By Álvaro Rodríguez Arregui (guest commentary)
September 18, 2012 – Mexico has a large, stable and growing economy, currently the 14th largest economy in the world and, according to Goldman Sachs, [GS 119.9044 0.0044 (+0%)] will be the fifth largest economy by 2050.
Mexico has such a solid macroeconomic context that — among the only four countries to have recovered all the lost ground after the stock markets crashed during the 2008 financial crisis — Mexico is the fastest-growing country according to the MSCI index, surpassing the U.S., Singapore and Sweden.
According to the Mexico Ministry of the Economy, 35 percent of Mexico’s Gross Domestic Product (GDP) and 73 percent of the country’s jobs are created by small and medium sized companies (SMEs), which are the fastest-growing segments of the economy. While only 21 percent of small and medium sized companies are subject to bank financing, most startups and SMEs have no access to credit.
In order to boost entrepreneurship and aid the development of startups, Mexican government institutions, particularly the Ministry of Economy and Nacional Financiera, Mexico’s development bank, decided to solve this limited access to credit by encouraging financing of these projects through venture capital.
Among the steps taken by Mexico’s government and institutions to attract venture capital funds to finance start-ups in Mexico was the establishment of Fund of Funds, a development fund dedicated to promoting the private equity and venture capital industry in Mexico. This institution is also able to co-invest with national and international venture capital funds to fund SMEs in Mexico.
Another key step was the introduction of a series of reforms by the Mexican Stock Exchange (BMV) and Mexican pension fund regulator (CONSAR) that enabled Mexican pension funds to invest in private equity and venture capital funds through a structure known as Development Capital Certificate (CKDs).
A more recent example of the Mexican government promotion of venture capital industry was the launch of a $22 million seed capital fund by the Ministry of Economy along with Nacional Financiera. Through this vehicle, the ministry will co-invest with venture capital funds to provide capital to early stage ventures operating in the country.
As a result of the all the reforms and promotions done by Mexican authorities, Mexico’s venture capital industry has evolved at a fast pace, growing from two funds in 2008 to 14 funds in 2012.
According to the Latin America Venture Capital Association (LAVCA), Mexican startups raised $469 million dollars in 25 projects in 2011 through these venture capital funds, compared to the $211 million dollars raised through 19 deals in 2010. For 2012, LAVCA estimates that VC firms will invest around $1 billion in more than 30 deals.
Still, there is a vast room for growth for the Mexican venture capital industry. VC firms in Mexico only deployed funds representing 0.02 percent of the country’s GDP, compared to Brazil, the leader in Latin America, where funds represent 0.22 percent of the country’s GDP.
Fortunately, global investors are finally taking note of the attractive opportunities generated by Mexican entrepreneurs and startups.
Álvaro Rodríguez Arregui is Co-Founder and Managing Partner of IGNIA, an impact investing venture capital firm based in Monterrey, Mexico. Arregui has a Master in Business Administration from Harvard Business School and a degree in Economics from the Instituto Tecnológico Autónomo de México (ITAM).
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