For a young entrepreneur with a digital business idea, the past two years have been golden. The United States Monetary Authority pumped $7 trillion into the financial system to soften the blow of the pandemic and interest rates were at zero, generating a sense of invincibility in the markets. In this climate, 12 Latin American companies became unicorns last year, a term reserved for companies valued at more than $1 billion, setting a new record for this low-to-middle income region. Plus, there were hundreds of other companies that raised big capital on Wall Street just below that benchmark.
But what goes up must come down and now the party is over. Such a capital injection by the US Federal Reserve generated high inflation; the Fed is now changing course to control rising prices and the market has reacted aggressively. On the morning of May 20, the financial media officially declared a bear market, which refers to major stock indices falling at least 20% from their highs. Inflation concerns, rising interest rates, ongoing supply chain disruptions caused by Covid-19 and the war in Ukraine are wreaking havoc on the global economy and, consequently, its backbone, the global financial system.
Investors who once felt invincible are now seeing losses and red numbers. In the first three months of the year, funding for new businesses fell 60% from its 2021 peak, when it hit $7.3 billion in the second quarter, according to Latin American data. from analyst firm CBInsights. Meanwhile, in the first quarter of this year, the number of new unicorns hit its lowest global level in five quarters. Moreover, not a single Latin American company has been listed on the international market.
“The best way to read the market is to see it as a pendulum swinging between stories and fundamentals,” says Scott Galloway, a professor at New York University’s business school and one of the technology analysts and most influential financiers in the world. “By stories, I mean the narratives, vision and sentiment that drive the business forward. By fundamentals, I mean how the business makes money. history, and this is particularly true of Latin America.
The region had become a “unicorn production line,” according to Galloway, increasing the global number of unicorns to stratospheric levels. However, many of these companies will have no choice but to scale back significantly as the pendulum swings back, and that already appears to be happening. Examples include digital companies like Netflix, which just made massive layoffs, to smaller companies like Brazil’s QuintoAndar and Loft Brasil Tecnologia, both of which laid off more than 100 people last month.
“The pain you see in public markets, especially among more narrative stocks, eventually trickles down to private markets,” says Galloway. “Many of these young entrepreneurs built their careers in a bull market and never heard of a bear market. But that is about to change. Valuations will fall, capital won’t be as cheap, and start-up investors won’t feel as savvy as they did a year ago.
Criticisms and dangers
The timing of a bear market coincides with the difficulties that come with unbridled and sudden growth. Mexico’s Kavak, a digital used-car buying and selling platform operating not only in its home country but also in Argentina and Brazil, grew from 300 employees in 2020 to 8,500 after becoming a unicorn . But the start-up, which operates via a mobile app, is facing an image crisis after complaints from a large number of users went viral on social media about poor service.
“Torture from start to finish,” a customer tweeted April 1 in a thread cataloging her experience that later went viral. Thousands added to the complaint. The noise was such that the CEO of Kavak, Alejandro Guerra, was forced to react. “We are not perfect. We make mistakes; technology fails,” Guerra said at a recent conference. “We are fully aware of what is happening on social media.”
For many countries in this region, digital startups that have grown into huge structures have failed to live up to expectations. Although they have raised billions in capital, their business model continues to be based on low wages and precarious employment, which is the norm for millions of Latin Americans. A report released in March by nongovernmental organizations Oxfam Mexico and the Institute for Inequality Studies (Indesig) found that the average income of a delivery driver for platforms such as Uber, DiDi and Colombian unicorn Rappi is 2,085 pesos ($104) per week. Companies, on the other hand, make profits in the millions.
These are “the light and dark shades of an industry and business model that are here to stay,” says Alexandra Haas, director of Oxfam Mexico. “That is why it is extremely important to report the situation and improve the work model used by the platforms, as well as the work system and access to rights in our country. Companies, authorities and society in general must promote a universal program of social protection which, on the one hand, maintains the flexibility of work desired by delivery people and, on the other hand, guarantees rights at all levels.
Therein lies the big challenge for Latin America, according to Galloway. “Big Tech has generated enormous wealth in the United States, which we should be grateful for,” he says. “But over the past decade, we’ve allowed Big Tech to invade our country. [the US] and that’s something Latin America should learn as these tech companies grow. Our biggest mistake was the chronic underinvestment in our regulatory agencies, which allowed private capital to emerge as a shadow government. This stemmed from a huge cultural problem – specifically our idolization of innovators. We have equated wealth with virtue and have not held the innovator class, or their businesses, to the same standards as traditional businesses or the general population. According to Galloway, “The way forward in high-growth countries is to balance technological progress with respect for rules and business arbiters, that is, regulation. Without regulation, monopolies emerge, killing competition and all progress from below. The state of American democracy in the digital age should be a wake-up call to emerging nations around the world.