End of millionaire valuations? A more difficult scenario is coming for startups

In the first quarter of this year, investment in the region for this market dropped by 28% compared to the previous quarter.

Source: La Segunda

The rise in interest rates being witnessed worldwide is reshaping the financing landscape for startups and venture capital (VC, funds that finance startups), and could slow down those massive capital rounds of Chilean firms that were celebrated so much last year.

“Today, it is much harder to get money than it was four months ago. Due to the rise in rates, obviously, there is less money circulating, and that will cause valuations to fall,” comments Andrés Meirovich, Managing Partner of Genesis Ventures, a Chilean fund that moved to Miami last year.

Higher rates also make other investments more attractive, such as fixed income. Adding to that the aversion to risky investments in a scenario with the Ukraine war and high inflation, an auspicious scenario for startups seeking resources is shaping up.

“The atmosphere is more active, which means it will be much harder for entrepreneurs to raise capital. Investors are uncertain, and new ones, who are raising money now, will find much less,” warns Claudio Barahona, Managing Partner of the Alaya Capital fund.

Investment figures are already showing some of this. In the first quarter of this year, VC investment in Latin America was $2.763 billion, 29% less than the $3.872 billion in the last quarter of 2021. Deals, such as capital raises or exits, decreased from 236 to 190 in that period. All according to the Association for Private Capital Investment in Latin America (Lavca).

“The big funds depended on public markets, the stock exchanges. They invest in a startup, increase its size, take it public, and then sell and make money, but the valuations of technology companies have been bad. This begins to generate a chain effect for the funds that come before,” adds Cristóbal Silva, Managing Partner of the Chilean fund, also based in Miami, FEN Ventures.

Technology companies that went public in the U.S., such as Robinhood and Peloton, lost 80% and 90%, respectively, of their highs last year. No Chilean startup has reached this stage yet, but the concern is that their valuations achieved in the boom and free money of 2020 and 2021 deflate once they try to take the next step and go public on the Nasdaq in the U.S., an index that, by the way, has fallen 13% in 30 days.

The bright side

But not everything is negative. The partners of Chilean funds see it as positive that “there are fewer craziness” in valuations, says Barahona.

“There were companies that raised huge amounts without having many sales or projection in that sense. This is an adjustment that may be necessary, and investors will now be more selective and will go for startups with better metrics,” adds Meirovich.

In fact, although Lavca’s investment and deals figures show a decline in the

first quarter of 2022 compared to the immediately preceding one, if compared to those of the first quarter of 2021, when investment was $1.656 billion and there were 165 deals, the industry still comes out ahead.

“Indeed, things have cooled down a bit this year. The rise in interest rates ultimately means less liquidity to invest in risk assets like VC, but this year is still very good,” comments Javier Cueto, CEO of Imagine Lab, which is currently raising part of a $10 million fund.

“We still see interest from investors, such as family offices and others, who still want to diversify. It’s just that, yes, everything will be more selective. In 2020 and 2021, we saw mega rounds with valuations that perhaps were not justified based on key performance metrics and indicators. And investors won’t be looking for just investing in a company that is only ‘cool’ or ‘sexy,’ but that will take 10 or 15 years to become profitable. Perhaps fewer investors will seek that, but they are still seeking,” explains Cueto.