The Chicken and the Exit

Based on Osarumen Osamuy and Derin Adebayo article at Subtext

By Martin Aspillaga, Partner @ Salkantay

Venture Capital (“VC”) is a relatively new industry to the world. It goes back to the mid-20th Century, and has an even more recent history in Latin America. However, that does not mean that the principles behind VC are recent. For millennia, the space for risk taking entrepreneurs and “Adventure Capital” lay in the sea. In fact, the “law of the sea” was a set of rules that freed enterprising teams from the rigid structures of land based commerce and opened the game for experimentation and innovation. Venetian traders and North American whalers relied on capital allocated by Middlemen and relied on incentive structures very similar to those of the modern LP/GP relationship through a VC fund. Seafarers returning from the Indies or from a profitable whaling trip could expect a 20% “carry” of the load.

So despite its short history in the region, is there a way we can better chart the future of VC in Latam, getting some feedback from the long experience of adventurers and risk takers? Or are we venturing in truly uncharted territory? Venture Capital and entrepreneurship had two incredibly transforming years in 2019 and 2020 in Latam. 2019 was the “year of investment records”, when capital arrived in full swing to innovation hubs in Latin America, achieving in one year the total invested in the last five ($4.6B). 2020 was “the year when everything changed”, as Covid-19 moved Latin American consumers into the digital economy, achieving more penetration in a period of 10 weeks during the first wave than in the past decade.

Now the question is what these landmarks mean for Latam´s progression from a “Nascent Ecosystem”, beyond the “Hype” of explosive levels of investments and deals. The record high levels of investment and entrepreneurship are part of what needs to happen for our region to move forward towards a more “Mature” ecosystem that enjoys both high levels of investment AND a healthy level of exits that feed the Venture Capital industry and the system as a whole.

This “Chicken or the Exit” dilemma opens many questions. What will drive the next evolutionary jump in Latam? A rebound in record levels of investment? More M&A activity coming from the newly minted unicorns? Increasing involvement of Corporates? A steady surge in exits? The answer is all of the above and more. We believe that the missing link actually materialized in 2020, as entire tracks of the economy turned digital, opening huge opportunities in ecommerce, edtech, healthtech, fintech and business platforms. Like the school of whales quietly advancing at a distance at open view from the deck, or like the early morning view of distant Calicut, the digital surge in Latam´s economy in 2020 will be the source behind higher levels of investment, new unicorns, more M&A and, finally, more exits.