Why the Honeymoon Is Over for Startups in Latin America
By Isabella Cota
Investors who felt invincible are now falling into red territory. ‘Many of these young entrepreneurs have spent their careers in a bull market, and have never heard of a down round. That’s about to change,’ says Professor Scott Galloway
For a young entrepreneur with an idea for a digital business, the last two years have been golden. The monetary authority in the US injected $7 trillion into the financial system to soften the blow of the pandemic and interest rates were at zero, which generated a sense of invincibility in the markets. In this climate, 12 Latin American companies became unicorns last year, a term reserved for firms that are valued at over $1 billion, setting a new record for this low to middle-income region. Moreover, there were hundreds of other businesses that raised large amounts of capital from Wall Street, just falling short of this benchmark.
But what goes up must come down and now the party is over. Such an injection of capital by the US Federal Reserve generated high inflation; the Fed is now reversing course to control the rise in prices and the market has reacted aggressively. On the morning of May 20, the financial media officially declared a bear market, which involves a decline of major stock indexes by at least 20% from their highs. Inflationary concerns, rising interest rates, persistent supply chain disruptions from Covid-19 and the war in Ukraine are wreaking havoc on the global economy and consequently on its backbone, the global financial system.
Photo courtesy of Danial Igdery.