Magma Partners Q4 2023 Investor Letter

February 22, 2024

February 23, 2021

We send quarterly investor letters to our LPs about what we're seeing in the Latin America startup market. We share edited versions with our portfolio. We’ve decided to share a further edited version publicly.


Magma LPs,

Hope you had a great end of the year and start of the new one! In this letter, we’ll cover:

The market seems to be warming up a bit, but still only the best companies can raise rounds at higher valuations than their previous round

  • In Q4 we’ve seen more “up rounds”, or investments where the new round is priced higher than the previous round
  • We expect more up rounds in 2024, but it’s still very hard to raise; only the best companies are getting up rounds
  • AI is the exception, the market is hot and there’s lots of froth
  • Early stage fundraising is still easier than later stage fundraising
  • Many pay to play rounds: Investors must invest in a new round or take massive dilution, convert to common or face other punitive measures for not participating; It’s happening at early stage too
  • The FED says it will likely cut rates 3 times in 2024, but the market is pricing in 2x more rate cuts, which would create headwinds if the expected cuts fail to materialize
  • There’s still lots of uncertainty in the macro environment, with commercial real estate, consumer debt, inflation and others indicators flashing yellow warning lights
  • We continue to advise founders to be more circumspect about this recovery and focus on unit economics, burn and solving a real problem efficiently

We’re still going through the slow motion reset from the ZIRP 2021/2022 highs; There’s likely at least 4-6 more quarters to go

  • Many companies that raised $10M+ in 2021/2022 successfully cut burn and focused on margins in 2023
  • We estimate 40-70% of these companies still have not come to market yet because they extended runway and gave themselves more time to grow into their 2021 valuation
  • Many still have 2-5 years of money left in the bank, or even reached break even, but will need to grow significantly to avoid a down or flat round when they go to market again
  • Some startups will raise in 2024, but others will push their reset out into 2025 and 2026
  • Some companies will likely never reach their 2021 valuations, even if they build a sustainable, profitable business
  • The private VC does not mark valuations to market each day like the public stock market, so there’s still many companies that haven’t repriced

60% of “ZIRPicorns” were minted by 4 funds, including Softbank and Tiger

  • According to research by Mark Suster, there are currently 1,400 private unicorns ($1B+ valuation) and an additional 343 VC-backed public unicorns
  • ~723, (40%) of current unicorns were minted in 2021!
  • 4 funds (Tiger, Softbank and 2 others) led the rounds that created 60% of the ~723 unicorns minted in the ZIRP-era, or 25% of all current unicorns!

Latin America got $4B of VC funding in 2023 compared to $15B+ at the peak

  • $4B is still 8x higher than when we got started in 2014, when Latin America got $500M
  • 2024 will likely be higher than $4B, but we won’t approach the peak anytime soon
  • There’s lots of cash on the sideline, but later stage investors have most of the power if startups don’t control their own destiny
  • Founders risk having to accept term sheets at much lower valuations and sometimes high liquidation preferences, additional warrants or options

The market seems to be warming up slowly, more rounds are happening, but we’re still going through the post-ZIRP reset

We didn’t see many up rounds in 2023, but we’ve started to see more in Q4 2023. Most early 2023 rounds were flat or down as founders cut burn and worked on unit economics. According to Carta, 45% of all Series A rounds were bridge rounds, the highest in recent history.

The startups doing well in this market are:

  • Software companies
  • High margin
  • Growing at a reasonable rate
  • Burning a reasonable amount relative to their size

But even those businesses are commanding much lower multiples than during ZIRP. Public market SaaS peaked at 19x average revenue multiples, and are now back to 7x, or their 2018 levels. The top public SaaS companies commanded 33x during ZIRP and are back to ~12x.

Public Market SaaS Valuations: EV/Revenue multiple

We estimate that a majority of Latin American companies that raised $10M+ have still not come to market. They’ve cut burn, extended runway, and are hoping to grow into their valuations.

Time to Close a VC Round in Latin America
Average no. of months since previous VC round, 2019-2023

Source: LAVCA. Data as of 31 December 2023

Note: Estimates based on known disclosed rounds. For example: Startups that raised a Series A round in 2021 closed the round 12.5 months after their previous disclosed financing, on average.

Many capital intensive, operations heavy businesses with bad unit economics have pivoted to software-only or asset-light models. Many of these businesses require full cap table recapitalization (recaps) led by an existing investor. Many, if not most, of these recaps have some form of pay to play, high liquidation preferences or other structures in place that are advantageous to new investors.

Some of these rounds are fair to founders and early investors, others are not. But in Latin America, unfortunately, the golden rule is: He who has the gold makes the rules. 

The slow reset may continue for another 4-6 quarters or longer

We originally shared Elad Gil’s Startup Decouplings and Reckoning a year ago, which predicted many companies would run out of cash in 2024 and 2025. We’re seeing his prediction in action, with a big jump in startup bankruptcies in 2023. According to Carta data, the number of startups that raised $10M+ and shut down went up 238% in 2023.

Many of the companies that raised $10M+ cut burn, extended runway and continued to grow, but have not come to market. We estimate ~50% will come to market in 2024, with the other half in 2025 and even 2026.

The companies that reset in 2022 and 2023 either were doing amazing and raised the rare  up-round, or were companies that didn’t react fast enough and needed to do down rounds, extensions or even shut down. Everyone else has been delaying as long as possible to grow into their valuation.

Some of these companies will eventually raise at higher valuations by improving unit economics and growing at a good clip. Others still need to figure out product market fit or expand to an additional country before raising a new round. Others likely never will grow into their ZIRP valuations, but might be great businesses if they can rework the cap table and liquidation preference stack. We expect this slow motion reset to continue in 2024 and drag into 2025.

60% of ZIRPicorns were minted by 4 firms, including Softbank and Tiger

Upfront Ventures managing partner Mark Suster recently shared some data on the ZIRP era unicorns (ZIRPicorns) on Jason Calacanis’ This Week in Startups podcast. 

There are 1,400 total unicorns in private markets, and another 343 in public markets. There were 723 new unicorns minted in 2021. Nearly half of all unicorns were created in 2021 during peak ZIRP.

Of those 723 minted in 2021, 60%, or ~433, were created by rounds led by only 4 firms. Two of them were Softbank and Tiger. Some of these unicorns were pre-product market fit and the round never made sense. Other unicorns were real businesses, but were able to raise Series C money with Series A traction.

We’re already seeing some of the carnage from the pre-product market fit or nonsense unit economics businesses that raised millions. According to the NY Times:

WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, gathered $852 million. Convoy, a freight start-up, raised $900 million. And Veev, a home construction start-up, amassed $647 million. All declared for bankruptcy in Q4.

In August, Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. In October, Zeus Living, a real estate start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, a scooter company that raised $776 million, was delisted from the New York Stock Exchange because of its low stock price. 

Its $7 million market capitalization is less than the value of the $22 million Miami mansion that its founder bought in 2021.

Many estimate at least 50% of the 1,400 private unicorns will never reach a $1B valuation again.

In Latin America, some startups that shot up to $200M-$1B valuations will never work. A few have already shut down. But many more raised Series C with Series A traction. They are real businesses, but are very overvalued. 

Some of these real businesses will grow into their valuations. Others will not be able to and will likely need to fix their capital stacks or sell the business. One of Latin America VCs biggest stories over the next 3 years will be which startups grow into their valuations and which do not.

Latin America VC investment is down ~73% from the 2021 peak, but still up 8x since 2014

According to LAVCA, Latin American VC investment was down 73% from the 2021 peak of $15B to $4B in 2023. The huge drop is fueled by a combination of tourist capital leaving Latin America and some of the biggest, best companies waiting to raise money until 2024 and 2025. When we zoom out, $4B is still up 8x from the $500M deployed in Latin America in 2014 when we started investing Magma 1 and 2x more than 2018, when we started investing Magma 2.

Annual VC Investment in Latin America, 2016-2023

Source: LAVCA. Data as of 31 December 2023.

There’s plenty of capital in Latin America for companies that are growing, solving real problems and burning a reasonable amount for their traction and stage. Our guess is that VC investment will go up some in 2024 as some of the Series B and later companies come to market, but we likely won’t approach the 2021 peak anytime soon.

The reset is a long term good thing for the market. Hopefully we can find an equilibrium where the best ideas, companies and founders are getting funded, but the ZIRPy frothiness that led to malinvestment in overvalued tech startups stops and more capital flows to the best companies.

According to famed investor Howard Marks, the ZIRP policies that led to tech’s bubble are the same forces that led to investors oversubscribing 100 year Argentine bonds in 2017: When rates are low, opportunity cost is low. Froth creeps in. Investors fund things that sound plausible even if they are extremely unlikely to turn out well. Read more about how easy money caused the bubble in Howard Marks’ essay.

While it seems like the booming stock market is pricing in inflation staying low, the wars in Ukraine and the Middle East not escalating, and the FED cutting rates multiple times in 2024, we still think there’s more risk in the system than the market seems to think. 

We are not smarter than the market, but we think caution is warranted. We are advising founders the same as the last few quarters: control your own destiny, keep growing, but don’t push to grow faster if it means bad unit economics. 

If you do have good unit economics and can take market share without sacrificing margins, try to take the market share. Try to extend runway into 2025, and be in a position where you can get runway to 2026, or even profitability, if you can’t raise on the terms you want.

As we wrote in the Q3 investor letter, innovation doesn’t stop. Great startups keep growing, no matter the market conditions. The pace of innovation led by seemingly weekly AI advances is likely a game changer. We’ll be active in the market trying to find these opportunities, while helping our current portfolio navigate these choppy times.


Nathan, Pedro, Mak, Francisco and the Magma team