From the conception of an idea, to growth and expansion, a startup’s journey is full of challenges. But also multiple people and institutions accompany and encourage towards success. Know who they are and how they participate in each milestone of the journey.
Investment in venture capital in Latin America doubled every year from 2016 to 2019, according to Lavca, and, last year alone, the investment record of more than US $ 4.6 billion was reached in startups in the region. With the growth of this market, news of startups also increased, their different investment rounds and fundraising and market launches, all accompanied by a language and jargon typical of the industry.
In this scenario, there is no longer an excuse to postpone vocabulary familiarization. Not only because of the importance of the industry in the Latin American economy, but also because of its impact on the development of innovation and value addition.
At AETecno we publish a basic glossary to understand the world of entrepreneurship. Already, in this article, we will explain how startups grow, who are the players that participate in the market and the milestones that define the path to success. But beware, not all startups go through the same journey and complying with all the steps does not imply success for the company.
1. PRE-SEED FUNDING OR BOOTSTRAPPING
This stage refers to the first investment of a venture to build its business. Since the startup is in a conceptual phase, the amount required is not that high, so the investment usually comes from friends and family or the entrepreneur himself.
There are also institutions that are dedicated to investing in this stage, such as incubators . As a subgroup of Venture Capitals, they are organizations that support the development of entrepreneurs’ projects in their initial stages until they are formalized as a company. They provide mentoring, personalized advice and contact networks with potential investors, as well as physical spaces and legal guidance. Certain incubators have more advanced programs in which they contribute money to selected ventures, also called seed capital.
2. SEED CAPITAL
If the land is already prepared, now you have to plant the seed. At this stage, an enterprise that already has business activity finally seeks to raise its first round of financing.
This investment allows startups to pay for the launch of a product or advance their marketing strategy, make the first hires, cover operating expenses and increase market research to improve their product or service.
Crunchbase considers investments of $ 3 million or less as seed capital, but the amount may exceed. For example, the Mexican delivery startup, Jüsto, raised US $ 10 million as seed capital in 2019.
It is very risky to invest in companies that are in this stage, since in many cases they still do not have customers or sales, nor do they guarantee success. But it is a great opportunity to find and bet on innovative ventures and have a shareholding in a company that may be the next disruption in the industry. For this reason, the investments made from now on are known as capital venturing.
According to LAVCA , the most active VC companies in the seed capital stage during 2019 were: Canary, Y Combinator, Bossa Nova Investimentos, 500 Startups, MAYA Capital, Monashees and Global Founders Capital.
In addition to Venture Capitals, individuals are also prominent players at this stage of startup development. They are known as angel investors and, unlike VCs, they are not institutions, but rather high-net-worth individuals that provide financial support to ventures. In Latin America, this type of investment is usually in the order of US $ 30,000 to US $ 250,000, and the average in 2019 was US $ 119,000, according to Xcala . In the United States, the average was $ 580,000, according to Pitchbook .
3. ACCELERATION STAGE
Unlike common ventures, startups are characterized by preferring to grow quickly than to break even. For this reason, they need more capital to invest in human talent, offices around the world, new products and services, marketing, etc. For this reason, there are different stages in which startups raise capital, divided into series:
Series A and B: These are the early stages of capital raising. In Latin America, the average investment in series A is approximately US $ 5 million, according to Nathan Lustig , managing partner of Magma Partner, wrote in Techcrunch , while in the United States the average of a series A round in 2018 was US $ 11, 29 million.
Later stages : From the third capital raising (series C) onwards. Most startups that reach series C go to the next stage or begin their closing strategies, but there are cases of companies that go up to series F and G. For example, the fintech Robinhood raised its US series G $ 200 million in August this year, three months after its Series F round of $ 280 million.
Since the capital needed by these types of startups is very high, the founders turn to institutions that create investment funds:
Accelerators: As a subgroup of Venture Capitals, such as incubators, accelerators provide tools such as mentoring, physical spaces, consulting with experts, as well as networks of contacts with potential investors and partner companies for the proof of concept of entrepreneurship products and services. They usually act in the early stages of capital raising.
These institutions look for startups that already have a legal operation, have a developed product or service, as well as clients. By needing a much larger amount to invest in startups, accelerators work like a fund, in which they pool capital from different investors, from private to companies.
According to LAVCA, the most active VC companies in the acceleration stage during 2019 in Latin America were SoftBank, General Atlantic, KaszeK Ventures, Redpoint eVentures, Riverwood Capital and Valor Capital.
Private Equity (investment capital): Many times, this type of institution is confused with a VC, since both invest in companies and profit at the time of their exit. But unlike a VC, they invest or buy companies that are no longer startups, but already established companies that have breached the breakeven point and with a considerable level of income. The invested companies may or may not be on a public listing of stocks.
These funds combine assets from multiple investors – from high net worth individuals to high income companies – with the aim of buying part or all of the company. The idea is not to maintain participation for long, but to accelerate its growth and prepare an exit strategy.
Mezzanine financing refers to a hybrid between debt and equity financing that gives the lender the right to convert its equity interest into equity in the event of default. This type of financing is done by startups – which are already established – to raise funds for specific projects.
The last stage of a startup’s journey concerns the liquidation of financial assets or tangible business assets, depending on the strategy of the participants. The best known strategies are:
IPO (Initial Public Offering): It refers to the process in which a private company goes public for the first time. One of the most recent initial public offerings in the Latin American entrepreneurship market was from Vasta Platform, a Brazilian provider of educational technologies, in July this year.
M&A: Merging or being acquired by another company is another great option, as it also allows the startup and investors to recover their initial capital and profit in the process. Through this transaction, the startup has the opportunity to gain a much larger customer base, scale its business, and acquire new tools and skills. One of the largest startup acquisitions in Latin America was that of the Brazilian shared transport company 99 by the Chinese Didi Chuxing for US $ 1 billion in 2018.
Closing: It is never ideal, but the liquidation of assets, withdrawing money from investors and keeping the rest is a common option and that several startups make that decision, since they cannot survive or generate traction.