In the midst of a complex scenario with high interest rates and global recession projections, the outlook looks less secure for startups. The investment boom they received during Covid-19 is behind them. Today, conditions have changed and the investment scenario has returned to near pre-pandemic levels.
According to a analysis performed by Valoriza evidence from early-stage capital raising indicates that globally a drop is observed during the first quarter of 2023. of 57% in financing rounds (raises) for early stage startups, compared to the first quarter of 2022. In Latin America this drop is 45% and in Chile it is close to 50%.
This could be explained by the fact that startups, in general, are not profitable companies in the short term. What defines them is both their scalability and an accelerated growth strategy; these factors explain why the expected positive cash flows are more forward-looking than in traditional companies, therefore, they are affected by the high interest rate.
According to the Valoriza analysis This can even be seen in stock market values, based on the TDV ETF (an index of profitable US stocks) and the Goldman Sachs GSCBMPTC index (an index of unprofitable technology stocks), both focused on the technology industry. The former only considers companies that are profitable, and this fell by 20% during 2022, while the Goldman Sachs index, which tracks unprofitable companies, fell by more than 60% during the year.
The current scenario of lower liquidity adds an additional risk of not being able to raise future rounds of capital and, therefore, put the startups' growth expectations at greater risk.
"Safer assets such as treasury bonds, time deposits or fixed income, are having a higher return, so they are being required to have a higher return on risky investments and the further away these returns are the higher the risk is." explains Fernando Tamblay, partner at Valoriza.
In addition, he concludes that "startup investment still exists, in amounts similar to the first quarter of 2022 and 2021 but investors are choosing "with tweezers" in which ones to invest, looking for those that have more certain futures or higher potential".
