The Hard Thing about Startups in Small Countries

After three years working with local founders, I feel as if I am getting an appreciation for the challenges in starting up from Uruguay.

Before moving to South America, I looked at this market the way I think a lot of Northerners currently do; either as a a wide open growth opportunity or as a potential next step if current clients already speak Spanish. Many fundraising rounds in the North were justified by that premise alone.

That was definitely my line of thinking. Being a founder from San Francisco, and having worked for years with European entrepreneurs, I was eager to see how much of an impact my international perspective might have on the regional ecosystem. Fortunately, Uruguay was building entrepreneurship programs at just that time. I was offered the chance to help start an incubator (Incubadora Sinergia) and I quickly began to work with local entrepreneurs.

I did not, however, show much respect for the market I was getting into. When founders would tell me about their ideas, I would think they were mostly copycats. When they would ask for advice, I would reach into my toolbox of startup best practices and cliches from other parts of the world. When they would talk about growth strategies, I would assume they would have plans to expand into bigger markets.

I would ask different founders “why wouldn’t you expand into Argentina, isn’t that where growth is?” A first response was “because we can’t charge people and get money out of the country”. A second had a much different justification, “because the problem we solve doesn’t exist there”. Other responses pointed to cultural differences, regulation hurdles, tax issues, political situations, etc. Brazil offered loads of new reasons for founders to turn away. There were a lot of problems that made growth risky.

Those risks started to appear whenever a Latin American startup would try to open up in another country. The amount of fragmentation caught me by surprise; the context of one culture or country was completely different from another. This was an illuminating insight for me; beforehand, I had taken growth for granted. I could begin to understand where Latin American founders saw friction and problem areas. Suddenly, a lot of other “complaints” about the local ecosystem fell into place. So many copycats? Well, founders can make better bets because those models are already validated. Give those founders credit, at least, for finding ways to adapt to local cultures and paving the road for future startups. What about a lack of local angel investors? They want a return on their investment. They cannot be blamed for preferring to invest in cattle and real estate rather than deal with all this risk and friction.

Regional growth is not easy to come by in Latin America. At the same time, regional growth is necessary because local markets might be too small. Entrepreneurship is filled with vicious cycles like these, but local founders are dealt a bad hand from the beginning. So, it was not a surprise to see them pivot back home after experimenting in other countries.

Uruguay has a population of 3.4 million people. And the country really could be divided into two regions — Montevideo and the Interior — with strong cultural and infrastructural differences between the city and the “campo”. This creates additional hurdles for a Uruguayan founder to deal with, and it has the consequence of making a small market even smaller. Yet, many founders are trying to make this work: opening up new population segments, building new features, and onboarding new clients into their platforms. This may seem like a common sense strategy for a local startup, but it has inherent dangers.

Longer sales cycles. Previous experience will set expectations for how people use a product and how long it takes them to pay for it. That amount of time will lengthen once talks open with a slightly different segment. In the best case scenario, a founder can adapt existing marketing and sales material for those use cases and not touch their product. In the worst case scenario, they will have to consider new feature requests, make system wide changes to their platform, and rebuild all their collateral. Getting more growth becomes a function of how much time or money they want to spend on catching up. Moreover, adding too many features is a fantastic way to dilute the value of their product, making it tougher to sell and harder for new clients to adopt. Down the road, the project might also be…

More vulnerable to competition. Founders in smaller markets tend to make the mistake of thinking they do not have competition just around the corner. They believe they have the time to justify those new feature requests to reach new clients. They may be aware of similar platforms, or perhaps a big player in the US or Europe. But they will say “they don’t do everything we do” or they assume competitors will not be making a country like Uruguay a priority anytime soon. To an extent that is true, but that defense may crumble in the future for two reasons: 1) products that try to do everything locally are going to have a tough time competing with niche products serving the world and 2) there are no barriers to entry on the internet. Local clients are still going to have problems to be solved (or jobs to be done) and the big competition has the means and the incentives to show up.

I got to know the ERP software market in Montevideo after working with some founders in the sector. There appear to be more than 20 different providers, and perhaps up to 50 different solutions all serving this one city. Many of these companies are running a fine business, but the amount of them does not seem to be very efficient. It is likely that many of these companies did not start out as an ERP system (which is software that does a bit of everything for businesses), but evolved from simpler solutions that grew more complex as new clients, segments and features were added. That is a sure way to make new sales cycles longer. It also made it hard to capture a big share of the market because other local companies were doing the exact same thing. With everyone selling bundles of commoditized products, the way to gain an advantage lead to services and customization. That can be a good business but it has the limitation of not being very scalable. Today the threat for this sector is the potential arrival of niche startups, backed by foreign venture capital, and hungry for growth in emerging markets. Companies in this sector are going to continue to have to work very hard to maintain their clients.

“El trabajo para montar una empresa es casi lo mismo para solucionar un problema pequeño que para solucionar uno grande.”

This is the hard thing about starting up in a small market; trying to expand is really risky, while trying to stay local is no longer safe. I used to work for a guy who would like to say “the amount of work in starting a company to solve a small problem is about the same as starting a company to solve a big one”. It took me coming to a small market in Latin America to see that play out.

It is clear what the suggestion is for local founders: Think Big. The reason is not because it is a Silicon Valley cliché, or because the goal should be to raise money from venture capitalists. In a small market, thinking big gives a founder the best chance to build a defensible startup.

It will be hard for locals to identify big problems, or to have sufficient exposure to recognize the needs of users somewhere else. There will be a lot of weird first steps and confidence issues. A local ecosystem should provide the support and the tide to raise all ships. They do not need to ask entrepreneurs to build the next Facebook, but they do need to ask them to get out of their comfort zone, to take on more risks and to get used to competition. Founders will need to answer the call accordingly. Then they will need to try again after they fail the first time, because now they are the ones who know what thinking big actually involves.

Problems do not need to be global either. There are many huge opportunities unique to the Latin American market, and they are not going to be solved by Silicon Valley types with no understanding for the diversity in the region. The evolution here could be more organic, perhaps a bit more Bollywood than Hollywood. That would be an excellent place for founders to start.

Finally, local founders will need time to deal with their healthy fear of failure. Everyone knows each other in these communities. It is ironic that this mechanic can make it so much easier for an entrepreneur to find early traction, and then make the lasting impact of a failure so much worse. Changing the culture of failure will take a generation. Still, a founder today cannot afford to play it safe.

This excellent post from Paul Graham touches on a lot of what might be in a Uruguayan founder’s mind.

Most of the groups that apply to Y Combinator suffer from a common problem: choosing a small, obscure niche in the hope of avoiding competition.

If you watch little kids playing sports, you notice that below a certain age they’re afraid of the ball. When the ball comes near them their instinct is to avoid it. I didn’t make a lot of catches as an eight year old outfielder, because whenever a fly ball came my way, I used to close my eyes and hold my glove up more for protection than in the hope of catching it.

Choosing a marginal project is the startup equivalent of my eight year old strategy for dealing with fly balls. If you make anything good, you’re going to have competitors, so you may as well face that. You can only avoid competition by avoiding good ideas.

I think this shrinking from big problems is mostly unconscious. It’s not that people think of grand ideas but decide to pursue smaller ones because they seem safer. Your unconscious won’t even let you think of grand ideas. So the solution may be to think about ideas without involving yourself. What would be a great idea for someone else to do as a startup?

Many countries in Latin America have already come a long way. The talent level of entrepreneurs here is as good as anywhere else. Some founders are already starting to build for large markets. There are also some success cases to learn from and healthy later stages for investment. But for all the big ideas about building entrepreneurial ecosystems, I think the key may be to have more empathy for the founder in a small market and to better understand what he or she is going through.

On this topic, I have been thinking about a couple other ideas or formats that could work for Latin America (or possibly other regions with small markets).

• Programs for entrepreneurs and entrepreneurship that cross more borders. A lot of the first touch is probably too local and offers too little exposure to other markets. At the same time, a lot can be done to make crossing borders more painless for founders but it involves a group effort.
• More regional specialization from incubators and accelerators. This is about finding the best deal flow, adding the most value and offering better access to markets. Those efforts are diluted when programs try to do a bit of everything, or are constrained to local markets by misaligned incentives on the back end.
• Angel Syndicates. Local founders need to be dedicated at this quite a while to have enough exposure and experience to reach their potential impact, local investors will need to follow suit. Trying to teach people to be angel investors on the side does not make sense when they likely will not have the mindset, risk profile and time for it. For those kinds of investors, angel syndicates (explained) would make the investment process much more efficient considering the fragmentation in Latin America, and the difficulty of developing enough proprietary deal flow.
• The Indie.vc Format. A contact suggested this model might work in Latin America and I was surprised I had not thought of it sooner. There is definitely room for an investment model with unique funding structures in this kind of environment, and it might give founders in smaller countries extra assurances about their options throughout the life of their startup.