Although Mexico has incredible conditions for creating and developing high-potential businesses (see “Mexico is one of the best places to innovate”), a frequently heard question among the still young startup/venture capital industry is ‘Why aren’t there more success stories in Mexico?’. After being involved with founders (both technology and business types), universities, government efforts, individual investors, and venture funds, I offer the following reasons why (in my opinion) this has been the case historically, going beyond the easy answers of “There are no investors” (mentioned by founders) and “There are no projects” (mentioned by investors):
- Lack of funding at the early stage: there are lots of options for later stage deals, but not at the beginning of the funnel.
- Investors waiting on the other side: most deals are screened for the right idea with the right founder at the right stage of development (and revenues). Successful companies don’t develop themselves, especially when compounded with the rest of the following factors, so as an industry we need to work more at the early stages.
- Wrong financing types: the funds that are available (mostly from the government) are either incredibly bureaucratic and/or require the founders to assume the risk personally by asking for a warranty.
- Alternatives for investments: not necessarily bad by itself (it’s good to have investment options), but when investing in real estate with 20%-30% annual returns (although for the most part that’s no longer the case), who wants to invest in a new business without physical assets?
- Limited understanding: Investors who have made their money in traditional industries find it harder to understand (and add value) to tech-based businesses.
- Wrong ambitions: Focus on easy solutions and/or traditional businesses (as an acquaintance put it, “too many sushi restaurants and t-shirt makers”, or too many ‘side-projects’ – see “The Peter Pan syndrome in eternal entrepreneurs“), not ones that can change industries (serious entrepreneurs want to create big businesses, not multiply small ones). A website or a mobile app is not a business; it needs to solve a real problem worth paying for.
- Need for absolute control: Many founders want to keep 100% ownership in their business, settling instead for a bigger slice of a smaller pie. Microsoft, Google, Apple or pretty much any hyper-growth company couldn’t have developed the way they did without external investors.
- Not mature enough: as a founder seeking investment, it’s critical to understand investors but most don’t know the basics of the VC model and believe that ‘really cool idea’ is enough. Venture Capital is a business, and it needs to be if we want to make it sustainable. Even though it’s not a topic usually taught in school, there’s lots of information available about how VC works (See Venture Hacks) and how to build a new business (see Nail it then Scale it).
- Accustomed to ‘Lost funds’ and subsidies: This doesn’t work in the long term and distorts the reality of economic model.
- Wrong default career models: We still push students to go work for a corporation (or start a small business) but not to swing for the fences and change how an industry works (see how the default for new graduates is corporate serfdom).
- Limited risk-taking culture: Society at large still assumes that starting a startup has a higher risk than a corporate job (and ironically, this is not the case; we will cover this topic in a future post).
- Wrong development models: Most incubation models still use the business plan as their main tool, even though Business Plans are dead (see “Are Business Plans Obsolete?”) and use the same process for traditional businesses and those that have the potential to scale.
- Wrong process for different types of businesses: the prevalent model is optimized for new businesses based on scientific development (see “Differences between internet startups and industrial-technology businesses”), but doesn’t work for new businesses that take advantage of existing technology to disrupt industries (see “Opportunities for disruption”) or that innovate through their business model.
- Complex licensing of Intellectual Property: With some exceptions, academic research is too far removed from the real world, and licensing terms for IP developed in many Universities are too complex, expensive, and inflexible so they end up not being used.
- Wrong incentives: As entrepreneurship has become sexy, there are almost too many people ‘supporting’ entrepreneurs and not enough actually starting companies (The Economist mentions how in India ‘More consultants, bankers & academics celebrating entrepreneurship than people actually starting companies’), making a living from consulting fees/sponsorships instead of building businesses.
- Lack of right experience: Building a business is very different from managing an existing one (see “Search vs. Execute”), and experienced executives who try to apply the same management principles to a new business could end up hurting it instead of helping.
- Few role models: Very few people have created a business from scratch and grown it to a big company (with some exceptions), so that skill set is very limited in the market.
- Wrong kind of experience: Most software development in Mexico is provided as a service to others, with few companies having gone through the process of developing a product (see “Software products vs. services”), not just selling an existing one.
- Regulations: Restrictions for pension funds limiting their investments in certain asset clases and corporate entities with limited rights for minority investors historically have reduced the incentive to invest.
- Business practices: Traditionally, businesses have been built on knowing the right person, not based on competence, leaving many capable founders out of the process.
- Economic environment: Government regulations and corruption, limited licenses, corporation forms, monopolies, and the informal economy have made it more difficult for new businesses to compete fairly.
Just to make it clear, this does not imply that there aren’t high potential businesses; in fact, Mexico produces a lot of healthy exits – for example, according to the Latin American Venture Capital Association, in 2008 Mexico had more exits than Brazil ($1,061M vs $1,042M) at the same time that Brazil was receiving 3.5x times the investment in that year ($2.5B vs. $700M) (we’ll cover this topic in a future post). The question we are trying to answer is why aren’t there even more. In the next post, we will cover how most of these factors have changed (or become irrelevant) and why Mexico’s potential is Venture Capital’s best-kept secret.