How Company Builders Create Long-Term Value in Latin America
So-called "venture studios" may be the solution for entrepreneurs in emerging markets.
The startup economy was valued at nearly $3 trillion worldwide in 2019. While it is still too early to determine where the valuation will land in 2020, the numbers are likely to look very different. The global economy is suffering, and experts predict a recession that will have lasting impacts across all industries. In past recessions, the total decrease in venture-capital investment was about 25 percent on average in 12 months, which would mean a loss of $86.4 billion in the current economic context. In the first two months of this year, venture capital deals in China alone decreased by more than 50 percent, indicating that the effects of this recession could be even greater globally.
The contagion timeline varies by region, and life in many countries is resuming some degree of normalcy. However, in Latin America, the rate of infection continues to rise. For entrepreneurs in emerging markets like Latin America, the continued rise of cases and subsequent economic impact is creating a challenging environment, and they are searching for strategies and support as they adapt to the “new normal.” Here’s a look at how company builders can help.
A Brief Overview of Latin America’s Startup Ecosystem
Heading into this year, the startup scene in Latin America was exploding. In just three years, investment in Latin American startups increased nearly tenfold, from $500 million in 2016 to $4.6 billion last year. Part of the record growth was due to a new $5 billion Softbank Innovation Fund, which focuses exclusively on the Latin American market. However, even without Softbank’s contribution, the region experienced a record increase in funding in 2019.
Unfortunately, it didn’t take long for startups to be impacted economic shutdowns. Between Q4 2019 and Q1 2020, the number of venture deals completed in Latin America decreased by 60 percent. As the contagion's spread continues throughout the region, short-term opportunities like cash injections from investors and startup accelerators will be harder to come by. Entrepreneurs should instead consider alternatives, like working with company builders for long-term support and funding.
How Company Builders Create Long-Term Value
Company builders, also known as “venture studios,” bring together talent, investors and experienced entrepreneurs to build out many ideas simultaneously. Their approach combines the stability of an established company with the creativity and innovation of individual startups, developing ideas through a rigorous process, and then establishing the most successful as independent companies.
Making It Easier to Register New Businesses
In many Latin American countries, setting up a new business is complicated, often requiring extensive paperwork and many appointments to meet all the legal requirements. And although some countries are beginning to ease their restrictions, the majority still have shelter-at-home mandates in place. These restrictions further complicate the process of legally registering a new company, especially for first-time entrepreneurs. Company builders, which work with many startup ideas simultaneously, are familiar with the necessary bureaucratic processes and can help navigate them with repeatable processes and their business branding. Additionally, they can draw upon industry experience and existing infrastructures to help stabilize and launch new businesses.
Building Investor Confidence
Most company builders also have established relationships with people who can help navigate local legal requirements. However, legally establishing a new company is not worth much if the business has no way to fund its operations. Investors in Latin America are known for being risk-averse, making it difficult for startups with innovative ideas to raise money. In times of crisis, this tendency to stick with the tried-and-tested only increases, leaving companies with less access to funding when they need it most.
Company builders help increase funding opportunities for startups because they lower the perceived risk for investors. The company-builder model is designed to create successful companies using a structured process to generate and test ideas that build upon past attempts. As part of a company builder, entrepreneurs work on multiple startup ideas and validate them before looking for outside funding. Furthermore, many startups incubated in company builders are led by experienced entrepreneurs who have built successful businesses in the past, which can be a reassuring indicator of success for cautious investors.
Increasing Startup/Corporation Partnerships
In addition to bringing together seasoned entrepreneurs, company builders often partner with industry experts and large corporations. These partnerships are mutually beneficial. Corporations can keep up with the latest tech developments by working with startups, and startup founders gain access to industry insights, new market opportunities and sometimes even funding.
By incorporating more established corporations into the process of building out startup ideas, company builders create lower-risk opportunities for regional corporate investors. Currently, only 16 percent of the large companies in Latin America partner with startups, and more than 80 percent of those collaborations are short-term opportunities like hackathons.
In the current climate, larger, more established companies have realized the importance of moving their operations online in order to survive in the new remote-work environment. Forming stable, lasting partnerships with startups can help bring large businesses firmly into the digital sphere for both the short- and long-term. In addition to modernizing traditional business approaches through tech, company builders can share their expertise and teach corporations how to be agile, innovative and flexible in response to new challenges.
Worldwide lockdown measures have revealed serious flaws in important systems in emerging markets, highlighting healthcare deficits, global supply chain weaknesses and limited financial safety nets. These deeply rooted problems will only be resolved by innovative approaches designed to create disruptive, sustainable change. With their long-term approach to generating value, company builders create the ideal environment for pursuing that change.