Between the years 2000 to 2010, when companies like MercadoLibre, Despegar, DeRemate, Globant, Technisys, and StarMedia were growing up, the entire Latin American VC market was between $150M and $300M (as measured by dollars invested in tech-enabled companies on a yearly basis). When MercadoLibre bought DeRemate for $40M—a sum that represented about 20% of the whole Latin American VC market in 2006—that seemed like a vast amount of money. We never thought we would see dollars flowing into the TecnoLatino grow more than 20 times in the coming decade.
Only in 2012, thanks to then-new funds like Kaszek, Monashees, Riverwood, Redpoint eventures, and NXTP, did the TecnoLatino start to find its legs and really grow. According to LAVCA, there was $1.8B invested into the TecnoLatino in 2018 alone, a 10x increase from the investment levels seen barely seven years earlier. And by 2019, that amount more than doubled again to $4.2B. That massive increase in available capital was what we were all waiting for during the 2000s.
Many of the biggest names today in the TecnoLatino, however, are now facing a day of reckoning. In the past three years, we’ve seen some of the best tech-enabled companies in Latin America close Series C or D financing rounds at $400M+ post-money valuations. If these companies are not proactive, many will become victims of their own success.
Why victims of their own success? In part, because investors who put up the capital for these large financing rounds are looking for at least a 2.5x to 3x return on their investment. So as soon as these companies finish celebrating their successful financing round, they are being nudged by investors to grow as fast as possible to support a $1B+ exit.
Today, there are only three main options available for a founder to engineer an exit at a $1B+ valuation:
- An initial public offering (IPO),
- A sale of the company to a strategic investor, or
- Selling a large chunk of equity to a VC or private equity fund.
But if you ask founders of super-successful VC-backed companies in the United States, most will tell you that each of these alternatives has its own special challenge.
- The IPO market has virtually closed for tech companies that cannot support the types of HUGE valuations that get the market excited—say $10B+. Zoom was considered a rather small IPO at $9.2B but fortuitously had considerable tailwinds from the Coronavirus pandemic. Especially in a post-WeWork world, any Latin founder trying to steer a Unicornio or near-Unicornio to an IPO exit needs to consider whether their company can realistically support a $10B+ valuation. [Hint: there won’t be many $10B+ IPOs coming out of LatAm.]
- At $1B+, we all know there aren’t many potential strategic buyers. Facebook, Amazon, Microsoft, Google, and Apple are the main strategics on every unicorn’s mind. In the United States, most strategic buyers generally pay $25M to $250M to purchase companies. Collectively “FAMGA” have made only 29 $1B+ acquisitions in their histories. That’s fewer than one $1B+ acquisition per company per year on average. Those aren’t great odds.
- As for the third option, there are only a few funds (like SoftBank and a handful of others) with the checkbooks and willingness to invest $1B+ to essentially provide a “take out/exit” of a venture-backed company’s early investors.
Despite these very narrow windows for huge exits, many founders of Unicornios (Latin Unicorns) believe they are in no rush to sell. But the reality is that these founders need to start working on engineering an exit the day after their substantial Series C or D financing round closes. We must remember that Amazon, on average, spends five years developing a relationship with a company before it enters into acquisition talks with that company. And other strategic buyers are no different. At Patagon.com, for instance, we spent two years quietly engineering our exit to Banco Santander.
Unicornios’ founders that have raised later-stage capital at huge valuations should learn from their US peers’ experience, think more creatively, and look at every path to liquidity.
For example, in the United States, SPACs are taking companies public with valuations between $800M to $3B+. A SPAC is a “Special Purpose Acquisition Company,” sometimes referred to as a “blank check company,” formed strictly to raise capital through an IPO and acquire an as-of-yet unidentified private company. Why would investors give a SPAC manager/sponsor $200M+ if she hasn’t yet identified a company to purchase? Because the manager/sponsor has a track record of making billions for its investors by investing in tech.
Ten years ago, when I was a principal shareholder at a 2,000 lawyer law firm, few clients used SPACs to go public or get sold. At the time, SPACs were considered a not very good way to go public or exit. They were akin to going to medical school in the Caribbean, a sign you couldn’t get into a “real” medical school or do a “real” IPO. But that prejudice is quickly changing. In 2020 alone, Virgin Galactic completed a $720M blank check company IPO, and billionaire investor Bill Ackman’s hedge fund has started raising $3B in a bet on the boom in blank check company mergers. In 2019, we saw 59 blank check company IPOs generating combined gross proceeds of more than $13B.
The legendary tech investor Peter Thiel points out that some entrepreneurs are good at going from zero to one, while others are better at going from one to 100. The next few years will test the most successful entrepreneurs in Latin America to see if they can go from $100M to $1B. Time to get to work. Time to create some exits, rather than waiting for them just to happen. ¡Vamos, ahora a trabajar!
Juan Pablo launched a bilingual podcast “Aqui & Ahora: El TecnoLatino Habla” where he has conversations with TecnoLatino leaders
This post is also available in: Español (Spanish)