Author: Nathan Lustig / Source: The Next Web
Latin American startups haven’t had the same valuations as Silicon Valley startups. This frustrates many Latin American entrepreneurs seeking investment, as they don’t understand why Latin American VCs aren’t doing deals at Silicon Valley valuations.
There are important reasons why Latin American early-stage investment valuations are lower.
For one, there are few acquisitions in Latin America, and when acquisitions do happen, they tend to be at lower valuations than their counterparts in other parts of the world. VCs need to make returns, or they’ll be out of business. Therefore, if exits are lower, the initial price that venture capitalists pay must be lower.But what other reasons are there for this? Why are there still so few Latin American exits and why are they at lower valuations compared to their international peers? Here are just a few of the reasons.
1. Large Latin American companies make very few acquisitions
Most Latin American companies have not been worried about competition, either from technology or other forces in the market. Many large companies in Latin America, even publicly traded ones, are family-run, have been in business for generations, and their goals are much more geared toward maintaining position and profit, rather than growth or remaining competitive in the market.
What’s more, many high-level executives at large Latin American companies never truly believed that global brands such as Amazon, Alibaba, Netflix, or other large technology companies would compete with them. While this mentality is starting to change as these giants move into the market, large companies haven’t felt the need to acquire to compete.
2. When Latin America acquisitions do happen, they’re for lower valuations
Many of the large Latin American business sectors are still controlled by powerful families. Of the $1 billion-plus businesses in Latin America, around 75 percent are family-run.
As many can imagine, these families want to keep cash in their pockets. Family-run businesses tend to focus on cash flows and dividends, rather than continuing to build their businesses for the long term.
As a result, if a private company wants to make an acquisition, it often requires taking cash out of their own pockets, which as we all know, is harder than spending other people’s money, resulting in fewer mergers and acquisitions, and therefore lower valuations for Latin America companies.
3. Foreign startups rarely make Latin American acquisitions
When Uber entered the Latin American market, it didn’t acquire top competitor Easy Taxi; instead, Uber used its billions to compete with Easy Taxi and others for market domination.
This is a typical pattern. Most US startups are not making Latin American acquisitions if and when they move into the market. This trend may be starting to change as 99, Brazil’s version of Uber, was just acquired for a reported $1 billion by Didi, China’s largest ride-hailing platform, but it’s still rare.
4. When acquisitions of Latin American startups do happen, they’re for lower multiples than similar acquisitions in other parts of the world
Latin American companies are currently valued at much lower multiples than companies in other parts of the world. 99 in Brazil was acquired for a reported $1 billion and was the second biggest player in a country of 220 million people. If 99 had similar numbers in the…
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