- Funding dries up
- Focused on cash preservation
- Opportunity for cash-rich startups
In the technology startup world, a lot can change in a short space of time.
Two years ago, Mexico implemented a groundbreaking law regulating cryptocurrency exchanges, crowdfunding platforms, and mobile payment companies that spurred hundreds of millions of dollars of investment into local fintechs from heavyweights like Softbank Group [TYO:9984], General Atlantic, and Goldman Sachs [NYSE:GS].
That all changed a few weeks ago. The spread of the coronavirus and its effects on the world economy has dried up funding for cash-hungry Mexican startups, which must now focus on preserving their balance sheets and weathering the storm.
“It’s going to get tougher to raise money, no question,” said Alvaro Rodriguez, managing partner at Monterrey-based venture capital firm Ignia Partners.
UnDosTres, a mobile payment platform backed by Ignia, for example, expects to close its USD 25m Series B funding round in 2Q20 at the earliest, instead of 1Q20 as originally planned, Co-CEO Naveen Sharma said. “I think (the funding round) will get delayed,” he said. “Everybody is in panic mode.”
Guadalajara-based point-of-sale (POS) business Billpocket also expects its Series B to take “longer than expected” to close, CEO Alejandro Guizar said.
The company is looking to raise USD 30m–USD 50m to start expanding internationally but potential investors are wary of betting on a POS company after similar businesses like San Francisco-based Square [NYSE:SQ] have so far struggled in the coronavirus market turmoil. The price of Square’s shares has fallen about 22% since 21 January, when the US announced its first COVID-19 case.
One reason for the drought in startup funding is the difficulty that VCs are having to raise money, a by-product of the losses that limited partners and institutional investors are piling up on the public capital markets, said Sharma, from UnDosTres. “There is no dry powder in the market,” he said.
Since 11 March, when the World Health Organization declared the coronavirus outbreak a pandemic, the NYSE and NASDAQ have dropped 8.9% and 5.7%, respectively, and the Mexican Stock Exchange index has fallen 12.6%.
Ignia, for instance, has no more money available from its Fund 2 to make new investments and plans to raise USD 100m-USD 150m for its third fund through publicly-traded Project Investment Certificates (CerPi) with the help of Credit Suisse, as reported.
Rodriguez declined to offer a timeline for the planned CerPi issuance.
Cash is king
Without new funds to invest in Mexican startups, VC firms are helping portfolio companies implement cost-reduction initiatives, which will be vital in the next few months, said the portfolio officer of a Mexico City-based VC firm. The VC is advising startups to use cheaper marketing channels and prepare for the “worst-case scenario,” she said.
Ignia is “watching the funding needs” of its companies and advising entrepreneurs to “save cash,” said Rodriguez.
“Investors…are telling us that cash will be the king,” said Sharma from UnDosTres. The company has decided to halt the launch of new marketing solutions that were trialed before the coronavirus pandemic and will focus instead on its core operational needs, Sharma said.
And while Billpocket continues to operate normally, its board has already approved a set of spending cuts that it could implement should the coronavirus crisis persist, said Guizar, who founded the business in 2013. “The first area that will be affected will be marketing,” he said.
Billpocket’s gross payment volume has dropped by around 65% in the last few weeks as Mexican states started to adopt stay-at-home measures, Guizar noted.
Survivors will rule
Despite the challenges, the changes in behavior as Mexicans are forced to work and stay at home are benefiting a number of local tech startups.
“The pandemic might accelerate certain changes that were taking a while to materialize in the country,” said Olivier Hache, Managing Partner and EY’s Transaction Advisory Services in Mexico City. E-commerce companies, for instance, could benefit as consumer habits pivot towards online spending, he noted.
Kinedu, a Monterrey-based education technology company, added 200,000 new users in just one week in March as parents take charge of their children’s schooling at home, said CEO Luis Garza. As of January, the company had around 500,000 active users in total, as reported.
Mexico’s government ordered all schools to close on 20 March until at least 20 April.
Launched in 2013, Kinedu produces digital content for the development of children aged 0-4, as reported. The company hopes the sudden jump in users could be a “sustainable long-term trend,” Garza said. “We are realizing that we can do a lot of things from home.”
Mexico City-based UnDosTres, which allows people to pay their utility bills and top up their mobile phone via a mobile app, has also seen an increase in transaction volume, said Sharma. He said he believes “a good chunk” of the new users will remain active on the platform once the stay-at-home measures are lifted.
And despite seeing a drop in transaction volume, Billpocket has so far added three times as many new active merchants in March as it usually does every month as companies search for alternative ways to grow their businesses, said Guizar.
Startups that can weather the coronavirus market turmoil “will for sure be pretty attractive for investors because these guys have taken the hit, survived, and are still growing,” said Sharma, from UnDosTres.
Cash-rich companies, for their part, could take advantage of the turmoil to acquire embattled companies, as reported. Billpocket, for example, planned to start scouting for M&A opportunities next year but is now considering accelerating those plans to snatch distressed assets on the market —provided it can close its Series B round, said Guizar.
“I think in the next 60-90 days we are going to see some of the companies actually (going out and) looking for money,” he said. “I think that will be the moment to start looking at (acquiring) some of them.”
Potential targets for Billpocket could include challenger banks and online SME-lending platforms, he noted.
by Dominic Pasteiner and Adriana Curiel