Nearshore Americas

Is Latin America’s IT Startup Scene Stuck in Neutral?

Latin America’s startup ecosystem has a problem. What is it? Well, that’s the thing. No one’s seems to agree. At the center of the debate is local vs. global, whether it’s enough to apply a proven model to the region (a.k.a. OpenTable or GrubHub for LatAm), or if entrepreneurs need to think globally from day one. And there is a fair share of arguments on both sides (take a look here and here).

But what if the issue is a different one? What if it is much more complex, coming down to the fact that entrepreneurs are still failing to fully comprehend the real problems that need addressing, and investors, by and large, are playing it safe?

“When we overcome that barrier, and everyone starts to think of global ideas, simple solutions for a lot of people and that are truly worth building, out of passion, the ceiling will break,” explained Martin Vivas, one of Argentina’s leading startup proponents. “We need people who can hack the real system.”

Hackathons Highlight Differences

Vivas has participated in a number of startup building and hackathon initiatives and events, including Palermo Valley, Startup Weekend and AngelHack. Last year, he also took part in Google Developer Bus, traveling to Colombia, Argentina, Mexico and Brazil to identify top development talent. The goal, Vivas explained, was not to bring Mountain View to Latin America but the other way around – to encourage developers and entrepreneurs to understand Latin America through Latin America, creating apps and then getting the opportunity to access Silicon Valley.

Each country presented its own challenges, and entrepreneurs specific characteristics. Argentines, for example, generally produced better ideas, and judges and mentors were of top quality. Brazilians responded enthusiastically to the call, and while concepts were quite creative, they were focused largely on the local market.

This, of course, is the result of the larger socio-economic pictures of each country. Argentine entrepreneurs have generally thought bigger (look at Globant, MercadoLibre and Despegar), because building a business for Argentina alone can prove extremely difficult and unstable. However, the Brazilian market is large enough to sustain a business (take a look at Hotel Urbano, which just picked up a $50 million Series D investment).

Mexican and Colombian entrepreneurs, on the other hand, struggled to come up with strong ideas and to think globally. Generally, concepts were very local, and lack of experience showed.

The overall verdict? Even in Argentina, where the socio-economic climate produces agile, outward-looking entrepreneurs, getting participants to look at the bigger picture is challenging. Moreover, helping them to delve deeper into the problems that need addressing is even more difficult.

The Validation Problem

While Latin America’s entrepreneurs are eager to outline the features of their products and the facets of their services, they often fall short when it comes to having a complete understanding of the problem they’re solving. Is it urgent? Do enough people have it? Will they be willing to pay? “Validation doesn’t really go far in Latin America,” Vivas affirmed.

In Silicon Valley, entrepreneurs have the luxury of creating markets and, to a certain extent, problems. Latin Americans, on the other hand, do not. Initiatives like Startup Weekend and Google Developer Bus are designed to help the region’s entrepreneurs to understand that difference.

Of course, not all hackathons are created equal. In the case of the Google Developer Bus, the point is to detect and support talent. Startup Weekend, on the other hand, is more educational. Other hackathons, however, are meant to attract talent, whether for specific companies or for accelerators. What’s important for developers and entrepreneurs is to figure out the right fit and the goals they’re hoping to achieve through their participation – something that isn’t always clear.

Copycatting & Solving Problems

“I believe that it’s time to stop funding copycats, but not things that solve problems,” Vivas remarked, highlighting the complexity of the cloning issue that, at a distance, seems cut and dry. Latin America is a tough nut to crack, and it’s not just Argentina and Venezuela. Each country poses its own set of challenges, meaning taking a model that works in the U.S. or Europe and trying to apply it locally is no easy feat. “You can’t just grab a pre-packaged model and toss it at Latin America,” Vivas affirmed.

That doesn’t, however, mean that cloning proven models – at least initially – doesn’t work. Take, for example, the case of MercadoLibre. While it started out as eBay for Latin America, it took its own path and developed quite differently. How? By understanding each and every aspect of the problem it is addressing through a regional lens. And today, it is the only Argentine technology company listed on the New York Stock Exchange.

Vivas highlighted a similar opportunity in payments. In Argentina, for example, PayPal has left the building, leaving a gap to be filled for entrepreneurs willing to take on the challenge. So far, no one sufficiently has.

In fact, it is in the arenas related to infrastructure and existing systems, such as payments, logistics and small business management, where entrepreneurs have the greatest chance of making an impact. Small and medium-sized businesses, for example, are the most important job creators in the region, and building solutions for a specific and complex problem within their operations can go a long way. And those solutions can be inspired by a foreign model, but they have to address the very real and urgent needs of the region. “Latin America has to find a solution together,” Vivas affirmed.

The Accelerator Issue

Accelerators are, in many ways, leading Latin America’s startup revolution. Numerous programs have popped up in recent months and years, all aiming to support the ecosystem and, at least outwardly, hoping to find the next big thing. Or are they?

Look at the portfolios of leading regional programs like NXTP Labs, Wayra, 500 Startups, 21212 and HubBOG. They’ve all got a lot of versions of the same thing – a taxi app, an online food delivery platform, etc. Not exactly the picture of innovation. Many organizations seem to be looking for validation in their peers, in turn investing in a number of companies that are very much the same.

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“It’s like they’re looking for their kits, and that’s because they’re looking at one another, not their own strategies. I think they stop looking at what’s interesting for their client. The clients of accelerators aren’t entrepreneurs, they’re investors, or big companies that can buy the products they generate. Basically, when you make the mistake of looking at the other accelerator as a model, everyone ends up putting together their own kits and having their own proposals of the same thing. And that may serve as a strategy, to a certain extent, but it won’t make a difference. Being the same as someone else will just mean you make the same mistakes as them, not that you’re making your own mistakes,” Vivas opined.

At the heart of this seems to be the fact that accelerators, angel investors and other funding players in the region aren’t looking for long-term value in their investments.  They’re looking at timelines of three to five years and a best-case scenario of an exit – most of which are small (a major indicator of this: deal amounts are hardly ever revealed).

This in mind, accelerators and angels are taking huge cuts equity-wise, meaning that many startups go from accelerator to accelerator, government program to government program, just trying to stay afloat. And if and when they company is bought, the entrepreneurs end up with very little to show.

The result: a Latin American startup ecosystem that largely fails to innovate on both local and global levels.

Emily Stewart

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