The global venture capital landscape looks quite depressing at this point in time, but fortunately, we’re seeing new and encouraging signs of life in select markets.
Europe is one such market, given that the value of venture deals on the continent has been steadily crawling higher this year. Latin America, new data indicates, could be another.
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We should note that while some of the data about Latin America, sourced from startup data providers focused on the region Sling Hub and Distrito, illustrates a few positive trends, other data points in a more negative direction. We cannot say that Q3 2023 has been a great time for startups — even when squinting and focusing only on a small collection of countries. Far from it.
But any good news is worth the attention at a time when the American IPO window has shut down again, venture activity is slowing, and global tensions are running high as conflicts burn around the world. So this morning, we’re looking at what’s good and what’s not so good in the Latin American venture market.
Investors are tiptoeing back into Latin America
According to data from Sling Hub and Itaú BBA, Latin American startups raised $2.5 billion in the third quarter of 2023. Equity funding made up $1.5 billion of that total — that’s notable because Sling pointed out that overall funding, inclusive of non-equity capital, was down 26% in the year by its calculation, while equity-based fundraising actually ticked up 13% compared to a year earlier.
Other data sources report different totals, but their results point in a similar direction. Distrito counted $883 million worth of venture capital deals in Latin America in Q3 2023, up from $723.4 million in Q2 2023. While this firm’s overall count is smaller — every data company uses its own set of criteria to count and exclude transactions — it agrees with Sling Hub that there was more capital at play in the third quarter. (PitchBook also reported Latin America’s venture capital investment of around $800 million for the quarter).
As with most venture data that we have ingested recently, this is a story with both ups and downs. While equity funding did rise, per Sling, the number of funding rounds dipped by 26% in Q3 compared to a year earlier. And since there was more capital involved through fewer deals, the average deal size in Latin America rose 36% to $8.4 million. Distrito also reported a decline in total Latin American deal volume in the third quarter.
Should we be surprised that the Latin American venture market looks like it’s on the way back up? Perhaps not. In our September 2023 survey of investors focused on Latin America, Julio Vasconcellos of Atlantico said, “While mega-rounds have been relatively sparse over the past 18 months, we anticipate a resurgence in venture funding, a trend that is gradually becoming evident.” The Q3 data largely backs up that view.
Why are Latin American startups raising a bit more than they were until recently? Vasconcellos said in the survey that a number of Brazilian startups would be valued at over $1 billion if they raised more capital today, but “these companies are currently operating profitably or at a break-even point” and thus “aren’t reliant on additional capital to drive expansion and viability.”
It is tempting to say that more efficient startups could be pulling down the demand for capital in the region, per Vasconcellos’ comment, which ameliorates any less-than-exciting data points from the region. But that would probably be too kind, since most startups consume cash and that is why total venture flows remain a critical barometer of a startup market’s health.
And there’s some reason to believe that Latin American venture totals could continue to correct upward. In the same investor survey, Ganas Ventures’ Lolita Taub said there are a “number of well-established companies that are ready to go public” in the Brazilian tech market. That’s another vote of confidence in the country and an indication that we could see some big pre-IPO rounds in time. That, in turn, would bolster regional funding totals in future quarters.
Other VCs are striking similarly positive notes. Geraldo Melzer of ABSeed Ventures told TechCrunch+ a few weeks ago that he believes that this “may be the best time in the history of venture capital in Latin America to invest and to start a business, especially in a healthy cash generator such as B2B SaaS.”
However, Latin American startups haven’t been immune from layoffs and setbacks. Does changing your approach to growth and cash conservation improve your chances of raising more funding? Maybe, but it’s not going to be on 2021 levels. Case in point: Online grocery delivery company JOKR, which does business in Brazil as Daki, raised a $50 million Series D round last September at a lower valuation than its Series C in February — down to $800 million from $1.3 billion, both post-money.
Distrito’s CEO Gustavo Gierun feels these down-rounds from unicorns make for an interesting trend, as it could “unlock investments, particularly in late-stage companies” (translation ours). But the factors that could put an end to the standoff are also macroeconomic. Referring to a Distrito study showing that tech companies at a more advanced stage suffer more from high interest rates, Gierun predicts that “as the reference [interest] rate in Brazil tends to fall and valuations adjust, this category should grow.”
Zooming in
Distrito’s report already describes Q3 as Brazil’s best quarter this year, based on some good signs that indicate that the country’s tech market is “resuming its growth little by little.” The biggest sign appears to be capital: Brazilian startups collectively raised more funding in Q3 than they did in the first two quarters of this year, according to both Distrito and Sling Hub.
Per Distrito, Brazilian startups raised $596.7 million in Q3, compared to $385.9 million in Q2 and $395.3 million in Q1. Sling Hub has different numbers, but they point upward, too, albeit a bit more sharply: Its tallies went from $282 million in Q1 and $306 million in Q2 to $931 million in Q3.
However, deal count is less encouraging. In Brazil, Distrito counted 112 rounds in Q3 than in Q2, when startups raised 135 rounds. The decline is starker when you compare it to Q3 2022’s tally of 197 deals. Sling Hub’s deal count is flat for the last two quarters, with 122 deals each, but it also found this number to be inferior to Q3 2022’s count of 171 rounds.
But is it fair to interpret one quarter of growth in the amount of capital raised as a sign of recovery? After all, Brazil’s venture market is still far below 2021 levels — in Q2 2021, for instance, startups in the country raised more than $3.3 billion, per Distrito. Still, the research firm noted that monthly funding trends indicated that Q3 2023 was more than a blip on the radar: Startups in the quarter raised more money every month of the quarter, with August and September showing significantly higher levels of activity than July.
Unfortunately, what might be true of Brazil may not yet apply to other Latin American countries. Per Sling Hub, Mexican and Colombian startups still raised much less last quarter than they had a year ago, and across fewer deals: In Mexico, startups raised $520 million in Q3, 65% less than the 1.5 billion they raised a year ago, and Colombian startups raised $119 million, 40% less than Q2 2022’s total of $199 million.
Colombia’s total is less than what Brazilian fintechs raised all by themselves. As you may have guessed, fintech is once again the country’s leading sector in terms of both the number of deals and the amount of capital raised ($165.7 million), per Distrito. The next most funded sectors in Brazil were health tech ($89 million) and HR tech ($76 million.) In Latin America overall, HR tech ($97 million) and mobility ($86 million) claimed the second and third spots on the list.
Sling Hub zoomed in on corporate investments: There were 23 such deals in the region last quarter, raising $796 million. Brazilian startups accounted for 18 of those deals and raised $668 million. In both cases, that’s a sizable increase compared to Q2 2023, but it’s still 47% less than in Q3 2022.
The more data we consider, the clearer it is that the overall picture for Latin American startups is far from bright, despite some glimmers of light. We had already intuited this from the charts we created based on PitchBook’s global data: In our regional breakdown, Latin America was hard to spot on the chart.
You could argue that the lower amount of capital raised isn’t that bad, since the same amount of money will go farther in countries with lower salaries and cost of living than it would in a developed market. But there’s not much positive about the region’s meager share of global deal count.