Mexico’s Venture Capital Revolution: Tracing the Roots of a Thriving Ecosystem
You probably have heard that Mexico is the second-largest startup market in Latin America, after Brazil. The startup ecosystem in Mexico experienced explosive growth in 2021. On average, between 2015 and 2018, the total annual VC investment in Mexico was $117 million dollars in 69 deals. In 2019 and 2020, these figures increased to an average of $791 million dollars and 99 deals per year.¹
The investment numbers skyrocketed in 2021, with $3,586 million dollars being invested in 172 deals.¹ Although the investment numbers from 2022 returned to the pre-existing growth trend ($1,768 million dollars in 236 deals¹), 2021 showcased the potential of LatAm and Mexico.
In that year, the region’s tech companies and the overall ecosystem were the subjects of continuous discussions, examining their potential, underlying strengths, and overall attractiveness. Numerous articles, podcast episodes, and LinkedIn posts praised LatAm’s thriving startup ecosystem. Investors from around the globe were making substantial investments in the region. Nowadays, despite receiving less frequent global attention, the region continues to hold strong allure and immense potential. The underlying fundamentals are still present, fostering confidence in its future and optimism for positive advancements in Mexico’s venture capital industry.
The rise in popularity of the VC industry in Mexico has been impressive, but it’s important to acknowledge its humble beginnings. It’s astounding that it all began just 15 years ago, despite the current impressive figures. Back in 2008, there were 12 seed and early-stage funds that invested a total of $3.6 million dollars in only 6 companies.² In comparison, Kavak, the first startup to be valued at over a billion dollars in Mexico, achieved that milestone just 12 years later, in late 2020.³
Mexico’s venture capital industry saw tremendous growth thanks to three government initiatives: the Fondo de Fondos (Fund of Funds), investment vehicles known as CKDes and CERPIs, and the National Institute of the Entrepreneur (INADEM). These actions laid the foundation for the industry and propelled it to where it is today.
In 2006, the Mexican federal government and the Secretary of Economy established Fondo de Fondos, an investment entity that currently manages more than $2 billion in assets.⁴ Fondo de Fondos focuses on investing in private capital, energy, infrastructure, and socially and environmentally impactful projects. Its primary goal is to encourage and strengthen investment in alternative assets and private capital.
In 2009, CKDes (Development Capital Certificates) were introduced by the Mexican stock exchange as a long-term investment vehicle. Afores, which are pension funds, gained the ability to diversify their investments by including alternative assets and private projects in their portfolio. This development in the VC industry in Mexico mirrors the 1979 United States Congress’ passage of the ERISA “Prudent Man” Rule, which allowed pension funds to invest in VC. As of 2015, venture capital investments through CKDes amounted to approximately $790 million dollars, comprising 8% of the total capital invested in these vehicles.⁵
A new vehicle was introduced in 2016 known as the CERPIs (Investment Project Fiduciary Securitization Certificates) which served as a complement to CKDes. These were more flexible in their regulations compared to CKDes and allowed investments of up to 90% in foreign funds. It was a significant change for the industry as the most commonly used vehicle for venture capital funds is the Canadian LP.
The government established INADEM in 2013 as part of Enrique Peña Nieto’s early initiatives. INADEM supported startups by offering training resources through Startup México (an organization that promotes innovation and entrepreneurial culture) and direct funding to both startups and venture capital funds. With an annual budget of $200 million dollars,⁶ INADEM was able to invest in funds and startups, while promoting and enhancing the ecosystem through the development of programs and partnerships. Unfortunately, the agency was discontinued by Lopez Obrador’s government after succeeding Peña Nieto. INADEM reports that they contributed to the creation of 6,000 companies and 73,000 jobs.⁶
Despite the notable increase in investment and the emergence of twelve unicorns — such as Kavak, Bitso, Incode, and Clara, among others — there is still significant potential for growth in Mexico. In 2022, the total venture capital investment amounted to $1,768 million dollars,¹ making it the second-highest in the country’s history.
However, that number only represents 0.07% of Mexico’s GDP in 2021.¹ ⁷ In comparison, the United States, India, the European Union, and China have significantly higher percentages at 1.01%,⁷ ⁸ 0.76%,⁷ ⁹ 0.50%,⁷ ¹⁰ and 0.45%,⁷ ¹¹ respectively. To bridge this gap and match the United States in terms of the percentage of VC investments compared to GDP, Mexico would need to increase its investment by 17 times (and not 14 times, as some growth trends and convergence are taken into account).
In order to achieve such growth, several events and transformations will need to occur. First, the venture capital industry must demonstrate its ability to deliver the promised returns by achieving exits and capital realization. This will be measured by the DPI (Distributions to Paid-in Capital) index of existing funds, reflecting the industry’s potential. Second, concurrently with the exits, growth funds must start investing in LatAm again. At the moment there is still funding in earlier stages, but growth funding is stagnant. It is a chicken-and-egg situation between exits and growth investing, but once either shows momentum, the other will too.
Third, the unicorns in the region should continue to expand, achieve profitability, and develop into mature, well-established companies. This will demonstrate how Mexican startups can revolutionize industries from scratch, offer exceptional returns to investors, dominate their respective markets, and drive positive change across the local communities. Additionally, the government should revisit its plans of fostering entrepreneurship by implementing policies such as reducing capital gains taxes, establishing secondary funds for liquidity, and creating R&D programs and subsidies.
Furthermore, the government should prioritize enhancing the regulatory framework. They need to update and reinforce it to ensure better protection for investors, reduce bureaucracy, and increase transparency. Finally, the government needs to work closely with venture capital funds to provide support to startups and develop training and education programs in entrepreneurship and in technology.
Mexico’s venture capital industry has achieved remarkable progress in only 15 years, yet it still has untapped potential. To reach substantial growth, the industry must deliver on its promised returns, unicorns must continue to expand and mature, and the government should revise its policies and improve the regulatory framework. With these improvements, Mexico’s VC industry has the potential to become one of the leaders in the global venture capital market.
Sources:
2. Pascua, M. (2018). Mexico VC Overview. AMEXCAP.
3. Solomon, B. (2020, October 1st). SoftBank-backed used-car startup Kavak becomes first Mexican unicorn. Reuters.
4. Fondo de Fondos.
5. Deloitte & Basila Abogados. (2016, February 16). Generacion de valor a partir de fuentes alternativas de financiamiento: CERPIs y CKDes.
6. Martínez de Velasco, D. (2022, January 13). La desaparición del INADEM y el futuro del emprendimiento en México. Ongoing Ibero.
7. World Bank Data.
8. Dealroom. Venture capital in the USA.
9. Moneycontrol. (2023, January 13). India ranks fourth globally for tech venture capital investments in 2022: Report.
11. Liu, R. and Wu, K. (2022, December 14). China venture capital deals seen recovering from 3-year lows. Reuters.
