2023 will be a year of many challenges for startups, says District CEO
“We will have a very challenging year for startups.” For Gustavo Gieru, CEO of District, a platform that offers solutions for new companies, four points connected with governments around the world, but in particular with the Brazilian one, will be decisive for good winds to blow in favor of companies and new investments. to restart stronger: how the fiscal issue, inflation and falling interest rates will be handled, in addition to political uncertainties.
“These themes will dictate the market’s readiness to recover. But it doesn’t look like the recovery will happen soon. We believe that the year 2023 will have great challenges and companies will adjust their operations to achieve the result”, explained the executive in a conversation with Mobile Time this Monday, 6.
Last week, a survey by Inside Venture Capital, the District’s innovation hub, noted an 84% drop in startup investment in January, compared to the same month in 2021. In total, US$96 million were pooled, with one company, Órigo, receiving half of that amount, or $45.5 million.
It’s worth remembering that the first quarter of 2022 was positive, with startups raising a total of $2.04 billion in the period, an increase of 4%. However, in the month of April, there was a 5% decrease in contributions compared to the same month of 2021. According to the District’s assessment, contributions should increase, but at a lower rate, which has happened throughout the year.
According to Gierun, at the moment there is a reduction in investments in the early stages, pre-seed and seed. “The startup investment buzz has died down. There are fewer angel investors, many of the funds are conserving their capital to support their investors. The decrease is natural”, he assesses.
Uncertainties lead investors to choose more mature companies. “Startups at this initial stage are less able to prove their financial viability. Investors will look for good entrepreneurs, with more experience, focused on the reality of the market, with high execution capacity”, he explains. “The momentum and the business environment calibrates the constraints – as the market improves and companies start to grow again, they start to reduce investment constraints,” he adds.
The significant decrease in investments in startups is directly related to the political and economic scenarios, not only in Brazil, but also in the world of the last year.
Governments lower interest rates to stimulate the economy. They injected liquidity into the markets, meaning there was plenty of money and it was worthwhile for investors to look for higher risk and higher return asset classes to balance their portfolios.
Over time, inflation increased worldwide. And countries coming from negative inflation and negative interest rates started to suffer from inflation. “Brazil was one of the first countries to react to this scenario, raising interest rates at the beginning of last year, and throughout 2022, all central banks, mainly in the United States and Europe, also made the same move. And along with available capital and low interest, we had the war in Europe. [entre Ucrânia e Rússia]which greatly affected the price and availability of food and energy, putting pressure on inflation,” Gierun summarized.
Until May of last year, the market was “bumpy”, as the CEO of the District defined it. And since rounds take time to negotiate and announce, it is very likely that what was seen in the first two quarters of 2022 was a holdover from the market heating up in 2021. “In the second half of 2022, there there was a very big slowdown in investments. Especially in late-stage rounds, i.e. for companies that are more mature”, explains Gierun.
“Funds operating in the last stage in Brazil were quickly withdrawn. And one of the biggest examples of this was Softbank. Softbank was one of the venture capital milestones for innovation and entrepreneurship in Brazil and, in the same way that it encouraged and watered this market here, it retreated given the losses it suffered worldwide. Brazil was orphaned by late state investments,” he explains.
The advice presented by the executive to startups and their entrepreneurs is that they look at the financial and operational responsibility of the company, especially for those who burn money, with the validation of an unfinished product and for those who are not prepared for this market new. . They will suffer more. “Adaptations are necessary and you have many ways to seek capital and sustainability for your company, focusing on three pillars: income, cost or financing. Income growth is always the best capital. Those who do not have the conditions, try to focus on cost or investment. In terms of costs, companies are already moving [vide as demissões que estão acontecendo nas companhias de TI]. And, in the case of investments, we still have an interesting amount of capital available. But it is available to those companies that have done their homework. There is fund capital available, there is venture debt, which is always an option, and the banks themselves. But it is important for the entrepreneur to understand the moment and try to adapt quickly”, he says.
Abroad, with impacts in Brazil as well, big tech started laying off tens of thousands of people. “There is a clear capital constraint, entrepreneurs and funds favored growth over profitability. But now, given the limitation of capital, the world is preferring profitability to the detriment of growth”, explains the District CEO.
According to Gierun, entrepreneurs who continue to grow at attractive rates, but profitably, with financial and operational sustainability, stand out here. “This is what the funds are looking for, that is, companies that have a certain maturity in terms of the product and that are able to safely demonstrate their numbers and the financial health of the operation,” he summarizes.
Among the verticals that the District CEO believes will stand out this year are fintechs – whose investment history is strong, in addition to more development in regulation and customized products. Healthtechs also need to gain more space. “Health was already seeing an increase in investment, but Brazil has a chronic health problem and it’s a big market where technology can help in several ways,” he sums up.