Canary, Kaszek, and Monashees: past, present, and future of venture capital in Latin America

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2021 was a dream year for venture capital investments in Latin America – and 2022 was a wake up call. Still, that ringing of the alarm clock shouldn't be a motive for you to be alarmed yourself.

That's because all the conditions for building amazing startups are still here: talents, capital, and market opportunities. If you're a startup founder, your job now is to work through the strategies and numbers, with a long-term vision in your horizon.

That's advice from some of the most well-known VCs in Latin America. Izabel Gallera (Canary), Marcelo Lima (Monashees), and Santiago Fossatti (Kaszek) discussed the past, the present, and the future of venture capital at Vamos Latam Summit. They also told us what makes their eyes shine when evaluating startups, so that you can be prepared when the time to raise a round comes.

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Past of venture capital: it all began with talent

Canary, Kaszek, and Monashees remembered what Latin America was like decade ago. Mercado Libre basically stood alone as the big tech company. Every other startup on the block faced a very disadvantageous competition for the talents. They preferred to work for traditional employers, like banks and multinationals.

The first transformation in the region was one of mindset: some wanted to break the mold and build something new. And did that by founding or joining early-stage startups.

This talent flow enabled a tech transformation in the region. We finally had a portfolio of viable startups focused on problems that were specific to Latin America. Some years later, they were fed by venture capital. Monashees and Kaszek are two examples of these early betters. The firms were created in 2005 and 2011, respectively.

Investors were first attracted to the hugeness of Latin American numbers. Wherever you look, there were big markets and big problems to be solved. Add to that the popularization of smartphones and consequently of internet access, which allowed for these new tech solutions to gain traction, and boom. The wheels were in motion.

"In 2011, the value of all public tech companies was US$ 5B. We projected that in 10 years that could be US$ 100B. It sounded crazy at the time", recalls Santiago. When the milestone arrived, it was even larger: US$ 120 billion.

In Latin America, some of those early-stage startups created a decade ago became the best brands in the region (and in the world!). Mercado Libre now has players like Nubank, Quinto Andar, and Creditas making it company on the top echelon of the tech industry. "That was unthinkable in 2011."

Present of venture capital: thriving and surviving

Canary was founded some years after Monashees and Kaszek, in 2017. The soil was already fertile by then, according to Izabel.

We'll also start with talent here: the decision of leaving a bank or a multinational for a startup was more accepted in the Latin American society. (Except on your family's awkward reunion at Christmas. We know.)

"We knew there was a wave of very talented people leaning towards tech, either taking a risk and starting their own companies or joining teams that had already started", Izabel remembers.

As we all know, this only grew from then to now. In 2017, they analyzed 30 startup investment deals per month. Now, they analyze about 300. And that's only a small percentage of deals they have access to.

2021 was the extreme of this trend, "when everything was funded", joked Santiago. But, as we all know, this year's different. Market valuations are now lower in the public and the private world. And even with the correction, it's harder to get funded than before.

Canary, Kaszek, and Monashees see the slowdown as a return to the status quo. And there's even a silver lining: it's a return to a better status quo. Even though investments have receded this year in relation to the same period of 2021, this year's poised to surpass 2020's results. That's because LatAm is now firmly on the map of many VCs.

"When Brazil entered crisis mode, the five or six funds in the region all disappeared during 2014 and 2015. It was very, very hard to fundraise. Now there are dozens of funds spending time in the region. Capital will be there if you're playing for the long term", says Marcelo.

Still, nobody knows how long the tech correction in public markets and the increased difficulty in fundraising for startups will last. Marcelo advises founders to try to buy time so that they can navigate this storm better.

Easier said than done, you might be saying to yourself, and you're right. Marcelo shared the simple but hard to execute path you can take to buy time until the next fundraising for your startup: focus on unit economics.

Unit economics represent the ratio between the revenue a customer generates to your startup (lifetime value, or LTV) and how much you spent to attract them (customer acquisition cost, or CAC). LTV/CAC shows the return on investment per unit of product or service.

One strategy to better your unit economics is to expand your revenues – and we will assume you are already doing everything in your power to sell more and better.

The other strategy to better your unit economics is to reduce your costs. Which, if you still have a negative cash flow, can also mean optimizing your burn rate.

Your startup's burn rate is how much money it's spending, generally received from investors, before it can generate a positive cash flow and sustain itself on its own. You need to look at where your startup can cut costs in order to burn less money each month. That will extend your runway – how many months your startup can survive considering its current burn rate. When you have more runway, you're buying your startup more time before its next round.

Future of venture capital: tech is bright in Latin America

Gallera points out that the key drivers for continued tech growth in Latin America remain the same: talent, capital, and market opportunities.

With talent and VCs already betting solidly in Latin American startups, what remains are the market opportunities. Yes, we have grown a lot in terms of tech adoption in the last decade, specially during the pandemic. Reflecting about those last two years and a half, tech adoption boom has held better in Latin America in comparison to developed countries.

Still, we all know there are still a lot of deep, deep problems to be solved and industries to be modernized here. "You don't have to build a Tesla to have an amazing company and to actually change industries [in LatAm]", Izabel says. "Everyday our life here is painful", Santiago laughed, highlighting how these pains are also business opportunities.

We already have some cases of success in the region, as we mentioned. But having even more successes will help the startup ecosystem to mature even more in Latin America.

One example of success is having a liquidity event, like an acquisition or an initial public offering (IPO). There are probably 20 or even more regional companies on track for IPOs, and this is going to be very important for the next wave of tech in Latin America, says Marcelo. "When you have the liquidity, you bring more talented people and even more capital to the ecosystem as a whole. These next three, four years will be very important."

Even if these companies don't decide to have a liquidity event yet, big startups can become buyers of other startups through M&As, providing liquidity to other startups and transforming first-time founders into second-time founders and angels. These big startups also become schools for currently employees, future startup founders. "We're still in the infancy of this ecosystem. We need to get to its adolescence", Santiago says.

What makes Canary, Kaszek, and Monashees' eyes shine?

Investors are looking for the next big thing – but with a smaller money bag. So it's important to stand out, above the crowd. So, what makes Canary, Kaszek, and Monashees' eyes shine?

For Izabel, it's all about building a long-term relationship. That soon-to-be special founder? He might be still hunting a good idea at this exact moment. "More than 40% of Canary company investments happened because we knew that person before. It's easier that way for us to get the conviction that that's a team we want to partner with", she says.

For Santiago, who also works with the same people for decades at a time, the shine in the eyes comes from the tech industry's essential component: making the impossible possible, and scaling that impact. "Being part of that story is really amazing", he says.

Finally, Marcelo says there are three signals that make his eyes light up. The first signal echoes Izabel's point of view: an amazing founder who excites investors and changes their point of view about something. The second and third signals echo Santiago's POV: a challenge the investors can help founders solve, and seeing the product impact the real world.

A success metric in Marcelo's eyes? When a startup reaches his own mother. We hope your startup has that same ambition – and is now more than ready to face the fundraising journey in Latin America.