One-Third of Latin American Startups Reportedly Mulling Mass Layoffs

A LAVCA study shows the strategies of founders to face the challenges of tightening venture capital funding

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Bloomberg Línea — Operational efficiency has become the keyword for startup founders in Latin America as, faced with greater difficulty in obtaining financing in the venture capital market, companies are opting for internal restructuring, building leaner teams, renegotiating contracts with suppliers and reducing sales and marketing expenses.

These are the conclusions of a new survey by the Association for Private Capital Investment in Latin America (LAVCA) following interviews with Latin American startup founders.

According to the study, 34% of startups in the region are considering mass layoffs, 28% are considering a freeze on new hires and 23% say they should reduce capex.

In addition, 18% say they intend to reduce bonuses or salaries. The goal is to preserve cash and thus extend the time the company can operate without raising new funds.

Another 21% say they are considering raising new venture capital funds to overcome the current market scenario.

Inorganic growth through business acquisitions was not the primary focus of any of the respondents at the time of the LAVCA survey, while 18% consider reducing marketing and sales expenditure.

The survey result reveals the strategies used by startups to cope with the increased difficulty in attracting venture capital investment.

Since last year, startups that had raised large amounts of investment in recent years have been announcing cutbacks and downsizing, including so-called unicorns (companies with a valuation of more than $1 billion).

The study also draws attention to the big difference between the value attributed to Latin American startups that are at the same stage of development.

While most seed-stage startups in Latin America have a reported valuation of less than $20 million, those in the early stage have reported valuations ranging from less than $20 million to more than $1 billion. According to LAVCA, almost 80% of those surveyed report having a valuation lower than $300 million.

In its 2023 report on founders in the region, the association found that Latin American startups rely on well-capitalized balance sheets to navigate current market adjustments, “with 39% of companies surveyed not raising funds at the time of the survey.”

“Of those in the market, 84% say the fundraising process is taking longer than expected, with seed-stage companies facing the most challenges,” the LAVCA report states.

Globally, valuations of late-stage startups fell significantly in 2022 compared to 2021. But that was not the case for early-stage (seed or angel investment) companies, according to a CB Insights survey.

For late-stage companies, median valuations have fallen significantly since the fourth quarter of 2021, posting year-over-year declines ranging from 24% to 50% due to rising interest rates, turmoil in public equities and a stagnant IPO market, according to CB Insights.

Meanwhile, last year, valuations for seed and angel tech companies were 3% above Q4 2021 levels ($12.6 million in Q4 2022 against. $12.2 million in Q4 2021), according to CB Insights data.

Venture capitalists’ interest is mainly in startups generating Artificial Intelligence, which, for the most part, is still at an early stage.

According to CB Insights, 2022 was a record year for investment in this type of companies, with $ 2.6billion invested in 110 transactions.

However, Tom Loverro, a seasoned investor at IVP, a Silicon Valley-based venture capital firm, recently tweeted a “prediction” that there will be a “mass extinction for early and mid-stage startups”.

“The end of 2023 and early 2024 will make the 2008 financial crisis look strange for startups,” he said, in a message containing advice to founders on how to survive this scenario.

“The ‘great’ startups will always be funded, though not at 2021 levels. Many ‘good’ startups will suffer rounds at lower valuations than before, or stable valuations. Many startups that are simply ‘good’ and fit the pre-product market will die, at a faster rate than anything we’ve seen since 2008″, he said.

Loverro explains that many startups raised about two years’ worth of cash in 2021 and 2022 and reduced cash burn in the second half of 2022 to extend their lifespan without raising cash. But no matter what, these companies will need cash again in late 2023 and 2024, he says.

“Four out of five early-stage companies have less than 12 months of runway [cash], according to a January Ventures survey. All of this points to a flood of startups coming to market to raise capital starting in the second half of 2023 and continuing through 2024″.

In other words, for Loverro there will be more companies seeking capital than receiving it, and that means the end of 2023 to early 2024 will be worse than the great financial crisis of 2008 and 2009 for VC-backed startups.

“The great financial crisis of 2008 was centered on Wall Street. Private startup valuations, round sizes and cash losses were not forgotten in the years leading up to the big crisis. This time it’s different. 2021, for startups, was more toxic than the great financial crisis. The hangover will start later this year and will be more severe.,” Loverro said.