Trend Indicators for VC in LatAm?

Part 3 of a blog series looking at the potential turnaround in Venture Capital markets.


In Part 1, we highlighted the turnaround of tech valuations in public markets and the expectation that global VC markets will benefit early in 2024. In Part 2, we explored how the trends of VC investing in Africa lag the global markets by about six months, so the recovery will likely be delayed. In this final instalment, we look at the VC market in Latin America (LatAm).   

So far, in this blog series, we have established that VC funding and valuations lag public markets by around 9-18 months. Fundraising and valuations in global VC markets (led by the US market) are expected to show meaningful recovery around Q1 2024 and into Q2 2024. However, Africa lagged the global slowdown by around six months. Fund-raising values in Africa have dropped to below a trendline of 20% compound annual growth since 2019, but Q3 2023 is still tracking 25% higher than the average level of funding in 2019. This suggests there still be some pain for the African VC markets and that recovery will only be in the second half of 2024. But how does the LatAm market compare to Africa, and when will it likely see a recovery?

LatAm market was hardest hit first

The chart above shows that the LatAm VC markets have sharply declined in dollars invested since the market’s peak, much like other parts of the world. However, the most important difference with the global chart that we saw in Part 1 of this series is that the global decline started in Q1 2022, while the decline in LatAm started as early as Q3 2021, long before markets became more risk averse when war broke out in Ukraine. This potentially puts LatAm on a timeline six months ahead of the global funding scenario.

Given that we have predicted that the global VC fund-raising levels will show sustainable recovery in Q1-Q2 2024, this would imply the LatAm recovery starting in Q3-Q4 2023.

Interestingly, Q3 2023 saw a meaningful increase in deal value of 101% q-on-q in LatAm (albeit off a low base) and recovered to a point where it is level with the deal value raised in Q3 2022. One needs to be careful not to be too bullish, however, since (1) the number of deals declined 27% q-on-q, (2) there were no public market exits, and (3) Merger and Acquisition activity remains on a slow negative trend which will provide headwinds into the VC environment (see chart below).

Limited correlation to the MSCI LatAm Index

In other geographical regions, Africa included, we have seen that the prices of listed equity in that region do not drive the VC fundraising cycle. In the MSCI LatAm Index below, we see no cyclicality in 2020/2021 to mirror the fund-raising cycle (and, by extension, the valuation cycle) in the VC industry. Much like our assumption with Africa, it is likely that the best public market leading indicator for VC markets is the performance of the Nasdaq Composite Index, which is up 37% year-to-date to 30 November. 

LatAm and Africa and how they stack up

We find it intriguing that VC fund-raising in LatAm has declined so much that it is now in line with Africa. In 2022, LatAm startups raised $7.4bn (according to the first chart), 59% higher than the $4.9bn that African startups raised. Year-to-date in 2023, the figure for Latam has dropped to only $2.4bn, while Africa is at $2.2bn, significantly closing the gap. This is despite LatAm making up 7.3% of global GDP while Africa is only 3.1%, which indicates that the correction in LatAm is overdone. An interesting parallel between the markets is that LatAm is dominated by three large markets (Brazil, Mexico and Colombia), which represented 77% of deal value in 2002, while Africa has the Big Four (Nigeria, South Africa, Kenya and Egypt) which were 75% of the funds raised in Africa in 2022. This concentration level increases the region’s reliance on a few markets, which can lead to lumpiness. However, the data above shows that LatAm’s decline in VC funding might have turned the corner in Q3 2023, which is good news for Africa. While we have concluded that Africa’s VC funding might only recover in the second half of 2024, it is encouraging to see green shoots worldwide leading the way.

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