End of the honeymoon for start-ups in Latin America

The last two years have been the best time to be a young entrepreneur with an idea for a digital business.

The monetary authority in the United States injected seven trillion dollars into the financial system to contain the economic impact of the pandemic and interest rates were at zero, which generated a feeling of invincibility in the markets.

Thus, twelve Latin American companies became 'unicorns' last year, an honor reserved for those that raise more than 1,000 million dollars in investment, setting a new record for this low-middle income region.

There were, in addition, hundreds of other businesses that raised large amounts of resources from Wall Street, but did not achieve unicorn status.

But what goes up must come down and today the party is over.

Such an injection of capital by the US Federal Reserve generated high inflation;

the Fed is now reversing course to rein in price rises and the market has reacted aggressively.

On Friday morning, the financial media officially declared the entry of a downtrend, known as a

, which refers to the fall of the main stock indices of at least 20% from their highest points.

Inflationary concerns, the increase in interest rates, the persistence of supply chain interruptions due to covid-19 and the war in Ukraine are wreaking havoc on the global economy and, therefore, on its backbone, which is the global financial system.

Investors who once felt invincible now see losses and red numbers.

In the first three months of the year, financing for new businesses fell 60% from its peak last year, when it reached $7.3 billion in the second quarter, according to Latin America data from analysis firm CBInsights.

Globally, also in the first quarter of this year, the number of new unicorns hit its lowest level in five quarters.

In addition, not a single Latin American company came out in initial offer to list on the international market.

“The best way to read the market is to see it as a pendulum swinging back and forth between stories and fundamentals,” says Scott Galloway, a professor at New York University (NYU) Business School and one of the thought leaders on trading. most influential technology and finance in the world.

“By stories I mean the narratives, vision and sentiment that drives the company forward.

By fundamentals, I mean how the business is making money.

During the last few years we have been in the phase of history, and this is especially true in Latin America.”

The region had become a "unicorn production line," Galloway says, pushing the global unicorn count to record levels.

However, many of these companies will have no choice but to vastly scale back their operations as the pendulum swings back and this seems to be already happening.

Digital companies such as Netflix, which had massive layoffs this week, even smaller ones, such as the Brazilian QuintoAndar and Loft Brasil Tecnologia, which laid off more than 100 people each last month, are some examples.

“The pain that is being seen in the public markets, especially among the more narrative-driven stocks, is eventually trickling down to the private markets,” says Galloway.

“Many of these young entrepreneurs have built their careers in a bull market and have never heard of a bear market.

But that is about to change.

Valuations will fall, capital won't be as cheap, and early-stage investors won't feel as smart as they did a year ago."

Criticisms and dangers

The timing for a bear market is compounded by the difficulties that come with sudden, unrestrained growth.

The Mexican Kavak, a digital platform for buying and selling used cars that operates not only in its country of origin but also in Argentina and Brazil, went from having 300 employees in 2020 to 8,500 today after becoming a unicorn.

The startup, which works through a mobile application, faces an image crisis after complaints from a multitude of users became viral on social networks due to poor service.

“Torture from start to finish,” a user reported on Twitter on April 1, in a thread detailing her bad experience that went viral, with thousands of users joining the complaint with their own experiences.

The noise was such that the general director of Kavak Alejandro Guerra was forced to respond.

“We are not perfect, we make mistakes, the technology fails,” Guerra said this week at a conference.

“We are fully aware of what is happening on social media,” he admitted.

For many in the countries of this region, these types of digital startups that have grown into huge structures have been a disappointment.

Despite raising billions in resources, its business model continues to exploit the low wages and precariousness in which millions of Latin Americans live.

A report published in March by the non-governmental organizations Oxfam Mexico and the Institute for Studies on Inequality (Indesig) found that the average income of a delivery person from platforms such as Uber, DiDi and the Colombian unicorn Rappi is 2,085 pesos (104 dollars) per person. week.

In contrast, say the economists who are the authors of the report, companies report income in the millions.

These are "the shadows of an industry and a business model that is here to stay," said Alexandra Haas, director of Oxfam Mexico.

“That is why it is extremely important to make this situation visible and improve the working model of the platforms, but also the labor system and access to rights in our country.

Companies, authorities and society in general must promote a universal social protection agenda that allows, on the one hand, to maintain the labor flexibility desired by delivery men and women and, on the other, to guarantee rights without distinction”, she pointed out. .

And here is the great challenge for Latin America, says Galloway.

“

has generated enormous wealth in the US, something for which we should be thankful.

But for the last decade, we've allowed

invaded our nation and this is something that Latin America should learn from as these technology companies expand,” said the academic.

“Our biggest mistake was the chronic underinvestment in our regulators, letting private capital emerge as a shadow government.

This grew out of a huge cultural problem, specifically, our idolization of innovators.

We equate wealth with virtue and do not hold the innovative class, or their companies, to the same standards as old economy companies (or the general population).”

“The way forward in high-growth nations is to balance technological progress with respect for the rules and arbiters of business, that is, regulation.

Without regulation, monopolies emerge, killing competition and progress below.

The state of American democracy in the digital age should be a warning sign for emerging nations around the world," Galloway said.

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