What Happened With Funding In 1Q22?
If you only read the headlines, the outlook for venture funding for Latin American start-ups looked bleak. One example: “Venture Funding to Latin America Fell Sharply in Q1.” While true, such statements lack context, as headlines often do. While equity investment fell in Q1 when compared to Q4, funding in 1Q22 was up a surprising amount when compared to 1Q21 (+34%). What to make of these trends?
First, we should keep in mind that 2021’s phenomenal funding metrics were an anomaly. Dollars invested in Latin American technology start-ups grew 3x from $6.2 billion in 2020 to $18.7 billion in 2021. This means that the net growth dollars in 2021 amounted to twice the prior year’s total fundraising, which was the highest annual total on record at the time. If funding had continued to accelerate into 2022, or even remain at the same growth rate, the region would be facing down the growing likelihood of an investment bubble rather than 1Q22’s healthy investment growth.
Second, funding drops from Q4 to Q1 are not a rare occurrence. In 3 of the past 4 Q4-to-Q1 transitions, funding dollars decreased, while annual totals increased. The only quarterly increase occurred, unsurprisingly, in 1Q21. From 4Q18 to 1Q19, funding fell 46%, from 4Q19 to 1Q20 funding fell 28%, and from 4Q21 to 1Q22 funding fell 25%. This 25% drop in funding still resulted in $3.2 billion worth of equity investments going to Latin America’s start-ups, more than any other quarter except 3 from 2021.
If anything, one might make the argument that funding dollars have not fallen enough to fully rationalize 2021’s growth. However, we take the quarterly drop as a good sign that we are not seeing an irrational run-up for the region’s start-ups. A core premise of our investment thesis is the growing virtuous cycle of good investments in talented founders leading to profitable exits and then additional start-up foundings, fundings, and exits. While a bubble could break that cycle, the data tends to support that the broader ecosystem continues on in good health.