Analysis of the LATAM market of Venture Capitals and Deeptech companies

Daniel Salvucci, Managing Partner at Draper Cygnus provides his analysis of the context of the venture capital industry and deep tech startups in the region. He maintains that Latin America has a potential of great value that, industrially and academically, is still closely related to the state realm. He highlights the low investment in deep tech companies and the great potential for talent.

Investment funds like Draper Cygnus are interested in disruptive ventures that go beyond what is socially accepted as “the latest”. They are companies that are in industries impacted by disruptive technologies that drive drastic changes and impose the creation of new business models. Developing those changes that are driven by the demand of society are not always possible in certain industries and at the same time require a lot of capital.

Looking for financing

A deep-tech company seeks capital in the VC industry. They are companies in which the chances of success are low, but the growth potential is unlimited.

These companies, through new technology or a different business model, propose an important change or advance in an entire industry. These are the kind of companies that Draper Cygnus focuses on.

“These types of companies are in such an uncertain stage that they require capital (investors) to be able to grow and that is where the investment industry appears in these types of companies. Due to the characteristics of these companies, non-traditional investors (bank, loans, etc.) would invest because they wait for them to offer something much more concrete and accurate. That you know how much you can bill, at what time you earn money, issues that in this type of company at this early stage are not yet known. We do focus on all that but without an immediate expectation of results in that matter. These companies still have to develop intellectual property, research and development, product development and, since they are making such profound changes, it is generally necessary to wait for a certain timing of the market,” says Salvucci.

These companies that fit into this paradigm and are recognized for seeking this type of activity are going to raise capital in an orderly, strategic manner to funds such as Draper Cygnus.

Salvucci highlights the main characteristic of these companies: they are led by entrepreneurs from very early stages who have a hypothesis of what they believe will happen. For its part, the fund also has a hypothesis of what believes it should happen in that industry. Once these issues are aligned, the investment is decided.

A transversal characteristic of all the companies that enter this VC industry is that the chances of doing well are low, not only for internal reasons but more than less for external reasons.

The possibility that a VC expects is not that they are a good SME that makes a few million dollars, but that they are huge companies that change entire industries.

Daniel Salvucci emphasizes: “It is relevant, I say, in that year 5 or 7 since we invested, it already bills many millions of dollars, it continues to grow… they become established companies of 500 people, which when we discovered them were 5 (it is the type of rapid evolution that they have). That is only when it ends up being a good investment, but the moment we start looking at them, it is all an analysis of potentialities”. The most common examples are the Silicon Valley unicorns (Amazon, Tesla, Microsoft, Google, Apple) which are all companies that worth trillions today. They are huge. Now they are public companies but, in the beginning, were financed by funds like Draper Cygnus.

Salvucci points out that when Jobs and Wozniak were creating Apple in the ’70s for those first investors it was also something incipient and uncertain. A product was being created for an industry that did not yet exist: the laptop industry.

“Today we are users of that industry, but if you look at it from its origins, at that time, it shared the characteristics that we see today with GBM, with the potential to change an entire industry, with a huge challenge, but… What if they succeed? What happens is spectacular” (Salvucci in Analysis of the LATAM market of Venture Capitals and Deep-tech companies, 2022).

The market in LATAM

Regarding the Latin American market, Salvucci maintains that, in general, it is a very good moment for the Latin American VC entrepreneurial and investor ecosystem. Last year several issues occurred that ended up targeting Latin America in the global eye as a place for this type of activity. The first factor that intervened to create this prosperous moment according to Salvucci, was that the first 7 or 8 years had passed since that first batch of entrepreneurs and investors. That elapsed time is the normal time for companies of this type to go from being something small and incipient to being huge companies. For this reason, last year there was a lot of news of $200 million rounds and the rise of more unicorns.

If the reports of the region are analyzed, of which Draper Cygnus actively participates, we could see that in the last two years more companies reached the unicorn-sized stage than in the last 10 years.

“Why? Did these companies appear out of nowhere? No, they are the companies that we and other colleague’s funds in the region have invested in seven years ago. We have four of these companies in our investment portfolio from 2012, 2013 and 2014. Four unicorns: Satellogic, Auth0, Mural and Tienda Nube. We invested in 2012, 2013 and 2014 in these companies at the stage that GBM is in today” says Salvucci.

He also states that the industry is at an excellent moment because it has reached that point of maturity due to the hypothesis that companies of this type can emerge from Latin America attracting more capital is being tested. There are also other geopolitical factors plus the pandemic that helped, first, to flatten the world to make it easier for others to come to the region, and second, to accelerate the digitization processes of Latin America.

The interviewee maintains that in Latin America there are two paths forward. Two types of investments. Two types of companies. Some are still in that paradigm of the digitization of Latin America -although much of the value has already been created in the last 10 years, there is still a lot to do- that has to do with digitizing the Latin market and Latin industries. The other type of companies are the technology companies where the game is no longer just in Latin America but globally.

Regarding GBM, Salvucci affirms that for the planet to move to the next stage of sustainable evolution and for everything not to collapse, companies that generate profound changes in industries are necessary towards sustainable industries over time and in terms of resources. These types of companies are the ones on which Draper Cygnus bases its thesis to invest in the coming years, and this thesis is where an investment logic enters a company like GBM.

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