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Cultural Realities Of Latin American Entrepreneurship

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Editor’s note: Derek Footer is the Managing Partner of Origo Ventures, a fund focused on early stage technology companies throughout the Latin American region, and the CEO of HardTech Labs, a firm focused on building hardware and biotech ecosystems in the San Diego/Baja region.

One of the brilliant things about tech leaders and pundits in Silicon Valley is their true passion for entrepreneurship and their belief in the power of the human spirit and intellect. Surrounded by the sight of so many motivated and talented founders in the Valley itself, they assume that this optimistic sensibility can override nearly any obstacle for a dedicated entrepreneur.

However, outside of the Valley and particularly in the rest of the world, the reality is more nuanced. Truthfully, as a means of understanding startup culture in the rest of the world, this viewpoint does international entrepreneurs a disservice.

Brilliant, hyper-motivated foreign founders inevitably find their way to the Valley, shaping this misperception. But the reality of entrepreneurship outside of the Valley is shaped by culture and policy in ways that add myriad challenging layers to the dream of founding a company and bringing it to success. Valley culture has been maturing for nearly five decades and it was founded in a culture that already exalted individualism – cultural underpinnings that nurtured entrepreneurial culture. Elsewhere, this is not the case. My experience has been with Latin America, but I think many of the structural impediments apply everywhere.

In Latin America, the fundamental cultural impediment to creating a sustainable entrepreneurial ecosystem is lack of individual risk-taking. While this is true at the entrepreneurial level, it is not a crucial element due to other factors compensating – primarily the attraction of the Silicon Valley lifestyle. However, this is not true in the investor layer, and thus a crucial piece of the infrastructure – the post-startup financing – is severely underdeveloped. The cultural factors here are clear: lack of comfort with technology, group decision-making, long decision-making cycles, desire for control and severe discomfort with failure result in an anemic investment community.

Consequently, the investment infrastructure necessary to sustain risk-takers is missing – beyond mostly government-funded accelerators, there is little further investment until Series A. And the Series A funds are also often beneficiaries of government funding. Even then, few deals get funded, resulting in a handful of positive outcomes via local funds or even fewer companies finding funding in the U.S. The rest die or become zombies.

But the commentary on non-U.S. entrepreneurship lacks this awareness. At a private breakfast for investors, I heard a very prominent partner at a leading Valley fund say to his audience of Latin American investors that there will be no more Facebooks or Googles from the States — that the next one would be from Latin America. While he had positive intentions, this investor drove home his ignorance of the region.

The quality of founders in Latin America is high enough that there will be potential multi-billion-dollar companies (and besides the obvious reality that the next Facebook or Google will likely be from the Valley), but it is unlikely any will – Latin America has had so few medium-sized successes that no founder is going to turn up a decent exit at the early stages.

This isn’t the Valley, where investors and entrepreneurs alike have the resources, confidence and passion to take the chance Mark Zuckerberg did. This is a region where risk-aversion and caution are prominent values. More to the point, a Latin entrepreneur is overwhelmingly incentivized to take the short-term windfall, as a multi-million-dollar exit would make one a rock star locally and ensure funding for their next venture.

There is a real and substantial cost to the Silicon Valley hype that spirited entrepreneurship overcomes all obstacles. The strategies that work in Silicon Valley – particularly the drive for growth over early revenues – are often fatal to new startups elsewhere. The best accelerators and institutions at the foundation of Latin American startup culture are following the Silicon Valley model – and incubating and accelerating great companies into a void with a very low chance of further financing – too early for substantial traction and out of cash.

So let’s keep the Valley spirit, but focus on developing appropriate local practices, as follows:

  1. Founders need to be directed to gain traction and revenue much earlier than is typical in the Valley due to the lack of second-stage capital, specifically: achieving meaningful revenue by graduation from an accelerator;
  2. Accelerators need to have longer times with companies – six months is a minimum, and a year is better;
  3. As the new government in Chile seems to recognize, capital needs to be directed to the funds that are investing at the post-accelerator/pre-Series A level; and,
  4. Funds investing in the post-accelerator stage need to work closely with accelerators on their portfolio company milestones to ensure they become investable companies.

There is no all-encompassing solution, but taken together the above points will extend the runway for companies to reach a level of traction that will enable them to survive through revenue, giving them time to succeed. A more sensitive approach to the cultural realities of investing in foreign ecosystems, better cooperation between the players in those ecosystems, a longer-term vision and a willingness to ignore at least some Valley “wisdom” in favor of local knowledge would certainly result in more frequent positive outcomes.

Featured Image: Matthew Straubmuller/Flickr UNDER A cc by 2.0 LICENSE