A Not So Glamorous Startup Life in Mexico

One of the most frustrating things about running a startup outside of Silicon Valley is not being in Silicon Valley. I’ve been a couple of times, both with the enthusiasm of a kid on her first trip to Disneyland.

The first was attending the TC Disrupt San Francisco. The vibe was lively and the people incredibly curious about our product. They were so eager to learn about our team, and our story, that I started to feel a strange bitterness at the thought of losing all this great feedback once I returned to Mexico. We came back with a bunch of business cards, media contacts, and, most of all, with recharged batteries after draining them with 9 months of intense product development. During the 3 days following the event, LastRoom had 300 new leads. The new users proved to be the kind of early adopters that an early-stage company needs: they were brutally critical and honest.

It was what we needed most at that time. In contrast: know what really happens in Mexico when you launch a new technology?

1. “Cool! I’ll use it for sure!” After which, he promptly throws your business card in the trash.

2. He signs up, he thinks it’s a crap, but he feels bad about sharing this with you and doesn’t.

3. He signs up, he thinks it’s a crap, he shares his disgust everywhere, except directly to you.

Some months ago I shared some lessons learned during the first couple of years of my company’s life and the reason why we pivoted from a B2C mobile app for same day hotel booking to a B2B travel management solution for small and medium sized organizations. Among other things, I questioned my scepticism about developing a product in a place where you wouldn’t be able to pay a developer less than $10k per month, considering it a financial suicide, and that the low-cost formula of being based in a more affordable city would give you a chance to keep going longer with the same money.

Six months later, I am starting to change my mind. There seemed to be a common pattern with bootstrapping entrepreneurs: you’re playing with your “family & friends” money, who may believe in you but not necessary in your business model, so every day you wake up thinking of the cheapest way to solve your company’s problems. If your budget is $50k and you need 5 guys working on your MVP for 5 months, you can easily do it in a place like Mexico, where your monthly burning rate might be $7k. In the Valley you will need 10 times that. You see, from a strictly mathematical perspective there is no comparison. However, what we don’t consider in this formula is another key-factor is lacking in Mexico and generally in many Latin American countries. This is something that I’d like to call “Vibe”. “Vibe” is a mixture of critical audience, role models, high-quality feedback, market demographic, technical culture and media exposure that makes the Valley one of the best places in this earth to test a new technology. It may be not the only place, but I’m pretty sure that it’s in the “top 5", no matter your main target market. So, imagine the amount of time and money you may be able to save developing your product from the beginning in this powerful mix of circumstances. It may be worth paying 10 times more for developing a technology in a place where the opportunities for learning and interacting with more experienced entrepreneurs are endless. Where is much easier to access seed-funding, and where, if you perform well, it’s also much easier to get media coverage.

Another crucial challenge of running a startup from Mexico is the difficulty of getting access to seed funding. Raising between $500k and $1M to bring your company “to the next level” is an especially hard mission to achieve. I can count very few active VCs, so, for the majority of startups, a common path is raising funds from many individuals. I’m not against the “Party rounds”, as I heard from Danielle Morrill during the YC Female Founders Conference: “It’s better than die”. If you’re running out of money and it’s the only path you see in front of you, take it! But when we speak about fund-raising opportunities and challenges, the difference between Silicon Valley and the Mexican ecosystem, where private funding is basically in its infancy, is bottomless. First of all, it’s a matter of numbers: I was able to count a total number of 16 investment companies officially registered in the AMEXCAP, but just 50% of them look active in seed funding, explaining the popularity of the angel funds. Secondly, and frankly this is what worries me most, it’s a matter of the quality of the investors. As an entrepreneur you should be really careful about the person you’ll invite to invest in your company, since his greatest value is in his experience, knowledge, and connections.

Some days ago, I got an email from Mick, a Mexican friend, who is cofounder and CEO at Kangou, a Mexican on demand bicycle delivery service. They launched 9 months ago and now they’re looking for a seed round of $500k to scale their service in Mexico and start operations in Colombia. They’re very passionate and talented entrepreneurs, who started with only $30k USD and who are making significant changes to the way logistic works in Mexico City.

In the email Mick shared with me his trouble analysing the clauses of a term sheet he received from a Mexican angel investor, who was going to invest in Kangou $25k USD for 10% of preferred stock. When I saw it I couldn’t believe it.

I’m going to translate the text for those of you who may not be familiar with Spanish language:

“The use of funds is limited to following:

1. Sales staff with a monthly wage that must not exceed 10,000 MXN (around $669 USD) and which will perform activities of customer acquisition and business development.
2. Outsourced marketing campaigns and PR activities: not more than 20,000 MXN per month (around 1,200 USD).

It’s strictly forbidden the use of funds for the following purposes:

• cofounders’ salaries and team members’ compensations (people that have been hired before the sign of this contract).
• development of new technologies. In case of being absolutely necessary, the decision of using this funds for the development of new technologies must be submitted to the Company Board of Directors and must be approved by the great majority.

Maybe I’m not experienced enough to judge, but: WHAT THE HELL IS THIS? Quickly, my first thoughts are:

1. Why investing in a startup if you don’t want to invest in technology?
2. I’m a tech guy, I know the market, I know who are my competitors and I know their strengths and weaknesses. Why should I ask for a permission to develop a new complementary technology that may help me to scale faster? Startups are supposed to move more quickly than traditional companies since their decision flow is short and their flexibility and open mindness make them able to quickly adapt to different scenarios.
3. A full time co-founder is supposed to survive eating fresh air? Maybe this investor believes in part-time co-founders, since accepting these terms you will be forced to find a job to provide for yourself.
4. Hiring sales staff is a good suggestion. However, it’s hard to find talented people willing to work for a startup for $10k MXN. How should I motivate them with such miserable compensation?
5. And finally, the role of an angel investor is to advise and guide the entrepreneur with his broad experience and knowledge, he/she shouldn’t take the control of the company’s decisions and strategies. Investing in a company means trusting in the team behind the idea and believing in their talent and ability to execute the idea.

Am I the only one feeling such big frustration at this abuse of power? The worst part of this story is that when you’ve no choice you feel forced to sign this kind of agreement. Do you think Mexican entrepreneurs deserve better and smarter investors? I do.

A big thank to my dear Female Founders’ friends, Marnee Dearman and Anne-Laure Chorro, who kindly help me with the proofreading.