Earlier this week, The Exchange wrote about the early-stage venture capital market, with the goal of understanding how some startups are raising more seed capital before they work on their Series A, while other startups are seemingly raising their first lettered round while in the nascent stages of scaling.
The expedition was rooted in commentary from Rudina Seseri of Glasswing Ventures, who said abundant seed capital in the United States allows founders to get a lot done before they raise a Series A, effectively delaying these rounds. But after those founders did raise that A, their Series B round could rapidly follow thanks to later-stage money showing up in earlier-stage deals in hopes of snagging ownership in hot companies.
The idea? Slow As, fast Bs.
After chatting with Seseri more and a number of other venture capitalists about the concept, a second dynamic emerged. Namely that the “typical” early-stage funding round, as Seseri described it, was “becoming atypical because of the rise of preemptive rounds [in which] typical expectations on metrics go out the window.”
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Series As, she said, could come mere months after a seed deal, and Series B rounds were seeing expected revenue thresholds tumble in part to “large, multiasset players that have come down market and are offering a different product than typical VCs — very fast term sheets, no active involvement post-investment, large investments amounts and high valuations.”
Focusing on just the Series A dynamic, the old rule of thumb that a startup would need to reach $1 million in annual recurring revenue (ARR) is now often moot. Some startups are delaying their A rounds until they reach $2 million in ARR thanks to ample seed capital.
While some startups delay their A rounds, others raise the critical investment earlier and earlier, perhaps with even a few hundred thousand in ARR.
What’s different between the two groups? Startups with “elite status” are able to jump ahead to their Series A, while other founders spend more time cobbling together adequate seed capital to get to sufficient scale to attract an A.
The dynamic is not merely a United States phenomenon. The two-tier venture capital market is also showing up in Latin America, a globally important and rapidly expanding startup region. (Brazilian fintech startup Nubank, for example, just closed a $750 million round.)
This morning, we’re diving into the Latin American venture capital market and its early-stage dynamics. We also have notes on the European scene, so expect more on the topic next week. Let’s go!
What’s hot
Mega-rounds are no longer an exception in Latin America; in fact, they have become a trend, with ever-larger rounds being announced over the last few months.
The announcements themselves often emphasize round size: For instance, the recent $100 million Series B round into Colombian proptech startup Habi was touted as “the largest Series B for a startup headquartered in Colombia.” This follows other 2021 records such as “the largest Series A for Mexico ” — $65 million for online grocer Jüsto — and “the largest Series A ever raised by a Latin American fintech” — $43 million for “Plaid for Latin America” Belvo.
However, it quickly becomes apparent that these mega-rounds aren’t equally distributed. For one, they typically focus on fintech, proptech and e-commerce startups. But, more importantly, they tend to go to “elite status” startups. In a blog post, VC firm Magma Partners listed some of the factors that grant access to the club: having founders who went to Harvard or Stanford; consulting or investment banking backgrounds; and solving “X for LatAm” problems with a copycat business model. Additional signaling patterns include having “executed” Rocket Internet-style at previous well-known startups and, sadly, belonging to the upper class or being an expat.
Bias and lack of innovation are not exactly what we love to hear at TechCrunch, so it’s interesting to see something of a wild card in the middle of this very predictable game: Y Combinator. Indeed, YC went from accepting a handful of Latin American founders to recurrently betting on startups from the region, and being a YC alum is undoubtedly a fast pass into elite status. This gives more hope for Latin American founders with innovative ideas and less traditional backgrounds, but there’s still a long way to go until pattern matching stops disadvantaging them.
“Since there’s less access to capital overall in [Latin America], and capital attracts capital, the mere fact that some elite status startups have raised big rounds at pre-seed, seed and A can crowd out capital to underestimated founders with similar or better traction,” Magma Partners co-founder and managing partner Nathan Lustig said.
Meanwhile, rules around traction seem to have gone out of the window, with rounds of $4 million to $10 million going to startups that are still at PowerPoint stage, Lustig noted. These funds often come from top-tier funds, including U.S. ones, with “GA, Softbank, Accel, Lightspeed, Tiger, D1, Index, Coatue, Greenoaks, DST, Ribbit, a16z investing one or two rounds earlier than they used to in Latin America.”
What about Series Bs?
But if the Series A market is driven in large part by pedigree and background, the Series B market in Latin America may be a bit more merit-based. ALLVP’s Federico Antoni told The Exchange that Series B rounds can “happen a few months after [a Series A] round, with rounds that end up higher than what the founders planned to raise.” (For example, Mexican fintech startup Clara raised $30 million just months after a $3.5 million round it announced earlier in 2021.)
The effect of elite-background startups having an easier time of raising doesn’t go away, but traction does appear to come more into play at this stage. Antoni said that quick Series Bs are often “preempted or oversubscribed,” at least for “a small group of elite founders with traction.”
An example of this from recent news is e-commerce firm Merama, which focuses on the Latin American market. Its CEO said after its most recent round, a Series A that valued the firm at more than $200 million, that his company is “receiving significant inbound for a Series B already.”
So, pedigree still matters in his view, but results matter more at the Series B level. That makes sense. Series A deals are inherently aimed at less mature startups than Series B rounds, so it is reasonable that the latter rounds are based more on metrics than background.
Lustig further explained the dynamic, saying that there is “big” investor competition for Series B rounds “when there seems to be an emerging winner in a category.” For founders that didn’t go to Stanford, this is when their results can pull them into contention. “For underestimated [founders], they’re having to compete with less money, and then are able to raise with great traction at Series B,” Lustig added.
Powering the quick and seemingly attractive Series B market in Latin America is a mix of local money and capital from other regions. SV Latam Capital’s Consuelo Valverde told The Exchange that a “combination” of both local and extra-local funds are behind earlier B investments, for example.
The influx of foreign money has proved uneven historically, Valverde said, but it’s getting better: “Latin America, particularly Mexico, is getting a lot more interest from outside VCs. Mexico had been lagging in comparison to Brazil. I think Mexico is finally catching up,” she said.
From our perspective, the idea of more external money flowing into Latin American startups checks out. We’ve heard of more and more rounds in the region, at what felt like greater and greater price points.
But despite the maturing and accelerating venture capital market, the startup industry in Latin America still lags behind its peers. For example, a recent count of unicorns by investor Elad Gil noted that the country with the most $1 billion startups in Latin America is Brazil. (It has 12.)
And it’s the only Latin American country in the top 15 worldwide. For reference, China has 159 unicorns, while the United States has 369.
With more capital will come larger, more valuable startups in the region. Perhaps with more money flowing into countries like Mexico, as Valverde mentioned, we’ll see other Latin American nations work their way up the global unicorn leaderboard, perhaps starting with Colombia. Some quick Series B rounds surely won’t hurt in that progression.
