The last two years have been the best time to have an idea for a digital business as a young entrepreneur. The Monetary Authority in the United States pumped $7 trillion into the financial system to stem the economic impact of the pandemic, and interest rates were at zero, creating a sense of invincibility in markets. Last year, twelve Latin American companies became “unicorns,” an honor reserved for those who raise more than $1,000 million in investments, setting a new record for this lower-middle-income region. In addition, there were hundreds of other companies that raised large amounts of resources from Wall Street but did not achieve unicorn status.
But what goes up must come down and today the party is over. Such a capital injection by the US Federal Reserve led to high inflation; the Fed is now reversing course to curb the rise in prices and the market has reacted aggressively. On Friday morning, the financial media officially declared the start of a downtrend known as a bear market, which refers to a fall in major stock indexes of at least 20% from their highs. Concerns about inflation, rising interest rates, ongoing supply chain disruptions due to Covid-19 and the war in Ukraine are wreaking havoc on the global economy and its backbone, the global financial system.
Investors who once felt invincible are now seeing losses and red numbers. In the first three months of the year, new business funding fell 60% from its peak last year when it reached $7.3 billion in the second quarter, according to Latin American data from analyst firm CBInsights. Also in the first quarter of this year, the number of new unicorns worldwide reached its lowest level in five quarters. In addition, not a single Latin American company made it into the first bid to be listed on the international market.
“The market is best viewed as a pendulum swinging between stories and fundamentals,” says Scott Galloway, a professor at New York University (NYU) Business School and one of the thought leaders on some of the most influential technology and finance in the world . “By stories I mean the narratives, visions and feelings that drive the company forward. By fundamentals, I mean how the company makes money. In recent years we have been in the phase of history and this is particularly true in Latin America.”
The region has become a “unicorn production line,” Galloway says, driving global unicorn numbers to record levels. However, many of these companies will have no choice but to severely curtail their operations as the pendulum swings back, and that already appears to be happening. Some examples include digital companies like Netflix, which had massive layoffs this week, and even smaller ones, like Brazil’s QuintoAndar and Loft Brasil Tecnologia, each laying off more than 100 employees in the last month.
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“The pain that’s seen in the public markets, particularly in the more narrative stocks, eventually trickles down to the private markets,” Galloway says. “Many of these young entrepreneurs built their careers in a bull market and have never heard of a bear market. But that should change. Valuations will fall, capital won’t be as cheap and early-stage investors won’t feel as smart as they did a year ago.”
criticism and dangers
The timing of a bear market is compounded by the difficulties that come with sudden, unbridled growth. Mexico’s Kavak, a digital platform for buying and selling used cars that operates not only in its country of origin but also in Argentina and Brazil, has grown from 300 employees in 2020 to 8,500 today after becoming a unicorn. The startup, which operates through a mobile application, is facing an image crisis after complaints from a large number of users on social networks about poor service went viral.
“Torture from beginning to end,” reported one user on April 1 on Twitter in a thread describing her bad experience, which went viral and thousands of users joined the complaint with their own experiences. The noise was so great that Kavak General Manager Alejandro Guerra was forced to react. “We’re not perfect, we make mistakes, technology fails,” Guerra told a conference this week. “We’re fully aware of what’s happening on social media,” he admitted.
For many in the countries of this region, such digital startups, which have grown into huge structures, have been a disappointment. Despite raising billions in resources, their business model continues to exploit the low wages and precarity in which millions of Latin Americans live. A report released in March by NGOs Oxfam Mexico and the Institute for Studies on Inequality (Indesig) found that the median earnings of a delivery driver from platforms like Uber, DiDi and the Colombian unicorn Rappi is 2,085 pesos ($104) per person, week . By contrast, say the economists who are the report’s authors, companies are reporting millions of dollars in revenue.
These are “the shadows of an industry and business model that is here to stay,” said Alexandra Haas, director of Oxfam Mexico. “It is therefore extremely important to make this situation visible and to improve the working model of the platforms, but also the working system and access to rights in our country. Businesses, public authorities and society in general must promote a universal social protection agenda that, on the one hand, makes it possible to maintain the labor flexibility desired by delivery men and women and, on the other hand, guarantees indiscriminate rights,” he stressed.
And here lies the great challenge for Latin America, says Galloway. “Big tech has generated tremendous wealth in the US, for which we should be grateful. But in the last decade we have allowed big tech to invade our nation and Latin America should learn from this as these tech companies expand,” the scholar said. “Our biggest mistake has been chronic underinvestment in our regulators, allowing private capital to emerge as shadow government. This arose out of a major cultural issue, specifically our idolization of innovators. We equate wealth with virtue and do not hold the innovative class or their companies to the same standards as old economy companies (or the general populace).”
“The way forward in high-growth nations is to balance technological advances with respect for the rules and arbiters of business, i.e., regulation. Without regulation, monopolies emerge, destroying competition and downward progression. The state of American democracy in the digital age should be a red flag for emerging markets around the world,” Galloway said.