Latam startup ecosystem is taking off, but it is not for the faint of heart
It certainly does feel that, finally, the Latin America moment has arrived. Just this year, Latin American startups have raised $1.6 billion, Brazilian Nubank became the most valuable digital bank in the world, and top global funds such as Softbank, QED, Sequoia and Andreessen Horowitz doubled down on their bets in the region. But what is it like starting a company here? Despite the vastly different markets, building a business in this part of the world — aside from its market volatilities, head-spinning currency devaluations and double-digit inflations — comes with its own pinch of picante.
Let´s start with the challenges and let´s start with fundraising. Latin America suffers the typical symptoms of a young venture capital ecosystem. You will meet local funds who have little experience, seldom have partners with operational backgrounds and have had few, if any, exits. Government initiatives to promote entrepreneurship, such as INADEM in Mexico and Startup Chile, have increased funding capability, but not investor quality. Some of the family offices of the handful of families that run the region´s economies have started to dabble in venture capital, often led by the new generation offering not much more than their last name. You are puzzled when you meet investors flying in from Spain who think that they understand the markets here just because they speak the same language.
Given this context, you are unfazed when you receive a term sheet with out-of-market terms. You raise an eyebrow when you see milestone-based tranches, media or office space for equity, burdensome information rights and heart-sinking valuations. You may be told that your deal inexplicably fell through as you hold a signed term sheet. It looks like the VC game in the region consists of waiting around for deals to come by — they all do, given the few funding alternatives — to then apply the investment criteria, and if approved, to squeeze out the best terms from the entrepreneur. There is no chasing and competing for the best deals, and venture partners seldom feel the need to brand themselves as matter experts. Investor appetite for risk is low while appetite for early revenue generation is high. Large burns are frowned upon and no amount of value created from amassing large userbases or datasets will change minds.
Second, take the startup culture, which is at its infancy. You start a company because you couldn´t get a corporate job, or so people think. Job hopping is uncommon and leaving a high-profile corporate role to build a company is reckless. Here, failure is really a failure. It shows weakness and it leaves a stain in your curriculum. Failing is absurdly expensive and time-consuming. For example, the average time to fully dissolve a company in Brazil is 2 years.
This leads to “it is difficult to hire” becoming your most frequent complaint. Few people want to join startups and top candidates are either overpaid or abroad. You are not able to find experienced product managers and data scientists locally. News about drug wars and crime stats do not help convincing foreign talent to relocate here. Equity as part of the compensation is neither understood nor valued as you struggle to give local examples of early employees with large paydays. You can hardly blame an Argentinian programmer, who has seen an economic crisis occur every 5 years, to have little interest in your option plan. The result is that well-funded local startups have started building teams outside of Latam.
Thirdly, inside and outside the office, you encounter a lot of friction on your day-to-day. You face mind-boggling bureaucratic processes, all paper-based, to set up your company. You spend an unhealthy amount of time waiting in lines, in airports, public notaries and government buildings. You are continuously worried about fraud. You develop a zen-like patience to deal with frequent inefficiencies and disappointments from providers or partners, often preempted with a Mexican “que crees?” (you won´t believe this) or a Brazilian “pode deixar” (you can leave it in my hands) or a Colombian “que pena contigo” (what a shame for you). You dearly miss the honesty and directness of words like “No, I am not interested” and “Sorry, I made a mistake”. Companies with monopolies in their segments, in response to your complaints about their exorbitant prices and poor service, cheekily suggest that you “look for other options”.
Your MBA International Entrepreneurship and Ethics classes do not prepare you for operating in the grey area that you are occasionally forced into. It is hard to “never break the law” when, for example, in Argentina in 2012 the only way to transfer funds from abroad, without them being frozen by Banco de Argentina, is through a “mule” who shows up at your office with wads of cash. You choose to not pay a “consultant” in Argentina to help with importation at customs, or in Mexico to help with obtaining a license; and it results in potentially indefinite delays. You, too often, feel that deals get closed only when friends call in favors.
Outside the office, you are on high alert so as not to get ripped off or mugged (unless you are in Santiago). Yet, sooner or later, you will get ripped off by the airport taxi in Buenos Aires, mugged in Sao Paolo’s Paraiso or pick pocketed in Bogota’s Centro. Most likely, you, also, will end up bribing a Mexican traffic police officer who has allegedly stopped you for an obscure infraction.
But the positives of the region, outweigh these challenges. It is these same inefficiencies, frictions and lack of infrastructure that make the Latam opportunity so large. Among a population of 639 million people, including two countries in the top 10 highest populations, with a growing middle class and internet penetration, you identify unmet or unsatisfied demand across a variety of products and services. In Mexico, you find that only 60% of the population is banked, with low penetration rates across all banking products, and that 50% of transactions are cash-based. 47 million Brazilians access Facebook every day (only second to US). In both Brazil and Mexico, you come across average interest rates for unsecured online loans of 400%. Only 4.2% of retail sales in the region are online. You are confident that the high level of fraud and bureaucracy can be disrupted with blockchain technologies. You are shocked about the low Net Promoter Score across most industries and lack of customer-centric innovation. Simply put, in Latam, once you get over the “bump”, you find opportunities everywhere you look.
Also, the ecosystem is improving and at a fast pace. International investors with entrepreneur-friendly term sheets and the capacity for leading later rounds are competing with local funds and standardizing deal terms. There is a contagious energy: better quality entrepreneurs, more second-timers, less copycats, and more foreigners with strong links to top US business schools, investors and corporates. The flow of MBA entrepreneurs promises the next wave of new projects — it was Brazil in 2011 and Mexico in 2015. More importantly, you are now celebrating exits: Brazil´s Stone and Pagseguro going public, 99 being acquired by Didi for us$1bn and Mexico´s Cornershop being acquired by Uber.
Lastly, at a personal level, it is tremendous fun to be here. Brazil is attractive because of its 200 million-people market, but also because of Rio´s Carnaval. In Argentina, there is great tech and design talent, but also malbec and tango. In Colombia, you have a growing middle class, but also aguardiente and salsa in Andres Carne de Res, and the list goes on. As a foreign entrepreneur, you enjoy adapting to a new business etiquette at meetings; you hug and kiss people you have just met before engaging in obligatory soccer chit chat. You close deals over tequilas, caipirinhas and piscos, and you celebrate by poorly attempting to dance salsa.
“Starting a business in Latin America is like running a marathon…..after 5 shots of guaro and 5 shots of tequila….. through a Rio favela during Carnaval” said an entrepreneur friend over a mezcal, “but there is no place I would prefer to do it.”