and raised its valuation from $1.2 billion to $1.3 billion after that round, according to data from consultancy Pitchbook.
While these cases point to a positive shift, there are still fewer rounds compared to the activity levels of 2021 and early 2022.
According to the Distrito platform, venture capital investments in Brazilian startups fell by 51.4% in the first half of this year compared to the volume invested in the previous semester, when $1.57 billion was invested. The number of contributions fell 49.1% compared to last semester and 63.2% compared to the same period in 2022.
In the US market, the data indicate a slight recovery. According to Carta, all stages from seed to Series D saw an increase in the median valuation, which is a distinct data in a more restricted venture capital market since interest rates around the world have risen to control inflation. Now, these stages (seed, series A, B and C) have valuations above or slightly below Q1 2021.
Experts who follow the sector, such as Filipe Trindade, who is CEO of Know How Club and a judge on the reality show Meet the Drapers and founder of Draper Startup House Brasil, the accelerator of renowned venture capitalist Tim Draper, says that everything that happens in Silicon Valley is reflected in Latin America.
“The breakup of Silicon Valley Bank established a new order among startups to keep cash and start being profitable,” Trindade said. “The US market looks a lot at Latin American startups, with as much potential as American ones, but with a lower valuation.”
According to Trindade, a startup that starts in the United States already comes out ahead in terms of valuation than a Brazilian one because of the exchange rate. “There are many entrepreneurs from Latin America who, due to the economic scenario, have been standing out in this chaotic environment that is starting a business in the region. US-based venture capital firms see good entrepreneurs with companies with the potential to be global,” he says.
According to data from Distrito, the average amount for contributions up to Series D in 2023 in Brazil has seen reductions. For Series D, for example, the average went from $80.9 million in 2022 to $69.3 million this year. Considering that the average percentages of capital participation that investors negotiate with companies have not changed, if the value of the average investment falls, the valuation also falls, although Distrito does not have enough data to draw conclusions about the valuations of Brazilian startups.
Eduardo Fuentes, new business manager at Distrito, told Bloomberg Línea that based on the latest reports released by Carta, an increase in the valuation of technology companies monitored by the organization was observed in the last quarter, and that although it is difficult to establish a timeframe, he expects this movement to happen again in Brazil as interest rates fall and startups adjust their operations by presenting business models with more consistent operating metrics.
Martin Fergus, a partner at Ilha Capital, an M&A consultancy, said that in recent weeks he has been talking to investors and has felt a significant return of interest. “It’s given me some optimism for the next few months, but I’m cautious. I think the rest of the year will be better than the beginning of the year, but 2024 and 2025 will be quite promising,” he said.
Also a partner at Ilha Capital, Michael Frase said the market won’t bounce back quickly, but he sees positive signs. “It’s great to see this news from Carta adding these statistics of the US market improving between Q1 and Q2, but Series D is still pretty tough compared to 2021 valuations. I think the market will be less volatile from now until the end of the year, but it will be a slow comeback,” Frase said when consulted by Bloomberg Línea.
For him, there are several indicators showing that there is room for optimism, but that the market will remain cautious for a while and show that 2021 was indeed an “off-curve” year.
Tightening scenario
Despite the movement toward recovery in the US market, there is also belief that down rounds will still loom ahead. Layoffs and debt raised in 2022 have extended startups’ cash time, pushing down rounds into the future, according to PitchBook. The consultancy said it believes it is likely that the number of down rounds will increase over time, despite the improved scenario pointed out by Carta.
Thiago Sandim, partner at Demarest Advogados, is also not so optimistic. For him, in the middle of 2024, the strongest companies should survive what he called a “Darwinian shakeout” in the market, for making the natural selection of the best companies. “We are in the middle of the most difficult phase, I think the rest of 2023 will not be easy. There is no macro indicator that indicates that the rest of 2023 will be a wonder,” Sandim said.
“There were M&As and follow-ons, but still the follow-ons were targeted. I’m a little skeptical of this seasonal recovery that the market is having. I think the world is setting itself up for a better 2024 and 2025 than 2023,” Sandim said at an event hosted by Demarest Advogados on Tuesday.
The M&A market in Latin America was down 23% in the first half of 2023, according to TTR data. But recently, significant deals have been announced in the region. Visa, for example, acquired Brazilian startup Pismo for $1 billion. And, on Tuesday, Enjoei announced that it intends to acquire Elo7, for an undisclosed amount to be paid in cash.
