Can Latin America be the Next Sweet Spot for startup investments?Date: 24/10
By Blas Rodríguez Irízar
Judy Webber wrote an article on June of 2011, on the section "Understanding Entrepreneurs" for the Financial Times, stating that Argentina had talent but also a lack of investment cash. More than three years have gone away since its release, but it still looks like breaking news.
Latin American countries are defined as developing economies. The Dependence Theory call them - more harshly - periphery economies. The thing is that if we (as a region) want to take these tags out of our way, we need to do new and existing stuff better than ever and then others are doing it. There are many obstacles indeed, but the big challenge is how to tackle them, and learn how to succeed on a wild and not friendly at all business environment. In this article, I will try to cover the main issues that the companies in Latin America face, and see if there is something fresh that might be done.
Jacques ( Jack ) Schnabel, on his paper "Entrepreneurial Startups: Emerging Markets Versus Developed Economies", establishes that a venture in Emerging Markets has an incentive (which is nonexistent in Developed Economies) to use the always available option to delay its launch in order to take advantage of this time to refine their business plan, and therefore to increase the odds of success. This is possible due to the lack of competitiveness in less developed economies, which does not push them to hurry up. On the contrary, Schnabel points out that the ventures on Emerging markets need to offer a much higher return to the investors. The higher return requirement is explained by the existence of this delay option in Developing Economies, which is included as a premium on the minimum rate required for investors in order to have Positive Net Present Values in their ventures. Thus, according to Schnabel, there will be less startups in Emerging Markets, since their time-to-market is much longer than in Developed Economies in addition to the fact that they must show higher expected cash flow streams, to compensate investors for the embedded bigger risk in these economies.
Why don't we stop trying to be the next Instagram of whatever-Sillicon Valley-new app is out there! We can always blame the governments, policies and everyone, but why don't we first do some self-criticism? It is obvious that we should not put all our best efforts on technology-based startups, at least for the moment. I now we have some good examples on these industries like Globant, Mercado Libre, Restorando and so on. But I have also witnessed the enormous tech-bias predominance among all kind of ideas. Let's move away (at least a bit) from this sweet and beautiful industry, let the Carneghie Mellon & Caltech geeks do their work and see where is the best place to put our effort and leverage our available resources as a region. All of this sounds logical and (probably) familiar to us. So, let's try to say something we haven't thought about before! What features shall the next start definitely have to be more attractive for investors by reducing their time-to-market and their perceived risk?
The products or services must be focused on external markets (let us try to export!), to reduce its exposure in our local, volatile and relatively small markets. To do so, you need to be world-class competitive. How to do that? Well, let us work on those areas in which we have absolute advantages! Which ones? Well... Let's foster the wine business, agricultural finished goods, animals genetics, etc..
Do we need more investment cash? What type of financial product can we offer to investors to reduce their risk? A simple idea is the following: It should be possible to create some sort of mutual funds of startups (maybe by industry, revenue size, anything...) and sell these shares on the market. I can quickly foresee a very big issue on the risk assessment for Risk Agencies, as these companies have few financial data since they are new. However, if there is will, and highly profitable startups I bet the experts should be able to overcome this issue, maybe by pricing this risk on the shares, or whatever fancy solution there might be. Maybe this is a good idea for opening new markets of investors for entrepreneurs. It is easier to selll a basket of 10-20 well risk diversified and good looking startups than a one shot venture with huge risk in a region like ours in which the investment culture throughout people is not a common habit.
There is a lot of room for improvement. Latin America has an enormous potential: the same language, very few political and social conflicts, and a consumption market that is still asleep. It is just about identifying what can we do better, just small steps, and work it out. It is only about gaining some momentum.
Blas Rodríguez Irízar lives in Buenos Aires, Argentina.
He is fond of the startup world and a truly believer that there is a lot of room for improvement. Follow him on Linkedin