Everyone knows that valuations for early-stage technology start-ups have been increasing over the last few years. Basically what has happened in the US is happening in Latin America. Of course a big cause is the fact that money is yielding 0% at banks, so it is going to other assets classes such as real estate, private equity, and venture capital. But on top of that root cause, there is also a revival to everything related to technology and entrepreneurship much like what happened in the late 90’s.
The other side of the coin of pricey entry valuations is of course exit valuations. If they are high enough to justify the risks of entering at high valuations, everybody is happy. The problem is that from what I am seeing right know in Latin America the exit valuations are not looking very good. I am seeing on almost every country, and while there are a few outliers, the average exit is not very encouraging for VC investing in the region.
Everyone likes to think they can sell their Latin American start-up for at least $10 million, but it is not that easy. And when seed and Series A investors accept valuations in the range of $1-5 million, the return starts to get crappy for VC standards. To add insult to injury, the exits I am seeing are usually a low amount in cash, and the rest in equity (of another private and illiquid company usually) or earn outs (where the investor has no control on the results). Different is the picture for entrepreneurs, which can make a few bucks despite the fact the exit is not so glamorous and also negotiate a good compensation package with the acquirer.
So what do we do? Well, not much. If you are an investor, take into account that agreeing on valuations above $2 million will put you on a dangerous place from a return standpoint. You can find good deals below that valuation? Maybe you need to wait until the market corrects. It always corrects, trust me. If you are an entrepreneur, enjoy the bubble while it lasts. My only word of advice is that if you raise money at a high valuation and the exit is not a good one, chances are that you will need to find new investors (or yourself) for your next venture. As any relationship in life, it should be win-win. And it is not happening like that.