Latin American VC Investment in the Second Quarter: Decline Continues but Early Stages Remain Optimistic

News agencies report that in the first quarter of 2022, less capital was raised in Latin America compared to the last quarter of 2021. Additionally, in May 2022, Y-Combinator, one of the most important accelerators in the USA, indicated that the next 6 to 12 months could be one of the most challenging times to achieve this goal.

The second quarter of 2022 cemented this downward trend, with a special focus on Series B, as indicated by Crunchbase.

From an optimistic point of view, early-stage companies maintain acceptable levels of investment, being one of the areas least affected by this decline. This can be interpreted as a long-term optimistic outlook, where themes of public offerings or raising hundreds of millions of dollars are still seen as something to be determined later.

What does this mean for startups looking to raise capital? In our experience, investment funds are going to be more stringent in their analysis of companies, regardless of their stage. Therefore, companies that are in seed rounds and early stages should pay special attention to the following elements:

• Traction: In early stages, entrepreneurs must demonstrate traction through their ideas, the product, and a strategic sales plan. In early stages, current traction should be shown, along with a timeline of projected traction and how funds will allow increasing sales and entering new markets.

• Budget: At any stage, it's important to demonstrate the ability to meet commercial objectives, both in terms of sales and costs, as well as a long-term view of the business's sustainability.

• Team: Founders must be able to add the capabilities they lack and that are strategically necessary.

• Cap table: Keeping capital and debt in order is a prerequisite for any investment. Founders will have to be particularly careful when developing their incentive plans using stock options (Employee Stock Option Plans or ESOPs).

In conclusion, despite an adjustment in investment amounts, the seed and early stages have still managed to avoid the deepest fall of VCs in Latin America. That said, investment funds are carefully considering how to allocate their capital, looking for companies with the ability to demonstrate their viability in the real world beyond their pitch deck or initial presentation.