How Can Latin America Keep Its Entrepreneurs At Home?
This article is adapted from AQ's print issue on entrepreneurship. To see our AQ Top 5 list of young entrepreneurs in Latin America, click here.
When Bruno Santiago first came up with his idea for a business travel app that combines commercial and private jet databases, he sat down and wrote a list of pros and cons of staying home in Brazil to develop it. He ultimately came up with a lot of cons.
It takes a long time to set up a company.
There’s a lack of funding.
There’s economic instability and uncertainty.
“I wanted to have peace of mind and focus on what I was doing rather than on external factors,” Santiago told AQ. So he incubated Biz Airlines in Florida, and is now accelerating it in Toronto, where he is establishing its headquarters. The startup is raising money at a $3 million valuation and has signed 100 aircraft into its database, plus three out of the top 15 travel companies worldwide.
Latin America still has a long way until it becomes an easier ecosystem for its ambitious tech entrepreneurs. Many choose to develop and operate their startups abroad, where funding is readily available and companies can easily be opened and shut down. Between 1990 and 2012, the number of Latino immigrant entrepreneurs in the U.S. more than quadrupled, according to a report by the Partnership for a New American Economy and the Latino Donor Collaborative.
Understanding the urgency of keeping this tech talent at home, governments and private entities in the region are taking steps to do so. Progress has been made in the past decade but there is still room for improvement.
Bureaucracy inundates the startup development process in many countries. Starting a business can take 101 days in Brazil, and averages 31 days in Latin America as a whole, while it can take one to four days in the U.S. and Canada, according to the World Bank. That alone can be a deal breaker.
Governments are aware. Argentina is working to implement policies that allow companies to get up and running in 24 hours. Such policies have been in place since February in Mexico, the country that has advanced the most in the region in promoting startups in the last four years, according to a recent OECD report.
In Chile, which has invested the most capital in the region, companies have been able to register online in just one day since 2013. Through Start-Up Chile, the pioneer seed accelerator of the Latin American tech community, the government also provides advisory services.
Still, both government and private accelerators struggle with a lack of funding. Venture capital investments in the region quadrupled between 2011 and 2015, according to the Latin American Private Equity & Venture Capital Association. However, they are still significantly smaller than in the U.S., which accounts for almost 70 percent of total global venture capital investment.
To overcome the funding challenge, entrepreneurs often seek capital from firms abroad. But knowledge of where to go is often limited. Governments “can do a better job in putting startups up on stage to attract the interest of international investors,” said Drew Beaurline, an American who developed a construction startup in Brazil. With that purpose, demo events are hosted in Silicon Valley by private accelerators like NXTP Labs, based in Argentina.
More Bureaucratic Barriers
Burdensome tax systems are another hindrance. To prepare, file and pay taxes can take 2,038 hours a year in Brazil and 359 hours in Argentina, while in the U.S. it can take 175 hours and in Canada only 131. Governments should “simplify tax structures for newly created companies that are fundraising,” said Santiago. Tax breaks would also help.
Difficulties are even greater for entrepreneurs who have failed in previous ventures. Insolvency proceedings can take four years in Brazil, and an average of two and a half years in Latin America generally, compared to one and a half years in the U.S. (New York City) and less than a year in Canada.
This not only discourages potential entrepreneurs, but also foreign investors. “They say, ‘Things might go well but if they don’t, I don’t want to be stuck in there,’” said Diego Remus, cofounder and former owner of Startupi in Brazil.
Most importantly, failure thwarts entrepreneurs from receiving credit or capital for the next attempt — a dynamic that is at the core of the startup ecosystem. “Failing has very concrete consequences, including social condemnation, which is sadly still very common across the region,” Gonzalo Costa, founding partner of NXTP Labs, told AQ.
“It’s tied to our culture. Since we are little we are taught that we cannot fail, that we cannot make mistakes,” Rocío Fonseca, executive director of Start-Up Chile, said. Many things need to change for that to shift, she added. For example, “Banks should be regulated so that once an entrepreneur fails, they don’t close his or her doors (to future financing).”
Large corporations can also inhibit startups. “Mexico is a country of monopolies. Instead of helping the ecosystem grow, they attack startups, they don’t buy them or collaborate with them,” said Marcus Dantus, CEO of Startup México, which is working with digital corporations like Telmex and Televisa to connect with startups instead.
The growth potential is high and trending upward. “I think that Latin America is going to be the next region that proves itself to be a player in the global startup ecosystem model,” Lisa Besserman, founder and CEO of Startup Buenos Aires, told AQ.
Fonseca agreed. “There’s a unilateral sentiment that we have to go up the stairs of the economy, that we can’t rely forever on natural resources, and that we need to move to tech, innovation and entrepreneurship.”
Krygier is an editorial intern at AQ.