What are you seeing in terms of fundraising trends within VCs and how is that influencing your own mandate? How is that influencing how you are looking at taking on new investments?
So I would start saying that especially, I think in emerging markets, we have seen a very big shift in trends of business models. Fintech has been the vertical that has received the greatest amount of capital from venture capital. At least for Latin America, more than 50% of the capital has been deployed in fintech companies. And from 2018 we’ve had business models very focused on solving the core problems, giving access to credit, giving SMEs, tools to make payments. We have shifted to business models around software as a service or even infrastructure that are allowing other fintechs or financial institutions to be more effective.
So we see Fintech as a core problem solver through technology, and capital is just an enabler. That's the core of our thesis. And the shift that we have seen has a lot to do with more scalable business models. In Latin America, we still have more than 70% of the population underbanked and a very great chunk of that are even unbanked. For instance, last year, 50% of the credit cards issued by new banks were to people that didn't have any credit scoring before.
So we see Fintech as a core problem solver through technology, and capital is just an enabler.
Fundraising last year was down 50%, basically. So we went from a total fundraise of 5 billion for the African continent in VCs, down to about 3.5. We also did see a decrease in the number of deals, but less a smaller decrease. It went down 28%, which means smaller deals still got done. What does that translate to as an investor? So we have been, like many VCs, a little bit more reticent. We're concerned about when we buy in, and we're concerned about throwing good money after bad, when a lot of companies are facing very short runways. And so we are being more circumspect about the investments we make. We are concerned about some of our portfolio companies in terms of their ability to get to a series A.
I live in a very different part of the world, and funding, it just flows differently over there. So the pools of capital that most VCs are tapping are the sovereigns, and in the GCC, they are still flush and they're still funding. I would say 2020 over 2022, definitely lower. But 2022 was a very high year of deploying LPs, deploying into VC funds. The thing about what is happening in the GCC countries is that for a long time these countries have been very dependent on oil. A few years ago, someone in emissions said “we can't do that”. So there's been a large focus for this knowledge economy.
So they decided to switch focus and invest internally within their own countries. And that has changed the game for a lot of local VCs
Family offices are very important in Latin America, and I think a trend that we're seeing right now that we're really excited about is that before, you had a small subsection of family offices that would allocate to venture, and now I think that's really opening up. So, in general, I think family offices are now excited about venture in Latin America.
I think it's very particular to each firm. In the case of Cometa, family offices were obviously very important historically. But now in fund three, the biggest proportion of money is from the local pension funds in Latin America, which has started to play venture capital, namely Mexico and Colombia. Obviously recent fundraising has been challenging. Rising interest rate environment has made less risky assets more attractive from a risk-adjusted perspective, and LPs have adjusted their strategies accordingly. What I've seen, a successful focus both for funds seeking out LPs and companies seeking either equity or debt investors, is focusing on investors that have incentives other than financial returns. So namely you have DFIs or VCs that have either impact or emerging market mandates.
A successful focus, is focusing on investors that have incentives other than financial returns, either impact or emerging market mandates.
One of the main points here for any emerging market VC fund is the importance of liquidity. And we have seen couple of M&A deals last year that I think validates the thesis in LATAM. I think M&A activity will pick up in the region. Maybe likely the IPO window can open at some point, maybe even until 2025.
But I think the ability also for our funds to demonstrate the ability to generate liquidity via exits, M&A or IPO eventually also brings validation to our thesis.
When you hear exit strategy, you hear people talk about IPO, that's everybody's default. There are obviously other exit strategies particularly over the last few years where VC valuations were so overly inflated and companies had to do a resetting round to get recapitalized, private equity would typically step in as an exit strategy.
We're starting to see more and more successful exits, and this is just a sign of our ecosystem evolving and growing because it was very nascent before. That's why you didn't see a lot of exits. Right now, as it grows, we're seeing more successful exits. We just had two unicorns announced in Q4. One of them included Wellington Asset Management and was valued at 1.5 billion. That's a nice exit, nice liquidity.
In the past, for companies to exit or to do a listing they would look at London or New York or even Singapore. Now there's the local listings that are becoming much more interesting. And there's enough trading volume there for it to be very interesting. So now it's all kind of being set up now, is a good time to hit on this opportunity.
We're starting to see more and more successful exits, and this is just a sign of our ecosystem evolving and growing because it was very nascent before.
We are a pre-seed and a seed fund. We're going to exit at secondary and someone else is going to figure this out. That's how we think about it. Now, that means the portfolio construction has to be a little different. We're not imagining that one good returns for the whole fund. We need a lot of good bets that we can exit at meaningful multiples in a secondary round, series A or series B.
Our real concern for our own exit strategy is that firms are having a hard time raising series A, so those secondaries are getting later in the process.
And because we're family office-backed and my co-founder and I come from a background that's across asset classes and across deal sizes, we're willing to come in at various interesting points before a sell-off or something else to get liquidity.
We are also concerned about diversification in our own platform. We're Africa first, not Africa only. We look at all markets. Our thesis is we look at markets at 100 million people or more with venture capital per capita at less than $10. That means venture is vastly underpenetrated, which means it's a buyer's market in that sense. We never fight for allocation. It's not a fight over allocation because it's not that crowded of a space.
Anyway, so thoughts on exit? A lot of M&A and there might be some local listings and companies exiting not at billion-dollar companies but exiting at 200-million-dollar kind of scenarios.
I agree that liquidity is one of the biggest concerns when you are raising money from an LP. But I think we are seeing a very interesting scenario. Last year there were a lot of M&A activity and we expect it to continue going forward, especially in fintech. And because last year, even though the VC investment in fintech and in every sector declined by more than 50%, the early stage was still active and dynamic. So there will be a lot of consolidation going forward.
What are currently red flags for you, and what are green flags now?
We as a firm are very focused on profitability and unit economics. Margins are very important to us in their financials, to see whether these guys are just going to grow forever, make any money, or you can see there's a clear path to how they're going to become profitable. There's no more spending for the sake of growth. That doesn't matter.
For us, it's always been about product. We still see a lot of fintech companies that are in the lending space where they found an underserved lending space and there's an opportunity there, but they're not building really a product around it where they're going to be able to get a lot of stickiness with their customers.
For us, it's always been about product.
You can't just be a one trick pony basically. Those are kind of the green flags and then the red flags for us because we invest pretty early, we invest at seed stage. Red flags are essentially they don't have the product mindset. When we look at the product, there are too many features. It's unfocused. I think those are kind of the things that make us nervous.
Red flags are essentially they don't have the product mindset.
In terms of red flags, coming from a very particular equity perspective, for us, it's much more about persons and teams when we talk about red flags. I think business aspects are objective and can be analyzed. Where you're assessing a team, it's much more complicated for us, red flags, and I think that applies for business and for life.
The biggest one is lack of integrity across the board that can be understood as miss-showing information, trying too hard to show positive facts about the company, having this supposedly full-time founder, which is across multiple endeavors. And, apart from personal aspects, I'd say something that can be seen also in early-stage companies is lack of focus when it's way too early.
All entrepreneurs in Africa are wearing 18 hats at the same time. So that's one thing we assess, how focused are they going to be on this business. Second is I love a co-founding team where one is like a tough-elbow operator. They're going to support, they're going to fight the fights, and the other ones can raise money globally. They're polished, and I need that pairing to get this thing from off the ground to raise through series B. I like that co-founding team. So we've always looked at red flags in that sense.
One of the green flags we look for is good and honest communication. I'm an outside investor. I need founders who communicate well, clearly, and simply and tell us the truth because you don't need to lie to me saying that everything is great. Just tell me what the problems are and so that we can be helpful.
In terms of the market, this whole TAM and what's your real market is something that I'm really looking for.
On fintech, particularly when we look at a fintech, I look at one thing. What is the founder's relationship to get cheap debt. They're going to need debt. So you've got to prove to me you've got some special sauce to get access to cheap debt in this market because that's what's going to make or break this thing.
One last comment on this. What I do like, I'm looking for a business that is building for Global EM from day one. Sometimes a foreigner or an expat who sees the broader horizon outside of the ecosystem can really help, because that means that from day one they might have their dev team in Portugal and they might have their parent company registered in Delaware. From day one, they have that vision already built out. And if you build from the DNA of a global EM company that can go to other EMs, not just your neighbor, then I'm interested.
AJ Davidson (CEO, Co-Founder SixPoint Capital)
Sonia Gokhale (Partner - Founder SOUQ)
Abel Bezares (Principal Cometa)
Drew Hamilton (Principal Polymath)
Adolfo Blasco (Managing Partner / Principal Nazca)
Cristobal de Atucha (Investor Fintech Collective)
Aubry Hruby (Co-Founder - Tofino Capital)
