Most Latin American SaaS startups are not built to generate venture capital returns

October 11, 2023

June 7, 2022

We love SaaS. If you want to learn more about what we like to invest in, check out our article How Magma Thinks about Latin American SaaS and the opportunities and Headwinds for Latin American SaaS.

Most Latin American SaaS founders are almost on autopilot: start building, raise a round, get some clients, raise more money, and get on the VC money treadmill.

Unfortunately for founders and for the VC model that backs them, most Latin American SaaS companies, even if they are amazing businesses, do not generate the VC returns that funds need to make money for our LPs. 

Historically, Latin American SaaS multiples are much lower than in the US. It’s also harder to get enough revenue scale with only Latin American clients. Most SaaS companies need to be able to get to at least $10-15M of ARR (Annual Recurring Revenue) with high margins to be venture backable. Hitting $10M+ high margin ARR is really hard anywhere, but it's even harder in Latin America.

These Latin American headwinds don’t mean that these SaaS companies are bad businesses, on the contrary, SaaS companies that get to $1-3M of ARR can be amazing businesses that change people’s lives, but probably won’t fit VC’s model where we need to get 10-20x returns at the earliest stage in order to drive returns for our LPs.

Founders hoping to raise VC for a SaaS business need to do the math from the VC’s side of the table. If you’re asking for a $15M valuation at Seed, it tells a VC that you’re expecting to be able to get a $150M-$300M exit at the very least. But those exit valuations don’t account for dilution. Most companies dilute 40% or more before an exit, which takes the exit valuation to somewhere in the $300M-500M range at exit. We love to back founders trying to build massive SaaS businesses, but it’s extremely hard. It may not be the path you want to be on as a founder.

We like investing in SaaS companies, but very few make the cut for early stage VC returns mostly because of market dynamics. We’re always happy to meet SaaS founders to talk about their companies, whether they are VC backable or not. 

We strongly believe there needs to be more funding options that work for SaaS founders that might build really profitable $3-7M ARR businesses, but that likely won’t deliver VC returns without a different investment structure. 

We’re inspired by initiatives like, Tiny and more who are building out this infrastructure in the US and hope we can work with people doing the same in Latin America. 

We understand that not all Latin American SaaS models are a fit for VC funding and might not drive the type of returns we seek for our LPs. Still, we believe many of these SaaS companies can reach amazing results by solving real problems. If you want to learn more about the opportunities and headwinds we see for Latin American SaaS, whether they’re VC-backable or not, or the types of companies we’d like to invest in, please read more in the following articles: How Magma Partners Thinks about SaaS in Latin America and The Opportunities and Headwinds for Latin American SaaS Companies.

If you are a SaaS founder in Latin America or considering starting a new SaaS venture, whether you fit our funding model or not, we're interested in talking with you. We are always looking to connect with amazing founders in Latin America. 

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