By Patick J. McGinnis
It’s not surprising that entrepreneurs and investors in Argentina and Brazil are at the forefront of the current wave of early stage ventures in Latin America. Building new businesses begins with people, and both Argentina and Brazil have established networks of proven entrepreneurs who contribute back into the system with capital, ideas, connections, and leadership.
Given their entrenched bases of talent and capital, Brazil and Argentina will continue to play critical roles in the early-stage space in Latin America. But other markets in the region are commanding new attention.
This fall I spent time in Mexico, which is an incipient but growing market for earlier stage ventures.
Building the Ecosystem from the Bottom Up: Seed and Angel Investing
Mexico benefits from one quality that no other country in Latin America can replicate: it’s faster to fly from SFO to Mexico DF than it is to fly from SFO to NYC. Mexico is also the country with the second largest number of Startup Weekends after the United States. Combine these factors with the size of Mexico’s economy (over $1 trillion) and its 60 million citizens with broadband access, and the potential for innovation grows clearer.
While in Mexico, I sat down with two of the individuals who are at the forefront of building and financing early stage ventures. First, I talked with Santiago Zavala, the Co-Founder of Mexican.VC (www.mexican.vc), which was acquired by 500 Startups in August. When he’s not working his day job, Zavala is at the forefront of building a start-up culture in Mexico. For Zavala, it all starts with the hackers, and he and his contemporaries are building the tech industry from the ground up through Startup Weekend. Their efforts are paying off: within the last 18 months, Startup Weekend organized some 36 events in 26 cities that generated nearly 400 teams, four of which have been funded. As Zavala travels the country evangelizing potential tech founders, he’s also making the kinds of connection with entrepreneurs the will serve him well as Mexican.VC raises its first fund in the coming months.
Angel Ventures Mexico (AVM) (www.angelventuresmexico.com) also plays in the seed space, although it seizes the opportunity from a different angle. Given that angel investing in Mexico is still in early days, AVM serves as a back office for seed investors, such as individuals and family offices that are eager to participate in Mexico’s burgeoning start-up scene. In this capacity, AVM vets businesses that are seeking capital and then helps to structure a transaction that achieves a meeting of the mind between angel investors and management teams. I recently attended one of the periodic pitch breakfasts that AVM hosts for its network of angel investors. The theme for the breakfast was healthcare, and two entrepreneurs each pitched an innovative approach to bringing healthcare to the masses.
Angel Ventures has now decided to raise a co-investment fund with the support of investors like the MIF (Multilateral Investment Fund). AVM Co-Founder and Partner Hernán Fernandez explained to me that after spending four years building an angel investor network, AVM realized that its network of individual investors bring smart capital to the table, but they face capital constraints with respect to deal size. Thus, a co-investment fund model empowers and leverages the angel network to do larger deals.
Beyond Seed Capital: Mexico’s Bid To Become an Entrepreneurship Hub
Participants in the early-stage market acknowledge that innovation in Mexico isn’t going to look the same as it does in Silicon Valley. Mexico’s distinct universe of investment opportunities has spawned the concept of “capital emprendedor” or “entrepreneurial capital,” which encompasses businesses ranging from start-ups through to promising small and medium enterprises (SME’s). Nacional Financiera (NAFINSA), the Mexican development bank focused on SME’s, defines capital emprendedor as capital that is destined for early-stage businesses and which serves to catalyze their growth by providing experience, strategic alliances, and corporate governance.
By jointly promoting the concept of capital emprendedor, NAFINSA, the Mexican Private Equity Association (AMEXCAP), and investment firms focused on this segment are together redefining the concept of early stage capital on the terms that are most relevant to the Mexican market. While there are plenty of purely tech-driven investment opportunities in DF, or Monterrey or Guanajuato, many of the companies looking for capital are more focused on introducing innovation to existing business models. These businesses adopt new approaches to manufacturing, healthcare, education, and agriculture, and root them in industries that serve large and existing markets.
The concept of capital emprendedor has also created a focal point for the Mexican government to catalyze investment in the segment. NAFINSA created two specific funds that are dedicated to the segment. The first vehicle Mexico Ventures 1, is an US$80 million fund that invests in relevant equity funds or co-invests alongside them. The second is a Seed Capital Co-Investment fund. With these types of programs, the Mexican government has allocated resources directly towards building investment firms and entrepreneurial ventures that, if successful, will create the type of entrepreneurial ecosystem that will be the basis for the next generation of investors and entrepreneurs.
In the coming years, it will be interesting to follow the Mexican market and to measure how the collaboration between government entities and private funds develops the market for early-stage capital. It will also be interesting to see how Mexico’s proximity to the United States shapes the market for venture capital. Will the best entrepreneurs expand their businesses in Mexico or move their headquarters to San Francisco or New York? Will US-based businesses move south in search of talent and capital? Will venture capitalists from the Valley start taking regular flights to Mexico or open offices in Mexico City? Will promising start-ups from Colombia, Peru, or Chile, look north TO seek financing from Mexican investors?
It seems that 2013 will be an important year in Mexico, with a number of funds in the market and Mexico’s new president settling into office. If private investors, industry groups, and the Mexican government can continue their ongoing collaboration, Mexico will continue to make its growing case as a hub for entrepreneurship in Latin America.
On November 28-29 Mexico is hosting the Mita Tech Talks organized by MITA (the Mexico Institute and Tech Accelerator) and Endeavor Mexico, with startup entrepreneurs from MIT, Stanford, ITAM and Tec de Monterrey, LAVCA regional advisor and VC investor Ariel Muslera is speaking on start up funding for tech ventures.