This is a draft
I woke up to listen a podcast by Andreessen Horowitz about “Latinos and the Tech Economy”. I thought I would listen about latinos entrepreneurs trying to bring more latinos into tech, how this new “share economy” affects us or how to help Silicon Valley become more diverse. Instead I listen a political marketing speech about water shortage, Washington &
I’m not an expert on the subject but I have three characteristics that help me talk about it:
- I'm Latino
- I live in Silicon Valley
- I work with tech companies
With that said I'm going to first share a Q&A I had with a journalist about the funding challenges and the VC’s situation in Latin America. Why start with this? Because if you want to help Latinos, first you need to understand where do they come from: culturally not geographically.
What are the funding challenges for start-ups in Latin America, both local and foreign?
To understand the challenges, you need first to understand latin american people. We are born and raised in dysfunctional countries. The whole continent has lived the last 60 years changing from corrupted political parties and military governments. Our economies has suffered cycles of crisis and enormous prosperity where we sometimes had something to do, and sometimes we were just sitting on the side lines. Most of the times we haven’t own our future. We are survivors of our own chaos.
In so much chaos our societies have turn into conservative and risk adverse positions. The people want steady jobs and monthly payment. Risk is not well taken. A clear example of it, is the fact that the most successful program is run and funded by the state! StartupChile. Why? Because its everyones money, so its nobody’s money.
The challenges are huge. There is barely a small amount of accelerators and incubators that are willing to fund early startups. We are still conservative. Most of them with some kind of involvement from the government. They have created a steady flow of startups so this has brought some rich individuals into the angel investing arena. Now you can find the “second” round (which I would say is still early and small) being done by angels. But after that there is nothing.
There are no VC’s. There is no money. Is that critical that the government of Chile has a new initiative to create VC’s partly funded by the government. Can you believe that! Similar to Bill Draper 30 years ago.
It doesn't matter if you are local or foreigner, if you are raising in Latin America, you will have trouble. Unless until now. Some american VC’s are taking the leap of faith and investing in some companies.
What are the biggest barriers for foreign start-ups to securing funding once they've completed an accelerator program, like Start-Up Chile?
It doesn't matter from where you are. Money follows markets, but is created locally. So VC’s in Silicon Valley will fund your startup if you are in the US, and if part of your market is here, but they won't invest if you are from a foreign country trying to make money only in a foreign country. And we are talking about the most *risky* money in the world.
Think about it: YCombinator (the most successful program) brings the founders to the U.S to run their startups. Many go home, most don’t. 500 Startups invest in the country of origin, but we haven't seen a breakthrough yet.
The challenge is that there is no one to pitch to. There is no money after certain point. Or it’s too expensive (give up too much equity).
What are Latin American investors looking for when considering funding a start-up?
Traction and specially revenue. Every country in Latin America is too small (except Brazil and maybe Mexico) to be able to help a startup grow fast enough. So, investors won’t care about users because they are small markets and many of today’s business models (advertising) doesn't work in small scale. You need huge amounts of users to be able to monetize at large scale (Chile has 17M people, California has 39M).
This make investors focus on revenue creation. In countries with a lower income average (all Latin America) , creating revenue becomes even more difficult than in the U.S. Add that to the fact that we come from conservative cultures, it becomes almost impossible to make it happen.
Are there infrastructure issues, in terms of legality or resources, that prevent investors from funding middle-stage start-ups in particular?
First of all, middle stage in the U.S is HUGE in South America. Even if there are some challenges on infrastructure, is not what it limits the growth of the startups. To my first answer: we adapt. But there is no capital to be able to grow. There is some issues with different legal structures in each country, but I would argue that with enough money, the problem would be more the different culture (customers) than the legal differences.
Second, to become middle stage (in US terms) you would already had to conquer your own local market, but you don't even get to that. Why? because of funding. So the legal issues come way after the money problems.
If you are growing really fast and entering new markets and facing legal problems (Zenefits, Uber, Airbnb) money will come. Is actually a good sign.
What needs to change in the Latin American entrepreneurship landscape to make it more favorable for domestic and international start-ups?
Some months ago, someone ask me that. My answer is: a flagship. It can sound cliche but we need a “unicorn”. One company that starts winning all the markets and even comes to the US and eats someone’s share of the market. It will make VCs (in the US) wake up and understand that the talent is equally distributed in the world. And it will give local investors the hope ( and ambition) that latin american companies can go global and compete with anyone else. It will take some time, but it eventually happen. It will be a mistake, an anomaly. It will hit everyone by surprise.
This was a draft. Hope you enjoy it. Will probably make it better later on adding other people’s experiences. Thanks for reading and will appreciate if you hit the Recommend button!
