By Nima Pourshasb
Contxto – It certainly does feel that, finally, the Latin America moment has arrived. Just this year, Latin American startups have raised US$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’s it like starting a company here?
Despite the vastly different markets, building a business in this part of the world comes with its own pinch of picante. That is, aside from market volatilities, head-spinning currency devaluations, double-digit inflations, etc.
Fundraising in Latin America
Let’s start with the challenges—fundraising. Latin America suffers from 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 have also increased funding capability, but not investor quality. Some of these include INADEM in Mexico and Start-up Chile.
Certain offices belonging to the handful of families that run the region’s economies have also started to dabble in venture capital. Often, they are led by the new generation offering not much more than their last name.
You may even meet investors flying in from Spain who think that they understand the markets here just because they speak the same language.
So, even given this context, you take the plunge as a venture capitalist in the region.
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 with a signed term sheet in your hand. It looks like the venture capital (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. 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 user-bases or datasets will change minds.
Starting up startup culture
Then let’s take the startup culture, which is at its infancy. So, you’ve now decided to 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 two years.
This leads to “it is difficult to hire here” 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 Argentine programmer, who has seen a string economic crises every five years, to have little interest in your option plan.
The result is that well-funded local startups have started building teams outside of Latin America.
Daily frictions—there’s the rub
Finally, 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. Moreover, you are continuously worrying about fraud.
Perhaps you develop a zen-like patience to deal with frequent inefficiencies and disappointments from providers or partners. Linguisticially, this is often preempted with a Mexican “¿qué crees?” (“Guess what?” or more likely “You won’t believe this”) or a Brazilian “pode deixar” (you can leave it in my hands) or a Colombian “qué pena contigo” (what a shame with 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 complaints about their exorbitant prices and poor service, cheekily suggest that you “look for other options.”
Fifty shades of grey
Your MBA International Entrepreneurship and Ethics classes do not prepare you for operating in the grey areas that you are occasionally forced into. It’s 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, was through a “mule” who would show 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. The resulting indefinite delays are suddenly on you. Often, you also feel that deals only close when friends call in favors.
Outside the office, you are on high alert against theft or muggings. Yet, sooner or later, a Buenos Aires airport taxi will likely rip you off or a pickpocket play some tricks in downtown Bogota. Most likely, you will probably end up bribing a Mexican traffic police officer who 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 Latin American opportunity so large. Among a population of 642 million people—including two of the world’s most populous countries—, with a growing middle class and internet penetration, you manage to identify unmet or unsatisfied demand across a variety of products and services.
In Mexico, you find that only 60 percent of the population has a bank account. Along those lines, there’s also low penetration rates across all banking products. Ultimately, 50 percent of transactions revolve around cash.
47 million Brazilians access Facebook every day (second only to the U.S.). In both Brazil and Mexico, you come across average interest rates for unsecured online loans of 400 percent.
Only 4.2 percent 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 could even feel astounded by the low Net Promoter Score across most industries and lack of customer-centric innovation.
Simply put, in Latin America, once you get over the “bump”, you find opportunities everywhere you look. Furthermore, the ecosystem is improving, and fast. 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 U.S. business schools, investors, and corporates. The flow of MBA entrepreneurs promises the next wave of new projects. Specifically, it was Brazil in 2011 and Mexico in 2015.
More importantly, you are now celebrating exits. For example, Brazil’s e-commerce service startups, Stone and Pagseguro, going public. Didi—a car-hire app—acquiring 99Taxis for US$1 billion and Uber acquiring Mexico’s Cornershop—a mobility app buying a last-mile delivery service.
Lastly, at a personal level, it is tremendous fun to be here. Brazil is attractive because of its 200 million-strong 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. The list goes on.
As a foreign entrepreneur—trained to adapt quickly in the business world—you enjoy adopting 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. Maybe you celebrate by poorly attempting to dance salsa.
“Starting a business in Latin America is like running a marathon after five shots of guaro and five shots of tequila, through a Rio favela during Carnaval,” said an entrepreneur friend of mine over mezcal. “But there is no other place I would prefer to do it.”