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Cuba’s Startup Paradox

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You see them everywhere. Throngs of young and old, men and women, heads down on their smartphones, fingers rapid fire, mouths curling into smiles as they soak up the joy of an Internet connection.

Something strange is happening in these streets. With the parade of classic cars rolling past faded colonial structures and brutalist Soviet office blocks, and scores huddled on the pavement, hoping for a signal, it’s abundantly clear that we’re far from the United States.

Why are all these people clogging the sidewalks instead of logging in at home?

This is Cuba, and in Cuba, you can’t log in at home. You basically can’t log in at all. Personal computers are outlawed, and Wi-Fi is only available in a handful of hotspots called CyberPoints — plus the lobbies of a few hotels. To get on, you need a tarjeta, a bus pass of sorts, for the web. At about $5 U.S. an hour, it’s an expensive ride, forcing most to work offline — then, in a mad data dash, upload, send and download when they access the crowded bandwidth.

There are five CyberPoints in Havana, a city of 2 million, and 155 throughout the island. Before July, there were none. Cubans could only use the web if they were employed by the state as doctors, professors or scientists. The only other options: an hour per week of dial-up at heavily regulated state-run computer labs, or pirated connections, a dangerous play in a country known for severe Communist control.

Internet is so scarce, many take jobs with lofty titles and salaries as low as $12 a month just to get online. Pitiful wages in exchange for equally pitiful 56K web portals. But even at that snail’s pace, it has become a vehicle to launch startups and take off-the-books jobs.

Havana 7

In a country with only 5 percent Internet penetration, you get online when — and however — you can. Which makes Cuba one of the least connected places on Earth, and one of the most challenging locations to work as a tech entrepreneur. And yet, it’s also one of the most rife with opportunity.

Despite the hurdles, a young creative class is succeeding and growing. After spending a week meeting with almost a dozen local players, I learned that the best way to get online in Cuba is to work offline.

Problems & Solutions

Cuba’s 11 million people are extremely well-educated. The literacy rate is an astounding 100 percent, and the rigorous state universities produce thousands of STEM graduates every year. Yet they graduate to a nation devoid of the infrastructure — or salary incentives — to use those tools.

Without access to real capital, lacking business and marketing experience and starving for real Internet access, it’s nearly impossible to build a tech business. And when people do get online, they can’t make purchases or accept payments. Credit cards are forbidden, and few have bank accounts.

That’s why when Netflix came to the island in February, no one subscribed. Not only is it too expensive, but Cubans have no way to pay. That’s why Uber would never work here — but a local version of it, YoTeLlevo, has given the idea a Cuban spin, emailing drivers and arranging rates in advance (all rides are paid in cash).

Airbnb, on the other hand, has been a surprise hit, in part because many Cubans already rent out their homes to guests. The service uses a Miami company to deliver remittances, which can be sent directly to a host’s home (however, paperwork is a nightmare in this very bureaucratic nation — as are amenities, or the lack thereof).

This is Cuba, and in Cuba, you can’t log in at home. You basically can’t log in at all.

All these factors make the market less than appealing to venture capital, a reality often glossed over in many of the “rara” pieces coming from U.S. news outlets. After years of isolation, renewed diplomatic relations are a huge step. But the Castro regime isn’t eager to welcome foreign tech giants. Tight control has kept them in power, and broadening web access means ceding that control. ETECSA, the state-owned, sole telecom provider, retains a major monopoly — so do software companies like Albet and Desoft — and they’re not giving up market share easily.

It’s a tale of two Cubas: a faux first-world one for the party elite and tourists, and a spartan reality for locals. Cuba opened a fiberoptic cable in 2013, and there’s talk of expanding Wi-Fi spots throughout the country — but when that happens remains to be seen. Roaming has arrived, but that’s for foreigners only. Hotels broadcast everything from CNN to “Naked and Afraid,” but Cubans can only tune in to state-run programming. All other media are outlawed. Well, officially, that is.

Youth Movement

Decades of isolation have created a perfect storm for micro-enterprise to thrive. Just not the way you might think.

The backbone of the tech scene is a weekly data dump that mirrors a drug distribution ring. For a few bucks, it’s a way for Cubans to consume media, and even share app updates and ads. A terabyte of fresh content, every week — all of it illegal.

It’s called El Paquete Semanal, and it’s an offline version of the web — like a Netflix, Spotify and App Store rolled into one — distributed via hard drives filled with music, films and TV, from telenovelas to “Game of Thrones,” even material as esoteric as Korean soap operas. When you look at the setup and scope, it very much mirrors a cartel. Everything from its structure to the way its users are addicted.

“The Paquete functions like the Internet,” Elio Hector Lopez, one of El Paquete’s founders, tells me in the lobby of the old Havana Hilton. “For distribution we have delivery people, and in every province there are four sub-administrators. They buy the content from us, and then resell it. This is a place where people find what they want.”

Each week a runner delivers the package to subscribers. Money exchanges hands, about $2 apiece, and 24 hours later, after users download the goods, runners return to collect the USBs. Wholesalers get the package even cheaper, pushing it out in stalls and open-air markets throughout the country. There’s no way to track just how far El Paquete’s reach is — no email capture or metrics — but Lopez estimates it hits 95 percent of the island. This is the beast communism bore, an offline service that has become Cuba’s drug of choice.

Elio Lopez

Elio Lopez

Lopez, a 27-year-old former economics student, helped start the business in 2006. Back then, it didn’t even have a name. At that time, Lopez was working in a bank, which afforded him Internet access — and the chance to download music. He started making mixtapes for friends; a year later, hooked up with others mining the web.

The network extended and the idea took root. Unlike most Cubans, Lopez has traveled to Europe and South America as an actor in a theatre troupe, and that exposure gave him a sense of what people want, and what type of content is hot abroad.

Lopez says there are four people working on the core of the project, and his crew uses four liberated TV satellites and a staff of 200 to procure media and distribute it, a herculean task he half-jokes is killing him. “This is an enslavement,” he says with sunken, bloodshot eyes. “Imagine, week in and week out, we have to obtain information, edit it — because we remove commercials and everything has commercials — it’s a job that never stops. We don’t have rest days.”

Still, Lopez clearly revels in the Robin Hood-aura that comes with the nickname “el transportador,” the transporter. And he is making money, though not as much as some press have claimed. The ones really making a profit are the wholesalers who cut up the data and seed it throughout the island. Every week, Lopez and his team sell their hard drives to a half dozen of these high-level pushers for about $20 a pop. With most Cubans making that same amount per month, it’s not a bad hustle. But it may not last.

These 20-somethings, with shaggy hair, scraggly beards and iPhones in hand, look like they could be working in SOMA instead of Havana.

When the country truly opens, web-wise, and with credit cards, this business could crumble, as it is a black market play banking off a lack of access.

When asked if he’s concerned, Lopez shrugs his narrow frame, and like most entrepreneurs, tells me this is a gateway to something bigger: in his case, opening an ad agency. El Paquete charges to insert ads into programming for local mom-and-pop shops, and a core of startups that use the service to reach the masses.

Those include AlaMesa, a popular Yelp-meets-TripAdvisor-meets-OpenTable Android app that provides restaurant listings, locations and prices; Vistar, a bilingual arts and culture magazine that publishes as a pdf; and Revolico, a marketplace that resembles Craigslist in look and feel. All have websites, but since getting online is so hard, most have greater reach offline, through El Paquete.

AlaMesa_App_02

AlaMesa

 

Technically, all of these businesses are illegal. Advertising is outlawed, and the press is most definitely not free here. Each of these businesses serve to undermine that fact. Still, the contents of El Paquete remain strict: no pornography, and no dissident politics. Nothing to tug the tiger’s tail — at least not too hard.

And while there are 500,000 legalized entrepreneurs in Cuba (according to the Brookings Institution), none of the above companies have official licenses. Yet the government tolerates them (Robin Pedraja and Gabriel Lara, the founders of Vistar, say they’ve tried several times to obtain licenses before getting lost in bureaucratic red tape. Lopez has a license to sell hard drives, but that’s it).

Some have proposed that El Paquete is secretly controlled by the state, but Lopez says that’s not true. It’s likely that the Castros turn a blind eye to avoid the powder keg that cracking down would cause.

Without access to real capital, lacking business and marketing experience and starving for real Internet access, it’s nearly impossible to build a tech business.

“There’s never been a magazine like this in Cuba,” Pedraja told me. Censorship is the norm here — Cuba ranked 169 out of 180 countries in press freedom. There are no publications covering music and fashion — just party rhetoric. “That’s why we’ve been successful.”

Operating close to the flame has produced unexpected results. Instead of inhibiting creation, it has pushed it.

“We’re sort of the guide between our country and the users,” added Yondainer Gutiérrez, the 28-year-old graphic designer and co-founder of AlaMesa. Gutiérrez is prepping an app update, and introducing an augmented reality function allowing users to virtually experience a restaurant before they step inside. “This is a business opportunity.”

It’s hard to predict what Che would have said about the war being waged on the streets of his adopted homeland. Today’s freedom fighters have traded Kalashnikovs and Molotov cocktails for smartphones and thumb drives. But they’re still fighting.

“I left because Revolico was blocked and I was afraid of what would happen to me,” Hiram Centelles told me over the phone from his adopted home of Córdoba, Spain. “It’s like a cat and mouse game.”

Che 2

In 2008, the Revolico co-founder fled after the government blocked his site. Centelles had been using pirated VPNs to fool the authorities and keep the site active. But with Revolico both a vehicle for advertising and a cross-border marketplace, his service became a target.

Now operating overseas with a team of six, he has clients in Cuba and Florida that pay about $15 a month for premium ads, which reach millions each week through El Paquete. But it’s still a challenge to accept payments from his countrymen. And it’s hard to convince U.S. companies like Google, and recently PayPal, who froze his accounts and funds, that he’s operating a lawful business — not aiding a nation that supports terrorism, a designation Cuba is still slow to shake.

“Google blocked our account because our site is being served from different domain names, but that’s what we must do to circumvent the Cuban government,” he explained.

Centelles returned to Cuba earlier this year, a trip that coincided with Google Ideas’ inaugural visit to the island. He managed to hustle a meeting with the Googlers, and “the first thing we asked them was: ‘can you unblock our AdSense account?’” And they did. But now, PayPal is a major problem. One of many.

“We are far from Cuba,” he laments, “far from our clients. It’s difficult — we have fights on both shores.”

Next Steps

For these upstart entrepreneurs, it’s a constant battle to connect, grow and make transactions online.

“A very tough climate for business,” noted Davis Smith, an American who spent 15 years living and working in Latin American web companies before founding the outdoor-gear startup Cotopaxi.

If travel restrictions are further eased, will Cuba retain its tech talent?

A few weeks ago, Smith led a kayak trip from Havana to the Florida Keys, donating proceeds from the paddle to emerging entrepreneurs. This was his second time in Cuba, and while his analysis is sobering, Smith is quick to point out that even in Cuba, change can come. “Five years ago nobody had a cell phone. Today everyone has one.”

He says it will take increased Internet penetration (upwards of 40 percent), and government stability to woo U.S. capital. And that will take time. But buoyed by the bounce of tourism, Smith predicts that “the first investors we’re going to see in Cuba will be in real estate — people trying to build hotels, and buy properties.”

Sparked by a curiosity for a place closed to Americans for more than 50 years, that seems like a sure bet.

The economic embargo still stands — only Congress can change that — but in September, the Commerce and Treasury Departments loosened business restrictions. American companies can now sell agriculture products and building materials, which could add more credence for real estate investment. And U.S. firms are now able to hire Cubans to create apps and software for the Cuban market. A major win for locals — and a nascent outsourcing economy. But if travel restrictions are further eased, will Cuba retain its tech talent?

According to AlaMesa’s Gutiérrez, there’s a core of startup founders like him committed to changing the culture — for the long-term — in Cuba. These 20-somethings, with shaggy hair, scraggly beards and iPhones in hand, look like they could be working in SOMA instead of Havana. But entrepreneurs like Gutiérrez remain adamant that their future is here — not in the States.

“This is my country,” Gutiérrez added. “I want to stay in Cuba. But, I want to help make it grow. I want to be a part of something important.”