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entrepreneurial momentum
access to capital
VC offers unique opportunities for entrepreneurs, especially those looking to innovate and grow rapidly. VC saw unprecedented growth, rising from about $2 billion in 2018 to $15.9 billion in 2021, but fell again to $7.8 billion in 2022, and another $3 billion in 2023. It has fallen to less than a dollar. Beyond financial support, VC firms provide valuable mentorship, strategic and operational support. , access to networks and experts around the world, business visibility. Venture capital leadership has provided the basic structure for new and innovative ways to fund entrepreneurs, including tools like impact investing and blended finance. The international nature of VC investments also facilitates cross-border collaboration, especially as VC-funded companies tend to expand regionally.
Successful entrepreneurs are known for creating synergy, a virtuous cycle of entrepreneurial investment and risk-taking, with innovative products and services that take advantage of the dynamics created by the work of other entrepreneurs. It can destroy traditional industries. For example, Mexico City-based e-commerce platform Linio ushered in the country’s rapidly growing e-commerce industry in the early 2010s, as the population rapidly adopted digital technology. Many of the company’s founders and former executives, including Carlos García Ottati, the founder of Mexico’s first unicorn, Kabak, went on to found 66 more companies, mostly in the e-commerce space. In Colombia, Lappi tells a similar story. More than 110 of his companies have been founded by alumni from a wide range of industries. In total, these companies have raised over $2.1 billion in VC funding and employ over 14,000 employees.
The level of VC investment in Colombia is skyrocketing. Colombian tech startups received more than $1.7 billion in VC funding in 2021, up from less than $100 million in 2017. Several governments in the region play an important role in encouraging entrepreneurship, establishing institutions that provide technical and financial support to entrepreneurs. Start-Up-Chile is an example of such an initiative. Launched in 2010, the project stands as a regional and global example of how government initiatives can advance entrepreneurial ecosystems. To take a partial example of Chile, in 2012 the Colombian government launched INNpulsa Colombia, a version of the National Entrepreneurship and Innovation Agency. Additionally, these two countries, along with Argentina, Brazil, Chile, Mexico, Panama, Peru, and Uruguay, have implemented digital development strategies such as “developing broadband infrastructure, promoting digital enterprises, and encouraging large and small businesses.” We have adopted a law to promote this. In addition to implementing digital technologies, it is also important to promote general IT skills and competencies. ”
Financing in an uncertain economy
VC access to capital has been on the decline since its peak in 2021. Late-stage investment deals drove much of the early, unprecedented growth, reaching more than $9.4 billion. This compares to his first and second quarters of 2023, when late-stage investments amounted to just $300 million. Comparing 2021, 2022, and 2023, investments generally shifted from late-stage funding to early-stage startups. In 2021, late-stage investments accounted for the majority of venture capital for LAC, but 2023 saw a notable change in the investment environment. Currently, early-stage investing ranks first, followed by seed, venture debt, and finally late-stage investing. stage. This change certainly reflects the depletion of capital around the world and investors becoming more conservative given the current economy. However, continued investment in seed, early stage and venture capital shows that investors are still interested in the region’s growth and potential, but at the same time their investment behavior is It also shows that it reflects the socio-economic realities of the world.
As a result, 39% of responding companies reported not raising capital in 2023 and instead focused on “restructuring internally and building lean teams,” according to the 2023 LAVCA Startup Founders Survey did. Additionally, startups are working to build more geographically dispersed teams in 2023 compared to 2018, and financially mature companies are likely to hire full-time employees outside of LAC. It will be expensive. However, given the rapidly changing nature of the venture capital landscape, it is difficult to make broad assumptions that apply to the entire startup ecosystem.
foreign direct investment
Following the commodities boom of the late 2000s and early 2010s, major private equity firms such as Carlyle of Georgia, TPG Capital, KKR, and Ajax Partners opened offices in LAC. However, a combination of political instability, protectionist policies, and slowing growth levels have made foreign investment in LAC risky, which has been significantly exacerbated by the impact of the COVID-19 pandemic. FDI levels have fallen from a peak of more than $200 billion in 2013 to around $100 billion in 2020.
However, in 2022, the post-COVID-19 economic recovery accelerated, with FDI levels exceeding $200 billion for the first time since 2013. Brazil received 41% of total FDI, followed by Mexico with 17%. FDI flows increased by 55.2 percent from 2021 to 2022, due to a significant increase in investor interest, particularly in the region’s oil and gas, mining and renewable energy sectors. The 14 megaprojects with total FDI exceeding $1 billion in these sectors accounted for 41% of total investment in 2022. Additionally, 80% of total LAC investment in energy projects announced went to the top 170 largest projects.
In terms of FDI investment by sector, services had the lowest relative growth rate (35%), while manufacturing increased by 47% compared to 2021 but remained 50% lower than its peak in 2013. did. The largest share of investment was in financial services, electricity, natural gas and water, information and communications, and transport-related services. In 2022 he natural resources FDI in LAC increased by his 79% and Brazil’s oil and gas sector grew significantly. Colombia’s FDI into the natural resource extraction sector increased by 228% in 2022, while Mexico’s FDI into the sector fell after more than doubling in 2021.
Investment in venture capital
VC investments in LAC followed a markedly different trajectory compared to traditional FDI capital flows. According to LAVCA, while FDI levels stagnated and declined from 2016 to 2021, the number of VC deals jumped from 197 to 1,095 in the same year. Additionally, since 2015, his international investments in LAC startups from various international companies have more than doubled. Additionally, approximately 75% of VC investments in LAC are directed to the information technology and financial services sectors, indicating the region’s large untapped potential for high-level digital connectivity. LAC’s VC investments in fintech services accounted for 43% of total technology VC investments in 2022.
tax system
In the LAC, where informal employment is a significant problem, businesses need clear tax policies and incentives to legally hire employees and integrate them into social security systems. This is especially important in the early stages of growth, when certainty is important for both entrepreneurs and employees. Predictable tax policies are essential for businesses to plan and budget effectively. Without a predictable tax system or tax court, companies would be forced to allocate resources to respond to unforeseen changes, which could lead to reduced productivity and profitability, as well as increased uncertainty. there is. Additionally, a predictable tax system is essential to attracting foreign investment and plays a key role in the growth and development of new businesses. The tax systems of some LAC countries are particularly complex due to poorly planned federal systems and interactions with provinces and provinces. Useful tax policy regulations must address and incorporate both local and federal taxes. Businesses can find calculating, reporting, and paying taxes a daunting task when dealing with state and local regulations. This is further exacerbated by the additional responsibility of managing and administering workers’ complex social security contributions.
Navigating the future direction
Entrepreneurship is on the rise in LAC. Over the past five years, startups in the region have attracted record investment from abroad, creating more efficient markets and disrupting traditional industries with innovative products and services that support the growth of high-value industries. Entrepreneurs have also faced the region’s long-standing challenges, including a large informal economy, overbearing bureaucracy, and the dominance of industries traditionally resistant to change. Governments that have worked to support the growth of the entrepreneurial sector have benefited from a virtuous cycle of investment and innovation, creating a resilient economy that is less vulnerable to commodity-driven shocks. To achieve this, the public and private sectors would be best served by learning from the following recommendations.
Fostering a culture of innovation and entrepreneurship. The job market continues to undergo significant changes due to ongoing technological changes. As a result, more people are showing interest in starting their own businesses. With easier access to this possibility, the motivation to become self-employed and enjoy greater flexibility is rapidly increasing. The COVID-19 pandemic has also accelerated technology adoption by businesses. However, there are still some challenges that must be overcome, such as accessing talent and funding, to fully benefit from the opportunities presented by technology. While COVID-19 has highlighted the need to digitize processes, a lack of information about financing and basic corporate finance education remains an issue.
A clear, transparent and simpler tax system. Recognizing the role of a predictable tax system in attracting foreign investment is critical to a country’s growth and development. Simplifying tax calculation, reporting, and payment is essential to reducing the administrative burden for small businesses. Rationalization and coordination must occur at all levels of government, especially in countries with federal structures like Brazil and Mexico. Finally, providing workers with support and guidance in managing complex social security contributions contributes to a more favorable business environment.
Reconsider your actors. The VC industry and its startups need to develop in this region, and industry-led initiatives are well suited to do this. VC funds are in a win-win position if they develop businesses that can grow and nurture the next unicorns. Acceleration, seed and initial investments, growth investments, and efforts focused on social and environmental drivers will expand our impact in the region while creating positive social, economic and environmental impacts. It has great potential.
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