Updates
Magma Summit 2024 Wrap-Up: Lima, Peru
We hosted Magma founders, LPs, and partners in Lima, Peru, for Magma Summit 2024. Here's a rundown of all the activities from each day at Magma Summit 2024.
Magma LPs,
2024 was a year of adjustments, finding a floor and starting to see the VC ecosystem rebounding off the post-bubble bottom. It was an attractive year to be deploying early stage capital, as valuations were mostly still depressed and AI created new, exciting opportunities.
The first half of the year was slow. All but the best companies struggled to raise money. Towards the end of the year, the slow motion car crash that we first talked about in our Q2 2023 letter seemed like it might be getting close to the end.
It’s still not clear if the slow motion crash will end Michael Bay Hollywood-style, in a final explosion-filled crescendo of value incineration, or simply peter out with cars hitting the guardrails, battered but still on the road, ready to go again. Most likely it will be a bit of both.
The AI boom rejuvenated parts of the startup ecosystem, but some AI companies might be reaching the bubbly highs of 2021, raising rounds at 100x revenue, or getting billion dollar valuations without a product.
The non-AI rest of the ecosystem isn’t back yet, but is starting to show signs of life. Global funds started to come back to Latin America and more companies raised rounds. But recent VC fund returns continue to be depressed compared to previous vintages, with AngelList data showing that the J Curve is back, (Q2 2024 letter).
2025 is likely to be a pivotal year for Latin American tech. Are the companies that haven’t raised since 2021 actually good companies? Or are they overvalued, inefficient and didn’t find product market fit? Did startups that raised down rounds after the bubble learn their lesson and build more capital efficient companies? Or are they in for more pain in 2025?
Will these companies turn into durable, long lasting, scalable, high multiple businesses and bring recent VC vintages closer to historical VC returns? Or are even these valuations filled with companies that will continue to destroy value? Or even worse, companies that are already failing, but just haven’t been marked down yet? We will likely find out in 2025.
AngelList and Pitchbook updated their data at the end of the year, which shows even 2017 funds struggling for DPI and TVPIs are down for 2021 and later vintages.
According to Crunchbase, 2024 Latin American VC investment rose 27%, reaching $4.2B. Although down from the nearly $20B peak in 2021, it’s still up nearly 9x from when we first got started in 2014 and good companies are finding the money they need to grow.
According to Carta, down rounds are still 20% or more of new rounds, a high since 2019. Nearly 40% of Seed and Series As were bridge rounds, but the real % is likely higher, as many struggling startups fire Carta and switch to alternatives that are up to 90% cheaper.
Even though there are more down rounds and bridge rounds, some valuations are starting to go up again. Seed valuations grew the most, hitting an all time high of ~$15M, which fits with what we’re seeing on the ground. While Carta reports that pre-seed valuations have also recovered, anecdotally, the recovery doesn’t seem to have reached Latin America yet.
It’s taking longer for companies to graduate to their next round. Many 2021/2022 companies will try to raise in 2025 as the market starts to unthaw. Some cut burn and grew while others used venture debt to extend runway, which boomed in 2024, equaling 2022 and 2023 combined.
Some companies are coming to market because they are running out of money in 2025. Others will come to market as conditions improve so that they can grow faster, even though they have plenty of money in the bank thanks to growth and cutting spending.
Right as many Latin American startups are going to market, there’s mounting uncertainty about US and Latin American relations. Some US VCs evaluating Magma companies paused investment processes until after the election, and extended their pause through Trump’s first 100 days to see how things shake out.
Conventional wisdom has been to take Trump seriously, but not literally. Whether you agree with Trump (and Elon), it seems like there’s more risk in the system, especially for Latin America, with a 2nd Trump administration that the market is pricing in.
Trump ran on tariffs, stating in October that "tariffs are the most beautiful word in the dictionary.” Tariffs would increase inflation in both markets short term. Long term, tariff threats will push Latin America to diversify its trade base away from the US and toward China, India and Europe. Some diversification is good for Latin America and presents investment opportunities for Magma, but the question is whether Latin America can diversify fast enough to avoid pain.
“Sounds about right” was Elon’s response to deep spending cuts, deportations, and tariffs that might “short term crash the economy, but lead to a stronger country going forward.” Deportations might add to inflation in the US, but also could reduce remittances to Latin America, averaging ~8% of LatAm GDP, and range from 4% in Mexico to 26% in Nicaragua.
Republicans seem to want to bomb or even invade Mexico to go after narcos, which sounds interesting in theory, but in practice, will cause collateral damage, unintended consequences, and add uncertainty to the investment environment. Mexico tried a militarized drug war during Felipe Calderon’s 2006-2012 presidency, which resulted in somewhere between 40k and 300k deaths, many of them civilians caught in the crossfire, and was not great for investments.
We think that these potential shocks likely won’t have a huge effect on early stage Latin American VC investing, but might affect later stage companies. Latin Americans need to live life: eat, buy things, save money, take out loans, and go on vacation. They’ll do all of those things with or without good local or foreign governments. Founders solving a big Latin American problem will get paid for it. Investors coming in early will too.
Founders should continue executing, but remain vigilant about burn and efficiency so that even with headwinds, they can either control their own destiny, or raise a round on their own terms.
When everyone is zigging, you should at least examine the case for zagging. Right now, it seems like the consensus is swinging toward optimism, which makes us think we should at least examine the downside possibility. Here’s 5 consensus opinions we’re watching in 2025.
After Trump won the US election, we heard variations of “it will be great for my investments” from US and Latin American investors. Most people seem confident that Trump’s win will lead to a market boom and lower interest rates. We hope it happens. But it seems like people are taking it for granted when there are potential disruptions via tariffs, inflation, and uncertainty that could be a strong headwind to Latin American startups raising significant US VC rounds.
Most people thought that interest rates would come down quickly. We wrote in our 2022 and 2023 letters that “it's likely we’re in a larger shift where interest rates are generally at this level or higher and there’s lower venture capital availability as the 2020-2021 vintages work their way through the system. This period might last longer than founders think.”
The market seems to think rate cuts are coming in 2025 and public market stock prices seem to be pricing them in. Any inflation shocks could mean that current interest rate levels are the new normal, or cuts come much slower, which would be a big drag on the startup ecosystem.
The Magnificent Seven are now 31% of S&P 500 market cap, and responsible for nearly 66% of all S&P gains in 2024. The Mag 7 has boomed while much of the rest of stocks haven’t done very well. Most people assume Mag 7 outperformance will continue. It might. These are generational companies that are executing at extremely high levels and seem to be winning AI.
But an opposing view is that we’re close to peak concentration and that these 7 are highly correlated and reliant on the current AI narrative. We might see a much bigger pullback in stocks than people expect if any of these companies stumble, AI slows down, or AI’s benefits don’t accrue to the biggest companies, which would in turn affect startups raising VC. Kevin Muir goes deeper on this thesis on the Odd Lots podcast.
Investors are paying just about any price for AI companies both in public and private markets, which according to Oak Tree’s Howard Marks is one of the warning signs of a potential bubble.
AI is already changing the world, and it’s likely to continue to accelerate. 35% of global VC dollars and 50% of North American investment went into AI in 2024. We are still in the early innings. Things can change quickly. Entire companies can become obsolete with new model announcements. It’s still not clear which AI companies will build durable moats. While AI is clearly a game changer, there’s lots of bubbly behavior.
We’re watching AI adoption in Latin America closely. AI will drive big efficiency and productivity gains in Latin America and potentially be the catalyst for quick catchup with more developed markets. At the same time, we think that investment entry point likely still matters.
If the AI bull case happens, AI will be better in 12 months, and exponentially better by 2030. The market seems all in on AI, but may be underestimating what disruption really looks like.
Wait But Why’s Tim Urban writes that humans estimate the rate of change by looking at the past. They look backwards on the exponential curve and estimate that the future will look the same. But if they turn around, they’ll find themselves staring at the vertical part of the curve. Nathan wrote about the half life of skills back in 2016, and it's only getting faster. Skills you learn can become obsolete in months now, rather than years, decades or even centuries.
Some think we might be getting toward the vertical part of the curve with breakthroughs in reasoning, but nobody really knows. Previously, people talked about small teams running high revenue companies in theory, but 2024 saw some of the first examples.
If AI fulfills its promise, even without reaching AGI, it could not only usher in huge productivity gains, but also lead to massive job losses. The 2nd and 3rd order consequences of fast societal change and the reactions to it are not being priced into the market.
People know that there could be big disruption, but what would it look like? What business models might be obsolete, or lose their moats? What happens to people who lose their jobs because AI is better?
The smartest people seem to, on one hand, acknowledge that there could be big disruptions, but hand wave away the consequences. Governments and big companies are not ready. If AI advances as fast as some people think, people are underestimating how destabilizing it could be, both to societies, but also to investment strategies.
We are bullish on Latin American tech. We think that the AI-enabled companies of today are building the durable, big Latin American winners of tomorrow. It’s an exciting time to be investing and operating in Latin America, with attractive entry points and many problems to solve. We’re motivated to find the best Latin American companies as early as possible.
At the same time, our advice is to stay lean, try to use AI as much as possible to automate and streamline operations, and come to market to test the waters for fundraising sooner rather than later in case any of the consensus views turns out to be wrong.
Strike while the iron is warming up.
Best,
Nathan, Pedro, Mak, Francisco and the Magma team
