Startups must reduce cash burn with capital shortage, research says

Founders of Brazilian unicorns, as startups valued at more than US$1 billion are known, believe it will be necessary to adjust the business to reduce cash burn, amid a sharp drop in investments in the sector, according to research by the fund of Atlantic venture capital.

Venture capital investments in Latin America fell to US$2.4 billion in the second quarter of the year, from US$5 billion in the same period last year, according to data from Lavca, the association for private equity investment in the region.

The unicorn founders surveyed agree that their competitors will also have to adjust to lessen cash burn — 37% say their companies will do this and 50% think it will be necessary at rivals.

While only 5% of these executives believe that their company will have to close or be sold in a hurry, 33% think that this will happen to the competition.

The most common measures to reduce cash burn are hiring freezes, reducing marketing spend and layoffs, according to the Atlantic survey. About 80% of startups that laid off staff cut 10% or less from their workforce.

Although it has become more difficult to raise capital, Latin America still has good opportunities, according to Julio Vasconcellos, a partner at Atlântico.

Internet penetration has grown in countries in the region with the pandemic, reaching 78%, and is now above the 69% seen in China and closer to the rates of developed countries. Penetration in the United States is 92%.

The growth in the share of e-commerce in sales in Brazil to around 7% appears to be permanent, while in the US the movement has escalated back to pre-pandemic levels.

The dynamics seem to have changed in Brazil in sectors such as healthcare, financial services and product delivery.

Despite the drop in share prices of technology companies in developed countries, investors are still optimistic about the potential for profits with these companies in Latin America, said Vasconcellos.

Only 1.5% of the market value of Latin American companies is related to the technology sector, a share that reaches 20% in China and 52% in the US.