The dream of many entrepreneurs in Latin America is to conquer the market, and while they’re working at it, secure enough venture capital funding to help them along the way.
The need to raise funds for many startups is understandable if we take into account that one of the main reasons why startups fail in their first years is precisely the lack of funding to scale the business, while, in contrast, well-executed rounds of funding at the beginning can help determine the success of a company.
VCs are key to the entrepreneurship ecosystem, which relies heavily on venture capital to give emerging startups and promising projects a chance to consolidate their products or services in the market, develop new ideas and, and if necessary, pivot into a more valuable company.
However, many entrepreneurs make the mistake of judging their company’s potential solely on the amount of capital it has raised, which in some cases even leads to founders seeking investment rounds without a clear plan. And a bad investor — or even one who doesn’t understand the path you are trying take — could be detrimental.
OpenAI and the other side of large investment rounds
Often times, the more venture capital a startup raises, the more complex it becomes to keep the original mission afloat.
“When a startup receives large sums of capital, it can feel pressured to focus on growth at all costs, which can divert attention away from building a solid and sustainable business model,” says Santiago Rojas Montoya, Managing Director of Cube Ventures. “In addition, these rounds can affect the structure of the company, with significant dilution for the founders and increased influence of investors in decision making.”
The case of OpenAI has recently attracted attention. The artificial intelligence giant was born in 2015 as a non-profit organization with the mission of ensuring that artificial intelligence is developed safely and with a positive human impact, something that, at the time, would only be possible “without being constrained by the need to generate a financial return.”
But starting in 2019, under the leadership of Sam Altman, the company’s mission began to change to the point of creating a for-profit arm that to date has allowed it to reach a valuation of $157 billion with investment from companies such as Microsoft, Nvidia, SoftBank, Khosla Ventures, and others.
While the funding is certainly justified to undertake the immense tasks required to develop cutting-edge AI, OpenAI is now moving towards a controversial move in which it would operate as a for-profit organization, eliminating commitments to the non-profit, which is where most of the company’s proceeds have been directed to develop impactful projects.
“These rounds can also bring significant challenges that are often not discussed as often,” mentions Santiago Rojas. “One of the biggest risks of raising large amounts of capital without a clear path to increased valuation is the possibility of facing a “downround,” where the company is forced to raise capital at a lower valuation than previous rounds. This can destroy value and damage the confidence of both investors and the team.”
The OpenAI case played out in an eventually very public internal dispute in which at the end of 2023 several board members began to clash with Altman’s ideas. They agreed to remove him from his role as CEO, but after the media crisis this generated, he ended up reinstated a few days later in his position, taking power again amid the chaos. Now his leadership has led to the resignation of several of the company’s leaders and executives, including the other original co-founders.
This, and other similar stories over the years, represent good lessons for Latin American founders who at some point could be drawn to the allure of raising capital at all costs.
What are Latin American VCs saying?
Many of today’s unicorns benefited from that momentum to get off the ground by landing a well-executed seed round. But as Latin American startup investment levels stabilize at a more modest pace after the explosion of capital invested in the region in 2021, VCs are focusing on startups and entrepreneurs that create value and can demonstrate much more than a revolutionary idea.
“Raising capital should not be the end goal, but a means to create sustainable companies that transform lives and generate long-term value,” asserts Roberto Ponce Romay, General Partner at Cube Ventures. “We believe that success is measured by a company’s ability to generate recurring revenue and scale efficiently, not just by the amount of capital raised.”
For his part, Boris Lancheros, CEO of the VC specialist firm Lanchmon, stresses that “Measuring the success of a startup based only on the amount of money it receives from external investors is a limited and potentially erroneous vision (…) There are other crucial factors for long-term success, such as market traction, the experience and capacity of the founding team, a sustainable business model, product or service innovation, and the positive impact it generates.”
Ultimately, large investment rounds can be a powerful tool to accelerate the growth of startups, allowing them to scale quickly, hire key talent, and expand operations. However, this is not the only factor to consider in determining the success of a startup.
