Blog

By Héctor Jirau Colón

With renewed optimism in the venture market after several tough years, ecosystems like Latin America are expecting an influx of funds.

Startups may be tempted to ride the high expectations into 2024, and I can’t blame anybody for hoping that the worst is over. But entrepreneurs — especially those in emerging markets like LatAm — would probably get more out of adopting a pragmatic, positive pessimistic approach to building a company.

We’ve seen what happens when founders get clouded by too much security when fundraising. They raise more than they need, overvalue their company, and get distracted by spending cash on new hires or resources when they haven’t yet laid the groundwork to support that growth.

Optimism isn’t always the right path

In Latin America, the pitfalls of “excessive optimism” are even riskier, given the more precarious nature of the startup ecosystem — something we saw all too starkly when the VC downturn hit the region far more drastically than in other parts of the world.

LatAm startups can instead harness a more practical pessimism that reminds them that money flows aren’t a given, that the landscape can change at any moment, and that they need to be resilient enough to handle it.

This practical approach pursues sustainable growth over the certainty of cash, and recognizes the value of smaller, strategic strides that can lead to more significant impacts in the long run.

Avoid the short-term ‘beer’ goggles

Short-term gains should not cloud the vision for long-term success. Don’t get carried away thinking that any positive sign is an indicator that the ecosystem will get back on a solid track. Rather than fixating on the next funding round, invest time and effort in laying the groundwork for sustained profitability. A great example of this is the story of Zoho, a fully bootstrapped company from an emerging country that has grown to more than 100 million users and is available in more than 150 countries.

Make organic growth your mission

Investors are increasingly drawn to companies that demonstrate organic, product-led growth rather than those solely fixed on fundraising.

Chilean startup Buk comes to mind. The company is a successful SaaS for HR that was bootstrapped for five years before it raised its $50 million Series A. You could say investors can be pessimistic, if that means they are attracted to predictable outcomes with a high return potential, and predictable, organic growth wins the game.

Don’t get dependent on fundraising

Striking a balance between securing funds and building a sustainable product is crucial. Focus on understanding core customer needs, proving product-market fit, and seeking investors aligned with a vision of sustainable growth.

Moreover, the better you sell the need for financing as an added value to your growth — rather than a necessity to stay afloat — the higher the probability of garnering their interest and the better the terms you will get.

Against toxic optimism

While fundraising can be a crucial part of the success of your startup, it shouldn’t dominate the agenda. Redirecting energy toward fortifying the company is essential, as every moment spent in fundraising is a moment lost in nurturing the business’ core. A practical pessimistic approach allows for conservative decision-making.

The call for pragmatic pessimism in the Latin American startup ecosystem for 2024 should be a strategic approach to counterbalance the excesses of toxic optimism. It’s great to be positive, but not to be blind to reality.

More than toxic optimism, we need resilience and adaptability for the days to come.

Héctor Jirau is the executive director of Parallel18, a program of the Puerto Rico Science, Technology and Research Trust and an international innovation hub that provides funding, mentorship, business connections and investment to underrepresented founders around the globe. Jirau also holds ownership and active participation in multiple early-stage companies in different sectors, especially in healthcare. He has a proven track record of leading compliance and investment due diligence efforts for pre-IPO and early-stage investments in highly vetted companies such as SpaceX, Thrasio, Stripe and Klarna. He is passionate about bridging the gap between science and finance, and empowering entrepreneurs to solve the world’s most pressing challenges.

Illustration: Dom Guzman