Welcome 2024

Year in Review at DILA Capital

“Every new beginning comes from other beginnings end,” Seneca.

Things begin. Things end. The end of one thing leads to the beginning of another. This is why December 31st is my favorite day of the year; while it is just like any other (days begin and days end), and it may seem arbitrary, this one has a special feeling to it because it is not only the end of a day, but the end of a year. It allows us to learn from the events of the past year and plan for the year ahead.

While I am a huge supporter of living in the present moment and never obsess over what has happened in the past or lose myself in visions of the future, I find it extremely important to look to the past in order to learn. The past is behind us and there is nothing we can do but analyze and reflect: it is an opportunity to turn whatever happened to our own benefit.

When we were writing this letter last year, this is what we expected of 2023: “. . . remain difficult, who knows when we will hit the bottom of the curve, surely to remain tough . . . we expect a more meritocratic ecosystem, with less capital from foreign investors . . . we will be looking for efficiency over growth and better unit economics. . .” However, we also expected there to be extraordinary opportunities because, “. . . problems still need to be solved, companies still need to innovate and venture capital is still very much needed for the development of our countries. . . The most influential companies of today all began as startups in need of capital.”

And while we were correct, we never expected 2023 to be as tough as it was. Looking back to 2023, if I could use one word, it would be “slow” and this is how I would summarize the VC landscape in Latin America:

• Nervous investors deploying less capital into fewer companies.
• Internal rounds were the norm versus open rounds, we heard of more round extensions than ever before.
• Startups focused on survival and capital efficiency.
• Many companies started looking for a path to profitability/breakeven to have the optionality to raise venture capital again or to not.
• Limited M&A and IPO activity.
• Despite tough conditions in the capital markets, Latin America, and particularly Mexico, had a good year with respect to sales and consumption.
• 2023 will be remembered as the year Artificial Intelligence became mainstream.

So, what did we learn and what are my takeaways?

• Back to basics: build great businesses that solve real pains for your customers, with sane unit economics.
• Invest in startups that are creating real value for their clients today. If you do this, the rest will come. Call it capital, debt, profitability . . . it will come to the businesses that are building real revenue and real profits, through offering customers great products and services.
• Growth vs Profitability: this is a discussion we had all year. And while I believe that profitability is extremely important and has to be achieved, we want to invest in companies that can scale, so growth is extremely important. If you can grow 50% a year for 10 years, your company will be enormous, but you must do it assuring that you can be profitable. We love companies that preserved cash while enabling growth. We need to look at growth through the eyes of an IRR perspective: what is the return on the invested capital? What is the return on the growth dollars we are spending? What is the payback of the customer acquisition, what is the lifetime value of your client?
• All capital comes at a cost: high interest rates affect every vertical in the capital markets and every stage of investing. In 2023, we expected interest rates to stay higher and for longer than the rest of the market did. . . . Let’s see what happens in the coming months.
• In complicated environments is where innovation and creativity pay off: innovation in the face of constraint.
• Cycles: The venture capital industry is closely tied to broader economic trends, and its dynamics are influenced by various factors during different phases of the economic cycle. In economic downturns, access to capital tightens, and risk aversion increases. Venture capital funding may decline as investors become more cautious and conservative in their investment decisions. Negative economic sentiment can result in heightened caution among investors. Venture capitalists may focus more on preserving capital and supporting existing portfolio companies rather than making new, riskier investments.

In conclusion, we must see the bigger picture and look beyond the noise and volatility. While the current economic downturn we live in 2022 and 2023 influenced funding availability, valuations, portfolio performance, investor sentiment, industry focus, and exit opportunities, we must remember we are long term investors, we need to navigate these dynamics and adapt our strategies based on the prevailing economic conditions.

2024 is here and I cant wait to see what it has in store. . .