Starting Up in Mexico: Do the opportunities outweigh the dangers?

On the surface, Mexico appears to be a great place to both found and grow a high-tech startup. Positioned at #57 on the 2015 Global Innovation Index, ahead of South Africa, Brazil, Argentina and even India, it’s predicted to be the world’s 8th largest economy by 2050. Before it can become the “Silicon Valley of LATAM” there are a few rather large internal speed bumps that they will need to show the world it can successfully navigate. The first and biggest one is well known: Personal security and widespread corruption

There is a perception of danger and a fear of loss

Nothing puts the brakes on big business like the fear of personal safety and the threat of losing trade secrets. Unfortunately, Mexico has major struggles with both. Tales of source code appropriation, intellectual property rights violations and executive kidnapping schemes continue to put a damper on innovation and foreign investment. Even though copyright and patent laws offer some level of protection, the problems have literally reached “urban legend” status globally. Fear can be an amazing motivator both in moving a sale forward and as a “wet blanket” when angel investors and founders are thinking about maximizing their resources.

If Mexico is really serious about elevating it’s position as a “startup hub” in the global community, it will need to present its “Startup Manifesto” in a very clear and convincing manner. The Mexican government, Mexican business leadership and foreign allies will need to stand together to make this future state a reality.

The Mexican government needs to assert its leadership

While sidestepping some issues, the Mexican government has certainly made significant efforts to encourage its startup ecosystem. In 2014 alone, it distributed $658 million to fund 6,000 new startups, and is expected to invest $18 billion in entrepreneurial projects by 2018.

The Instituto Nacional del Emprededor (INADEM) is a world-class program established to encourage innovation and promote the country’s startup credentials. INADEM has five frameworks – regional development, business development, high-impact financial and entrepreneurial culture, medium and small business projects, and technology access for micro business.

“The talent exists, there’s population that is a force for change and dares to create options rather than follow them,” stresses the General Manager of High-Impact Entrepreneurship Programs at INADEM, Adriana Tortajada, adding that Entrepreneurs in Mexico need to be prepared, be sophisticated, be the best at what they love to do Click To Tweet

The Mexican government is also seeking to encourage more foreign investment by growing its international network with free trade agreements. The impact of this effort is not yet clear, especially when you consider that the tariff-free technology benefits of NAFTA have been in place for over 20 years.

That being said,cities like Guadalajara, based in the central region of Jalisco, are pushing ahead with their own agenda. Governor Jorge Aristoteles Sandoval has established an Innovation Department and is building a business hub to attract more hi-tech business to the city and bring together its growing innovation community. Global high-tech firms such as IBM and Intel are investing heavily in the city. Intel sank more than $177 million into the Guadalajara Design Center which offers vital, co-working space to fledgling start-up enterprises. With all of this support, attracting entrepreneurs should be easy.

Building an entrepreneur friendly environment is still a work in progress

In a normal world, with the support of the INADEM framework and a burgeoning startup ecosystem, creating and supporting innovative entrepreneurs is becoming much easier. Startup hubs, like 500 startups and Startup Mexico, represent some of the over 100 incubators operating in Mexico. They serve to bring together advisers, investors and entrepreneurs to accelerate ideas. Coupled with co-working spaces and crowdfunding platforms, Mexico is well on its way to becoming one of the world’s greatest innovation centres Click To Tweet

Angel investors are not yet “feeling the love”

While there is certainly considerable growth at the incubation stage, investors are gun-shy when it comes to funding ambitious projects. In 2014, only $38 million was invested in 54 startup deals, which is less than the startup community in Nebraska. It’s not just the overall amount of investment that’s an issue, but also the level of funding for specific deals. Seed funding of over $500,000 is rare, leading to low-level investments that just don’t provide startups with the runway they need to fly. In the US, it is normal for a startup to take years to develop a solid customer base and several years beyond that to prove to investors the real potential for market/revenue scalability. Without the proven success of a “Google” in their past, angel investors don’t yet have the confidence needed to fully commit to supporting Mexican startups. This reality makes the possibility of a “Unicorn” coming out of Mexico more “blue sky” than reality.

FinTech may finally get investment dollars flowing in the right direction

Banking in Mexico has never been easy, so it’s no surprise that fintech startups are flooding the market with solutions for everything from micro-finance to credit scoring. While disruption in countries like Hong Kong are restricted by regulatory issues, Mexico has fostered innovation out of sheer desperation. While investors prevaricate over whether they should involve themselves in the country’s growing scene, some startups may just solve some of the pervasive issues hindering financing or payments in many developing countries.

While Mexico is flush with quality talent it needs more “cowboys”

One thing Mexico is not short of is talent. Its universities produce 130,000 high quality engineers a year giving it a potential pool greater than Canada, Brazil or Germany. The issue is keeping the talent in-country rather than just supplementing the US’s STEM pool. Even though brain drain is a problem, there’s a real advantage to the US (and other countries) to bring their opportunities to Mexico rather than import the talent; they’re cheaper if they stay home. This is a big bonus for companies that do shift their technology programs to Mexico, providing experience to budding entrepreneurs who can then reinvest that into the startup world.

Like India, it’s also attracting expatriate entrepreneurs, like Andy Kiefer at Agave Labs, back into the fold. He brings practical experience, a cowboy mentality and US dollars; three things badly needed to drive quality tech startup development.

Good business requires good Infrastructure in order to grow

A good tech hub needs sound telecommunications infrastructure, and Mexico has done a great job in making that happen. About 78.2 million people have mobile phones, and foreign investment is making connectivity faster and better. AT&T is planning on adding 3,000 microwave stations, something that other networks will be able to leverage. This will not only ensure that business can function without interruption, but also fuel internal demand as an attractive cherry on the top.

English is great but knowing Spanish is necessary

Even as foreign investment grows in Mexico, most professionals prefer to communicate in Spanish. Fortunately, technology translators like SpanishDict have advanced to the point of helping you communicate “well enough” to allow you to move your venture forward without having to spend six months in class.

There are many legitimate reasons why you should and shouldn’t consider building your start-up in Mexico. While security and safety are valid negatives, tremendous talent and global community support are obvious positives. If you perform an extra level of due diligence and then focus on developing/funding a value-added business idea that can scale well beyond Mexican borders, I think the opportunities presented in Mexico significantly outweigh the risks,

The real question is “Do you have both the vision and the heart to succeed in Mexico?” The answer to that question trumps any argument made in this article. Clint Eastwood said it best. “Do you feel lucky today? Well do ya?”

Let me know!

 

References

https://www.globalinnovationindex.org/userfiles/file/reportpdf/GII-2015-v5.pdf

http://www.nearshoreamericas.com/mexicos-startup-ecosystem-drives-talent-development-innovation/

http://www.bloomberg.com/news/articles/2015-06-23/mexico-to-overtake-russia-by-2050-as-u-s-slides

http://www.usatoday.com/story/money/2016/02/02/mexico-startup-economy-tech/79679364

http://www.wired.com/2016/02/startups-can-escape-their-cash-crunch-by-going-to-mexico/

http://www.panamericanworld.com/en/article/mexicos-location-benefiting-tech-firms-and-startups-new-ways

http://www.ibtimes.com/mexico-city-next-silicon-valley-how-mexicans-became-obsessed-unicorns-2317659

www.orange-business.com/en/magazine/business/mexico-the-new-start-up-frontier

http://stories.newco.co/2016/02/03/startup-mexico-incubates-homegrown-innovation/

http://www.centrodeinnovacionbbva.com/en/news/new-opportunity-us-startups-mexico

http://tech.co/5-damn-good-reasons-startup-mexico-2015-02

http://www.ft.com/cms/s/2/ec7461a8-ffb3-11e4-bc30-00144feabdc0.html#axzz46CZts82g

http://techcrunch.com/2015/03/26/beyond-the-maquiladora-a-look-at-mexicos-startup-scene/

http://techcrunch.com/2015/08/01/the-next-great-startup-will-be-a-unicornio/

 

Starting up in India?..Things are good, working on great

In my last post I shared my thoughts on building a tech startup in Hong Kong. Now, let’s turn our attention to India. Often called the Silicon Valley of Asia, India is now the third largest tech startup hub in the world (behind only the US and UK). Its startup ecosystem (which extends well beyond high techis estimated to almost quadruple, from 3,100 startups in 2014 to 11,500, by 2020.  

High tech startups in India cover almost every industry from healthcare to education. Click To Tweet While consumer and e-commerce encompass the lion’s share of investment, health insurance and payment platforms are emerging as key areas of growth. As per usual in my posts, there are as many positives regarding doing high tech business in India as there are concerns about whether India has the environment to accommodate such rapid growth. While I generally believe India represents a great growth opportunity for tech startups there are a few challenges you should keep in mind.

Government and legal support is outstanding

In August 2015, Prime Minister Narendra Modi announced the Startup India Movement. Focused on supporting startups and growing ecommerce , it provided a Rs 2,000 crore (over $300m) funding boost. There are 3 key initiatives it puts forward:

  • Creating a Credit Guarantee Fund that provides funding support at a regional level. This is aimed at encouraging innovation and supporting communities who would not normally have access.
  • Establishing up to 75 new technology startup hubs (including innovation parks and research hubs) with the intention of supporting new businesses in getting off the ground, and encouraging job creation.
  • Launching the Atal Innovation Mission which is focussed on establishing new incubators and sources of seed funding. It also promotes innovation through industry recognition, state councils, trade workshops and conferences.

This initiative also includes regulatory measures that make “starting-up” easier as well as clearing barriers to entry. The 5 key measures worth noting include:

  • Establishing a business portal designed to reduce government bureaucracy by enabling 14 regulatory permissions at one time.
  • Introducing capital gains tax exemptions for people investing their own wealth.
  • Exempting startups from income tax for the first 3 years.
  • Reducing royalty tax to entrepreneurs from 25% to 10%.
  • Offering greater protection to patent holders, and improving the speed of patent filings.

The initiative has been met with a positive response from both entrepreneurs and business leaders as it also demonstrates Prime Minister Modi’s dedication to innovation and growth in the market.

Funding / Venture capital is plentiful

Venture capital funding, private equity and angel investment is booming in India. Funding for startups grew from $2.2b in 2014 to $4.9b just a year later, with the number of startups being funded growing rapidly. As the charts below demonstrate, VCs, Private Equity, angel investors and incubators are also growing exponentially. Seed funding is also growing, while small in value, has increased from $15m to $99m in the space of one year.  

Nasscom

Image courtesy of Nasscom, Start-up India – Momentous Rise of the Indian Start-up Ecosystem 

The money is coming from both local and international sources, with many serial entrepreneurs such as Ratan Tata of Tata Group and Kunal Bahl of Snapdeal getting in on the action. VC companies are also throwing cash into the ecosystem, including several international firms such as TGM, Tiger, DST Global, SoftBank, Sequoia Capital and Accel Partners.

While initial valuations in India are lower than their US counterparts ($2.3m compared to $4.2m), there have been some major investments in companies such as Flipkart and Ola that show the potential for large D, E and F funding rounds.  

Startup enablers are many

Business has also jumped on the startup bandwagon, with incubators, shared workspaces and advisors creating their own booming industries.  There are now over 100 incubators and accelerators supporting startups with resources, mentoring and seed funding. Chief among them is NASSCOM’s 10,000 startups which is providing direct support. This initiative is supported by the likes of Google, Microsoft and Intel.

Language is not an issue

English is one of the official languages in India and the prevailing language of business. While there are challenges for businesses targeting customers in regional India, due to the wide variety of dialects, this is an operational issue rather than one of strategic impact.

Talent is readily available (with a few caveats)

Skilled talent is one of India’s strengths, but it may soon be a weakness. Click To Tweet The majority of startup founders are young, with 73% under the age of 36.  This is a reflection of the general population. By 2020 India’s average age will be only 29 years. When coupled with a burgeoning middle class that is educated and ambitious, it sets the stage for the country to become a global talent powerhouse. Unlike their parents and grandparent, the new generation will be more willing to take risks, seek out new challenges and relish the blue sky opportunities offered by startups.

While brain drain was once a major sore point for India, talent is now returning home. With many returning with valuable experiences in some of the world’s top blue chip technology companies (i.e. Peeyush Ranjan left Google to take a position at Flipkart, Namita Gupta swapped Facebook for Zomato, and Rushil Goel left Boston Consulting to join Ola).

These ex-expatriates can now assume a mentor role to support their younger counterparts and foster an exciting community of innovation and growth.

The legal environment is daunting

While the Startup India Movement contains several initiatives to reduce regulatory hindrances, as outlined above, many doubt that that the new policy will work as planned. Progress in the sub-continent has been historically plagued by both the slow wheels of bureaucracy and high levels of regulation and corruption. While there have been moves to change this, many businesses are still reporting obstacles.

Last year, approximately 65% of tech startups that had raised Series A funding were looking to move out of India due to legal and regulatory issues, with many opting to relocate to the US, Singapore and the UK. Issues such as capital gains tax, conducting IPOs and facilitating international payments are slowing these businesses down. Navigating the maze of paperwork and red tape would be challenging enough for large businesses, for startups it’s a distraction they don’t need.

Infrastructure continues to be a significant barrier

Infrastructure in India still has a long way to go before it can meet the needs of a developed nation. Digital infrastructure is just one area that requires support, with major cities still experiencing daily electricity outages. While growth is occurring at an exponential rate, it is unclear whether India will be able to keep up with the growing demands of its burgeoning technology ecosystem. This is a risk factor that would be hard for any founder to ignore.

While startups are booming across the sub-continent, I believe that there are many reasons to be equally optimistic about the long-term potential of the India marketplace. If you can go in armed with the knowledge regarding  the challenges I discussed, I have every confidence that you will be able to build a successful tech startup in India.

Arm yourself with knowledge of the challenges in India before you build your tech startup Click To Tweet

Now that I’ve spoken my mind, I’d love to hear your thoughts and experiences on tech investing and working in India. Do you believe it can someday surpass the US as the startup hub of the world?

References:

http://www.nasscom.in/startup-india-%E2%80%93-momentous-rise-indian-startup-ecosystem

http://thenextweb.com/in/2015/07/05/india-the-worlds-fastest-growing-startup-ecosystem/#gref

http://techstory.in/startup-india/

http://yourstory.com/2015/10/disruptive-technology-company/

http://www.firstpost.com/business/startup-india-the-ecosystem-has-taken-off-we-are-the-youngest-startup-country-now-2586266.html

https://e27.co/can-india-prevent-exodus-tech-startups-us-singapore-20150528/

http://indianexpress.com/article/technology/tech-news-technology/start-up-india-what-india-inc-has-to-say-about-modis-pet-scheme/

http://www.thehindu.com/business/corruption-delays-hamper-startups-in-india-survey/article8069465.ece

Should you build your tech startup in Hong Kong?

For any tech entrepreneur looking to start or grow a future “unicorn” (a tech company valued >1B) internationally, the most obvious place to consider is mainland China. China’s e-commerce market is forecast to be larger than those of the U.S., United Kingdom, Japan, Germany and France combined by 2020 (KPMG). Although there are clear advantages to doing business in China, I would suggest an intriguing alternative: Hong Kong.

Hong Kong is more famous for its thriving financial markets and while it sits in the shadow of mainland China, it does offer an intrepid tech founder several unique benefits that set it apart.

As the first in a series of articles designed to help tech entrepreneurs explore interesting opportunities for scaling their startup abroad, I will share with you why I think you should consider Hong Kong when the time comes for your business to “go global”, and some things you should be aware of before jumping in.

There are clear advantages to doing business in China, but Hong Kong is an intriguing alternative Click To Tweet

The Pros

Government Benefits

The Hong Kong government has proven its dedication to fostering innovation, particularly in the area of science and technology. Key initiatives include establishing the Hong Kong Science & Technology Parks and the Innovation and Technology Bureau. As at February 2016, the Innovation and Technology Fund had approved 5,038 projects and provided financial support in excess of HK$10.9b. The real question that is being asked by many entrepreneurs is whether the government is getting too involved in innovation, rather than acting as a mere facilitator. While government funding does exist, in October 2014 there were 1,065 registered startups in Hong Kong and over 20 government funding schemes, there’s still plenty of space for funders (and bootstrappers) to forge their own path.

Legal Environment

The startup scene isn’t the sole domain of locals, with 40% of founders from overseas or mainland China. This is mostly thanks to the business environment left by the British and the decision to maintain the city as a self-administering region. This has enabled Hong Kong to retain its business friendly legal system and relatively low tax regime, there is no value-added tax or capital transfer tax, ensuring the city remains an attractive base for businesses.

Business Environment

Hong Kong has always had a western outlook to business, one that is well received by foreign investors and locals alike. Its proximity to mainland China adds to its attractiveness, particularly as the country opens up to more collaboration with the west.

Language

The language of business in Hong Kong is English and its highly-skilled workforce are generally fluent, enabling a seamless entry into the city’s business environment. However, knowledge of both Mandarin and Cantonese would not hurt.

The Cons

Financial Regulation

One area where reform is required to capitalize on the startup potential is in the area of FinTech, one that would fit naturally within Hong Kong’s strong position as a global financial capital. The current regulatory environment is based around traditional financial business, but to enable disruption fintech businesses require a flexible environment that encourages innovation and creative thinking.

Fintech disruption requires a flexible environment encouraging innovation & creative thinking Click To Tweet
Funding/Venture Capital

One area where Hong Kong lacks support is with regards to funding. While there has been significant growth in the amount of venture capital funding in Hong Kong in recent years, the city’s entrepreneurs still attract far less funding than their Asian counterparts. In 2014 Hong Kong startups attracted $33.7m funding, while Singapore saw $319.4m, Seoul received $72.3m and neighboring Shenzhen saw $202.9m. It’s an odd conundrum for a city that has built itself to be one of the world’s greatest financial centers, but investors seem to be gun-shy when it comes to investing in smaller businesses, preferring more traditional investment vehicles. For those that have attracted investment, it still falls short of the larger C and D funding rounds seen in other startup hubs; funding that has the potential to catapult a regional play into a global leader.

Talent

One of the key issues has been access to talent. 65% of employers in Hong Kong have reported difficulties filling roles, with educated locals favoring more ‘secure’, larger businesses, particularly in technology; an issue that continues to hinder growth of innovative startups. Although Hong Kong’s appeal to expatriates does make it easier to attract imported talent, navigating immigration laws means it comes at a price for cash-strapped startups and a headache for small businesses.

Cost of Business

Another challenge facing businesses is the high cost of living in Hong Kong. At $255.50 per square foot, Hong Kong has the most expensive office space in the world. A fact of life that has spurned a new industry in co-working spaces across the space-poor city .

The Conclusion

The startup ecosystem in Hong Kong has much in its favor, and this will only increase if the issues of funding and resourcing are addressed. While it is still not one of the world’s largest tech startup its investor friendly business environment and proximity to China make it hard to ignore.

Hong Kong is a sleeping start-up metropolis that is worthy of consideration Click To Tweet

I believe Hong Kong is a sleeping start-up metropolis that is worthy of your consideration but I am more interested in what you think. If you are looking to build your startup in Hong Kong or are expanding an existing business I’d appreciate you sharing the benefit of your experiences with me and my followers in the comments below.