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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/