How 2023 Arrives at Venture Capital Businesses in the Region

Mexico will be the leading country in the sector and smaller startups will be more attractive to investors, according to Alan Farcas, general partner at Impacta VC and director of Fundación Chile at Conexión América.

“We can define the balance of 2022 in the venture capital industry as a true roller coaster: volatility, very high uncertainty, with a great start to the year with fundraising and then a not so good development, especially in large rounds.” This is how Alain Farcas, General Partner of Impacta VC in the Conexión América space for summed up the year.

The CEO, who is also director of Fundación Chile, explained that during the year just ended there was a very significant adjustment in the valuations of companies, based on a reconsideration of the ecosystem that now seeks more balance after just wanting to grow.

The review of valuations in fintechs and other sectors has been brutal. What we expect is that 2023 starts a slow but sustainable recovery in rankings, especially for unicorns, he said.

And that is, he explained, “sort of two different worlds happen. Those big multi-million dollar companies that are going into a downturn, and conversely, the high interest and capital available to smaller companies, are in the early rounds.”

In this sense, he announced that 2023 will be marked by slower operations. “Companies need to be more careful with capital, amid adjustments in valuation perspectives. They need to adapt to this and understand that Ebitda is now more important than before.”

“Venture capitalists must be smarter and more balanced in understanding that there is an adjustment, but at the same time they must continue to support companies. Today we have to see sustainable business models and hopefully short and medium term profits or numbers blue at least as a function of both parties.”

Great Fort of Mexico

Asked which markets are most attractive to investors, Farkas noted that while the biggest markets – Brazil, Mexico and Colombia – are more attractive on their own, some of them stand out from the rest.

First, he declared, “Mexico will probably invent everything.” In his opinion, “there is a growing interest of start-ups in setting up in that country, in addition to the worldwide interest in replacing industrial activity in Asia for geopolitical issues”.

“We see Mexico as likely to be the superpower of 2023, with a very strong recovery in its startups and the industry in general,” he said.

Brazil, due to its size, is still important, but the executive recognized that “it has more organizational problems and political difficulties”. This is the case of Colombia, the third largest market that, although very well positioned in terms of prospects, opportunities and human capital, is undergoing political changes that may affect the growth of startups.

“We hope this does not affect the entrepreneurial potential and climate in Colombia, although some difficulties may arise, especially in more regulated sectors,” he said.

Meanwhile, “Chile and Uruguay have something very valuable in terms of being able to try and test hypotheses for new initiatives”, which he considered very strong.

Potential of Chile and Uruguay

Regarding the first of these two markets, the founder of Impacta VC highlighted the performance of the entrepreneurship ecosystem, the development of its own funds and the support and promotion of the production promotion company (Corfo, a government agency). “The truth is that I see Chile with a lot of hope in the emergence of very attractive new companies that can reach the level of Mexico, and perhaps Colombia, Peru and so on,” he said.
In the case of Uruguay, which gained great fame at the end of the year as a technological center in the region, Farkas considered what was happening “very exciting”, referring to the work of the state carried out in the last two decades, regardless of the government in power.

“Of all political sectors, it has aligned and continues in a very strong and very attractive direction. In addition, they have first-class human capital (…) In addition, there are a series of tax advantages, both for companies and for entrepreneurs, that make it attractive to live there and generate this entire ecosystem,” he said.

From this he saved that “the great virtue is in maintaining a long-standing policy. Something very difficult in Latin America”.

The region has enormous potential, but we also have great challenges. He added that we must start from a joint effort by all public, private and academic sectors and prioritize the nation’s interest.

Attractive industries

Just as there are markets that attract investors, there are also economic sectors. In Farkas’ opinion, digital companies that require less capital to scale stand out.

There is, he said, the industry of sustainability, climate change and social impact, “which will mobilize the new generations and where we see it as a very interesting space, because not only is it good for the world, it is also good for business”.

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