Latin America's start-up ecosystem continues to gain visibility worldwide

As tech business grows more expensive in California’s Silicon Valley, some investors are looking to alternative markets for lower costs and ventures that promise growth. The tech ecosystems in Berlin and Barcelona are among the locations absorbing investment, while in Latin America Mexico City is competing for prominence among the region’s tech cities. Mexico City’s proximity to Silicon Valley, its position between New York and San Francisco’s time zones, and top engineering talent are several factors turning the country into a hotspot for tech start-ups. In 2019 Mexico ranked second to Chile in Latin America and 32nd worldwide as a tech hub, according to StartupBlink, a website that studies the technology ecosystems of countries around the world.

Background

In 2018 private equity and venture capital funds raised $6.7bn for Latin American operations, up 55% from 2017, according to the Association for Private Capital Investment in Latin America (la Asociación para la Inversión de Capital Privado en Latinoamérica, LAVCA). LAVCA reported 610 deals in 2018, with investment in Mexico second only to Brazil. Investments largely targeted the IT sector, as well as energy and infrastructure projects. “Linking these themes were deals in technology infrastructure, such as fibre-optic cable networks and delivery/logistics infrastructure,” LAVCA wrote in the introduction to its “2019 Industry Data and Analysis” report.

Mexico, specifically, benefits from several centres of engineering talent. Besides Mexico City, where many tech start-ups form, Monterrey and Guadalajara are wells of innovation. Indeed, according to StartupBlink, the three cities are included in the top-100 tech locations of the world: Mexico City ranks 47th, Monterrey 81st and Guadalajara 90th. Although the economies of Latin America are less competitive than those of Asia when it comes to the size of their talent pools, some investors believe the skills available in Mexico stack up well with Asian competitors. “There are over 100,000 manufacturing and engineering jobs in Guadalajara alone, and while the area cannot compete against those in other emerging markets like India and China when it comes to the sheer quantity of its workforce, it does score highly when it comes to quality,” James Paine, founder of West Realty Advisors, wrote on Inc.com, a business resource for small firms and entrepreneurs.

Current Environment 

The opportunities provided by local start-ups are promising to investors, including in digital commerce. In 2018 US retail giant Walmart bought Mexico-focused grocery app Cornershop for $225m. The company was founded in 2015, raised $31m and expanded quickly. Digital finance start-ups are also having success. In 2018 the Congress passed a law regulating financial technology companies that paved the way for entrepreneurs to engage in digital banking, lending and investment services. Digital banking app ALBO offers a zero-fee debit card to unbanked clients, while Clip, a mobile payments service, raised $20m for its operations in early 2019. However, not all tech investments have flourished. Start-up Yogome challenged Mexico’s education system with learning games for children, but after raising $30m, it shut down in October 2018 on accusations of defrauding investors.

While the entrance of heavyweight competitors speaks to the market’s potential, it also poses a constraint for the growth of some companies. Amazon, the US e-commerce monolith, has already expanded into Mexico with the August 2019 opening of a new $125m distribution centre in Tepotzotlán, its largest in Latin America. At the same time, Brazilian financial technology start-up Nubank is seeking to challenge local digital banking firms. In addition to competition, the supply of tech talent will have to keep up with demand for services in the country, given strong urbanisation trends and a preference for digital services among a middle class with rising incomes. Nonetheless, the ideas and talent are there for developing, as evidenced by the growth of private equity and venture capital flowing into Mexican tech start-ups over the past several years.