Silicon Valley, It’s Not You It’s Mexico

It is not your fault that VC markets such as Mexico and other emerging VC hubs are still quite not ripe. The responsibility to create irresistible investment opportunities for local and foreign investors that will generate a booming ecosystem is ours.

The prepaid phone industry, the biggest Spanish-speaking TV network and the nearshore industry have all been created in Mexico. If Silicon Valley wasn’t instrumental in starting businesses such as America Movil from Carlos Slim, Grupo Televisa or Softtek — with a combined market cap of more than $80.57 billion dollars — why should it be different now?

There is no doubt about the inspiration and impact that the Valley has over the entire world. Cities, countries and regions frequently refer to Silicon Valley as close to Mecca as there is and, maybe even more, as something that should be replicated in every potential entrepreneurial hub.

Furthermore, we have witnessed cases in which people stood up demanding Silicon Valley look our way as a mere cry for help. But that inevitably raises a fundamental question: Does Silicon Valley have a strong debt toward any other region?

I think not; rather the contrary, we should be thankful for the inspiration and teachings we have absorbed, which serve as a basis for global startup hubs. To think there is no hope to generate startup ecosystems without Silicon Valley’s capital is to play to the strengths of the latter, but not necessarily our own. It is certainly not about replicating Silicon Valley, but rather about establishing our own differentiated communities that can strive on local flavors.

If anything, we should wonder why there isn’t more capital being deployed into VC locally, or even regionally, while the wealthiest from Mexico, Colombia and Venezuela add up to 80 percent of the recent foreign investment in real estate in Madrid, Spain. We need to do a better job at creating incentives for private and corporate investors, such as offsetting potential losses or reducing taxes on capital gains.

Mexico, Not Juicy Enough

“The Mexican entrepreneurial community is yet too small for a country this size and there is yet too much interest in what is happening in the United States,” said Carl Scharmm of the Kauffman Foundation, during his speech at an Angel Ventures Mexico event in Mexico City last year.

In 2014, the United States saw $47.3 billion in VC investments across 3,617 operations, where California alone accounts for $26.8 billion of those investments. According to data provided by LAVCA and CBInsights, this is, simply put, 51 times bigger than all of Latin America’s investments — combined ($525 million across 186 deals).

Among the leading countries in the region, Brazil attracted one-third of this capital and represented nearly half of the early stage deals. As for Mexico, the PE/VC managers deployed 1.31 billion during 2014, but only $38 million was invested in startups across 54 deals, which means that a country of 120 million people and a GDP of $1.2 trillion has a similar VC activity for startups to Nebraska ($37.8 million in 9 deals — $115 billion GSP and 1.8 million people) or Kansas ($42.3 million in 7 deals).

Mexico has everything it needs to become a powerful entrepreneurial hub for Latin America; it is our job to make it happen.

The ugly truth is that there is still work to be done to generate a startup community that is sustainable and can prove interesting to many in the affluent Mexican community who should be LPs in VC funds or angel investors — or even attract more traditional corporates to have a more active funding role. A dynamic ecosystem requires that successful entrepreneurs generate enough capital and influence to increase the volume and size of investments.

According to Endeavor, out of different possible connections among entrepreneurs in Mexico City, such as mentorships, investments, inspiration, previous employment or founding team, only 14 percent of these interactions account for investments. To really be able to have an exponential growth in the ecosystem, it is imperative that we lower the cost and friction of what it takes to become an investor in the sector.

As means of comparison, the same study conducted by Endeavor in Buenos Aires, Argentina, shows that more than 90 percent of the startups created between 2000 and 2010 are somehow connected; 21 percent of total influence connections are business investments. MercadoLibre,  Officenet, Globant, Patagon, Fnbox and Digital Ventures are among the top Argentinian companies that have invested in other startups from Argentina, particularly through their founders as angels or newly created investment vehicles.

There Is Still Hope

After all, we might need Silicon Valley to create our next unicorn: I argue it is not its capital, but rather the belief and conviction that has united for decades the elements to foster an ecosystem with the capacity to change the world once and over again. A sense of collaboration that brings together corporates with startups, founders with mentors, co-investors and capital with opportunities.

It is very important we recognize the need of a critical mass of venture=backed entrepreneurs. Most of them will fail, while some of them will go on to build business we will all know. But most importantly, all of them will learn and get back to it. Success stories, knowledge and mentors are critical to the community.

There also is a boom in co-working spaces and dev-schools, in addition to an increasing pool of talent while Mexico still graduates more than 100,000 engineers each year. As the founder community keeps getting bigger, dev communities such as Chela.js or Platzi’s are bolstering sophistication among local developers.

The infrastructure has improved substantially, with better access to payments and logistics. And although credit card penetration still remains below 15 percent, fintech companies are addressing this opportunity at a speed banks never did — arguably the main barrier holding back the biggest Spanish-speaking market in the world from becoming one of the hottest e-commerce spots worldwide.

We have set the basis of what we have envisioned. With at least 42 early stage VC funds currently present in Mexico, we can predict that some of us have already invested in those companies that will have significant exits in the next 5-8 years. We need this to make sure we have a more active local LP base and serial entrepreneurs encouraged to grow this industry.

Mexico has everything it needs to become a powerful entrepreneurial hub for Latin America; it is our job to make it happen.