Cross-border payments startup dLocal has raised USD 150 million at a USD 5 billion valuation, less than 7 months after securing USD 200 million at a USD 1.2 billion valuation. Welcome to 2021, where the tremendous boom in ecommerce means countries as small as Uruguay with its population of 3.5 million people are producing fintech unicorns. This from a region of 652 million people that as of 2017 had zero unicorns to now 18 and counting in Latin America.
A unicorn is a privately held startup company that reaches a USD 1 billion valuation in less than ten years. This once-revered and elusive status seems to now be increasingly commonplace; there are now 635 unicorns worldwide with two new unicorns being minted per working day. In terms of speed records, ecommerce site Jet.com reached a USD 1 billion valuation in less than four months from founding in 2015.
All said, what does it even mean these days to be a unicorn? Indeed, what does it mean to be a startup when Stripe, the mostly highly valued startup in America at USD 95 billion, if publicly traded, would easily fall within the world’s largest 100 companies by market cap?
The definition of a startup has always been somewhat ambiguous. Alex Wilhem of TechCrunch’s efforts to simplify this to three guiding metrics in 2014 probably made some sense at the time. He suggested that a startup could be defined as a company below: USD 50 million revenue run rate, 100 employees and a USD 500 million valuation. Yet these days, a company is currently just as likely to surpass any or all of these three metrics within 10 months or 10 years. Indeed, while the world was experiencing the extreme challenges of COVID-19, VC-backed tech companies with their digital solutions thrived. VC deals in the US totaled USD 156.2 billion during 2020, beating every other year on record. In just the first three months of 2021, global VC investments topped USD 125 billion.
Other interesting defining criteria revolve around the key focus of the business, based on its stage or maturity. Serial entrepreneur and business professor Steve Blank suggests that a startup is defined as a company in its first stages of operations, is tech-oriented to reach a big market demand, and still in the search phase for the right business model and overall product-market fit, while a company is focused on the execution of a proven model, customer creation, and company building.
While we could pontificate all day long on what is and isn’t a startup, it is clear that one definition does not fit all. Thus, perhaps the more useful discussion is around the current outlook: what it means to be a startup in 2021, how this might impact the way a founder thinks about her product and her business, and what implications it may have for potential partners and clients.
Let’s look at what it means to be a startup in 2021 in terms of two key components: capital and contracts.
Capital
As mentioned above, in these frenzied times of free-flowing venture capital dollars, previously unthinkable round sizes have become somewhat de rigeur. Over the past year, mega rounds have become the trend, as investors moved toward less overall deals with bigger ticket sizes. 2020 saw more than USD 20 million in investment just in fintech, another record-breaking figure. The same Alex Wilhelm at TechCrunch observes that ‘there have never been more USD 100 million fintech (funding) rounds than right now’. While this was concentrated in later-stage deals, recent changes in SEC rules have unlocked new sources of capital for earlier-stage startups with higher maximums for crowdfunding and lower minimums to qualify as an accredited investor (angel).
What does the rosy outlook for capital raising mean for tech startups? Generally speaking, a startup raises capital to fund the tech and/or talent required to reach the next set of key milestones.
In terms of tech expenses, more silver linings from 2020. Thanks to the pandemic, exponentially better products have become available for the same or lower cost, as COVID-19 created a boom in cloud-based services. Amazon Web Services, for example, grew 29% year-over-year in both the second and third quarter of 2020 while offering a plethora of new functionalities. This means lower costs and barriers to entry for a startup resulting in the possibility of earmarking more of the funds raised for the other important piece of the equation, talent.
As a fintech founder recently mused to me, the talent he was looking for to fill a VP of Sales role was a unicorn (unrelated to the billion-dollar companies but rather a nod to rarity). The ideal candidate would need to be able to sell into both fintechs as well as Fortune 500 companies.
This seasoned executive would be able to work with C-levels in large corporations as well as possessing the grit and agility required to succeed in a high-growth tech startup environment.
Contracts
This brings us to the topic of contracts (sales) and the potential implications for partners and clients in working with startups, whose very nature is a continual state of flux:
Takeaway: consider a streamlined, sandboxed, or lite version of not only the procurement process but also for the structure of the pilot. Continually review your definition of success, how you will measure success and failure, and work with the startup to design the smallest possible experiment to prove or disprove hypotheses at every step of the way.
Takeaways: pilots should always be paid in order to ensure a minimum of time, and financial and human resources committed from all parties. This joint investment sets everyone up for success. Be open and collaborative in negotiations on everything from tech requirements to pricing to potential internal blockers you may face along the way. This is invaluable feedback for startups on the key value proposition of its product, validated by a willingness to pay.
Perhaps then, in the end, the way of working is where the small but important differences come out between what is or isn’t a startup. Partnering with a startup successfully likely requires the same or more investment of your time and resources versus working with more traditional companies or incumbents. It is a journey of a thousand miles, therefore, vitally important to get clear on the overarching goal for the end to justify the means, which is sure to be an iterative process.
When startups and traditional players come together to collaborate towards a common goal, there are sure to be differences in opinions and approaches, however, what is also certain is that there is no challenge that cannot be overcome thanks to a wider variety of tools and winning strategies.
This article has been published in The Paypers' Who’s Who in Payments Report 2021. To learn more about the payments industry's high-rising trends, M&A activity and investments, startups to watch, along with detailed accounts of all the relevant capabilities and distinguishing portfolios of players activating in the B2B and B2C ecommerce space, download the full report here.
About Christine Chang
Christine Chang is a venture partner at Rally Cap. She has extensive work experience in Latin America, the US, and Europe. Previously, Christine led Industry & Investor Relations at IGNIA, a cross-border fund focused on solutions for the emerging middle-class in Latin America. Christine is also the founder of Santosha Advisors where she advises startups and collaborates with different agents in building the Latam venture ecosystem. Other roles include launching the Startupbootcamp Scale programme designed to help pre-series A fintechs and insurtechs in the Spanish-speaking Latin America reach exponential, scalable growth, and leading transformational projects at American Airlines, UBS, oneworld, Deloitte and Rappi.
About Rally Cap
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